ACRES Commercial Realty(US:ACR)2020-03-10 00:19markdown PART I [Item 1: Business](index=4&type=section&id=Item%201%3A%20Business) Exantas Capital Corp. is a REIT focused on originating and managing commercial real estate mortgage loans and debt, externally managed by C-III Capital Partners - The company's investment strategy focuses on originating, holding, and managing commercial real estate (CRE) mortgage loans and related debt investments[9](index=9&type=chunk) 2019 Loan and CMBS Activity | Activity | Type | Commitments/Face Value | | :--- | :--- | :--- | | Acquired | CRE Loans | $210.8 million | | Originated | CRE Loans | $731.2 million | | Acquired | CMBS | $147.2 million | Portfolio Composition at December 31, 2019 | Asset Class | Net Carrying Amount (in thousands) | Percent of Portfolio | | :--- | :--- | :--- | | **Core Assets** | **$2,299,195** | **98.80%** | | CRE whole loans | $1,747,633 | 75.10% | | CRE mezzanine loan & preferred equity | $30,848 | 1.33% | | CMBS, fixed-rate | $138,039 | 5.93% | | CMBS, floating-rate | $382,675 | 16.44% | | **Non-Core Assets** | **$28,004** | **1.20%** | | Legacy CRE assets | $28,004 | 1.20% | | **Total Portfolio** | **$2,327,199** | **100.00%** | - The CRE loan portfolio is geographically concentrated in Mountain, Southwest, and Southeast regions, primarily collateralized by multifamily properties[33](index=33&type=chunk) - The company is externally managed under an agreement that includes a monthly base management fee calculated at **1.50% of equity annually** and potential incentive compensation based on Core Earnings performance[40](index=40&type=chunk)[41](index=41&type=chunk) - The company operates its business to be excluded from regulation under the Investment Company Act, primarily relying on the Section 3(c)(5)(C) exclusion for its main subsidiary, which requires at least **55% of assets** to be Qualifying Interests (mortgages and real estate interests)[50](index=50&type=chunk)[51](index=51&type=chunk) [Item 1A: Risk Factors](index=12&type=section&id=Item%201A%3A%20Risk%20Factors) The company faces significant risks including leverage dependence, interest rate volatility, reliance on its external manager, illiquid investments, real estate market declines, and REIT qualification challenges - Significant financing risks include reliance on leverage, potential margin calls from lenders if asset values decline, and the risk of losses from defaults on repurchase agreements[67](index=67&type=chunk)[69](index=69&type=chunk)[71](index=71&type=chunk) - CRE debt securitizations, a key financing tool, carry risks of cash flow and income elimination if performance tests are failed[80](index=80&type=chunk)[81](index=81&type=chunk)[82](index=82&type=chunk) - The planned phase-out of LIBOR by **end of 2021** creates uncertainty and risk, as the company's loans, borrowings, and derivatives are benchmarked to it; a transition to a new rate like SOFR could cause market disruptions or interest rate mismatches[125](index=125&type=chunk)[126](index=126&type=chunk) - High dependence on external manager C-III creates potential conflicts of interest and makes agreement termination difficult and costly[143](index=143&type=chunk)[145](index=145&type=chunk)[150](index=150&type=chunk) - Maintaining REIT qualification is critical, requiring adherence to strict income, asset, and distribution tests, and failure would result in significant corporate-level taxes[187](index=187&type=chunk)[196](index=196&type=chunk) - Adoption of the new Current Expected Credit Loss (CECL) accounting standard is expected to materially increase and add volatility to the allowance for loan losses[114](index=114&type=chunk)[115](index=115&type=chunk)[116](index=116&type=chunk) [Item 1B: Unresolved Staff Comments](index=33&type=section&id=Item%201B%3A%20Unresolved%20Staff%20Comments) The company reports no unresolved comments from the Securities and Exchange Commission staff - None[224](index=224&type=chunk) [Item 2: Properties](index=33&type=section&id=Item%202%3A%20Properties) The company does not own principal real property, maintaining leased office spaces in New York and Philadelphia - The company's principal office is located in leased space at 717 Fifth Avenue, New York, New York 10022[225](index=225&type=chunk) [Item 3: Legal Proceedings](index=33&type=section&id=Item%203%3A%20Legal%20Proceedings) The company faces potential litigation from loan repurchase claims, maintaining a **$1.7 million** reserve, while prior shareholder derivative actions were settled or dismissed - A reserve of **$1.7 million** was maintained at December 31, 2019, for potential litigation demands related to mortgage repurchases and indemnifications from its subsidiary, PCM[227](index=227&type=chunk) - Multiple shareholder derivative