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    Acres Commercial Realty Corp (ACR)

    Business Description

    ACRES Commercial Realty Corp. (ACR) is a Maryland-based real estate investment trust (REIT) specializing in originating, holding, and managing commercial real estate (CRE) mortgage loans and equity investments in CRE properties. The company primarily targets the middle market segment of CRE lending across the United States, focusing on property types such as multifamily, student housing, hospitality, office, and industrial properties. ACR generates income through interest-bearing assets, rental income from equity investments, and other real estate-related activities.

    1. Commercial Real Estate (CRE) Loans - Provides transitional floating-rate loans, including first mortgage loans, A-notes, B-notes, and mezzanine loans, secured by CRE properties.
    2. Real Estate Income - Generates rental income from direct equity investments in commercial real estate properties.
    3. Other Revenue - Includes miscellaneous income sources related to real estate operations.

    Q3 2024 Summary

    Initial Price$12.81July 1, 2024
    Final Price$15.76October 1, 2024
    Price Change$2.95
    % Change+23.03%

    What went well

    • ACR plans to monetize several REO assets over the next two quarters, which is expected to improve book value per share and provide capital to reinvest into their loan portfolio.
    • Management is focusing on growing earnings and reinstating dividends, indicating confidence in future profitability and commitment to shareholder returns.
    • Analysts have highlighted that ACR's stock has doubled over the last year, making it the best-performing mortgage REIT year-to-date, reflecting positive market sentiment towards the company.

    What went wrong

    • ACRES is experiencing deleveraging due to paydowns on existing CLOs, negatively impacting Earnings Available for Distribution and hindering the company's ability to drive earnings and reinstate dividends.
    • The company's liquidity is constrained, with only $80 million available, limiting its capacity to originate new loans and grow the loan portfolio, potentially affecting future earnings growth.
    • Future financing costs may increase as current CLO market conditions are less favorable, potentially resulting in higher costs and lower returns for shareholders.

    Q&A Summary

    1. Asset Monetization and REO Sales
      Q: What REO assets are you selling in the next 6 months?
      A: We are in the process of selling the student housing asset at FSU and have three other assets that we are highly certain will be executed over the next couple of quarters.

    2. Dividend Resumption
      Q: What is needed to resume and grow the dividend?
      A: We will continue to monetize assets and drive EAD, paying a dividend out of EAD that we believe will be growing as we re-lever the balance sheet and focus on driving earnings.

    3. Loan Pipeline and Originations
      Q: How is the loan pipeline ramping up for new originations?
      A: With about $80 million of liquidity, we plan to redeploy funds as assets repay, especially since many are not in a CLO and proceeds can be used for re-originations. ACRES is actively engaged in the marketplace, originating new loans weekly, and we expect to allocate some of this flow to the REIT when liquidity allows.

    4. Financing Costs and CLOs
      Q: How do your current CLOs compare to today's market, and plans for new deals?
      A: Our existing CLOs (FL1 and FL2) were executed in particularly attractive markets. While new CLOs might not match those terms due to wider spreads, we focus on the ROEs the structure can deliver. Based on current CRE CLO markets, we expect to drive mid- to high-teens ROE outcomes, assuming market conditions remain similar.

    5. Loan Ratings and Foreclosure
      Q: What caused the decline in 4-rated loans this quarter?
      A: The decline was due to a conversion to REO. The borrower had issues within his portfolio and couldn't keep the loan current, so we proceeded with foreclosure during the quarter.

    6. REO Asset Valuations and Gains
      Q: Have you appraised REO assets, and what gains are expected?
      A: We hold REO assets at cost or depreciated value and don't mark them until monetized. While we won't provide specific projections, we expect incremental gains upon sale, which will be positive rather than losses. These gains will flow through EAD when realized.

    7. Share Repurchase Program Update
      Q: How much was used for share repurchases, and what's left?
      A: We used $1.7 million for share repurchases this quarter and have about $2.3 million remaining in the program.

