UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 8-K CURRENT REPORT Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Date of Report (Date of earliest event reported): February 28, 2024 ACRES Commercial Realty Corp. (Exact name of Registrant as Specified in Its Charter) Maryland 1-32733 20-2287134 (State or Other Jurisdiction (Commission File Number) (IRS Employer of Incorporation) Identification No .) 390 RXR Plaza Uniondale, New York 11556 (Address of Princ ...

PART I. FINANCIAL INFORMATION [ITEM 1. FINANCIAL STATEMENTS](index=3&type=section&id=ITEM%201.%20FINANCIAL%20STATEMENTS) This section presents the unaudited consolidated financial statements of ACRES Commercial Realty Corp. and its subsidiaries for the period ended September 30, 2023, including balance sheets, statements of operations, comprehensive income (loss), changes in equity, and cash flows, along with detailed notes explaining the company's accounting policies, financial instruments, and other relevant disclosures [Consolidated Balance Sheets](index=3&type=section&id=Consolidated%20Balance%20Sheets) The consolidated balance sheets show a decrease in total assets and liabilities from December 31, 2022, to September 30, 2023, while total equity slightly increased | Metric | Sep 30, 2023 (in thousands) | Dec 31, 2022 (in thousands) | Change (in thousands) | | :-------------------------------- | :-------------------------- | :-------------------------- | :-------------------- | | Total assets | $2,261,496 | $2,376,652 | $(115,156) | | Total liabilities | $1,813,269 | $1,935,338 | $(122,069) | | Total equity | $448,227 | $441,314 | $6,913 | | CRE loans, net | $1,892,571 | $2,038,787 | $(146,216) | | Allowance for credit losses | $(27,634) | $(18,803) | $(8,831) | - Assets of consolidated Variable Interest Entities (VIEs) decreased from **$1,503,132 thousand** at December 31, 2022, to **$1,474,780 thousand** at September 30, 2023, primarily due to a reduction in CRE loans pledged as collateral[13](index=13&type=chunk) [Consolidated Statements of Operations](index=5&type=section&id=Consolidated%20Statements%20of%20Operations) The company reported increased net income for both the three and nine months ended September 30, 2023, compared to the same periods in 2022, driven by higher total interest income and a lower provision for credit losses in the three-month period, despite increased interest expense | Metric (in thousands) | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :-------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Total interest income | $48,208 | $34,065 | $140,685 | $83,760 | | Interest expense | $33,555 | $22,939 | $97,372 | $53,591 | | Net interest income | $14,653 | $11,126 | $43,313 | $30,169 | | Total revenues | $24,006 | $20,933 | $68,686 | $51,929 | | Total operating expenses | $16,552 | $17,450 | $54,349 | $41,070 | | Net income | $7,567 | $5,486 | $15,418 | $13,092 | | Net income (loss) allocable to common shares | $2,870 | $713 | $1,271 | $(1,368) | | Basic EPS | $0.34 | $0.08 | $0.15 | $(0.15) | | Diluted EPS | $0.33 | $0.08 | $0.15 | $(0.15) | - Provision for credit losses, net, decreased by **$637 thousand** for the three months ended September 30, 2023, compared to the same period in 2022, but increased significantly by **$8,437 thousand** for the nine months ended September 30, 2023, compared to 2022[15](index=15&type=chunk) [Consolidated Statements of Comprehensive Income (Loss)](index=6&type=section&id=Consolidated%20Statements%20of%20Comprehensive%20Income%20%28Loss%29) Comprehensive income allocable to common shares increased for both the three and nine months ended September 30, 2023, compared to the prior year, primarily due to higher net income and reclassification adjustments from interest rate swaps | Metric (in thousands) | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :-------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Net income | $7,567 | $5,486 | $15,418 | $13,092 | | Reclassification adjustments from interest rate swaps | $402 | $415 | $1,192 | $1,332 | | Comprehensive income (loss) allocable to common shares | $3,272 | $1,128 | $2,463 | $(36) | [Consolidated Statements of Changes in Equity](index=7&type=section&id=Consolidated%20Statements%20of%20Changes%20in%20Equity) Total equity increased from **$441.3 million** at December 31, 2022, to **$448.2 million** at September 30, 2023, driven by net income, contributions from non-controlling interests, and amortization of terminated derivatives, partially offset by common stock repurchases and preferred stock dividends | Metric (in thousands) | Dec 31, 2022 | Sep 30, 2023 | Change | | :-------------------- | :----------- | :----------- | :----- | | Total Equity | $441,314 | $448,227 | $6,913 | | Common Stock Shares Outstanding | 8,708,100 | 8,448,524 | (259,576) | | Additional Paid-In Capital | $1,174,202 | $1,173,975 | $(227) | | Accumulated Other Comprehensive Loss | $(6,394) | $(5,202) | $1,192 | | Distributions in Excess of Earnings | $(732,359) | $(731,088) | $1,271 | | Non-controlling interests | $5,846 | $10,524 | $4,678 | - The company repurchased and retired **298,457 common shares** during the nine months ended September 30, 2023, reducing common stock and additional paid-in capital[20](index=20&type=chunk)[23](index=23&type=chunk)[24](index=24&type=chunk) [Consolidated Statements of Cash Flows](index=9&type=section&id=Consolidated%20Statements%20of%20Cash%20Flows) Net cash provided by operating activities significantly increased for the nine months ended September 30, 2023, compared to 2022, while investing activities shifted from a net outflow to a net inflow, and financing activities saw a substantial net outflow | Metric (in thousands) | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :-------------------- | :-------------------------- | :-------------------------- | | Net cash provided by operating activities | $36,224 | $19,002 | | Net cash provided by (used in) investing activities | $106,954 | $(300,507) | | Net cash (used in) provided by financing activities | $(147,673) | $74,524 | | Net decrease in cash and cash equivalents and restricted cash | $(4,495) | $(206,981) | | Cash and cash equivalents and restricted cash at end of period | $100,316 | $76,950 | - Origination and purchase of loans decreased significantly from **$543,783 thousand** in 2022 to **$75,002 thousand** in 2023, contributing to the shift in investing activities[34](index=34&type=chunk) - Payments on borrowings, particularly securitizations and senior secured financing facilities, were a major use of cash in financing activities for the nine months ended September 30, 2023[34](index=34&type=chunk) [Notes to Consolidated Financial Statements](index=10&type=section&id=Notes%20to%20Consolidated%20Financial%20Statements) This section provides detailed disclosures on the company's financial statements, covering organization, significant accounting policies, variable interest entities, loan portfolio, real estate investments, financing arrangements, equity, related party transactions, fair value measurements, market risks, and commitments [NOTE 1 - ORGANIZATION](index=10&type=section&id=NOTE%201%20-%20ORGANIZATION) ACRES Commercial Realty Corp. is a Maryland REIT focused on originating, holding, and managing commercial real estate (CRE) mortgage loans and equity investments, operating through consolidated subsidiaries, with ACRES Realty Funding, Inc. holding core assets including CRE loans and securitizations - The Company is a REIT primarily focused on CRE mortgage loans and equity investments in multifamily, student housing, hospitality, office, and industrial properties in top U.S. markets[36](index=36&type=chunk) - ACRES Realty Funding, Inc. (ACRES RF), a wholly-owned subsidiary, holds the Company's core assets, including CRE loans, real estate investments, and CRE securitizations[37](index=37&type=chunk) [NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES](index=10&type=section&id=NOTE%202%20-%20SUMMARY%20OF%20SIGNIFICANT%20ACCOUNTING%20POLICIES) The company's financial statements are prepared under GAAP, consolidating majority-owned subsidiaries and VIEs, with key policies including the use of estimates, classification of cash and restricted cash, depreciation of real estate assets, income tax valuation allowances, and the transition of floating-rate instruments from LIBOR to SOFR - The Company adopted new FASB guidance in 2023, eliminating troubled-debt restructuring (TDR) recognition and measurement guidance, which did not materially impact its financial statements[52](index=52&type=chunk) - The Company transitioned its entire portfolio of floating-rate whole loans and borrowings from LIBOR to SOFR by September 30, 2023, following the FCA's announcement[49](index=49&type=chunk)[50](index=50&type=chunk) - A full valuation allowance was recorded against net deferred tax assets at September 30, 2023, due to historical losses and uncertainty regarding future taxable income from taxable REIT subsidiaries[47](index=47&type=chunk) [NOTE 3 - VARIABLE INTEREST ENTITIES](index=12&type=section&id=NOTE%203%20-%20VARIABLE%20INTEREST%20ENTITIES) The company consolidates five CRE securitizations and CDOs as Variable Interest Entities (VIEs) where it is the primary beneficiary, financing assets with long-term debt, and also consolidated the FSU Student Venture due to a 72.1% interest, while unconsolidated VIEs are not consolidated as the company is not the primary beneficiary - The Company is the primary beneficiary of **five consolidated VIEs** (CRE securitizations and CDOs) at September 30, 2023, and December 31, 2022, which are used to invest in real estate-related securities and commercial mortgage-backed securities[54](index=54&type=chunk) | Asset/Liability (in thousands) | Consolidated VIEs (Sep 30, 2023) | | :----------------------------- | :------------------------------- | | Total assets | $1,474,780 | | Total liabilities | $1,207,616 | - The Company holds a **100% interest** in the common shares of Resource Capital Trust I and RCC Trust II, valued at **$1.5 million**, which are unconsolidated VIEs where the Company is not the primary beneficiary[60](index=60&type=chunk) [NOTE 4 - SUPPLEMENTAL CASH FLOW INFORMATION](index=14&type=section&id=NOTE%204%20-%20SUPPLEMENTAL%20CASH%20FLOW%20INFORMATION) Supplemental cash flow information highlights significant non-cash investing and financing activities, including proceeds from deed-in-lieu of foreclosure and accrued preferred stock dividends | Supplemental Cash Flow Item (in thousands) | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :----------------------------------------- | :-------------------------- | :-------------------------- | | Interest expense paid in cash | $94,433 | $46,999 | | Proceeds from deed-in-lieu of foreclosure | $20,900 | $14,299 | | Distributions on preferred stock accrued but not paid | $3,262 | $3,262 | [NOTE 5 - LOANS](index=15&type=section&id=NOTE%205%20-%20LOANS) The company's CRE loan portfolio decreased from **$2.06 billion** at December 31, 2022, to **$1.92 billion** at September 30, 2023, with a significant concentration in multifamily properties (**76.3%**) and the Southwest region (**24.2%**), and all whole loans