ACRES Commercial Realty Corp. (NYSE:ACR) is a Maryland-based real estate investment trust (REIT) that is 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 strategy is to provide its shareholders with total returns over time, including quarterly distributions and capital appreciation, while seeking to manage the risks associated with its investment strategies.
Business Overview and History ACRES Commercial Realty Corp., formerly known as Resource Capital Corp., was founded in 2005 and has a long history of navigating the commercial real estate market. The company initially focused on investing in commercial real estate loans and securities. In its early years, ACRES grew its CRE loan portfolio through direct originations and acquisitions. However, the company faced significant challenges during the 2008 financial crisis, as many of its CRE loans experienced credit issues. In response, ACRES shifted its strategy to focus more on CRE debt and equity investments.
In 2016, the company rebranded to ACRES Commercial Realty Corp. to better reflect its focus on commercial real estate lending and investing. Over the following years, the company continued to grow its CRE loan portfolio through originations and acquisitions, while also expanding into direct equity investments in commercial properties.
Despite the challenges posed by the COVID-19 pandemic in 2020, which impacted many commercial real estate sectors, ACRES Commercial Realty was able to navigate the market disruptions. The company worked closely with its borrowers to manage its loan portfolio and took advantage of opportunities to acquire properties through foreclosure or deed-in-lieu transactions.
Today, ACRES Commercial Realty operates as a diversified REIT, with a portfolio that includes a variety of property types, such as multifamily, office, hospitality, self-storage, and retail assets located across the United States. The company’s current portfolio comprises $1.6 billion in CRE loans, with a focus on transitional, floating-rate loans secured by a diverse array of property types. The loan portfolio is well-diversified, with a weighted average benchmark rate floor of 0.85% and a weighted average spread of 3.73% over one-month Term SOFR.
Financial Performance and Ratios ACRES Commercial Realty’s financial performance has been resilient, despite the challenges posed by the COVID-19 pandemic and the current macroeconomic environment. For the fiscal year 2023, the company reported revenue of $91.88 million, net income of $22.39 million, and operating cash flow (OCF) and free cash flow (FCF) of $45.61 million.
In the most recent quarter (Q3 2024), ACRES Commercial Realty reported revenue of $39.30 million, net income of $8.14 million, and OCF and FCF of $8.42 million. The decrease in revenue and net income compared to the previous year was primarily attributable to a decrease in the total par value of the CRE loan portfolio due to loan payoffs and foreclosures, as well as an increase in the benchmark interest rate. The decrease in OCF and FCF was due to lower net interest income.
For the trailing twelve months ended September 30, 2024, the company reported net income of $19.4 million and generated $32.6 million in net interest income.
The company’s balance sheet remains strong, with a GAAP debt-to-equity ratio of 3.3x and a recourse debt leverage ratio of 1.1x as of September 30, 2024. Additionally, the company maintains healthy liquidity, with $79 million in available liquidity, including $70.07 million in unrestricted cash and $9.7 million in projected financing available on unlevered assets.
ACRES Commercial Realty’s financial ratios also reflect its solid financial position. As of September 30, 2024, the company’s current ratio stood at 8.50, its quick ratio was 8.50, and its cash ratio was 7.09, indicating a strong ability to meet its short-term obligations. The company has a $250 million senior secured financing facility and $250 million in term warehouse financing facilities, with $436.90 million and $335.36 million in available capacity, respectively, as of September 30, 2024.
Portfolio and Asset Management ACRES Commercial Realty’s CRE loan portfolio is actively managed by its experienced team, who closely monitor the performance of each asset and implement proactive strategies to mitigate risks. The company’s portfolio is diversified across property types, with multifamily loans comprising the largest portion at 79.4% as of September 30, 2024.
During the third quarter of 2024, the company experienced $118.1 million in loan payoffs, $23.7 million in foreclosures, and $7.4 million in funded commitments, resulting in a net decrease of $134.4 million in the loan portfolio. The weighted average risk rating of the portfolio remained stable at 2.7% as of both June 30 and September 30, 2024.
As of September 30, 2024, the CRE loan portfolio had a carrying value of $1.55 billion, down from $1.83 billion at December 31, 2023, primarily due to $270.1 million in loan payoffs and $37.7 million in loan foreclosures, offset by $28.1 million in fundings of previously committed loans. The weighted average coupon on the CRE loan portfolio was 8.95% at September 30, 2024, down slightly from 9.15% at the end of 2023. The CRE loan portfolio is diversified across property types and geographies, with the Southwest, Mountain, and Southeast regions comprising the largest concentrations.
In addition to its CRE loan portfolio, ACRES Commercial Realty has a growing investment in real estate, which it has acquired through its lending activities or direct equity investments. The company is actively working to monetize these real estate assets, with several transactions in the pipeline that are expected to generate gains and provide additional capital for reinvestment.
ACRES Commercial Realty also holds investments in several unconsolidated joint ventures and entities, including a 100% interest in the common shares of two business trusts (Resource Capital Trust I and RCC Trust II), a 90% interest in the 65 E. Wacker Joint Venture that is converting an office property to multifamily, and a 50% interest in the 7720 McCallum JV that owns a multifamily property. These investments totaled $22.04 million at September 30, 2024, up from $1.55 million at the end of 2023, primarily due to the addition of the Wacker JV and McCallum JV investments.
At September 30, 2024, the Company had $207.31 million in net investments in real estate and properties held for sale, up from $169.30 million at the end of 2023. This increase was driven by the acquisition of several properties through foreclosure, including a multifamily property in the Southwest and an office complex in the Southwest.
Outlook and Risks ACRES Commercial Realty remains cautiously optimistic about the commercial real estate market, though it acknowledges the ongoing challenges posed by rising interest rates, macroeconomic uncertainty, and the evolving office market dynamics. The company is focused on proactively managing its portfolio, selectively originating new loans, and recycling capital through the monetization of its real estate investments.
Management has indicated that they expect to monetize several real estate investments and foreclosed assets over the next two quarters, and that these monetizations are expected to have a flat to better impact on the company’s book value per share compared to the current level of $27.92 per share. The company plans to use the proceeds from these asset monetizations to redeploy capital back into the loan portfolio and focus on growing earnings and being able to pay a market-based dividend over the next 12 months. However, the company did not provide a specific target timeline or dividend amount.
One of the key risks facing the company is the potential for increased credit losses in its CRE loan portfolio, particularly if the economic environment deteriorates further. To mitigate this risk, ACRES Commercial Realty has implemented robust underwriting standards and actively works with its borrowers to address any performance issues. Additionally, the company’s use of interest rate caps and debt service reserves helps to protect its asset yields in a rising rate environment.
Another risk factor is the company’s reliance on its CRE debt securitizations for long-term financing. As these securitizations mature, ACRES Commercial Realty will need to carefully manage the refinancing process to ensure continued access to cost-effective capital.
Conclusion ACRES Commercial Realty Corp. has demonstrated its ability to navigate the complex and ever-changing commercial real estate landscape. The company’s diversified portfolio, disciplined investment approach, and experienced management team have been instrumental in its resilience during challenging times. While the company faces ongoing risks, its strong financial position, proactive asset management, and strategic focus on monetizing its real estate investments position it well for future growth and value creation for its shareholders. The company’s focus on improving credit quality, recycling capital into performing assets, and growing earnings to support a market-based dividend underscores its commitment to long-term shareholder value.
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.