ACRES Commercial Realty Corp. (ACR) is a Maryland-based real estate investment trust (REIT) that has established itself as a prominent player in the commercial real estate (CRE) lending and equity investment landscape. With a focus on originating, holding, and managing CRE mortgage loans and equity investments through direct ownership and joint ventures, ACR has navigated the challenges of the ever-evolving real estate market with strategic precision.
Business Overview and History
ACR was founded in 2005 as Resource Capital Corp., with a focus on originating, holding, and managing commercial real estate mortgage loans and equity investments in commercial real estate properties. The company was incorporated in Maryland and is headquartered in Uniondale, New York. In 2006, ACR formed two trusts, Resource Capital Trust I and RCC Trust II, to issue junior subordinated debentures and provide debt financing to the company. Over the following years, the company expanded its portfolio of CRE loans and investments, primarily financed through collateralized debt obligations (CDOs) and securitizations.
In 2014, the company changed its name to Exantas Capital Corp. to better reflect its focus on commercial real estate lending and investments. During this period, the company managed a diverse portfolio of CRE loans and equity investments across various property types and geographic regions. In 2020, the company underwent another name change to ACRES Commercial Realty Corp. to align with its manager, ACRES Capital, LLC, a subsidiary of ACRES Capital Corp. This change solidified the company’s relationship with its external manager and signaled a renewed focus on its core commercial real estate lending and investment business.
Throughout its history, ACRES Commercial Realty Corp. has faced various challenges, including the global financial crisis of 2008-2009, which impacted its CRE loan portfolio and financing arrangements. The company weathered these challenges by working closely with its borrowers, restructuring loans, and adapting its financing strategies. More recently, the company has navigated the economic disruptions caused by the COVID-19 pandemic, leveraging its strong asset management capabilities to actively manage its investment portfolio.
Financials
Financial Snapshot
As of September 30, 2024, ACR reported a total asset base of $2.00 billion, with a diverse portfolio of CRE loans and equity investments. The company’s net income for the year ended December 31, 2023, was $22.39 million, with an annual revenue of $91.88 million and operating cash flow of $45.61 million. ACR’s free cash flow for the same period stood at $45.61 million.
For the most recent quarter (Q3 2024), ACR reported revenue of $39,301,000, net income of $8,141,999, operating cash flow of $8,417,000, and free cash flow of $8,417,000. The company reported increases in real estate income and other revenue compared to the prior year quarter, partially offset by higher operating expenses.
The company’s financial ratios paint a picture of a well-capitalized and prudently managed organization. As of September 30, 2024, ACR’s debt-to-equity ratio was 3.30, indicating a balanced approach to leveraging its assets. The company’s current ratio, a measure of liquidity, stood at 8.50, demonstrating its ability to meet short-term obligations.
Liquidity
ACR maintains a strong liquidity position, with $79 million in available funding as of September 30, 2024. This robust liquidity allows the company to capitalize on new investment opportunities and maintain its competitive edge in the CRE market. The company’s cash position as of September 30, 2024, was $70,070,000.
Loan Portfolio and Asset Management
ACR’s CRE loan portfolio, valued at $1.60 billion as of September 30, 2024, is primarily composed of floating-rate loans secured by first liens on commercial properties. The weighted average spread of these loans over one-month Term SOFR rates was 3.73% at the end of the third quarter of 2024.
The company’s proactive asset management strategy has been instrumental in maintaining the health of its loan portfolio. As of September 30, 2024, 76.20% of the par value of ACR’s CRE loan portfolio had interest rate caps in place, with a weighted-average maturity of six months, helping to mitigate the impact of rising interest rates.
ACR’s loan portfolio performance has been strong, with 11 loans rated 4 or 5 (on a scale of 1 to 5, with 1 being the highest credit quality) as of September 30, 2024, representing 23% of the par value of the portfolio. The company’s weighted average risk rating remained stable at 2.70 over the past two quarters.
The CRE loan portfolio, which comprises 87.7% of the company’s total investment portfolio, had a carrying value of $1.55 billion as of September 30, 2024. During the nine months ended September 30, 2024, ACR did not originate any new CRE loans but received $270.1 million in loan payoffs and had $37.7 million in loan foreclosures, resulting in a net decrease of $279.7 million in the portfolio’s par balance. The portfolio is diversified by property type, with multifamily loans making up 79.4% of the portfolio at September 30, 2024.