now use one-month Term SOFR, with a weighted-average benchmark rate of **5.37%** at September 30, 2023 | Loan Type (in thousands) | Sep 30, 2023 Carrying Value | Dec 31, 2022 Carrying Value | | :----------------------- | :-------------------------- | :-------------------------- | | Whole loans | $1,892,571 | $2,038,787 | | Mezzanine loan | — | — | | Total CRE loans, net | $1,892,571 | $2,038,787 | | Property Type (Sep 30, 2023) | Carrying Value (in thousands) | % of Loan Portfolio | | :--------------------------- | :---------------------------- | :------------------ | | Multifamily | $1,443,261 | 76.3 % | | Office | $247,062 | 13.1 % | | Hotel | $146,144 | 7.7 % | | Self-Storage | $48,079 | 2.5 % | | Retail | $8,025 | 0.4 % | - At September 30, 2023, the weighted-average one-month benchmark rate for whole loans was **5.37%**, up from **4.21%** at December 31, 2022, with all whole loans transitioned to one-month Term SOFR[74](index=74&type=chunk) [NOTE 6 - FINANCING RECEIVABLES](index=17&type=section&id=NOTE%206%20-%20FINANCING%20RECEIVABLES) The allowance for credit losses increased to **$27.6 million** at September 30, 2023, driven by increased modeled portfolio credit risk due to macroeconomic uncertainty, with individually evaluated impaired loans including a fully reserved office mezzanine loan and retail/office loans with probable foreclosure, but no CECL allowance due to appraised values | Metric (in thousands) | 9 Months Ended Sep 30, 2023 | Year Ended Dec 31, 2022 | | :-------------------- | :-------------------------- | :---------------------- | | Allowance for credit losses at beginning of period | $18,803 | $8,805 | | Provision for credit losses | $9,779 | $12,295 | | Charge offs | $(948) | $(2,297) | | Allowance for credit losses at end of period | $27,634 | $18,803 | - The provision for credit losses of **$9.8 million** for the nine months ended September 30, 2023, was primarily due to increased modeled portfolio credit risk related to ongoing macroeconomic uncertainty in the commercial real estate market[83](index=83&type=chunk) | Risk Rating | Sep 30, 2023 (in thousands) | Dec 31, 2022 (in thousands) | | :---------- | :-------------------------- | :-------------------------- | | Rating 2 | $1,049,699 | $1,635,376 | | Rating 3 | $709,481 | $309,491 | | Rating 4 | $128,161 | $85,226 | | Rating 5 | $32,864 | $27,497 | [NOTE 7 - INVESTMENTS IN REAL ESTATE AND OTHER ACQUIRED ASSETS AND ASSUMED LIABILITIES](index=22&type=section&id=NOTE%207%20-%20INVESTMENTS%20IN%20REAL%20ESTATE%20AND%20OTHER%20ACQUIRED%20ASSETS%20AND%20ASSUMED%20LIABILITIES) The company held investments in **six real estate properties** at September 30, 2023, with a total net carrying value of **$168.7 million**, including a hotel property sold in February 2023 for a **$745,000 gain** and an office property acquired via deed-in-lieu of foreclosure in June 2023, valued at **$20.9 million**, resulting in a **$948,000 charge-off** against the allowance for credit losses - At September 30, 2023, the Company held investments in **six real estate properties**, with four in 'investments in real estate' and two in 'properties held for sale'[105](index=105&type=chunk) - A hotel property was sold in February 2023 for **$15.1 million**, generating a gain of **$745,000**[105](index=105&type=chunk) - An office property was acquired via deed-in-lieu of foreclosure in June 2023, valued at **$20.9 million**, leading to a **$948,000 charge-off** against the allowance for credit losses[106](index=106&type=chunk) [NOTE 8 - LEASES](index=25&type=section&id=NOTE%208%20-%20LEASES) The company has operating leases for office space and equipment, expiring between January 2024 and September 2029, in addition to a 93-year ground lease for a hotel property, with lease costs and cash payments for operating leases increasing for the nine months ended September 30, 2023, compared to 2022 | Operating Lease Metric (in thousands) | Sep 30, 2023 | Dec 31, 2022 | | :------------------------------------ | :----------- | :----------- | | Right of use assets | $716 | $822 | | Lease liabilities | $(760) | $(828) | | Lease Cost (in thousands) | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :------------------------ | :-------------------------- | :-------------------------- | | Operating lease cost | $154 | $73 | | Cash paid for operating leases | $113 | $70 | - The weighted average remaining lease term for operating leases is **6.0 years**, with a weighted average discount rate of **8.70%** at September 30, 2023[114](index=114&type=chunk) [NOTE 9 - INVESTMENTS IN UNCONSOLIDATED ENTITIES](index=26&type=section&id=NOTE%209%20-%20INVESTMENTS%20IN%20UNCONSOLIDATED%20ENTITIES) The company holds a **100% interest** in the common shares of RCT I and RCT II, valued at **$1.5 million**, accounted for using the cost method, with dividend income from these investments increasing for both the three and nine months ended September 30, 2023, compared to 2022 - The Company's investments in unconsolidated entities consist of a **100% interest** in the common shares of RCT I and RCT II, totaling **$1.5 million**[118](index=118&type=chunk) | Dividend Income (in thousands) | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :----------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Dividends from RCT I and RCT II | $37 | $25 | $107 | $60 | [NOTE 10 - BORROWINGS](index=27&type=section&id=NOTE%2010%20-%20BORROWINGS) Total borrowings decreased from **$1.87 billion** at December 31, 2022, to **$1.74 billion** at September 30, 2023, with a weighted average borrowing rate increasing to **7.28%**, and the company's securitizations (ACR 2021-FL1 and ACR 2021-FL2) transitioned from LIBOR to Term SOFR in June 2023, with the reinvestment period for ACR 2021-FL1 ending in May 2023 | Borrowing Type (in thousands) | Sep 30, 2023 Outstanding | Dec 31, 2022 Outstanding | Sep 30, 2023 Avg Rate | Dec 31, 2022 Avg Rate | | :---------------------------- | :----------------------- | :----------------------- | :-------------------- | :-------------------- | | ACR 2021-FL1 Senior Notes | $640,493 | $671,397 | 6.95% | 5.81% | | ACR 2021-FL2 Senior Notes | $563,369 | $562,159 | 7.25% | 6.13% | | Senior secured financing facility | $61,383 | $87,890 | 9.11% | 7.94% | | CRE - term warehouse financing facilities | $250,494 | $328,288 | 8.02% | 6.85% | | Mortgage payable | $18,544 | $18,244 | 9.13% | 8.08% | | Construction loans | $5,020 | — | 7.26% (weighted) | — | | 5.75% Senior Unsecured Notes | $147,978 | $147,507 | 5.75% | 5.75% | | Unsecured junior subordinated debentures | $51,548 | $51,548 | 9.53% | 8.52% | | Total Borrowings | $1,738,829 | $1,867,033 | 7.28% | 6.29% | - The reinvestment period for ACR 2021-FL1 ended in May 2023, and for ACR 2021-FL2, it ends in December 2023, impacting the ability to reinvest principal proceeds[128](index=128&type=chunk)[131](index=131&type=chunk)[132](index=132&type=chunk) - The company was in compliance with all financial covenants for its financing arrangements at September 30, 2023, and December 31, 2022[142](index=142&type=chunk) [NOTE 11 - SHARE ISSUANCE AND REPURCHASE](index=33&type=section&id=NOTE%2011%20-%20SHARE%20ISSUANCE%20AND%20REPURCHASE) The company has **4.8 million Series C Preferred Stock** and **4.6 million Series D Preferred Stock** outstanding, repurchased **$2.7 million** of common stock (**298,000 shares**) during the nine months ended September 30, 2023, with **$4.5 million** remaining under the November 2021 repurchase plan, and warrants to purchase **391,995 common shares** issued to Oaktree remain unexercised - At September 30, 2023, the Company had **4.8 million shares of Series C Preferred Stock** and **4.6 million shares of Series D Preferred Stock** outstanding[163](index=163&type=chunk) - During the nine months ended September 30, 2023, the Company repurchased **$2.7 million** of its common stock, representing **298,000 shares**[167](index=167&type=chunk) - Warrants to purchase **391,995 shares of common stock** issued to Oaktree Capital Management, L.P. at an exercise price of **$0.03 per share** remain unexercised at September 30, 2023[168](index=168&type=chunk) [NOTE 12 - SHARE-BASED COMPENSATION](index=34&type=section&id=NOTE%2012%20-%20SHARE-BASED%20COMPENSATION) The company recognized **$2.1 million** in stock-based compensation expense for the nine months ended September 30, 2023, with unrecognized compensation costs for unvested restricted stock totaling **$2.4 million**, expected to be recognized over **2.2 years**, and incentive compensation to the Manager is **50% cash** and **50% common stock**, with **38,881 shares** issued during the nine-month period | Metric (in thousands) | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :-------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Stock-based compensation expense | $482 | $913 | $2,095 | $2,648 | - Total unrecognized compensation costs for unvested restricted stock were **$2.4 million** at September 30, 2023, with a weighted average recognition period of **2.2 years**[173](index=173&type=chunk) - Incentive compensation to the Manager for the nine months ended September 30, 2023, was **$857,000**, with **50% payable in cash** and **50% in common stock** (**38,881 shares** issued)[174](index=174&type=chunk)[175](index=175&type=chunk) [NOTE 13 - EARNINGS PER SHARE](index=36&type=section&id=NOTE%2013%20-%20EARNINGS%20PER%20SHARE) Basic and diluted earnings per common share increased significantly for both the three and nine months ended September 30, 2023, compared to the prior year, reflecting improved net income allocable to common shares | Metric | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :----- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Net income (loss) allocable to common shares (in thousands) | $2,870 | $713 | $1,271 | $(1,368) | | Basic EPS | $0.34 | $0.08 | $0.15 | $(0.15) | | Diluted EPS | $0.33 | $0.08 | $0.15 | $(0.15) | [NOTE 14 - DISTRIBUTIONS](index=36&type=section&id=NOTE%2014%20-%20DISTRIBUTIONS) The company did not pay common share distributions for the three and nine months ended September 30, 2023, but intends to continue regular quarterly distributions to preferred stockholders, with preferred stock dividends remaining consistent year-over-year - The Company did not pay any common share distributions for the three and nine months ended September 30, 2023, or 2022[184](index=184&type=chunk) | Preferred Stock | Date Paid (2023) | Total Distribution Paid (in thousands) | Distribution Per Share | | :-------------- | :--------------- | :----------------------------------- | :--------------------- | | Series C | Oct 30 | $2,587 | $0.5390625 | | Series D | Oct 30 | $2,268 | $0.4921875 | - The Company intends to distribute substantially all of its taxable income to qualify as a REIT and avoid corporate federal income taxes[183](index=183&type=chunk) [NOTE 15 - ACCUMULATED OTHER COMPREHENSIVE LOSS](index=37&type=section&id=NOTE%2015%20-%20ACCUMULATED%20OTHER%20COMPREHENSIVE%20LOSS) The net unrealized loss on derivatives, the sole component of accumulated other comprehensive loss, decreased from **$(6,394) thousand** at January 1, 2023, to **$(5,202) thousand** at September 30, 2023, due to