ACRES Commercial Realty Corp. (ACR) is a real estate investment trust (REIT) that has carved out a niche in the commercial real estate (CRE) lending and equity investment space. With a primary focus on originating, holding, and managing CRE mortgage loans and equity investments in CRE properties, ACR has demonstrated a remarkable ability to weather the challenges of the past few years and position itself for continued growth.

Business Overview and History

Incorporated in 2003 and headquartered in Uniondale, New York, ACR operates as an externally managed REIT, with ACRES Capital, LLC serving as its manager. The company’s roots can be traced back to Resource Capital Corp., which was founded in 2005 and later rebranded as Exantas Capital Corp. in 2018 before becoming ACRES Commercial Realty Corp. in 2021.

In 2006, ACR formed two trusts, Resource Capital Trust I and RCC Trust II, for the purpose of issuing junior subordinated debentures, providing the company with additional financing for its operations. During the years leading up to the 2008 financial crisis, ACR expanded its investment portfolio to include commercial finance and residential mortgage lending, in addition to its core CRE loan business.

The economic downturn following the 2008 crisis and the more recent COVID-19 pandemic have presented significant challenges for ACR. As of September 30, 2024, the company had a net operating loss carryforward of $32.1 million and net capital loss carryforwards of $121.9 million, reflecting the impact of these economic headwinds.

To strengthen its financial position and navigate the challenging market conditions, ACR has undertaken several strategic actions. In 2020, the company entered into a $250 million senior secured financing facility with Massachusetts Mutual Life Insurance Company to support its CRE lending business. Further diversifying its funding sources, ACR issued $150 million of 5.75% senior unsecured notes due 2026 in 2021.

Portfolio and Business Segments

ACR operates through two primary business segments: Commercial Real Estate (CRE) Loans and Investments in Real Estate.

CRE Loans Segment

The CRE Loans segment is the core focus of ACR’s operations, comprising 87.71% of the company’s total investment portfolio as of September 30, 2024. This segment consists primarily of floating-rate CRE whole loans, with a small allocation to a CRE mezzanine loan. The CRE whole loan portfolio had a total amortized cost of $1.58 billion and a carrying value of $1.55 billion, after an allowance for credit losses of $34.70 million. The weighted average contractual interest rate on the CRE whole loans ranged from 2.50% to 8.61%, with a weighted average of 8.95%.

The CRE loan portfolio is diversified by property type, with 79.40% allocated to multifamily, 14.00% to office, 4.30% to hotel, 2.30% to self-storage, and 0.40% to retail. Geographically, the largest concentrations are in the Southwest (28.10%), Mountain (17.90%), and Southeast (16.10%) regions. The CRE loan portfolio experienced $270.10 million in payoffs and $37.70 million in foreclosures during the nine months ended September 30, 2024, offset by $28.10 million in new fundings, resulting in a net decrease of $279.70 million.

Investments in Real Estate Segment

The Investments in Real Estate segment, which includes direct equity investments and properties acquired through the company’s lending activities, comprised 12.29% of ACR’s total investment portfolio as of September 30, 2024. This segment had a total net carrying value of $194.51 million, consisting of $115.46 million in investments in real estate and $79.05 million in properties held for sale.

The real estate investments include a ground lease with a 92-year remaining term, as well as intangible assets such as franchise agreements, management contracts, and customer lists. During the nine months ended September 30, 2024, ACR acquired several properties through foreclosure or deed-in-lieu of foreclosure, including a multifamily property in the Southwest region and an office complex in the Southwest region, which were immediately contributed to joint ventures with unrelated third parties.

Financials and Performance

ACR’s financial performance has been marked by periods of both growth and challenges. For the fiscal year ended December 31, 2023, the company reported net income of $22.39 million, or $2.97 per diluted share. This represented a significant improvement from the previous year’s net loss of $10.62 million. Total revenue for 2023 stood at $91.88 million, up from $77.04 million in 2022.

For the most recent quarter ended September 30, 2024, ACR reported revenue of $39.30 million and net income of $8.14 million. The company generated operating cash flow (OCF) and free cash flow (FCF) of $8.42 million each during this period. The decrease in revenue and net income compared to the prior year quarter was primarily due to decreases in the CRE loan portfolio and benchmark interest rates.

During the first nine months of 2024, ACR reported GAAP net income allocable to common shares of $5.03 million, or $0.63 per diluted share. The company’s Earnings Available for Distribution (EAD), a non-GAAP metric used to evaluate its performance, was $0.91 per diluted share for the same period.

Liquidity

The company’s liquidity position remains strong, with $70.07 million in unrestricted cash and $9.60 million of potential proceeds from unlevered CRE loans as of September 30, 2024. ACR’s GAAP debt-to-equity ratio stood at 3.30x at the end of September 2024, indicating a prudent approach to leverage.

ACR has access to CRE loan warehouse financing facilities with a total maximum capacity of $500.00 million, of which $302.59 million was outstanding at September 30, 2024. This provides the company with additional financial flexibility to support its lending operations.

The company’s current ratio and quick ratio both stood at 8.50 as of September 30, 2024, indicating a strong ability to meet short-term obligations.

Navigating Challenges and Opportunities

Like many CRE-focused companies, ACR has had to navigate the challenges posed by the COVID-19 pandemic and the resulting economic uncertainty. In 2020, the company reported a significant net loss of $197.71 million, primarily due to non-cash impairment charges and unrealized losses on its investment portfolio. However, the company’s proactive approach to asset management and its diversified portfolio have enabled it to weather the storm and return to profitability in subsequent years.

One of the key strengths of ACR has been its ability to identify and capitalize on opportunities in the CRE market. During the pandemic, the company was able to acquire several properties through foreclosure or deed-in-lieu transactions, which it subsequently contributed to joint ventures to maximize value. As of September 30, 2024, the company held $200.19 million in properties held for sale, which it expects to monetize in the coming quarters, further strengthening its balance sheet and positioning it for future growth.

Moreover, ACR has been actively managing its loan portfolio, working closely with borrowers to address any performance issues and mitigate potential losses. The company’s allowance for credit losses stood at $34.70 million as of September 30, 2024, representing 2.19% of the total loan portfolio, a testament to its prudent risk management practices.

Looking Ahead

As the CRE market continues to navigate the lingering effects of the pandemic and rising interest rates, ACR remains focused on identifying and executing on strategic opportunities. The company’s management team, led by President and CEO Mark Fogel, has a proven track record of navigating challenging market conditions and delivering value for shareholders.

In the coming quarters, ACR plans to continue monetizing its real estate holdings, using the proceeds to selectively originate new CRE loans and reinvest in its portfolio. The company expects to monetize several real estate investments and foreclosed assets over the next two quarters, with the goal of improving credit quality and recycling capital into performing assets. Management anticipates that the monetization of these assets will have a flat to positive impact on the company’s book value per share going forward.

ACR plans to redeploy the capital generated from these asset sales back into growing their commercial real estate loan portfolio. The management team has stated that their focus is on growing earnings and positioning the company to pay a market-based dividend over the next 12 months, although no specific targets or timelines were provided for the dividend or loan portfolio growth.

The company’s strong liquidity position and access to various financing sources, including securitizations and warehouse facilities, position it well to capitalize on emerging opportunities in the CRE market. While the commercial real estate industry faces ongoing headwinds, ACR’s diversified portfolio, prudent risk management, and experienced management team suggest that the company is well-equipped to navigate the challenges and continue delivering value for its shareholders.

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.