The CRE loan portfolio had a weighted average benchmark rate of 5.22% and a weighted average benchmark floor of 0.85% at September 30, 2024. ACR recorded a net provision for credit losses of $5.94 million during the nine months ended September 30, 2024, primarily due to worsening macroeconomic factors offset by decreases in modeled credit risk.
Equity Investments and Real Estate Assets
In addition to its CRE lending activities, ACR has strategically invested in commercial real estate properties through direct equity investments and as a result of its lending activities. As of September 30, 2024, the company held $200.19 million in properties held for sale and $71.40 million in investments in real estate.
The company has demonstrated its ability to successfully navigate the acquisition, management, and monetization of these real estate assets. During the third quarter of 2024, ACR foreclosed on two loan assets, recording a $2.8 million unrealized gain on the conversion of one of the properties to real estate owned.
ACR’s Investments in Real Estate segment includes direct equity investments in commercial properties as well as properties acquired through its lending activities. As of September 30, 2024, the company held investments in eight real estate properties, with a total net carrying value of $194.5 million.
During the three months ended September 30, 2024, ACR acquired two additional properties through foreclosure, one multifamily property in the Southwest region and one office complex in the Southwest region. The company also reclassified one property in the Southeast region from investments in real estate to properties held for sale, with a carrying value of $118.2 million.
The real estate investments generated $29.4 million in income during the nine months ended September 30, 2024, an increase of 16% compared to the same period in 2023. This increase was primarily attributable to the acquisition of new properties and improved performance at existing properties.
Guidance and Outlook
ACR’s management has provided a positive outlook for the company’s future performance. The successful monetization of the company’s real estate assets, coupled with the redeployment of capital into its core CRE lending business, is expected to drive earnings growth and book value appreciation in the coming quarters.
Furthermore, the company’s strong liquidity position, with $79 million in available funding as of September 30, 2024, positions ACR to capitalize on new investment opportunities and maintain its competitive edge in the CRE market.
While the company did not provide specific quantitative guidance for the future, management discussed their plans and expectations for the next several quarters:
The company plans to redeploy the capital from these asset sales into the loan portfolio.
ACR is focused on growing earnings and being able to pay a market-based dividend to shareholders over the next 12 months.
Management indicated they are actively originating new loans through the ACRES platform and expect to allocate some of that origination volume to the REIT once they have the appropriate liquidity profile.
The company is considering collapsing their existing CRE securitizations and issuing a new CLO, which they expect could provide financing at spreads that would allow them to achieve a mid- to high-teens return on equity.
Risks and Challenges
Like any real estate investment firm, ACR faces a range of risks and challenges, including exposure to fluctuations in the CRE market, interest rate volatility, and potential defaults within its loan portfolio. The company’s ability to navigate these risks through prudent underwriting, active asset management, and disciplined capital allocation will be key to its long-term success.
Additionally, the company’s reliance on its external manager, ACRES Capital, LLC, presents a degree of operational risk that investors should consider. Any disruptions or changes in the management team or the management agreement could have a significant impact on ACR’s performance.
Conclusion
ACRES Commercial Realty Corp. (ACR) has proven itself to be a resilient and adaptable player in the commercial real estate investment arena. With a well-diversified portfolio, a focus on disciplined risk management, and a strategic vision for growth, the company is poised to capitalize on the evolving dynamics of the CRE market. As ACR continues to navigate the challenges and opportunities ahead, investors may find the company’s combination of strong fundamentals and strategic positioning worthy of further research and consideration.
The company’s business model, which focuses on originating, holding, and managing CRE loans, as well as selectively investing in commercial real estate properties, has provided stable sources of revenue and cash flow. However, the business faces exposure to credit, interest rate, and macroeconomic risks that it seeks to actively manage. With its strong liquidity position and strategic plans for asset monetization and capital redeployment, ACR appears well-positioned to pursue growth opportunities in the coming quarters while maintaining a prudent approach to risk management.
Disclaimer: This article is for informational purposes only. It does not constitute financial, legal, or other types of advice. While every effort has been made to ensure the accuracy of the information presented here, the author and the publisher do not make any guarantees about the completeness, reliability, and accuracy of this information.