reclassification adjustments | Metric (in thousands) | Amount | | :-------------------- | :----- | | Balance at January 1, 2023 | $(6,394) | | Amounts reclassified from accumulated other comprehensive loss | $1,192 | | Balance at September 30, 2023 | $(5,202) | [NOTE 16 - RELATED PARTY TRANSACTIONS](index=37&type=section&id=NOTE%2016%20-%20RELATED%20PARTY%20TRANSACTIONS) The company has significant related party transactions with its Manager, ACRES Capital, LLC, including base management fees, incentive management fees (**50% cash, 50% stock**), expense reimbursements, and a **$11.1 million loan receivable** from ACRES Capital Corp., with other transactions including loan originations, securitization structuring, and development management fees | Related Party Transaction (in thousands) | 3 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2023 | | :--------------------------------------- | :-------------------------- | :-------------------------- | | Base management fees earned | $1,600 | $4,900 | | Incentive management fees earned | $473 | $857 | | Expense reimbursements to Manager | $670 | $3,000 | | Interest income on ACRES Loan | $85 | $254 | - The ACRES Loan, a **$12.0 million loan** to ACRES Capital Corp., had a principal balance of **$11.1 million** at September 30, 2023, accruing interest at **3.00% per annum**[192](index=192&type=chunk)[193](index=193&type=chunk) - The Company purchased a **$22.5 million** participation in one CRE whole loan from ACRES Commercial Mortgage, LLC during the nine months ended September 30, 2023[196](index=196&type=chunk) [NOTE 17 - FAIR VALUE OF FINANCIAL INSTRUMENTS](index=39&type=section&id=NOTE%2017%20-%20FAIR%20VALUE%20OF%20FINANCIAL%20INSTRUMENTS) The company had no financial instruments carried at fair value on a recurring basis, with fair values for CRE whole loans, related party loans, and various borrowings estimated using discounted cash flow models or approximating carrying values for variable-rate instruments - The Company had no financial instruments carried at fair value on a recurring basis at September 30, 2023, and December 31, 2022[201](index=201&type=chunk) - Fair values of CRE whole loans are measured by discounting expected future cash flows using current interest rates for similar loans, with floating-rate loans approximating fair value unless credit deterioration exists[203](index=203&type=chunk) | Financial Instrument (in thousands) | Carrying Value (Sep 30, 2023) | Fair Value (Sep 30, 2023) | | :---------------------------------- | :---------------------------- | :------------------------ | | CRE whole loans | $1,892,571 | $1,923,014 | | Loan receivable - related party | $11,050 | $8,391 | | Senior notes in CRE securitizations | $1,203,862 | $1,161,331 | | 5.75% Senior Unsecured Notes | $147,978 | $136,980 | [NOTE 18 - MARKET RISK AND DERIVATIVE INSTRUMENTS](index=41&type=section&id=NOTE%2018%20-%20MARKET%20RISK%20AND%20DERIVATIVE%20INSTRUMENTS) The company manages interest rate risk by matching adjustable-rate assets with variable-rate borrowings and historically used interest rate swaps as cash flow hedges, with all interest rate swap positions terminated in April 2020, resulting in a realized loss of **$11.8 million**, and remaining unrealized losses of **$5.4 million** amortized into interest expense - The Company terminated all interest rate swap positions in April 2020, realizing a loss of **$11.8 million**[212](index=212&type=chunk) - At September 30, 2023, the Company had **$5.4 million** in unrealized losses from terminated hedges recorded in accumulated other comprehensive loss, which are amortized into interest expense[212](index=212&type=chunk) | Derivative Effect (in thousands) | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :------------------------------- | :-------------------------- | :-------------------------- | | Interest rate swap contracts, hedging (Interest expense) | $(1,192) | $(1,332) | [NOTE 19 - OFFSETTING OF FINANCIAL ASSETS AND LIABILITIES](index=42&type=section&id=NOTE%2019%20-%20OFFSETTING%20OF%20FINANCIAL%20ASSETS%20AND%20LIABILITIES) The company presents all balances associated with warehouse financing facilities on a gross basis on its consolidated balance sheets, despite underlying agreements providing for a right of offset in certain default or bankruptcy events - All balances associated with warehouse financing facilities are presented on a gross basis on the Company's consolidated balance sheets[215](index=215&type=chunk) - Certain warehouse financing facilities are governed by agreements that provide for a right of offset in the event of default or bankruptcy[216](index=216&type=chunk) [NOTE 20 - COMMITMENTS AND CONTINGENCIES](index=43&type=section&id=NOTE%2020%20-%20COMMITMENTS%20AND%20CONTINGENCIES) The company is subject to potential litigation and claims for loan repurchases/indemnifications, with reserves totaling **$1.1 million** at September 30, 2023, and also has unfunded loan commitments of **$118.8 million** for CRE loans and provides guarantees related to a student housing construction loan - Reserves for potential litigation and indemnification claims related to Primary Capital Mortgage, LLC (PCM) totaled **$1.1 million** at September 30, 2023[219](index=219&type=chunk) - Outstanding demands for indemnification, repurchase, or make-whole payments totaled **$3.3 million** at September 30, 2023[220](index=220&type=chunk) - Unfunded commitments on CRE loans were **$118.8 million** at September 30, 2023, down from **$158.2 million** at December 31, 2022[223](index=223&type=chunk) [NOTE 21 - SUBSEQUENT EVENTS](index=44&type=section&id=NOTE%2021%20-%20SUBSEQUENT%20EVENTS) The company evaluated subsequent events through the filing date and determined no material adjustments or disclosures were required beyond those already described in other notes - No material subsequent events requiring adjustments or disclosures were identified beyond those already detailed in Notes 6, 10, 12, and 16[226](index=226&type=chunk) [ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS](index=45&type=section&id=ITEM%202.%20MANAGEMENT%27S%20DISCUSSION%20AND%20ANALYSIS%20OF%20FINANCIAL%20CONDITION%20AND%20RESULTS%20OF%20OPERATIONS) This section provides management's perspective on the company's financial performance and condition, highlighting the impact of macroeconomic factors like inflation and rising interest rates, detailing the company's strategy, investment portfolio, financing arrangements, and liquidity, emphasizing the shift to SOFR and efforts to manage credit risk and enhance returns [Special Note Regarding Forward-Looking Statements](index=45&type=section&id=Special%20Note%20Regarding%20Forward-Looking%20Statements) This section cautions readers that the report contains forward-looking statements subject to risks and uncertainties, and actual results may differ materially, with the company disclaiming any obligation to update these statements - The report contains forward-looking statements that involve risks, uncertainties, and contingencies, meaning actual results may differ materially from expectations[229](index=229&type=chunk) - The Company disclaims any intention or obligation to update or revise forward-looking statements, except as required by applicable securities law[229](index=229&type=chunk) [Overview](index=45&type=section&id=Overview) ACRES Commercial Realty Corp. is an externally managed REIT focused on CRE mortgage loans and equity investments, with a strategy to drive book value growth by utilizing NOL carryforwards and deploying capital into new loan originations, actively managing liquidity and its diversified CRE loan portfolio amidst market disruptions from inflation and rising interest rates, which have increased net interest income but also pose non-performance risks - The Company is an externally managed REIT focused on originating, holding, and managing CRE mortgage loans and equity investments, primarily in multifamily, student housing, hospitality, office, and industrial properties[230](index=230&type=chunk) - The short-term strategy is to drive book value growth by utilizing **NOL carryforwards ($46.6 million)** and **net capital loss carryforwards ($121.9 million)** to grow the investable base and deploy capital into new whole loan originations at attractive yields[230](index=230&type=chunk) - Rising interest rates (Federal Funds rate increased by **5.25%** between March 2022 and July 2023) generally correlate to increased net income but may adversely affect borrowers' ability to pay debt service, a risk partially mitigated by interest rate caps and debt service reserves[232](index=232&type=chunk)[237](index=237&type=chunk)[238](index=238&type=chunk) [Results of Operations](index=49&type=section&id=Results%20of%20Operations) The company's net income allocable to common shares significantly increased for both the three and nine months ended September 30, 2023, compared to the prior year, driven by higher net interest income due to rising benchmark rates, partially offset by increased operating expenses and a decrease in real estate income | Metric (in thousands) | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :-------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Net income allocable to common shares | $2,870 | $713 | $1,271 | $(1,368) | | Basic EPS | $0.34 | $0.08 | $0.15 | $(0.15) | | Diluted EPS | $0.33 | $0.08 | $0.15 | $(0.15) | [Net Interest Income](index=50&type=section&id=Net%20Interest%20Income) Net interest income increased by **$3.5 million** for the three months and **$13.1 million** for the nine months ended September 30, 2023, primarily due to a significant increase in benchmark interest rates, which boosted interest income from CRE whole loans and increased interest expense on floating-rate liabilities | Metric (in thousands) | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :-------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Net interest income | $14,653 | $11,126 | $43,313 | $30,169 | | Increase in interest income | $14,143 | N/A | $56,925 | N/A | | Increase in interest expense | $10,616 | N/A | $43,781 | N/A | - The increase in interest income from CRE whole loans was primarily attributable to a significant increase in the benchmark rate over the comparative periods[259](index=259&type=chunk) - Securitized borrowings saw net increases in interest expense of **$9.8 million** (3 months) and **$34.4 million** (9 months) due to rising benchmark rates, partially offset by the liquidation of XAN 2020-RSO8 and XAN 2020-RSO9 in 2022[260](index=260&type=chunk) [Real Estate Income and Other Revenue](index=54&type=section&id=Real%20Estate%20Income%20and%20Other%20Revenue) Aggregate real estate income and other revenue decreased by **$457,000** for the three months ended September 30, 2023, but increased by **$3.6 million** for the nine months, primarily due to the acquisition of a hotel property in April 2022 and increased travel, partially offset by property sales | Revenue Type (in thousands) | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Real estate income | $9,316 | $9,785 | $25,266 | $21,700 | | Other revenue | $37 | $25 | $107 | $60 | | Total | $9,353 | $9,810 | $25,373 | $21,760 | - The decrease in