suits, including Federal Actions and New York State Actions, were settled or dismissed during 2019[228](index=228&type=chunk)[229](index=229&type=chunk) [Item 4: Mine Safety Disclosures](index=34&type=section&id=Item%204%3A%20Mine%20Safety%20Disclosures) This item is not applicable to the company's business - Not applicable[232](index=232&type=chunk) PART II [Item 5: Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities](index=35&type=section&id=Item%205%3A%20Market%20for%20Registrant%27s%20Common%20Equity%2C%20Related%20Stockholder%20Matters%20and%20Issuer%20Purchases%20of%20Equity%20Securities) The company's common and Series C Preferred Stock are publicly traded, with **$44.9 million** remaining for securities repurchase at year-end 2019 - The company's common stock and Series C Preferred Stock are listed on the New York Stock Exchange under symbols **XAN** and **XANPrC**[233](index=233&type=chunk)[235](index=235&type=chunk) - As of December 31, 2019, **$44.9 million** remained available under the securities repurchase program, with no shares repurchased during the year[236](index=236&type=chunk) [Item 6: Selected Financial Data](index=37&type=section&id=Item%206%3A%20Selected%20Financial%20Data) This section summarizes five-year financial data, showing **$61.0 million** net interest income and **$36.2 million** net income from continuing operations in 2019 Selected Financial Data (2015-2019, in thousands) | Metric | 2019 | 2018 | 2017 | 2016 | 2015 | | :--- | :--- | :--- | :--- | :--- | :--- | | **Net interest income** | $61,049 | $55,163 | $41,661 | $58,871 | $65,388 | | **Net income (loss) from continuing ops** | $36,217 | $27,306 | $47,457 | $(11,334) | $11,079 | | **Total assets** | $2,454,326 | $2,130,913 | $1,912,075 | $2,053,543 | $2,765,562 | | **Total stockholders' equity** | $556,398 | $553,819 | $671,476 | $704,299 | $818,863 | [Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations](index=38&type=section&id=Item%207%3A%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management's discussion analyzes financial performance, highlighting increased net income to common shares, asset growth, strategic plan completion, and the expected impact of CECL - The company substantially completed its 2016 strategic plan, with core CRE debt investments representing **95% of equity allocation** at year-end 2019[255](index=255&type=chunk) Net Income Comparison (in millions, except per share) | Metric | 2019 | 2018 | | :--- | :--- | :--- | | Net Income Allocable to Common Shares | $25.6 | $7.0 | | Per Share - Basic | $0.82 | $0.22 | | Per Share - Diluted | $0.81 | $0.22 | - Net interest income increased by **$5.9 million** year-over-year, primarily from a **$14.1 million** increase in CRE whole loan interest income due to higher balances[263](index=263&type=chunk) - Total assets increased to **$2.5 billion** at year-end 2019 from **$2.1 billion** in 2018, driven by CRE loan and CMBS origination and acquisition[287](index=287&type=chunk) - The company's leverage ratio increased to **3.4x** at year-end 2019 from **2.8x** at year-end 2018, due to increased borrowings for asset growth[383](index=383&type=chunk) - Upon CECL adoption on January 1, 2020, the company expects an initial CECL reserve of approximately **$4.5 million**, with a **$3.0 million** charge to retained earnings[413](index=413&type=chunk) [Item 7A: Quantitative and Qualitative Disclosures About Market Risk](index=71&type=section&id=Item%207A%3A%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) The company manages interest rate risk through asset-liability matching and derivatives; a **100 basis point** rate rise would decrease investments by **$5.6 million** and increase hedges by **$5.5 million** Interest Rate Sensitivity Analysis at Dec 31, 2019 (in thousands) | Item | 100 bps Rate Fall (Change in Fair Value) | 100 bps Rate Rise (Change in Fair Value) | | :--- | :--- | :--- | | Interest rate-sensitive investments | +$7,520 | -$5,583 | | Interest rate-sensitive hedging instruments | -$5,887 | +$5,469 | [Item 8: Financial Statements and Supplementary Data](index=72&type=section&id=Item%208%3A%20Financial%20Statements%20and%20Supplementary%20Data) This section presents the company's audited consolidated financial statements for 2019, including an unqualified opinion from Grant Thornton LLP - The report includes an unqualified opinion from independent registered public accounting firm Grant Thornton LLP on the consolidated financial statements[423](index=423&type=chunk) Consolidated Balance Sheet Highlights (in thousands) | Account | Dec 31, 2019 | Dec 31, 2018 | | :--- | :--- | :--- | | Total Assets | $2,454,326 | $2,130,913 | | CRE loans, net | $1,789,985 | $1,551,967 | | Total Liabilities | $1,897,928 | $1,577,094 | | Total Stockholders' Equity | $556,398 | $553,819 | Consolidated Statement of Operations Highlights (in thousands) | Account | 2019 | 2018 | | :--- | :--- | :--- | | Net Interest Income | $61,049 | $55,163 | | Total Operating Expenses | $21,663 | $24,049 | | Net Income from Continuing Operations | $36,217 | $27,306 | | Net Income Allocable to Common Shares | $25,616 | $6,973 | [Item 9: Changes in and Disagreements with Accountants on Accounting and Financial Disclosure](index=131&type=section&id=Item%209%3A%20Changes%20in%20and%20Disagreements%20with%20Accountants%20on%20Accounting%20and%20Financial%20Disclosure) The company reports no disagreements with its accountants regarding accounting principles, financial disclosure, or auditing scope - None[702](index=702&type=chunk) [Item 9A: Controls and Procedures](index=131&type=section&id=Item%209A%3A%20Controls%20and%20Procedures) Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2019, with an unqualified auditor opinion - Management concluded that disclosure controls and procedures are effective at a reasonable assurance level as of December 31, 2019[704](index=704&type=chunk) - Management concluded that internal control over financial reporting was effective as of December 31, 2019, based on the COSO framework[706](index=706&type=chunk) - The independent registered public accounting firm, Grant Thornton LLP, issued an unqualified opinion on the company's internal control over financial reporting as of December 31, 2019[709](index=709&type=chunk) [Item 9B: Other Information](index=133&type=section&id=Item%209B%3A%20Other%20Information) Effective March 6, 2020, the board approved amended bylaws granting stockholders power to alter or repeal bylaws by majority vote - On March 6, 2020, the company amended its bylaws to allow stockholders to alter or repeal bylaws with a majority vote[716](index=716&type=chunk) PART III [Item 10: Directors, Executive Officers and Corporate Governance](index=134&type=section&id=Item%2010%3A%20Directors%2C%20Executive%20Officers%20and%20Corporate%20Governance) Information on directors, executive officers, and corporate governance is incorporated by reference from the 2020 proxy statement - Information is incorporated by reference from the registrant's definitive proxy statement for the 2020 annual meeting[719](index=719&type=chunk) [Item 11: Executive Compensation](index=134&type=section&id=Item%2011%3A%20Executive%20Compensation) Information on executive compensation is incorporated by reference from the company's 2020 annual meeting proxy statement - Information is incorporated by reference from the registrant's definitive proxy statement for the 2020 annual meeting[720](index=720&type=chunk) [Item 12: Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters](index=134&type=section&id=Item%2012%3A%20Security%20Ownership%20of%20Certain%20Beneficial%20Owners%20and%20Management%20and%20Related%20Stockholder%20Matters) Information on security ownership by beneficial owners and management is incorporated by reference from the 2020 proxy statement - Information is incorporated by reference from the registrant's definitive proxy statement for the 2020 annual meeting[720](index=720&type=chunk) [Item 13: Certain Relationships and Related Transaction and Director Independence](index=134&type=section&id=Item%2013%3A%20Certain%20Relationships%20and%20Related%20Transaction%20and%20Director%20Independence) Information on certain relationships, related transactions, and director independence is incorporated by reference from the 2020 proxy statement - Information is incorporated by reference from the registrant's definitive proxy statement for the 2020 annual meeting[720](index=720&type=chunk) [Item 14: Principal Accountant Fees and Services](index=134&type=section&id=Item%2014%3A%20Principal%20Accountant%20Fees%20and%20Services) Information on principal accountant fees and services is incorporated by reference from the company's 2020 annual meeting proxy statement - Information is incorporated by reference from the registrant's definitive proxy statement for the 2020 annual meeting[721](index=721&type=chunk) PART IV [Item 15: Exhibits, Financial Statement Schedules](index=135&type=section&id=Item%2015%3A%20Exhibits%2C%20Financial%20Statement%20Schedules) This section lists all financial statements, schedules, and exhibits filed with the Annual Report on Form 10-K, including governance and material contracts - This item lists the financial statements and exhibits filed with the 10-K, including governance documents, material contracts, and certifications[724](index=724&type=chunk)[725](index=725&type=chunk) [Item 16: Form 10-K Summary](index=138&type=section&id=Item%2016%3A%20Form%2010-K%20Summary) The company has not provided a summary for its Form 10-K - None[730](index=730&type=chunk)