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    Acres Commercial Realty Corp (ACR)

    Q3 2024 Earnings Summary

    Reported on Feb 18, 2025 (After Market Close)
    Pre-Earnings Price$15.30Last close (Oct 31, 2024)
    Post-Earnings Price$15.30Open (Nov 1, 2024)
    Price Change
    $0.00(0.00%)
    • ACR is expected to monetize several REO assets in the next two quarters, potentially realizing gains that will positively impact book value per share. The company is in the process of monetizing its REO assets and expects that over the next two quarters, much of that work will be completed. They have a high degree of certainty on executing the sale of three other assets in addition to the student housing asset near Florida State University. ,
    • The company plans to redeploy capital from asset sales into the loan portfolio, focusing on earnings growth and aiming to drive to a market-based dividend over the next 12 months. With the proceeds from the asset monetizations, ACR expects to redeploy capital back into the loan book and focus on earnings, with the goal of driving to a market-based dividend over the forward 12 months. ,
    • ACR is preparing to issue new CLOs, expecting to achieve mid-to-high teens ROE outcomes, supporting future earnings growth. Despite deleveraging due to current CLO paydowns, the company plans to issue new CLOs and expects to drive mid-to-high teens ROE outcome based on current market conditions and the collateral they have.
    • Deleveraging from current CLOs is reducing Earnings Available for Distribution (EAD), and the company needs to issue new CLOs to drive earnings. Management acknowledges that they may not replicate the favorable terms of previous CLOs in the current market, stating: "So as it relates to the FL1 and 2 terms, those were done, obviously, in a market environment that were particularly attractive. So I'm not sure if we collapse these two and redeploy into a new one, they're going to be at the same levels, but spreads are wider as well." ,
    • Uncertainty around the monetization of REO assets: While the company plans to sell REO assets over the next couple of quarters, management has not provided specifics on expected gains or timelines, saying: "We're not going to be specific in terms of giving projections. We'll give you the results when they actually get completed." This lack of clarity may lead to uncertainty about future earnings and book value. Additionally, since they hold REO assets at cost and have not revalued them, there is a risk that actual realized values may differ from expectations. ,
    • Lack of clarity on dividend reinstatement: The company "hasn't set a specific target" for reinstating the dividend and is facing challenges due to deleveraging from CLO paydowns impacting EAD. Management stated: "We're going to have to flip at some point to thinking about how to issue a new one, and that will impact our ability to drive earnings as well." This uncertainty may concern investors seeking income, as the timing and amount of future dividends remain unclear.
    TopicPrevious MentionsCurrent PeriodTrend

    Asset Monetization Strategy

    Emphasized monetizing REO assets and investments to redeploy capital, although timelines remained uncertain and the focus was on removing REO from the books and offsetting NOLs.

    Detailed discussion with specific examples (student housing at 95% occupancy, office property gain, multifamily stabilization) and clearer timing (completion expected by end Q4 2024/early Q1 2025) with an expectation for a flat to positive impact on book value per share.

    Consistent focus with enhanced clarity: The strategy remains central, but the current period provides more specifics and a more optimistic outlook.

    Dividend Reinstatement and Shareholder Returns

    Discussed using asset monetization and investment sales to drive Earnings Available for Distribution (EAD) with the target of a 10% dividend at book value and emphasized accretive share repurchases, though specifics on timing were not provided.

    Continued focus on monetizing assets and redeploying capital to eventually pay a market-based dividend; however, additional challenges were noted due to deleveraging from current CLO paydowns which affect liquidity and earnings potential.

    Steady interest amid caution: The emphasis remains, but current commentary reflects additional concerns over liquidity and deleveraging, adding nuance to an otherwise consistent objective.

    Capital Redeployment

    Focused on monetizing investments to offset NOLs and recycle capital into the loan portfolio, targeting a ROE of approximately 15% and supporting shareholder returns through enhanced EAD.

    Proceeds from both proactively acquired and REO asset monetizations are being redeployed into the loan portfolio, coupled with plans to allocate origination flow into a warehouse for future loans and ultimately drive a market-based dividend.

    Consistent strategic emphasis: Both periods stress redeploying capital to fund new loans and drive earnings, reflecting a steady, long‐term approach.

    CLO Issuance and Deleveraging Challenges

    Not mentioned in the Q4 2023 earnings call.

    Introduced as a challenge; current discussions note that ongoing deleveraging from CLO paydowns is straining liquidity and prompting considerations for issuing new CLOs, which could impact the effectiveness of earnings generation.

    New negative concern: This issue emerges in the current period, signaling potential headwinds that could impact future liquidity and capital efficiency.

    Interest Rate Cap Maturity Management

    Addressed proactively with borrowers by initiating conversations six months in advance, yielding very positive interactions and smooth cap replacements.

    Not mentioned in the Q3 2024 discussion.

    Topic dropped: Once a highlight in the previous period, it is no longer mentioned in the current call, suggesting a deprioritization or resolution of related issues.

    Share Repurchases as a Capital Return Mechanism

    Highlighted significant repurchase activity with large discounts (e.g., 71% discount) and an accretive impact on book value, along with substantial remaining authorization for further repurchases.

    Continued repurchase activity was noted, though at a lower volume (114,000 shares at a 46% discount) with a remaining repurchase balance still in place.

    Consistent but muted: Share repurchases remain a central capital return tool; however, differences in scale and discount levels indicate evolving market conditions and possibly a more cautious deployment of this mechanism.

    Credit Quality and Loan Performance Concerns

    Raised concerns about increasing risk profiles with the average risk rating moving from 2.6 to 2.7 and a higher proportion of loans rated 4 or 5, alongside an increase in credit loss reserves driven by short-term cash flow issues.

    The portfolio performance was generally stable with a maintained average risk rating at 2.7 and proactive management of credit quality, despite a slight rise in higher-risk loans; overall, the tone was less negative and more focused on stabilization and improvements in property-level performance.

    Slight improvement in sentiment: While risks remain, the current period reflects more proactive management and a steadier performance, suggesting effective mitigation of previously noted concerns.

    Market Conditions Impacting Financial Instrument Terms

    Not mentioned in the Q4 2023 earnings call.

    Discussed how current market conditions—such as wider spreads—are adversely affecting the terms on potential new CLO issuances, which in turn could affect future ROE if assets are redeployed under less favorable conditions.

    New risk factor: This topic is new in the current period and highlights potential challenges in financing and asset redeployment due to deteriorating market conditions, which could significantly impact future financial outcomes.

    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.