real estate income for the three-month period was mainly due to the sale of a hotel property in February 2023 and an office building in September 2022[267](index=267&type=chunk) - The increase for the nine-month period was primarily driven by the acquisition of a hotel property in April 2022 and improved performance at an existing hotel due to lifted COVID-19 restrictions[268](index=268&type=chunk) [Operating Expenses](index=55&type=section&id=Operating%20Expenses) Aggregate operating expenses decreased by **$898,000** for the three months ended September 30, 2023, but increased by **$13.3 million** for the nine months, primarily due to higher real estate expenses from property acquisitions and a significant increase in the provision for credit losses | Operating Expense (in thousands) | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Total operating expenses | $16,552 | $17,450 | $54,349 | $41,070 | | Real estate expenses | $9,706 | $10,099 | $29,058 | $24,055 | | Provision for credit losses, net | $1,983 | $2,620 | $9,779 | $1,342 | - The **$5.0 million** increase in real estate expenses for the nine months was mainly due to the acquisition of a hotel and a student housing complex in April 2022, and an office property via deed-in-lieu of foreclosure in June 2023[273](index=273&type=chunk) - The provision for credit losses, net, increased by **$8.4 million** for the nine months ended September 30, 2023, driven by modeled increases in general portfolio credit risk and macroeconomic uncertainty[274](index=274&type=chunk) [Other Income (Expense)](index=56&type=section&id=Other%20Income%20%28Expense%29) Aggregate other income decreased by **$1.9 million** for the three months and **$1.3 million** for the nine months ended September 30, 2023, primarily due to lower gains on real estate sales and the absence of a loan recovery seen in the prior year | Other Income (Expense) (in thousands) | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :------------------------------------ | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Gain on sale of real estate | — | $1,870 | $745 | $1,870 | | Other income | $113 | $130 | $465 | $1,103 | | Total | $113 | $2,000 | $1,210 | $2,513 | - The decrease in gain on sale of real estate was due to the sale of a hotel property in February 2023 (**$745,000 gain**) compared to an office property sale in September 2022 (**$1.9 million gain**)[277](index=277&type=chunk) - The decrease in other income for the nine-month period was primarily due to a loan recovery received in 2022 that did not recur in 2023[277](index=277&type=chunk) [Financial Condition](index=58&type=section&id=Financial%20Condition) The company's total assets decreased to **$2.3 billion** at September 30, 2023, primarily due to a reduction in CRE loans, with the allowance for credit losses increasing, reflecting macroeconomic uncertainty, and liquidity managed through operating cash flows and various financing arrangements, including securitizations and warehouse facilities, with a leverage ratio of **3.9 times** - Total assets decreased from **$2.4 billion** at December 31, 2022, to **$2.3 billion** at September 30, 2023[279](index=279&type=chunk) - The leverage ratio (borrowings to total equity) decreased from **4.2 times** at December 31, 2022, to **3.9 times** at September 30, 2023, due to a net decrease in borrowings and a net increase in total equity[371](index=371&type=chunk) [Investment Portfolio](index=58&type=section&id=Investment%20Portfolio) The total investment portfolio decreased to **$2.18 billion** at September 30, 2023, primarily driven by a **$119.7 million** net decrease in the par balance of CRE whole loans, with multifamily properties continuing to dominate the portfolio (**76.3%**), and the company holding investments in **six real estate properties**, including two held for sale | Investment Type (in thousands) | Sep 30, 2023 Net Carrying Amount | Dec 31, 2022 Net Carrying Amount | | :----------------------------- | :------------------------------- | :------------------------------- | | CRE whole loans, floating-rate | $1,892,571 | $2,038,787 | | Investments in unconsolidated entities | $1,548 | $1,548 | | Investments in real estate | $109,588 | $88,132 | | Property held for sale | $59,138 | $50,744 | | Total investment portfolio | $2,179,211 | $2,062,845 | - The CRE loan portfolio decreased by **$119.7 million** in par balance during the nine months ended September 30, 2023, with **$38.5 million** in new commitments and **$194.9 million** in loan payoffs[281](index=281&type=chunk) - Multifamily properties represent **76.3%** of the CRE loan portfolio at September 30, 2023, maintaining its majority allocation[240](index=240&type=chunk) [Financing Receivables](index=61&type=section&id=Financing%20Receivables) The allowance for credit losses increased to **$27.6 million** at September 30, 2023, primarily due to increased modeled portfolio credit risk, with individually evaluated impaired loans including a fully reserved office mezzanine loan and retail/office loans with probable foreclosure, but no CECL allowance due to appraised values | Metric (in thousands) | 9 Months Ended Sep 30, 2023 | Year Ended Dec 31, 2022 | | :-------------------- | :-------------------------- | :---------------------- | | Allowance for credit losses at beginning of period | $18,803 | $8,805 | | Provision for credit losses | $9,779 | $12,295 | | Charge offs | $(948) | $(2,297) | | Allowance for credit losses at end of period | $27,634 | $18,803 | - The provision for credit losses of **$9.8 million** for the nine months ended September 30, 2023, was primarily driven by increased modeled portfolio credit risk related to ongoing macroeconomic uncertainty[293](index=293&type=chunk) - At September 30, 2023, **four CRE whole loans ($47.8 million)** and **one mezzanine loan ($4.7 million)** were in payment default, and **one CRE whole loan ($44.8 million)** was on nonaccrual status[312](index=312&type=chunk) [Restricted Cash](index=64&type=section&id=Restricted%20Cash) Restricted cash decreased by **$2.7 million** to **$35.9 million** at September 30, 2023, primarily due to reinvesting proceeds in one of the company's securitizations | Restricted Cash (in thousands) | Sep 30, 2023 | Dec 31, 2022 | | :----------------------------- | :----------- | :----------- | | Total restricted cash | $35,900 | $38,600 | - The decrease in restricted cash was primarily attributable to reinvesting proceeds in one of the Company's securitizations prior to the end of the reinvestment period[313](index=313&type=chunk) [Accrued Interest Receivable](index=65&type=section&id=Accrued%20Interest%20Receivable) Accrued interest receivable increased by **$464,000** to **$12.4 million** at September 30, 2023, primarily due to rising benchmark rates | Accrued Interest Receivable (in thousands) | Sep 30, 2023 | Dec 31, 2022 | | :----------------------------------------- | :----------- | :----------- | | From loans | $12,401 | $11,936 | | From promissory note, escrow, sweep and reserve accounts | $32 | $33 | | Total | $12,433 | $11,969 | - The increase in accrued interest receivable was primarily attributable to rising benchmark rates[316](index=316&type=chunk) [Other Assets](index=65&type=section&id=Other%20Assets) Other assets decreased by **$224,000** to **$4.14 million** at September 30, 2023, mainly due to changes in receivables at real estate properties, partially offset by other asset purchases | Other Assets (in thousands) | Sep 30, 2023 | Dec 31, 2022 | | :-------------------------- | :----------- | :----------- | | Total other assets | $4,140 | $4,364 | - The decrease in other assets was primarily attributable to receivables held at real estate properties and miscellaneous receivables from real estate properties acquired in 2022 and 2023, offset by the purchase of other assets[317](index=317&type=chunk) [Deferred Tax Assets](index=65&type=section&id=Deferred%20Tax%20Assets) The net deferred tax asset remained zero at September 30, 2023, due to a full valuation allowance of **$20.8 million**, reflecting management's belief that realization of these assets is unlikely - At September 30, 2023, the net deferred tax asset was zero, with a full valuation allowance of **$20.8 million**, as the Company believed it was more likely than not that the deferred tax assets would not be realized[318](index=318&type=chunk) [Derivative Instruments](index=65&type=section&id=Derivative%20Instruments) The company terminated all interest rate swap positions in April 2020, realizing an **$11.8 million loss**, and at September 30, 2023, **$5.4 million** in unrealized losses from these terminated hedges remained, being amortized into interest expense, with the effect of derivative instruments on operations for the nine months ended September 30, 2023, being a **$1.19 million** decrease to interest expense - The Company terminated all interest rate swap positions in April 2020, resulting in a realized loss of **$11.8 million**[320](index=320&type=chunk) - At September 30, 2023, **$5.4 million** in unrealized losses from terminated hedges were recorded in accumulated other comprehensive loss, amortized into interest expense[320](index=320&type=chunk) | Derivative Effect (in thousands) | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :------------------------------- | :-------------------------- | :-------------------------- | | Interest rate swap contracts, hedging (Interest expense) | $(1,192) | $(1,332) | [Financing Arrangements](index=66&type=section&id=Financing%20Arrangements) The company utilizes various financing arrangements, including a senior secured financing facility, term warehouse financing facilities (JPMorgan Chase and Morgan Stanley), mortgage payable, and construction loans, with all facilities in compliance with covenants at September 30, 2023, and the MassMutual Facility transitioned to a floating-rate term loan, while the JPMorgan Chase and Morgan Stanley facilities had their amendments extended through December 2024 | Financing Arrangement (in thousands) | Sep 30, 2023 Outstanding Borrowings | Sep 30, 2023 Weighted Average Interest Rate | | :----------------------------------- | :---------------------------------- | :------------------------------------ | | Senior Secured Financing Facility | $61,383 | 9.11% | | JPMorgan Chase Facility | $117,637 | 7.99% | | Morgan Stanley Facility | $132,857 | 8.05% | | Mortgage Payable | $18,544 | 9.13% | | Construction Loans | $5,020 | 7.26% (Florida Pace) / 11.34% (Oceanview) | - The MassMutual Facility was amended in December 2022 to a senior secured term loan facility with a floating interest rate (one-month Term SOFR plus spread)[331](index=331&type=chunk) - The JPMorgan Chase Facility and Morgan Stanley Facility had amendments extending certain financial covenants through the quarter ending December 2024[333](index=333&type=chunk)[334](index=334&type=chunk) [Securitizations](index=69&type=section&id=Securitizations) The company retains equity in two active CRE loan securitizations, ACR 2021-FL1 and ACR 2021-FL2, which transitioned from LIBOR to Term SOFR in June 2023, with the reinvestment period for ACR 2021-FL1 ending in May 2023, while ACR 2021-FL2's period ends