Business Overview and History ACRES Commercial Realty Corp. (ACR) is a real estate investment trust (REIT) that specializes in originating, holding, and managing commercial real estate (CRE) mortgage loans and equity investments in CRE properties through direct ownership and joint ventures. The company has navigated a challenging market environment in recent years, but its proactive management and strategic moves have positioned it well for future growth.
ACRES Commercial Realty Corp. was originally incorporated in 2005 under the name Resource Capital Corp. In 2016, the company underwent a name change to Exantas Capital Corp., and then in 2021, it adopted its current name, ACRES Commercial Realty Corp. The company is a Maryland corporation that operates as a real estate investment trust (REIT).
ACRES has faced various challenges and milestones throughout its history. In 2020, the company encountered significant losses, recording a net loss of $197.7 million for the year, largely driven by a $195.4 million loss on the sale of investment securities. This was partly due to the economic disruptions caused by the COVID-19 pandemic, which impacted its commercial real estate portfolio.
To address these challenges, ACRES underwent a transition in its management and leadership in 2020. ACRES Capital, LLC, a subsidiary of ACRES Capital Corp., became the company's new manager, bringing in a new executive team led by President and CEO Mark Fogel. This change in management marked an important milestone as the company worked to stabilize its operations and reposition its investment portfolio.
Over the next few years, ACRES continued to actively manage its loan portfolio, working closely with borrowers to mitigate potential losses. It also selectively acquired real estate properties through foreclosure or deed-in-lieu transactions, seeking to maximize the value of these assets. Despite the lingering impacts of the pandemic, the company was able to gradually improve the credit quality of its loan book through this period.
The company's core focus is on transitional floating-rate CRE loans, with a target size between $10 million and $100 million. Over the years, ACRES has built a diversified portfolio of CRE loans, with a particular emphasis on the multifamily sector, which has historically demonstrated lower credit losses.
Financial Performance As of the latest reporting period (Q4 2024), ACRES had a $1.5 billion CRE loan portfolio across 53 individual investments, with a weighted average risk rating of 2.8 on a scale of 1 to 5. The company's net interest income for the full year 2024 was $56.7 million, while its net income allocable to common shares was $22.4 million, or $2.97 per diluted share.
For the most recent quarter (Q3 2024), ACRES reported revenue of $39.3 million and net income of $8.1 million. The company's CRE loan portfolio had a carrying value of $1.55 billion as of September 30, 2024, comprising primarily floating-rate whole loans secured by a diverse mix of CRE property types. The portfolio breakdown included multifamily (79.4%), office (14.0%), hotel (4.3%), self-storage (2.3%), and retail (0.4%). The weighted average interest rate on the CRE loan portfolio was 8.95%, with maturities ranging from October 2024 to September 2027.
During the nine months ended September 30, 2024, ACRES did not originate any new CRE loans but received $270.1 million in loan payoffs and experienced $37.7 million in loan foreclosures, offset by $28.1 million in fundings of previously unfunded loan commitments. This resulted in a net decrease of $279.7 million in the portfolio's par balance.
Liquidity ACRES' balance sheet remains strong, with a GAAP debt-to-equity leverage ratio of 3.0x as of December 31, 2024. The company's available liquidity, consisting of unrestricted cash and projected financing on unlevered assets, stood at $76.9 million at the end of the fourth quarter. Additionally, ACRES had $32.1 million in net operating loss (NOL) carryforwards, which it plans to utilize to shield future capital gains from income taxes.
As of September 30, 2024, the company reported cash holdings of $70.1 million. ACRES maintains an allowance for credit losses on its CRE loan portfolio, which stood at $34.7 million, or 2.2% of the portfolio, as of September 30, 2024.
Portfolio Management and Capital Allocation During 2024, ACRES actively managed its CRE loan portfolio, with $107.5 million in loan payoffs and one new $47.9 million commitment, resulting in a net reduction of $81.8 million. The company also continued to monetize its equity investments in real estate, including the sale of an office property in Pennsylvania for a $7.5 million gain in the fourth quarter of 2024. These asset sales have allowed ACRES to recycle capital and redeploy it into its core CRE lending business.
In addition to its CRE loan portfolio, ACRES held investments in eight real estate properties as of September 30, 2024, with a total net carrying value of $194.5 million. These investments include multifamily, office, and hotel properties located across various geographic regions. During the nine months ended September 30, 2024, ACRES acquired several new real estate investments through foreclosure or deed-in-lieu of foreclosure processes, including a converted office property in the East North Central region, a multifamily property in the Southwest region, and an office complex in the Southwest region. The company recognized gains of $2.8 million and $8.6 million on the conversion of these CRE loans to real estate investments during the three and nine months ended September 30, 2024, respectively.
Looking ahead, the company is focused on growing its loan portfolio, with a target of reaching $1.8 billion to $2.0 billion in assets by the end of 2025. ACRES also plans to refinance its two existing CRE securitizations in the first quarter of 2025, which will result in a one-time charge related to unamortized debt issuance costs of $2.3 million as of December 31, 2024. This refinancing is expected to provide additional liquidity and flexibility to support its lending activities.
Market Disruption and Opportunities The commercial real estate market has experienced significant disruption in recent years, driven by factors such as the COVID-19 pandemic, rising interest rates, and changes in consumer and business behavior. These market conditions have presented both challenges and opportunities for ACRES.
On the challenge side, the company has had to work closely with its borrowers to address cash flow pressures and potential defaults. However, ACRES' proactive asset management approach and conservative underwriting have helped it navigate these headwinds and maintain the overall quality of its portfolio.
At the same time, the market disruption has created opportunities for ACRES to selectively acquire high-quality CRE loans and assets at attractive valuations. The company has been focused on identifying and capitalizing on these opportunities, leveraging its expertise and deep industry relationships to source and underwrite new investments.
Risks and Outlook While ACRES has demonstrated resilience and adaptability in the face of market challenges, the company remains exposed to risks inherent in the CRE lending and investment space. These include interest rate risk, credit risk, and potential volatility in property values and cash flows. The company's ability to effectively manage these risks will be crucial to its long-term success.
Looking ahead, ACRES remains cautiously optimistic about the market outlook. The company expects its earnings available for distribution (EAD) profile to trend up from a low point in the early part of 2025 as it completes the transition of monetizing equity investments and redeploying the capital into its CRE loan book. ACRES' goal is to drive mid-teens ROEs that net down to a run-rate 8% to 10% EAD range at book value.
The company anticipates some near-term challenges, including a $700,000 charge-off related to the sale of a loan on an underperforming hotel in Orlando in the first quarter of 2025. However, ACRES believes that its focus on high-quality, transitional CRE loans, coupled with its proactive asset management approach, will enable it to capitalize on emerging opportunities and deliver sustainable growth and returns for its shareholders.
Conclusion ACRES Commercial Realty Corp. has navigated a complex and volatile market environment with skill and determination. By actively managing its investment portfolio, recycling capital, and capitalizing on market disruptions, the company has positioned itself for long-term success. As ACRES continues to execute on its strategic initiatives, including growing its loan portfolio and refinancing its securitizations, it remains well-positioned to generate attractive risk-adjusted returns for its shareholders in the evolving commercial real estate market.