ACRES Commercial Realty(ACR) - 2019 Q2 - Quarterly Report

Part I - Financial Information Item 1: Financial Statements Exantas Capital Corp. reported increased net income and total assets for H1 2019, driven by its strategic shift to CRE debt investments Consolidated Balance Sheets Total assets increased to $2.52 billion by June 30, 2019, primarily due to growth in CRE loans, funded by increased borrowings Consolidated Balance Sheet Highlights (in thousands) | Metric | June 30, 2019 (unaudited) | December 31, 2018 | | :--- | :--- | :--- | | Total Assets | $2,519,737 | $2,130,913 | | CRE loans, net | $1,948,492 | $1,551,967 | | Investment securities | $445,664 | $418,998 | | Total Liabilities | $1,961,785 | $1,577,094 | | Borrowings | $1,935,265 | $1,554,223 | | Total Stockholders' Equity | $557,952 | $553,819 | Consolidated Statements of Operations Net income for the six months ended June 30, 2019, significantly increased to $17.0 million, driven by higher net interest income from CRE loan portfolio expansion Statement of Operations Summary (in thousands, except per share data) | Metric | Three Months Ended June 30, 2019 | Three Months Ended June 30, 2018 | Six Months Ended June 30, 2019 | Six Months Ended June 30, 2018 | | :--- | :--- | :--- | :--- | :--- | | Total Interest Income | $37,138 | $29,660 | $71,070 | $55,617 | | Net Interest Income | $15,557 | $13,501 | $30,094 | $25,074 | | Total Operating Expenses | $5,335 | $6,037 | $11,727 | $12,091 | | Net Income | $8,891 | $8,739 | $17,024 | $8,849 | | Net Income (Loss) Allocable to Common Shares | $6,304 | $6,152 | $11,849 | $(6,430) | | Diluted EPS | $0.20 | $0.20 | $0.38 | $(0.21) | Consolidated Statements of Comprehensive Income (Loss) Comprehensive income allocable to common shares for H1 2019 was $16.6 million, a significant turnaround from a prior-year loss, driven by unrealized gains on investment securities Comprehensive Income (Loss) (in thousands) | Metric | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2019 | | :--- | :--- | :--- | | Net Income | $8,891 | $17,024 | | Total Other Comprehensive Income | $585 | $4,734 | | Comprehensive Income (Loss) Allocable to Common Shares | $6,889 | $16,583 | Consolidated Statements of Changes in Stockholders' Equity Total stockholders' equity increased to $558.0 million in H1 2019, driven by net income and comprehensive income, partially offset by distributions - Key drivers for the change in stockholders' equity in H1 2019 were net income ($17.0M), distributions on preferred stock (-$5.2M), distributions on common stock (-$13.5M), and a positive change in accumulated other comprehensive income from securities and derivatives ($4.7M)[17] Consolidated Statements of Cash Flows Net cash used in investing activities was $410.4 million in H1 2019, primarily for loan origination, funded by $358.5 million from financing activities Cash Flow Summary (in thousands) | Cash Flow Activity | Six Months Ended June 30, 2019 | | :--- | :--- | | Net cash provided by operating activities | $17,657 | | Net cash used in investing activities | $(410,370) | | Net cash provided by financing activities | $358,455 | | Net Decrease in Cash and Restricted Cash | $(34,258) | Notes to Consolidated Financial Statements Notes detail accounting policies, the company's CRE REIT focus, use of VIEs, the $1.95 billion CRE loan portfolio, $1.94 billion in borrowings, and strategic plan completion - The company is a REIT primarily focused on originating, holding, and managing commercial real estate (CRE) mortgage loans and is externally managed by Exantas Capital Manager Inc., a subsidiary of C-III Capital Partners LLC[21] - The company has substantially completed its strategic plan, approved in November 2016, to focus on CRE debt investments by disposing of legacy assets and exiting non-core businesses. Operations from residential mortgage and middle market lending segments are reported as discontinued[23][167] - The company utilizes consolidated VIEs, primarily CRE securitizations, to finance its assets. As of June 30, 2019, these VIEs held $1.31 billion in assets and had $964.8 million in