in December 2023 - ACR 2021-FL1 and ACR 2021-FL2, with **$802.6 million** and **$700.0 million** financing capacity respectively, transitioned their non-recourse, floating-rate notes from one-month Term LIBOR to one-month Term SOFR in June 2023[339](index=339&type=chunk)[340](index=340&type=chunk) - The reinvestment period for ACR 2021-FL1 ended in May 2023, and for ACR 2021-FL2, it ends in December 2023, affecting the ability to reinvest principal proceeds into new CRE loans[339](index=339&type=chunk)[340](index=340&type=chunk) [Corporate Debt](index=69&type=section&id=Corporate%20Debt) The company's **4.50% Convertible Senior Notes** matured and were paid off in August 2022, with the **5.75% Senior Unsecured Notes due 2026** remaining outstanding and redemption options available to the company, and unsecured junior subordinated debentures to RCT I and RCT II, totaling **$51.5 million**, are not consolidated and had interest rates of **9.49%** and **9.58%** at September 30, 2023 - The remaining **$48.2 million** of **4.50% Convertible Senior Notes** were paid off upon maturity in August 2022[341](index=341&type=chunk) - The Company issued **$150.0 million** of **5.75% Senior Unsecured Notes due 2026**, redeemable at the Company's option with a make-whole premium prior to May 15, 2026, and at par thereafter[343](index=343&type=chunk) - Unsecured junior subordinated debentures to RCT I and RCT II total **$51.5 million**, with interest rates of **9.49%** and **9.58%** respectively at September 30, 2023[345](index=345&type=chunk) [Equity](index=70&type=section&id=Equity) Total equity increased to **$448.2 million** at September 30, 2023, from **$441.3 million** at December 31, 2022, primarily due to contributions from non-controlling interests, partially offset by preferred stock distributions and common stock repurchases | Metric (in thousands) | Sep 30, 2023 | Dec 31, 2022 | | :-------------------- | :----------- | :----------- | | Total equity | $448,227 | $441,314 | - The increase in equity was primarily attributable to contributions from non-controlling interests, partially offset by distributions on preferred stock and common stock repurchases[346](index=346&type=chunk) [Balance Sheet - Book Value Reconciliation](index=71&type=section&id=Balance%20Sheet%20-%20Book%20Value%20Reconciliation) Common stock book value increased to **$25.07 per share** at September 30, 2023, from **$24.54** at December 31, 2022, driven by net income allocable to common shares and changes in other comprehensive income, partially offset by common stock repurchases | Metric | 9 Months Ended Sep 30, 2023 (Total Amount in thousands) | 9 Months Ended Sep 30, 2023 (Per Share Amount) | | :-------------------------------- | :-------------------------------------- | :--------------------------------------------- | | Common stock book value at beginning of period | $208,976 | $24.54 | | Net income allocable to common shares | $1,271 | $0.15 | | Change in other comprehensive income on derivatives | $1,192 | $0.14 | | Repurchase of common stock | $(2,684) | $0.56 | | Common stock book value at end of period | $211,213 | $25.07 | - Common stock repurchases were accretive to per share book value due to being purchased at significant discounts[348](index=348&type=chunk) [Management Agreement Equity](index=71&type=section&id=Management%20Agreement%20Equity) Equity, as defined in the Management Agreement for calculating base management fees, was **$438.9 million** at September 30, 2023, calculated based on capital stock issuances, retained earnings, and repurchases | Metric (in thousands) | Amount (Sep 30, 2023) | | :-------------------- | :-------------------- | | Proceeds from capital stock issuances, net | $1,330,472 | | Retained earnings, net | $(649,069) | | Payments for repurchases of capital stock | $(242,444) | | Total | $438,959 | - The monthly base management fee is **1/12 of 1.50%** of the Company's equity, as defined in the Management Agreement[349](index=349&type=chunk) [Earnings Available for Distribution](index=71&type=section&id=Earnings%20Available%20for%20Distribution) Earnings Available for Distribution (EAD), a non-GAAP measure, increased significantly for both the three and nine months ended September 30, 2023, compared to the prior year, indicating improved performance and ability to pay dividends, with EAD for reporting purposes including incentive compensation payable to the Manager | Metric (in thousands) | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :-------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | GAAP net income (loss) allocable to common shares | $2,870 | $713 | $1,271 | $(1,368) | | Earnings Available for Distribution allocable to common shares | $6,292 | $3,467 | $15,950 | $5,164 | | EAD per common share - diluted | $0.73 | $0.40 | $1.85 | $0.58 | - EAD is a non-GAAP financial measure used to evaluate performance and dividend-paying ability, excluding non-cash items and non-core asset income/loss[350](index=350&type=chunk)[352](index=352&type=chunk) - EAD in accordance with the Management Agreement (excluding incentive compensation) was **$6.8 million ($0.79 per share)** and **$16.8 million ($1.95 per share)** for the three and nine months ended September 30, 2023, respectively[353](index=353&type=chunk) [Incentive Compensation Hurdle](index=72&type=section&id=Incentive%20Compensation%20Hurdle) The incentive compensation hurdle calculation was revised starting December 31, 2022, now based on **20% of the excess of EAD over 7% per annum of book value equity**, with the hurdle for the three months ended September 30, 2023, being **$16.4 million** - Commencing December 31, 2022, incentive compensation is calculated as **20% of the excess of EAD over 7% per annum of book value equity**[356](index=356&type=chunk) | Metric (in thousands) | Amount (Sep 30, 2023) | | :-------------------- | :-------------------- | | Book value equity at September 30, 2023 | $234,052 | | Incentive Compensation Hurdle | $16,384 | [Liquidity and Capital Resources](index=73&type=section&id=Liquidity%20and%20Capital%20Resources) The company's liquidity at September 30, 2023, included **$64.4 million** in unrestricted cash, **$34.6 million** in securitization reinvestment cash, and **$5.0 million** in unlevered financeable CRE loans, with key liquidity sources for the nine months ended September 30, 2023, including proceeds from loan purchases by securitizations, loan repayments, and property sales, offset by debt paydowns and investments - At September 30, 2023, liquidity consisted of **$64.4 million** in unrestricted cash, **$34.6 million** in reinvestment cash at CRE securitizations, and **$5.0 million** in unlevered financeable CRE loans[370](index=370&type=chunk) - Principal sources of liquidity for the nine months ended September 30, 2023, included **$95.0 million** from CRE whole loan purchases by ACR 2021-FL1, **$32.2 million** from loan repayments, and **$14.3 million** from real estate sales[359](index=359&type=chunk) | Securitization | Sep 30, 2023 Cash Distributions (in thousands) | Sep 30, 2023 Overcollateralization Cushion (in thousands) | Sep 30, 2023 Annualized Interest Coverage Cushion (in thousands) | | :------------- | :------------------------------------------- | :------------------------------------------------------- | :------------------------------------------------------- | | ACR 2021-FL1 | $19,283 | $12,488 | $22,221 | | ACR 2021-FL2 | $14,791 | $5,652 | $14,690 | [Net Operating Losses and Loss Carryforwards](index=77&type=section&id=Net%20Operating%20Losses%20and%20Loss%20Carryforwards) The company has **$46.6 million** in cumulative net operating losses (NOLs) and **$121.9 million** in net capital losses to carry forward, with TRSs holding an additional **$60.2 million** in NOLs and **$1.0 million** in net capital losses, intended to shield future taxable income and grow book value | Tax Asset Item | Tax Year | Recognized REIT (QRS) Tax Loss Carryforwards (in millions) | TRS Tax Loss Carryforwards (in millions) | | :------------- | :------- | :----------------------------------------- | :--------------------------------------- | | Net Operating Loss Carryforwards | Cumulative as of 2022 | $46.6 | $60.2 | | Net Capital Loss Carryforwards | Cumulative as of 2022 | $121.9 | $1.0 | - NOLs can generally be carried forward indefinitely to offset both ordinary taxable income and capital gains, with a deduction limit of **80% of taxable income**[374](index=374&type=chunk) [Distributions](index=77&type=section&id=Distributions) The company did not pay common share distributions for the nine months ended September 30, 2023, prioritizing liquidity and book value growth through NOL utilization, and intends to resume common share distributions prudently and continue regular quarterly distributions to preferred stockholders - No common share distributions were paid during the nine months ended September 30, 2023, as the Company focused on retaining liquidity and growing book value using NOL carryforwards[376](index=376&type=chunk) - The Company intends to continue making regular quarterly distributions to preferred stockholders[377](index=377&type=chunk) - To qualify as a REIT, the Company must distribute at least **90%** of its taxable income annually[377](index=377&type=chunk) [Contractual Obligations and Commitments](index=78&type=section&id=Contractual%20Obligations%20and%20Commitments) Total contractual commitments were **$2.74 billion** at September 30, 2023, with the largest portions in CRE securitizations (**$1.21 billion**) and lease liabilities (**$855.1 million**), and unfunded commitments on CRE loans totaling **$118.8 million** | Contractual Commitment (in thousands) | Total (Sep 30, 2023) | Less than 1 year | 1 - 3 years | 3 - 5 years | More than 5 years | | :------------------------------------ | :------------------- | :--------------- | :---------- | :---------- | :---------------- | | CRE securitizations | $1,210,132 | — | — | — | $1,210,132 | | Senior secured financing facility | $64,495 | — | — | $64,495 | — | | CRE - term warehouse financing facilities | $253,114 | — | $253,114 | — | — | | Mortgage payable | $18,854 | — | $18,854 | — | —

ACRES Commercial Realty Corp. (NYSE:ACR) Q3 2023 Earnings Conference Call November 2, 2023 11:00 AM ET Company Participants Jaclyn Jesberger - Chief Legal Officer Mark Fogel - President and Chief Executive Officer Dave Bryant - Chief Financial Officer Andrew Fentress - Chairman Eldron Blackwell - Chief Accounting Officer Conference Call Participants Chris Muller - JMP Operator Good day, ladies, and gentlemen, and welcome to the Third Quarter 2023 ACRES Commercial Realty Corp. Earnings Conference Call. [Oper ...

THIRD QUARTER 2023 EARNINGS PRESENTATION DISCLAIMER Forward-Looking Statements This presentation contains forward-looking statements within the meaning of federal securities laws. These forward-looking statements are not historical facts but rather are based on ACRES Commercial Realty Corp.’s (“ACR’s” or the “Company’s”) current beliefs, assumptions and expectations. These beliefs, assumptions and expectations can change as a result of many possible events or factors, not all of which are known to ACR or ar ...

