ACRES Commercial Realty(US:ACR)2024-08-06 20:00PART I - FINANCIAL INFORMATION Item 1: Financial Statements Consolidated financial statements for June 30, 2024, show total assets decreased to $2.095 billion, net income increased to $1.7 million, and credit loss allowance rose to $35.0 million Consolidated Balance Sheets Total assets decreased to $2.095 billion by June 30, 2024, driven by reduced CRE loans, slightly lowering total equity Consolidated Balance Sheet Summary (in thousands) | Metric | June 30, 2024 (unaudited) | December 31, 2023 | | :--- | :--- | :--- | | Total Assets | $2,095,242 | $2,196,105 | | CRE loans, net | $1,678,721 | $1,828,336 | | Cash and cash equivalents | $89,622 | $83,449 | | Total Liabilities | $1,650,850 | $1,749,890 | | Borrowings | $1,582,031 | $1,676,200 | | Total Equity | $444,392 | $446,215 | - Assets of consolidated variable interest entities (VIEs) decreased to $1.37 billion from $1.48 billion at year-end 2023, with a corresponding decrease in VIE liabilities13 Consolidated Statements of Operations Net income allocable to common shares improved to $1.7 million in Q2 2024, driven by a real estate gain and lower credit loss provisions Key Operating Results (in thousands, except per share data) | Metric | Q2 2024 | Q2 2023 | H1 2024 | H1 2023 | | :--- | :--- | :--- | :--- | :--- | | Total Revenues | $20,936 | $23,622 | $39,704 | $44,680 | | Net Interest Income | $10,755 | $14,706 | $22,115 | $28,660 | | Provision for credit losses, net | $1,337 | $2,700 | $6,233 | $7,796 | | Net Income | $6,397 | $5,558 | $11,321 | $7,851 | | Net Income (Loss) Allocable to Common Shares | $1,653 | $817 | $2,209 | $(1,599) | | Net Income (Loss) Per Common Share - Basic | $0.22 | $0.10 | $0.29 | $(0.19) | Consolidated Statements of Cash Flows Operating activities provided $10.2 million, investing activities generated $102.7 million, and financing activities used $113.2 million Cash Flow Summary for the Six Months Ended June 30 (in thousands) | Cash Flow Category | 2024 | 2023 | | :--- | :--- | :--- | | Net cash provided by operating activities | $10,211 | $24,468 | | Net cash provided by investing activities | $102,662 | $73,652 | | Net cash used in financing activities | $(113,166) | $(130,568) | | Net (Decrease) Increase in Cash | $(293) | $(32,448) | Notes to Consolidated Financial Statements Notes detail a CRE loan portfolio decrease to $1.7 billion, credit loss allowance increase to $35.0 million, and active share repurchases - The company's CRE loan portfolio had a carrying value of $1.68 billion, down from $1.83 billion at year-end 2023, consisting of 63 whole loans and one mezzanine loan62 - The allowance for credit losses increased to $35.0 million as of June 30, 2024, from $28.8 million at year-end 2023, with a provision of $6.2 million recorded in the first six months of 20247275 - Total borrowings decreased to $1.58 billion from $1.68 billion, with CRE securitizations ($1.09 billion) being the largest component107112 - During the first six months of 2024, the company repurchased $3.6 million of its common stock (310,285 shares) and $2.2 million of its Series D Preferred Stock (100,000 shares)142 Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses macroeconomic challenges, NOL utilization strategy, and improved net income despite a smaller CRE loan portfolio Overview The REIT navigates market challenges by leveraging significant NOL and capital loss carryforwards to grow book value - The company's short-term strategy is to drive book value growth by utilizing its NOL carryforwards of $46.6 million and a portion of its net capital loss carryforwards of $121.9 million193 - The market faces challenges from inflation and prolonged higher interest rates, disrupting financial services, real estate, and credit markets194 - The office property market continues to experience high vacancies and slower leasing activity, negatively impacting borrowers' investment support ability196 Results of Operations Net income allocable to common shares improved to $1.7 million in Q2 2024, driven by lower credit provisions and a real estate gain Net Income (Loss) Allocable to Common Shares (in thousands) | Period | 2024 | 2023 | | :--- | :--- | :--- | | Three Months Ended June 30 | $1,653 | $817 | | Six Months Ended June 30 | $2,209 | $(1,599) | - Net interest income for Q2 2024 decreased by $4.0 million