liabilities[41][42][46] CRE Loan Portfolio (in thousands) | Loan Type | Principal (June 30, 2019) | Carrying Value (June 30, 2019) | Carrying Value (Dec 31, 2018) | | :--- | :--- | :--- | :--- | | Whole loans | $1,928,828 | $1,918,382 | $1,527,712 | | Mezzanine loan | $4,700 | $4,700 | $4,700 | | Preferred equity | $25,565 | $25,410 | $19,555 | | Total | $1,959,093 | $1,948,492 | $1,551,967 | - In April 2019, the company closed a $687.2 million CRE debt securitization (XAN 2019-RSO7), issuing $585.8 million of non-recourse, floating-rate notes to finance CRE loans[93] - For the quarter ended June 30, 2019, the company declared a dividend of $0.225 per common share[123] Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes improved H1 2019 performance to strategic focus on CRE debt investments, with portfolio growth driving increased net interest income and lower operating expenses - The company's strategic focus is on originating, holding, and managing CRE mortgage loans and other CRE-related debt investments, financed through matched-maturity borrowing strategies and derivatives to mitigate interest rate risk[174] - The company has substantially completed its strategic plan to exit non-core assets, with 95% of equity now allocated to core CRE assets. As of June 30, 2019, only $27.6 million of the original $480.1 million of identified non-core assets remained[185] - During Q2 2019, the company acquired 28 CRE loans with commitments of $210.8 million and originated 17 CRE loans with commitments of $252.1 million[186] - The company projects total originations and investments for the full year 2019 to be between $850.0 million and $1.0 billion[187] Core Earnings Reconciliation (in thousands, except per share data) | Metric | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2019 | | :--- | :--- | :--- | | Net income (loss) allocable to common shares - GAAP | $6,304 ($0.20/share) | $11,849 ($0.38/share) | | Adjustments (Non-cash items, non-core assets, etc.) | $2,537 | $4,821 | | Core Earnings allocable to common shares | $8,841 ($0.28/share) | $16,670 ($0.53/share) | Item 3: Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate risk, managed through asset/liability matching and derivatives, with sensitivity analysis showing fair value changes for investment securities - The company's primary market risk is interest rate risk, which affects net interest income and the value of its assets. This risk is managed through matching asset/liability terms and using derivatives[316][324] Interest Rate Sensitivity Analysis (in thousands) | Scenario | Change in Fair Value of Investment Securities | Change in Fair Value of Hedging Instruments | | :--- | :--- | :--- | | Rates Fall 100 bps | +$6,907 | -$6,133 | | Rates Rise 100 bps | -$5,639 | +$5,675 | Item 4: Controls and Procedures Management concluded that disclosure controls and procedures were effective, 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 are effective at the reasonable assurance level[326] - No material changes were made to the company's internal control over financial reporting during the quarter[327] Part II - Other Information Item 1: Legal Proceedings The company is involved in several shareholder derivative suits, with federal actions settled and state-level suits largely stayed or dismissed, and plans to seek further dismissals - Federal shareholder derivative actions against the company were settled and dismissed as of May 17, 2019. The settlement involved corporate governance changes and a payment of $550,000 in plaintiffs' attorneys' fees, funded by insurers[334] - Four of six shareholder derivative suits in New York State remain open but are currently stayed. The company intends to seek their dismissal[330] Item 1A: Risk Factors No material changes to risk factors were reported compared to the company's Annual Report on Form 10-K - As of the report date, there were no material changes to the risk factors disclosed in the company's Annual Report on Form 10-K[336] Item 6: Exhibits This section lists all exhibits filed with the Form 10-Q, including various agreements, corporate documents, and officer certifications