Part I - Financial Information [Financial Statements](index=3&type=section&id=Item%201%3A%20Financial%20Statements) The company's financial statements for the period ended June 30, 2023, show a decrease in total assets to $2.27 billion from $2.38 billion at year-end 2022, primarily due to a reduction in CRE loans [Consolidated Balance Sheets](index=3&type=section&id=Consolidated%20Balance%20Sheets) As of June 30, 2023, total assets were $2.27 billion, a decrease from $2.38 billion at December 31, 2022, mainly driven by a reduction in CRE loans Consolidated Balance Sheet Summary | Account | June 30, 2023 (unaudited) | December 31, 2022 | | :--- | :--- | :--- | | **Total Assets (in thousands)** | **$2,266,656** | **$2,376,652** | | CRE loans, net (in thousands) | $1,938,089 | $2,038,787 | | Cash and cash equivalents (in thousands) | $57,112 | $66,232 | | **Total Liabilities (in thousands)** | **$1,822,655** | **$1,935,338** | | Borrowings (in thousands) | $1,749,199 | $1,867,033 | | **Total Equity (in thousands)** | **$444,001** | **$441,314** | - The allowance for credit losses increased from **$18.8 million** at the end of 2022 to **$25.7 million** as of June 30, 2023, reflecting a more cautious outlook on loan performance[12](index=12&type=chunk) - Assets of consolidated Variable Interest Entities (VIEs), primarily CRE loans pledged as collateral, totaled approximately **$1.5 billion** at both June 30, 2023, and December 31, 2022[13](index=13&type=chunk) [Consolidated Statements of Operations](index=5&type=section&id=Consolidated%20Statements%20of%20Operations) For Q2 2023, net income was $5.6 million, up from $5.5 million in Q2 2022, driven by higher net interest income despite increased provision for credit losses Consolidated Statements of Operations Summary | Metric (in thousands) | Q2 2023 | Q2 2022 | Six Months 2023 | Six Months 2022 | | :--- | :--- | :--- | :--- | :--- | | Total Interest Income | $47,148 | $27,019 | $92,477 | $49,695 | | Net Interest Income | $14,706 | $11,274 | $28,660 | $19,043 | | Provision for credit losses | $2,700 | $524 | $7,796 | $(1,278) | | **Net Income** | **$5,558** | **$5,522** | **$7,851** | **$7,606** | | Net Income (Loss) to Common | $817 | $690 | $(1,599) | $(2,081) | | **EPS - Diluted** | **$0.10** | **$0.08** | **$(0.19)** | **$(0.23)** | [Consolidated Statements of Cash Flows](index=9&type=section&id=Consolidated%20Statements%20of%20Cash%20Flows) Net cash provided by operating activities significantly increased to $24.5 million for the first six months of 2023, while investing activities reversed to a cash inflow, and financing activities used cash Consolidated Statements of Cash Flows Summary | Cash Flow Activity (in thousands) | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :--- | :--- | :--- | | Net cash provided by operating activities | $24,469 | $13,717 | | Net cash provided by (used in) investing activities | $73,652 | $(247,927) | | Net cash (used in) provided by financing activities | $(130,568) | $10,516 | | **Net Decrease in Cash (in thousands)** | **$(32,447)** | **$(223,694)** | [Notes to Consolidated Financial Statements](index=10&type=section&id=Notes%20to%20Consolidated%20Financial%20Statements) The notes detail accounting policies, including the transition to SOFR, the $1.94 billion CRE loan portfolio, increased allowance for credit losses, and common stock repurchases - The company has transitioned its entire **$1.9 billion** floating-rate whole loan portfolio to SOFR-based interest rates. Of its **$1.6 billion** in floating-rate borrowings, **96.8%** are tied to SOFR, with the remainder expected to be converted in 2023[49](index=49&type=chunk)[50](index=50&type=chunk) - The CRE loan portfolio's carrying value decreased to **$1.94 billion** as of June 30, 2023, from **$2.04 billion** at year-end 2022. Multifamily properties represent the largest collateral type at **75.4%** of the portfolio[73](index=73&type=chunk)[76](index=76&type=chunk) - The allowance for credit losses increased to **$25.7 million** from **$18.8 million** at year-end 2022, with a provision of **$7.8 million** recorded in the first six months of 2023, primarily due to the negative macroeconomic outlook[78](index=78&type=chunk)[81](index=81&type=chunk) - During the first six months of 2023, the company repurchased **215,160 shares** of its common stock for **$2.0 million**. **$5.3 million** remains available under the current repurchase plan[154](index=154&type=chunk) [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=44&type=section&id=Item%202%3A%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses the impact of rising interest rates and inflation on the CRE market, noting risks to borrowers' debt service ability and the company's increased CECL allowance [Overview](index=44&type=section&id=Overview) The company, a REIT focused on CRE mortgage loans, navigated a challenging macroeconomic environment, resulting in a net portfolio decrease and an increased CECL allowance - The company is actively managing its operations in response to market pressures including inflation, rising interest rates, and disruptions in the credit markets[216](index=216&type=chunk)[217](index=217&type=chunk) Loan Portfolio Activity | Activity (Six Months Ended June 30, 2023) | Amount (in millions) | | :--- | :--- | | Floating-rate CRE whole loan originations | $38.5 | | Loan payoffs | $141.4 | | Net funded commitments | $28.5 | | **Net decrease to portfolio** | **$(74.4)** | - The CECL allowance for credit losses stood at **$25.7 million** (**1.3%** of the loan portfolio) at June 30, 2023, up from **$18.8 million** (**0.9%**) at December 31, 2022, due to a worsening macroeconomic outlook[233](index=233&type=chunk) [Results of Operations](index=48&type=section&id=Results%20of%20Operations) Net income allocable to common shares increased in Q2 2023 due to higher net interest income from rising benchmark rates, partially offset by increased provision for credit losses Key Financial Metric Changes | Metric (in thousands) | Q2 2023 vs Q2 2022 Change | Six Months 2023 vs 2022 Change | | :--- | :--- | :--- | | Net Interest Income | $3,432 | $9,617 | | Real Estate Income | $102 | $4,035 | | Provision for credit losses | $2,176 | $9,074 | | Total Operating Expenses | $3,449 | $14,177 | - The increase in aggregate interest income for the three and six months ended June 30, 2023 (**$20.1M** and **$42.8M**, respectively) was primarily attributable to the increase in benchmark interest rates[247](index=247&type=chunk) - The increase in aggregate interest expense for the three and six months ended June 30, 2023 (**$16.7M** and **$33.2M**, respectively) was also primarily driven by the rise in benchmark rates on securitized borrowings and warehouse facilities[247](index=247&type=chunk) [Financial Condition](index=57&type=section&id=Financial%20Condition) The company's investment portfolio decreased to $2.13 billion, with an increased CECL allowance and a shift in loan credit quality towards lagging expectations Loan Risk Rating Distribution | Loan Risk Rating (Amortized Cost in thousands) | June 30, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Rating 2 (Performing as expected) | $1,353,353 | $1,635,376 | | Rating 3 (Lags expectations) | $514,179 | $309,491 | | Rating 4 (Significantly lags) | $63,344 | $85,226 | | Rating 5 (Default likely) | $32,864 | $27,497 | | **Total (in thousands)** | **$1,963,740** | **$2,057,590** | - As of June 30, 2023, two CRE whole loans with total amortized costs of **$28.2 million** and one mezzanine loan of **$4.7 million** were in payment default[299](index=299&type=chunk) - Common stock book value per share decreased by **$0.04** during the first six months of 2023, from **$24.54** to **$24.50**. The decrease was mainly due to the net loss allocable to common shares, partially offset by accretive stock repurchases[330](index=330&type=chunk) [Liquidity and Capital Resources](index=71&type=section&id=Liquidity%20and%20Capital%20Resources) The company maintains liquidity through cash, debt financing, and equity, with a decreased leverage ratio of 3.9x and no common stock dividends paid to preserve liquidity - At June 30, 2023, the company had **$57.1 million** of unrestricted cash and cash equivalents[345](index=345&type=chunk)[360](index=360&type=chunk) - The company's leverage ratio decreased to **3.9x** at June 30, 2023, from **4.2x** at December 31, 2022, due to a net decrease in borrowings and a net increase in total equity[361](index=361&type=chunk) - No common share distributions were paid during the first six months of 2023 as the company focused on retaining liquidity and utilizing its significant Net Operating Loss (NOL) carryforwards[365](index=365&type=chunk) - The company has unfunded commitments of **$128.7 million** on its CRE loans and **$4.1 million** on a construction loan as of June 30, 2023[368](index=368&type=chunk)[370](index=370&type=chunk)[371](index=371&type=chunk) [Quantitative and Qualitative Disclosures About Market Risk](index=74&type=section&id=Item%203%3A%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) The company's primary market risks include credit and interest rate risk, with 94.5% of the loan portfolio having interest rate caps to mitigate rising rate impacts - The company mitigates credit risk from rising interest rates by requiring borrowers to purchase interest rate caps. As of June 30, 2023, **94.5%** of the CRE loan portfolio's par value had interest rate caps in place[378](index=378&type=chunk) Interest Rate Sensitivity Analysis | Scenario | Impact on Annual Net Interest Income (in thousands) | Impact on Annual Net Interest Income Per Share | | :--- | :--- | :--- | | 100 Basis Point Decrease | $(924) | $(0.11) | | 100 Basis Point Increase | $943 | $0.11 | [Controls and Procedures](index=75&type=section&id=Item%204%3A%20Controls%20and%20Procedures) The CEO and CFO concluded that disclosure controls and procedures were effective, with no material changes to internal control over financial reporting during the quarter - Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of June 30, 2023[389](index=389&type=chunk) - No material changes were made to the company's internal control over financial reporting during the second quarter of 2023[390](index=390&type=chunk) Part II - Other Information [Legal Proceedings](index=76&type=section&id=Item%201%3A%20Legal%20Proceedings) The company's subsidiary, Primary Capital Mortgage, LLC (PCM), maintains a $1.1 million reserve for potential mortgage repurchase and indemnification claims, with no outstanding litigation demands - A reserve of **$1.1 million** was held as of June 30, 2023, for potential mortgage repurchase and indemnification claims related to the subsidiary Primary Capital Mortgage, LLC (PCM), although no litigation demands were outstanding[394](index=394&type=chunk) [Risk Factors](index=76&type=section&id=Item%201A%3A%20Risk%20Factors) There have been no material changes to the risk factors disclosed in the company's Annual Report on Form 10-K for the year ended December 31, 2022 - The company reports no material changes to its risk factors from those presented in its 2022 Form 10-K[395](index=395&type=chunk) [Unregistered Sales of Equity Securities and Use of Proceeds](index=76&type=section&id=Item%202%3A%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) The company continued its common stock repurchase program, repurchasing 215,160 shares in the first half of 2023, with $5.3 million remaining available Common Stock Repurchase Activity | Period | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | Jan 2023 | 9,822 | $9.78 | | Feb 2023 | 24,754 | $9.48 | | Mar 2023 | 45,168 | $9.39 | | Apr 2023 | 45,645 | $9.48 | | May 2023 | 62,001 | $8.61 | | Jun 2023 | 27,770 | $8.41 | - As of June 30, 2023, approximately **$5.3 million** remained available under the company's stock repurchase program[396](index=396&type=chunk) [Other Information](index=76&type=section&id=Item%205%3A%20Other%20Information) No director or officer adopted or terminated a Rule 10b5-1 or non-Rule 10b5-1 trading arrangement during the second quarter of 2023 - No directors or officers adopted or terminated Rule 10b5-1 trading arrangements during the three months ended June 30, 2023[397](index=397&type=chunk) [Exhibits](index=77&type=section&id=Item%206%3A%20Exhibits) This section lists all exhibits filed with the Form 10-Q, including certifications by the CEO and CFO, and various agreements related to financing and management