    Key Metrics

    View all financials →
    Revenue by Segment - in Millions of USDFY 2013Q1 2014Q2 2014Q3 2014Q4 2014FY 2014Q1 2015Q2 2015Q3 2015Q4 2015FY 2015Q1 2016Q2 2016Q3 2016Q4 2016FY 2016Q1 2017Q2 2017Q3 2017Q4 2017FY 2017Q1 2018Q2 2018Q3 2018Q4 2018FY 2018Q1 2019Q2 2019Q3 2019Q4 2019FY 2019Q1 2020Q2 2020Q3 2020Q4 2020FY 2020Q1 2021Q2 2021Q3 2021Q4 2021FY 2021Q1 2022Q2 2022Q3 2022Q4 2022FY 2022Q1 2023Q2 2023Q3 2023Q4 2023FY 2023Q1 2024Q2 2024Q3 2024
    Interest Income45.3347.14848.208--42.61-39.30
    - CRE Loans44.4746.35147.567--41.87-38.71
    - Securities--------
    - Other0.860.7970.641--0.75-0.59
    Real Estate Income7.078.8799.316--7.37-11.86
    Other Revenue0.030.0370.037--0.04-0.04
    - Dividend Income--------
    Commercial Real Estate Debt Investments--------
    Commercial Finance--------
    Residential Mortgage Lending--------
    Corporate & Other--------
    Total Revenue52.4323.62224.006-8.9391.13150.0220.93651.20
    KPIs - **Metric (Unit)**FY 2013Q1 2014Q2 2014Q3 2014Q4 2014FY 2014Q1 2015Q2 2015Q3 2015Q4 2015FY 2015Q1 2016Q2 2016Q3 2016Q4 2016FY 2016Q1 2017Q2 2017Q3 2017Q4 2017FY 2017Q1 2018Q2 2018Q3 2018Q4 2018FY 2018Q1 2019Q2 2019Q3 2019Q4 2019FY 2019Q1 2020Q2 2020Q3 2020Q4 2020FY 2020Q1 2021Q2 2021Q3 2021Q4 2021FY 2021Q1 2022Q2 2022Q3 2022Q4 2022FY 2022Q1 2023Q2 2023Q3 2023Q4 2023FY 2023Q1 2024Q2 2024Q3 2024
    Weighted-Average Maturity of Interest Rate Caps (Months)10.8986-646
    % of CRE Loan Portfolio Earning Floating Rate of Interest (%)99.8%99.8%99.8%99.7%-99.7%99.6%99.5%
    Weighted-Average Benchmark Floor for Floating-Rate Loan Portfolio (%)0.66%0.68%0.68%0.70%-0.74%0.75%0.85%
    % Allocation of CRE Loan Portfolio to Multifamily Loans (%)76.2%75.4%76.3%79.6%-79.1%79.4%79.4%
    Maximum Principal Balance of Construction Loan for Student Housing ($M)48.048.048.048.0-48.048.048.0
    Maximum Principal Balance of Energy Efficiency Financing Agreement ($M)15.515.515.515.5-15.515.515.5
    Fixed Interest Rate on Energy Efficiency Financing (%)7.26%-7.26%7.26%-7.26%7.26%7.26%
    Fair Value of Property Acquired Through Foreclosure ($M)-20.920.920.9-20.320.327.3
    Internal Rate of Return (IRR) Used in Property Valuation (%)--9.25%9.25%-8.50%8.50%8.50%
    Terminal Capitalization Rate Used in Property Valuation (%)--7.50%7.50%-7.00%7.00%6.00%
    Allowance for Credit Losses ($M)23.925.727.628.8-33.735.034.7
    Unfunded Loan Commitments for CRE Whole Loans ($M)143.6128.7118.8109.4-97.489.178.4

    Executive Team

    NamePositionStart DateShort Bio
    Mark S. FogelPresident, Chief Executive Officer, and DirectorJuly 2020Co-founded ACRES Capital in 2012 and leads its executive management team. Previously held leadership roles at UC Funds, Arbor Realty Trust, and others, with nearly 30 years of experience in commercial real estate.
    Eldron C. BlackwellSenior Vice President, Chief Financial Officer, and TreasurerJanuary 1, 2024 (expected)Previously served as Vice President and Chief Accounting Officer at ACR (March 2014–December 2023). Held roles at New Penn Financial and Grant Thornton LLP, with extensive experience in accounting and auditing.
    Jaclyn A. JesbergerChief Legal Officer, Senior Vice President, and SecretaryJuly 2020Joined ACRES Capital in June 2015 as General Counsel and Chief Compliance Officer. Previously worked at Arbor Commercial Mortgage and Credit Suisse, specializing in real estate finance and securitization.
    Linda M. KilpatrickVice President and Chief Accounting OfficerJanuary 1, 2024 (expected)Previously served as Controller at ACR (October 2017–December 2023). Earlier roles include Accounting and Reporting Manager at Independence Blue Cross and Manager in audit practice at Grant Thornton LLP.
    Michael PierroSenior Vice PresidentJune 2020Also serves as Managing Director and Chief Credit Officer of ACRES Capital. Previously held senior roles at C-III Capital Partners, Nomura Securities, and other firms in commercial real estate finance.
    Kyle K. BrengelVice President – OperationsJuly 2020Also serves as Chief Operating Officer of ACRES Capital. Held various positions within ACRES since 2017 and previously worked at Napier Park Global Capital, Ares Management, and Duff & Phelps.
    Richard A. PersaudVice President – FinanceSeptember 2020Also serves as Chief Financial Officer of ACRES Capital. Previously worked at Ernst & Young LLP as a senior manager in real estate assurance practice. Certified Public Accountant and Certified Internal Auditor.