compared to Q2 2023, primarily due to a lower volume of interest-earning assets219 - The provision for credit losses decreased to $1.3 million for Q2 2024 from $2.7 million in Q2 2023, contributing to higher net income227231 - A non-recurring gain of $5.8 million on the conversion of a loan to real estate owned was recognized in the first half of 2024233234 Financial Condition Financial condition shows total assets at $2.1 billion, reduced CRE loan portfolio, increased credit loss allowance, and decreased leverage - The CRE loan portfolio's carrying amount decreased to $1.68 billion at June 30, 2024, from $1.83 billion at year-end 2023, with multifamily properties representing 79.4% of the portfolio198203 - The allowance for credit losses (CECL) increased to $35.0 million, or 2.0% of the loan portfolio, reflecting worsening macroeconomic factors212244 - The company's leverage ratio (borrowings to total equity) decreased to 3.6x at June 30, 2024, from 3.8x at December 31, 2023316 - The company did not pay common share distributions during the first half of 2024, focusing on retaining liquidity and utilizing NOLs to grow book value320 Item 3: Quantitative and Qualitative Disclosures About Market Risk Primary market risks include credit, counterparty, financing, and interest rate risks, mitigated by strategies like interest rate caps - Primary market risks identified are credit risk, counterparty risk, financing risk, and interest rate risk329 - To mitigate credit risk from rising interest rates, 85.6% of the CRE loan portfolio's par value had interest rate caps in place as of June 30, 2024331 Interest Rate Sensitivity Analysis | Scenario | Impact on Net Interest Income | Impact per Share | | :--- | :--- | :--- | | 100 Basis Point Decrease | $(839,000) | $(0.11) | | 100 Basis Point Increase | $846,000 | $0.11 | Item 4: Controls and Procedures Management concluded disclosure controls were effective, with no material changes to internal control over financial reporting - The Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures are effective at the reasonable assurance level as of the end of the period340 - No changes in internal control over financial reporting occurred during the quarter ended June 30, 2024, that have materially affected, or are reasonably likely to materially affect, internal controls341 PART II - OTHER INFORMATION Item 1: Legal Proceedings The company is unaware of any litigation contingencies requiring accrual or disclosure in financial statements as of June 30, 2024 - The company is unaware of any contingencies arising from litigation that would require accrual or disclosure in the consolidated financial statements at June 30, 2024343 Item 1A: Risk Factors No material changes to the risk factors previously disclosed in the 2023 Annual Report on Form 10-K have occurred - No material changes to the risk factors disclosed in the 2023 Annual Report on Form 10-K have occurred as of the date of this report344 Item 2: Unregistered Sales of Equity Securities, Use of Proceeds and Issuer Purchases of Equity Securities The company continued its share repurchase program and issued 333,333 common shares under incentive plans, with an ownership limit waiver - The company has an active share repurchase program, expanded by an additional $10.0 million in November 2023, with $4.1 million remaining available as of June 30, 2024346 Issuer Purchases of Equity Securities (H1 2024) | Period | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | Jan 2024 | 75,138 (Common) | $9.86 | | Jan 2024 | 100,000 (Preferred) | $21.57 | | Feb 2024 | 52,195 (Common) | $10.14 | | Mar 2024 | 67,494 (Common) | $11.84 | | Apr 2024 | 52,812 (Common) | $13.83 | | May 2024 | 39,994 (Common) | $13.37 | | Jun 2024 | 22,652 (Common) | $12.80 | - On May 7, 2024, the company issued 333,333 shares of common stock under its incentive plans after reaching a book value target of $27.00 per share346 Item 5: Other Information No director or officer adopted, modified, or terminated a Rule 10b5-1 or non-Rule 10b5-1 trading arrangement during Q2 2024 - No director or officer adopted, modified, or terminated a Rule 10b5-1 or non-Rule 10b5-1 trading arrangement during the three months ended June 30, 2024348 Item 6: Exhibits This section lists all exhibits filed with the Form 10-Q, including various agreements, articles, bylaws, and certifications