Financial Data and Key Metrics Changes - GAAP net income allocable to common shares for Q2 2023 was $817,000 or $0.10 per share, which included an increase to CECL reserves of $2.7 million or $0.31 per share compared to $5.1 million in Q1 2023 [9] - Earnings available for distribution (EAD) for Q2 was $0.60 per share, up from $0.52 per share in Q1 [10] - GAAP book value per share was $24.50 on June 30, 2023, compared to $24.51 on March 31, 2023 [10] - Available liquidity at June 30, 2023, was $91 million, consisting of $57 million in unrestricted cash, $20 million in projected financing, and $14 million in reinvestment cash [10] - GAAP debt-to-equity leverage ratio decreased to 3.9x from 4.1x, and recourse debt leverage ratio decreased to 1.2x from 1.3x [11] Business Line Data and Key Metrics Changes - The company originated one $22.5 million mixed-use loan commitment in Q2, with loan payoffs totaling $47.3 million, resulting in a net decrease to the portfolio of $10 million [6] - The weighted average spread of floating rate loans increased to 3.94% over one-month benchmark rates [6] - Net loss from real estate investments decreased to $1.6 million in Q2 from $1.8 million in Q1 [11] Market Data and Key Metrics Changes - The portfolio ended the quarter with $2 billion in commercial real estate loans across 78 investments, with five loans rated 4 or 5, representing 4.9% of the portfolio [7] - The company acquired an office property in Chicago valued at $20.9 million, classified as held for sale [6] Company Strategy and Development Direction - The company continues to focus on selectively originating high-quality investments and actively managing the portfolio to grow earnings and book value [5] - The long-term mission remains to deliver value to shareholders through increasing earnings and book value over time [13] Management's Comments on Operating Environment and Future Outlook - The mortgage REIT sector remains challenging, but fundamentals in the multifamily segment are strong due to low unemployment and positive rent growth [13] - Credit quality in the portfolio remains stable, with active monitoring for early signs of weakness [13] Other Important Information - The company incurred $1 million in property tax arrearages on the asset acquired via deed in lieu of foreclosure [11] - G&A expenses for Q2 were $2.3 million, down from $3 million in Q1, reflecting seasonality [12] - The company used $1.2 million for share repurchases, redeeming 135,000 shares at a 64% discount to book value [12] Q&A Session Summary Question: Discussion on spreads for new originations - Management noted that there are opportunities for higher spreads in the market, but the focus remains on high credit quality and good sponsorship [16] Question: Share repurchases versus originating new loans - Management indicated that as long as the return on equity exceeds 15%, they will continue to allocate liquidity to share repurchases, with $5 million remaining in the authorized program [18]

Financial Performance - The company's Earnings Available for Distribution (EAD) for Q2 2023 was $0.60 per share[9, 10] - GAAP net income per share for Q2 2023 was $0.10, including a $(0.31) impact from a $2.7 million provision for CECL reserves[9, 10] - The company's book value was $24.50, a year-over-year increase of $0.02, and an annual increase of 12.9% since the ACRES acquisition in Q3 2020[9, 11] Loan Portfolio - The company's CRE loan portfolio totaled $2.0 billion, comprising 78 loans with a weighted average LTV of 74%[11] - The company had $22.5 million in CRE loan production and $47.3 million in loan repayments during the quarter[11] - Multifamily-focused CRE loans represent 75% of the loan portfolio[9] - 98% of the par value of the CRE loan portfolio is current on payments, with 5% rated 4 or 5[11] - Net CRE loan payoffs for the second quarter were $10 million[9] Capitalization and Liquidity - The company's total liquidity at June 30, 2023, was $91.2 million[9, 11] - Non-recourse, non-mark-to-market CLO financings comprised 80% of asset-specific borrowings[11, 34] Real Estate Investments - The company has $161.9 million of net investments in real estate and properties held for sale[11, 28] Loan Portfolio Composition - Texas represents 23.6% of the company's top state concentration, followed by Florida at 15.1% and Arizona at 8.9%[17]

Part I - Financial Information [Financial Statements](index=3&type=section&id=Item%201%3A%20Financial%20Statements) The company reported total assets of $2.32 billion as of March 31, 2023, with Q1 2023 net income of $2.3 million, driven by increased net interest income, reducing net loss per common share to ($0.28) Consolidated Balance Sheet Summary (in thousands) | Account | March 31, 2023 | December 31, 2022 | | :--- | :--- | :--- | | **Total Assets** | **$2,321,559** | **$2,376,652** | | CRE loans, net | $1,970,891 | $2,038,787 | | Cash and cash equivalents | $87,314 | $66,232 | | **Total Liabilities** | **$1,879,774** | **$1,935,338** | | Borrowings | $1,810,767 | $1,867,033 | | **Total Equity** | **$441,785** | **$441,314** | Consolidated Statement of Operations Summary (in thousands, except per share data) | Account | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :--- | :--- | :--- | | Total Interest Income | $45,329 | $22,676 | | Net Interest Income | $13,954 | $7,769 | | Total Revenues | $21,058 | $10,923 | | Total Operating Expenses | $19,625 | $8,897 | | Provision for (reversal of) credit losses, net | $5,096 | $(1,802) | | **Net Income** | **$2,293** | **$2,084** | | **Net Loss Allocable to Common Shares** | **$(2,416)** | **$(2,771)** | | **Net Loss Per Common Share - Basic & Diluted** | **$(0.28)** | **$(0.30)** | - Cash flow from operating activities was **$9.1 million** for Q1 2023, a significant increase from **$1.6 million** in Q1 2022[28](index=28&type=chunk) - Net cash provided by investing activities was **$70.0 million**, primarily due to **$94.1 million** in principal payments received on loans[28](index=28&type=chunk) - Net cash used in financing activities was **$62.6 million**, driven by payments on borrowings[28](index=28&type=chunk) [Notes to Consolidated Financial Statements](index=10&type=section&id=Notes%20to%20Consolidated%20Financial%20Statements) The notes detail accounting policies, including the transition of its $2.0 billion CRE loan portfolio to SOFR, with a $23.9 million allowance for credit losses and total borrowings of $1.81 billion - The company is a **REIT** focused on originating, holding, and managing CRE mortgage loans and equity investments, with ACRES Capital, LLC as its manager[31](index=31&type=chunk) - As of March 31, 2023, all of the company's **$2.0 billion** floating-rate loans have transitioned to SOFR[46](index=46&type=chunk) - However, **78%** (**$1.3 billion**) of its **$1.7 billion** floating-rate borrowings are still tied to LIBOR, with the conversion expected to be completed in **2023**[47](index=47&type=chunk) Allowance for Credit Losses Activity (in thousands) | Period | Beginning Balance | Provision for Credit Losses | Charge Offs | Ending Balance | | :--- | :--- | :--- | :--- | :--- | | **Q1 2023** | **$18,803** | **$5,096** | **$0** | **$23,899** | Borrowings Summary (in thousands) | Borrowing Type | Principal Outstanding (Mar 31, 2023) | Weighted Avg. Rate | | :--- | :--- | :--- | | ACR 2021-FL1 Senior Notes | $675,223 | 6.20% | | ACR 2021-FL2 Senior Notes | $567,000 | 6.51% | | Senior secured financing facility | $53,336 | 8.54% | | CRE - term warehouse financing facilities | $313,493 | 7.32% | | 5.75% Senior Unsecured Notes | $150,000 | 5.75% | | Unsecured junior subordinated debentures | $51,548 | 8.93% | | **Total** | **$1,829,310** | **6.62%** | - During Q1 2023, the company repurchased **79,744 shares** of its common stock for **$0.756 million**[155](index=155&type=chunk) - As of March 31, 2023, **$6.5 million** remains available under the repurchase plan[155](index=155&type=chunk) [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=43&type=section&id=Item%202%3A%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management attributes improved Q1 2023 results, including a reduced net loss per share of ($0.28) and EAD of $0.52 per share, to increased net interest income, with the CRE loan portfolio at $2.0 billion and CECL allowance at $23.9 million - In Q1 2023, the company originated one floating-rate CRE whole loan with a commitment of **$16.0 million**[217](index=217&type=chunk) - Loan payoffs were **$94.1 million**, resulting in a net portfolio decrease of **$64.4 million**[217](index=217&type=chunk) - The CECL allowance for the CRE loan portfolio was **$23.9 million** (**1.2%** of the portfolio) at March 31, 2023[231](index=231&type=chunk) - This is up from **$18.8 million** (**0.9%**) at year-end 2022, reflecting increased credit risk and macroeconomic decline[232](index=232&type=chunk) Net Interest Income Change Analysis (Q1 2023 vs Q1 2022, in thousands) | Description | Net Change | Change Due to Volume | Change Due to Rate | | :--- | :--- | :--- | :--- | | **Increase in Interest Income** | **$22,653** | **$2,041** | **$20,612** | | **Increase in Interest Expense** | **$16,468** | **$260** | **$16,208** | | **Net Increase in Net Interest Income** | **$6,185** | **$1,781** | **$4,404** | Earnings Available for Distribution (EAD) Reconciliation (in thousands, except per share) | Description | Q1 2023 | Q1 2023 Per Share | Q1 2022 | Q1 2022 Per Share | | :--- | :--- | :--- | :--- | :--- | | Net loss allocable to common shares - GAAP | $(2,416) | $(0.28) | $(2,771) | $(0.30) | | Non-cash provision for (reversal of) CRE credit losses | $5,096 | $0.59 | $(1,802) | $(0.20) | | Other reconciling items | $1,822 | $0.21 | $2,314 | $0.25 | | **EAD allocable to common