    Questions to Ask Management

    1. With 11 loans rated 4 or 5, representing 23% of your loan portfolio, can you provide more detail on the specific challenges these assets are facing, and what strategies you're implementing to mitigate risks and improve credit quality?

    2. Given the decrease in Earnings Available for Distribution (EAD) from $0.51 to $0.24 per share this quarter, can you elaborate on the factors contributing to this decline and how you plan to stabilize and grow EAD moving forward?

    3. As your current CLOs are paying down and you're considering issuing new ones, how do you anticipate the changes in financing costs and market conditions will impact your ability to achieve target returns and ROEs on new investments?

    4. Considering the significant net decrease of $134.4 million in your loan portfolio due to payoffs and foreclosures, how do you plan to effectively redeploy capital amidst current market conditions to prevent further portfolio contraction?

    5. Regarding your monetization strategy for the REO assets, particularly the student housing asset near Florida State University, what risks do you foresee that could impact your ability to realize the expected gains, and how are you addressing them to ensure positive outcomes for shareholders?

    Share Repurchase Program

    Program DetailsProgram 1Program 2
    Approval DateNovember 2020 November 2023
    End Date/DurationN/AN/A
    Total Additional Amount$20.0 million $10.0 million
    Remaining Authorization$0.0 million $2.3 million
    DetailsAuthorized for repurchase of common and preferred stock Authorized for repurchase of common and preferred stock

    Notes:

    • The remaining authorization amount of $2.3 million as of September 30, 2024, is allocated entirely to Program 2 since it is the newest program.
    • Specific end dates or durations for the programs were not provided in the documents.

    Past Guidance

    Q3 2024 Earnings Call

    • Issued Period: Q3 2024
    • Guided Period: Q4 2024 and Q1 2025
    • Guidance:
      • Monetization of Assets: Expectation to complete much of the monetization work over the next two quarters, impacting book value per share to be flat or better than the current level.
      • Dividend Strategy: Plans to continue monetizing assets and driving earnings available for distribution (EAD) to support a growing dividend, considering issuing a new CLO.
      • Asset Sales: Expectations of incremental gains from asset sales, with three other assets in process for liquidation.
      • Earnings Impact: Unrealized gain from REO conversion to flow through EAD once monetized.
      • CLO Market Strategy: Considering collapsing existing CLOs and redeploying into new ones, aiming for mid- to high-teens return on equity (ROE).

    Q2 2024 Earnings Call

    • Issued Period: Q2 2024
    • Guided Period: N/A
    • Guidance: The documents do not include any information from the Q2 2024 earnings call for ACR. Therefore, no guidance or metrics are available for this period.

    Q1 2024 Earnings Call

    • Issued Period: Q1 2024
    • Guided Period: N/A
    • Guidance: The documents do not provide any information regarding guidance from the Q1 2024 earnings call for ACR.

    Q4 2023 Earnings Call

    • Issued Period: Q4 2023
    • Guided Period: Q4 2023 and FY 2023, with forward-looking commentary about 2024
    • Guidance:
      • Dividend Timing: No specific guidance on dividend reinstatement timing; dependent on monetizing investments and achieving EAD level supporting a 10% dividend at book value.
      • Loan Book Deployment: Aim for a 15% return on equity (ROE) when deploying new dollars into the loan book.
      • Monetization of Investments: Plan to monetize certain real estate investments to offset NOLs and redeploy capital into the loan book.
      • Interest Rate Cap Maturities: Engaging with borrowers in advance of interest rate cap maturities, expecting most to replace caps without issues.