ACRES Commercial Realty Corp. (ACR) is a real estate investment trust (REIT) primarily focused on originating, holding, and managing commercial real estate (CRE) mortgage loans and equity investments in commercial real estate properties through direct ownership and joint ventures. The company's portfolio is well-diversified across property types and geographic regions, positioning it to weather the current market volatility.

Financials

For the full year 2023, ACR reported net income of $22,390,000 and revenue of $45,501,000. The company's annual operating cash flow and free cash flow both stood at $45,609,000. While the company did not provide specific guidance for the upcoming year, management remains cautiously optimistic about the long-term prospects of the business.

In the first quarter of 2024, ACR reported GAAP net income allocable to common shares of $556,000, or $0.07 per share. This result included a $4.9 million, or $0.61 per share, increase in the company's current expected credit loss (CECL) reserves, primarily driven by worsening macroeconomic factors due to higher interest rates lasting longer than expected, compounded by an increase in modeled credit risk.

Earnings available for distribution (EAD), a non-GAAP metric used by the company, was $0.16 per share for the first quarter of 2024, compared to $0.55 per share in the prior quarter. The decline in EAD was largely attributable to a $0.25 run-rate decrease in net interest income resulting from net loan payoffs and, to a lesser extent, loan modifications that occurred during the quarter and late in the fourth quarter of 2023, as well as a $0.16 decline in real estate operations due to seasonality.

GAAP book value per share increased to $27.25 at March 31, 2024, up from $26.65 at the end of 2023. This increase was primarily driven by the company's share repurchase program, which generated $0.41 of book value per share during the first quarter. ACR used $2.1 million to repurchase 195,000 common shares at an approximate 61% discount to book value and $2.2 million to repurchase 100,000 shares of its preferred Series D securities at an approximate 14% discount to the stated redemption value of $25.

Business Overview

The company's CRE loan portfolio totaled $1.8 billion across 66 individual investments as of March 31, 2024. Loan payoffs during the first quarter were $80.8 million, while net funded commitments were $11.4 million, resulting in a net decrease of $69.4 million in the loan portfolio. The weighted average spread of the floating-rate loans in the portfolio is now 3.78% over the one-month benchmark rate.

At the end of the first quarter, there were 11 loans rated 4 or 5, representing 17% of the par value of the portfolio, an increase of 1% compared to the end of the fourth quarter of 2023. The company's weighted average risk rating improved from 2.7 at the end of 2023 to 2.6 at March 31, 2024.

During the quarter, ACR acquired an office property in Chicago via deed-in-lieu of foreclosure, with a basis of $14 million and a fair value of $20.3 million upon acquisition. The company recognized a $5.8 million gain on the conversion and immediately contributed the asset to a joint venture seeking to maximize its value through a multifamily conversion.

Liquidity

The company's available liquidity at March 31, 2024, was $92.1 million, comprising $84.6 million of unrestricted cash and $7.5 million of projected financing available on unlevered assets. ACR's GAAP debt-to-equity leverage ratio decreased slightly to 3.7 times at the end of the first quarter, down from 3.8 times at the end of 2023, while its recourse debt leverage ratio remained consistent at 1.1 times.

Geographic Diversification

In terms of geographic diversification, ACR's CRE loan portfolio was concentrated in the Southwest (26.7%), Southeast (21.1%), and Mountain (15.8%) regions based on carrying value at March 31, 2024. The company's investments in real estate and properties held for sale were primarily located in the Midwest and Northeast regions.

Outlook

Looking ahead, the ACRES team remains focused on the overall quality of the investment portfolio, including investments in real estate, with the goal of improving credit quality and recycling capital into performing categories. The company's longer-term objective is to provide shareholders with total returns over time, including quarterly distributions and capital appreciation, while seeking to manage the risks associated with its investment strategies.

Conclusion

Despite the challenges posed by the current market environment, ACR has demonstrated resilience and a commitment to prudent capital allocation. The company's diversified portfolio, proactive asset management, and strategic initiatives, such as the share repurchase program, position it well to navigate the evolving landscape and create value for its shareholders.