shares** | **$4,502** | **$0.52** | **$(2,276)** | **$(0.25)** | [Quantitative and Qualitative Disclosures About Market Risk](index=70&type=section&id=Item%203%3A%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) The company manages credit, counterparty, financing, and interest rate risks, with 93.5% of its CRE loan portfolio having interest rate caps, and a 100 basis point rate increase estimated to boost net interest income by $0.865 million - To mitigate credit risk from rising interest rates, the company generally requires borrowers to purchase interest rate caps[367](index=367&type=chunk) - As of March 31, 2023, **93.5%** of the par value of the CRE loan portfolio had such caps in place[367](index=367&type=chunk) Interest Rate Sensitivity Analysis (Annualized Impact, in millions) | Scenario | Change to Net Interest Income | Change to Net Interest Income Per Share | | :--- | :--- | :--- | | **100 Basis Point Increase** | **$0.865** | **$0.10** | | **100 Basis Point Decrease** | **$(0.808)** | **$(0.09)** | [Controls and Procedures](index=72&type=section&id=Item%204%3A%20Controls%20and%20Procedures) Management concluded that the company's disclosure controls and procedures were effective as of March 31, 2023, with no material changes to internal control over financial reporting during the quarter - The CEO and CFO concluded that the company's disclosure controls and procedures were **effective** as of the end of the period covered by the report[376](index=376&type=chunk) - **No changes** in internal control over financial reporting occurred during the quarter that have materially affected, or are reasonably likely to materially affect, these controls[377](index=377&type=chunk) Part II - Other Information [Legal Proceedings](index=73&type=section&id=Item%201%3A%20Legal%20Proceedings) The company's subsidiary, PCM, maintains a $1.2 million reserve for potential mortgage repurchase claims, with no outstanding litigation demands as of March 31, 2023 - The company's subsidiary, PCM, has a reserve of **$1.2 million** for potential mortgage repurchase and indemnification claims, although **no litigation demands** were outstanding as of March 31, 2023[382](index=382&type=chunk) [Risk Factors](index=73&type=section&id=Item%201A%3A%20Risk%20Factors) No material changes to the risk factors disclosed in the company's 2022 Annual Report on Form 10-K were reported - **No material changes** to the risk factors from the 2022 Annual Report on Form 10-K were reported[383](index=383&type=chunk) [Unregistered Sales of Equity Securities and Use of Proceeds](index=73&type=section&id=Item%202%3A%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) During Q1 2023, the company repurchased 79,744 common shares at an average price of $9.52, with $6.5 million remaining available under the repurchase plan Common Stock Repurchases (Q1 2023) | Period | Total Shares Purchased | Average Price Paid per Share | Approx. Value Remaining for Purchase (in thousands) | | :--- | :--- | :--- | :--- | | Jan 2023 | 9,822 | $9.78 | $7,121 | | Feb 2023 | 24,754 | $9.48 | $6,887 | | Mar 2023 | 45,168 | $9.39 | $6,464 | - The company's Board authorized an additional **$20.0 million** for its share repurchase program in November 2021[384](index=384&type=chunk) [Exhibits](index=74&type=section&id=Item%206%3A%20Exhibits) This section lists all exhibits filed with the Form 10-Q, including key corporate and financing agreements, and CEO and CFO certifications - The filing includes **CEO and CFO certifications** pursuant to Rule 13a-14(a)/15d-14(a) and Section 1350[389](index=389&type=chunk) - A list of **key corporate and financing agreements** are provided as exhibits, including the Amended and Restated Loan and Servicing Agreement dated December 22, 2022, and various amendments to financing facilities[386](index=386&type=chunk)[389](index=389&type=chunk)[391](index=391&type=chunk)

UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) ☑ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2022 or ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _________ to __________ Commission file number 1-32733 ACRES COMMERCIAL REALTY CORP. (Exact name of registrant as specified in its charter) Maryland 20-2287134 (St ...

Financial Performance - Net interest income for the three months ended September 30, 2022, was $11,126 thousand, up from $9,452 thousand for the same period in 2021, reflecting a year-over-year increase of 17.7%[7] - The company reported a net income of $713 thousand for the three months ended September 30, 2022, compared to a net loss of $9,805 thousand for the same period in 2021, indicating a significant turnaround[7] - Net income for the three months ended September 30, 2022, was $5,486,000, compared to a net loss of $4,928,000 for the same period in 2021, representing a significant turnaround[8] - Comprehensive income before allocation to preferred shares for the nine months ended September 30, 2022, was $14,424,000, down from $23,151,000 in the same period of 2021[8] - Net income for the nine months ended September 30, 2022, was $13.1 million, a decrease of 39.5% compared to $21.8 million for the same period in 2021[12] - Total revenues for the three months ended September 30, 2022, were $20,936, compared to $12,096 for the same period in 2021, representing a 73.5% increase[7] Assets and Liabilities - Total assets increased to $2,426,386 thousand as of September 30, 2022, compared to $2,284,275 thousand on December 31, 2021, representing a growth of approximately 6.2%[5] - Total liabilities rose to $1,978,907 thousand as of September 30, 2022, from $1,836,080 thousand at the end of 2021, marking an increase of approximately 7.8%[5] - The company’s total equity decreased slightly to $447,479 thousand as of September 30, 2022, from $448,195 thousand at the end of 2021, reflecting a marginal decline of 0.16%[5] - Total stockholders' equity as of September 30, 2022, was $442,549,000, with a non-controlling interest of $4,930,000[9] - Total assets as of September 30, 2022, amounted to $1,500,325,000, with CRE securitizations contributing $1,499,956,000[32] Cash Flow and Investments - Net cash provided by operating activities was $19.0 million, down 25.4% from $25.5 million in the prior year[12] - Cash and cash equivalents and restricted cash at the end of the period totaled $76.9 million, down 46.1% from $142.4 million at the end of the previous year[12] - The company recorded a net cash used in investing activities of $300,507 for the nine months ended September 30, 2022, compared to $316,421 in 2021, showing a slight improvement[12] - The company has $193.7 million in unfunded loan commitments as of September 30, 2022, compared to $157.6 million at December 31, 2021[38] - The company reported a net cash used in investing activities of $300.5 million, a slight improvement from $316.4 million in the previous year[12] Credit Losses and Provisions - The provision for credit losses was $2,620 thousand for the three months ended September 30, 2022, compared to a reversal of $537 thousand for the same period in 2021, indicating a shift in credit quality assessment[7] - The company recorded a provision for expected credit losses of $2.6 million during the three months ended September 30, 2022, reflecting the impact of increased portfolio credit risk[142] - The allowance for credit losses decreased to $7.9 million from $8.8 million, representing a reduction of approximately 10.8%[5] - The provision for (reversal of) credit losses for the three months ended September 30, 2022, was $2,620, compared to a reversal of $537 in the same period of 2021[7] - The company reported a net reversal of credit losses of $15.4 million for the nine months ended September 30, 2021, indicating prior improvements in macroeconomic conditions[133] Stock and Equity - The weighted average number of common shares outstanding was 8,713,256 for the three months ended September 30, 2022, down from 9,553,412 for the same period in 2021, reflecting a decrease of approximately 8.8%[7] - The company repurchased common stock amounting to $8,194 during the nine months ended September 30, 2022, compared to $14,725 in the same period of 2021[12] - The company declared distributions of $0.54 per share for Series C Preferred Stock and $0.49 per share for Series D Preferred Stock for the three months ended September 30, 2022[91] - The company issued a total of 4.6 million shares of 7.875% Series D Cumulative Redeemable Preferred Stock, receiving net proceeds of $110.4 million[82] - The company had 4.8 million shares of Series C Preferred Stock and 4.6 million shares of Series D Preferred Stock outstanding as of September 30, 2022[82] Real Estate and Investments - Real estate income for the nine months ended September 30, 2022, was $21,700 thousand, compared to $7,013 thousand for the same period in 2021, representing a substantial increase of 209.5%[7] - The company acquired two real estate properties with a combined acquisition-date fair value of $51.6 million[52] - The company received a deed-in-lieu of foreclosure on a hotel property with an acquisition-date fair value of $14.3 million, which was reported as property held for sale[54] - The company recognized a realized loss of $2.3 million from a discounted payoff of a loan during the nine months ended September 30, 2022[51] - The total fair value of net assets acquired during the nine months ended September 30, 2022, was $65,926[53] Interest Rates and Financing - The weighted average interest rate for the Senior Secured Financing Facility was 5.75% as of September 30, 2022[158] - The company reported a total of $482,802,000 in outstanding borrowings across various financing facilities as of September 30, 2022[77] - The company entered into a Note and Warrant Purchase Agreement allowing for the issuance of up to $125.0 million of 12.00% Senior Unsecured Notes, with $42.0 million issued to Oaktree and $8.0 million to MassMutual[73] - The company exercised optional redemption for XAN 2020-RSO8 and XAN 2020-RSO9, paying off all outstanding senior notes from sales proceeds of certain securitization assets[71] - The company reported interest expense paid in cash of $46,999,000 for the nine months ended September 30, 2022, compared to $33,889,000 for the same period in 2021, reflecting a 38.7% increase[35] Economic Conditions and Outlook - The U.S. Federal Reserve raised the Federal Funds rate by 3.00% in five rate hikes between March 2022 and September 2022 to combat inflation[112] - The Company continuously monitors the effects of domestic and global events, including inflation and rising interest rates, on its operations and financial position[112] - The company expects to qualify as a REIT in the current fiscal year, focusing on commercial real estate mortgage loans and equity investments[14] - The company is focused on originating, holding, and managing commercial real estate mortgage loans and equity investments in commercial real estate properties[112] - The anticipated CRE loan originations, CRE debt securitizations, and other CRE-related investments for the year ended December 31, 2022, are projected to be between $600.0 million and $800.0 million[113]