ACRES Commercial Realty(US:ACR)2025-08-05 19:21Part I Financial Statements The company's H1 2025 financial statements reflect decreased assets and a net loss, driven by lower interest income and a credit loss reversal Consolidated Balance Sheets As of June 30, 2025, total assets, liabilities, and equity decreased, primarily driven by a reduction in CRE loans and lower borrowings Consolidated Balance Sheet Highlights (in thousands) | Account | June 30, 2025 (unaudited) | December 31, 2024 | | :--- | :--- | :--- | | Total Assets | $1,818,308 | $1,881,467 | | CRE loans, net | $1,361,648 | $1,454,545 | | Cash and cash equivalents | $42,747 | $56,713 | | Total Liabilities | $1,382,906 | $1,431,805 | | Borrowings | $1,309,296 | $1,360,371 | | Total Equity | $435,402 | $449,662 | - The company had no consolidated Variable Interest Entities (VIEs) as of June 30, 2025, a change from December 31, 2024, when consolidated VIEs held $1.14 billion in total assets and $865.0 million in total liabilities, due to the optional redemption of two CRE securitizations in March 20251144 Consolidated Statements of Operations For H1 2025, the company reported a net loss allocable to common shares, primarily due to decreased net interest income, partially offset by a credit loss reversal Statement of Operations Summary (in thousands, except per share data) | Metric | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | | :--- | :--- | :--- | | Total Interest Income | $57,557 | $83,677 | | Net Interest Income | $14,170 | $22,115 | | (Reversal of) provision for credit losses, net | $(2,497) | $6,233 | | Net Income | $3,594 | $11,321 | | Net (Loss) Income Allocable to Common Shares | $(6,591) | $2,209 | | Net (Loss) Income Per Common Share - Basic | $(0.90) | $0.29 | Consolidated Statements of Cash Flows For H1 2025, cash and restricted cash decreased, with operating and investing activities providing cash, largely offset by financing activities from securitization repayments and new facility proceeds Cash Flow Summary (in thousands) | Activity | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | | :--- | :--- | :--- | | Net cash provided by operating activities | $7,203 | $10,211 | | Net cash provided by investing activities | $54,626 | $102,662 | | Net cash used in financing activities | $(74,582) | $(113,166) | | Net Decrease in Cash | $(12,753) | $(293) | | Cash at End of Period | $44,850 | $91,593 | Notes to Consolidated Financial Statements The notes provide detailed disclosures on accounting policies, including VIE redemption, the CRE loan portfolio, a new financing facility, share repurchases, and unfunded loan commitments - The company is a REIT focused on originating, holding, and managing CRE mortgage loans and equity investments, externally managed by ACRES Capital, LLC26 - In March 2025, the company exercised the optional redemption on its two consolidated VIEs, which were CRE securitizations, resulting in no consolidated VIEs as of June 30, 202544 - The company has several investments in unconsolidated entities, including joint ventures for property conversion and development, accounted for using the equity or cost method515455 - The company has $77.7 million in unfunded loan commitments as of June 30, 2025, advanced as borrowers meet specified criteria for projects like capital improvements or construction225 Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's performance in a challenging market, highlighting book value growth via NOLs, a decreased CRE loan portfolio, significant refinancing, a net loss from lower interest income, and current liquidity - The company's short-term strategy is to drive book value (BV) growth by utilizing its $32.1 million in NOL carryforwards and $121.9 million in net capital loss carryforwards to retain future earnings and grow its investable base231 - The CRE loan portfolio decreased to a carrying value of $1.4 billion at June 30, 2025, from $1.5 billion at December 31, 2024, with multifamily properties representing 75.0% of the portfolio238243 - The allowance for credit losses (CECL) was $30.3 million (2.2% of the loan portfolio) at June 30, 2025, down from $32.8 million at year-end 2024, due to improved credit risk modeling and loan payoffs despite worsening macroeconomic factors254 - Common stock book value per share decreased by $0.94 to $27.93 at June 30, 2025, from December 31, 2024257 Results of Operations The company reported a net loss allocable to common shares for Q2 2025, driven by decreased net interest income, significantly offset by a positive swing in credit loss provisions, with real estate income growth Net Interest Income Variance Analysis (Q2 2025 vs Q2 2024, in thousands) | Description | Net Change | Due to Volume | Due to Rate | | :--- | :--- | :--- | :--- | | Total Decrease in Interest Income | $(12,235) | $(7,881) | $(4,354) | | Total Decrease in Interest Expense | $(10,047) | $(9,619) | $(428) | | Net Decrease in Net Interest Income | $(2,188) | $1,738 | $(3,926) | - Real estate income increased by $3.1 million (31%) in Q2 2025 compared to Q2 2024, driven by a newly operational student housing property, asset acquisitions via foreclosure, and improved occupancy and rates at two hotel properties276 - The provision for credit losses saw a significant positive change, with a reversal of $0.8 million in Q2 2025 compared to a provision of $1.3 million in Q2 2024, primarily due to decreased modeled credit risk and loan payoffs277281 Financial Condition The company's investment portfolio, dominated by CRE loans, saw a net reduction, with the allowance for credit losses at $30.3 million; financing was significantly altered by securitization redemptions and a new facility, maintaining a 3.0x leverage ratio Investment Portfolio Summary (June 30, 2025, in thousands) | Asset Type | Amortized Cost | Net Carrying Amount | Percent of Portfolio | | :--- | :--- | :--- | :--- | | CRE whole loans | $1,372,635 | $1,347,264 | 83.71% | | CRE mezzanine loans | $19,363 | $14,384 | 0.89% | | Loans held for sale | $45,800 | $45,800 | 2.85% | | Other investments (Real Estate, etc.) | $202,010 | $202,010 | 12.55% | | Total Investment Portfolio | $1,639,808 | $1,609,458 | 100.00% | - The CRE loan portfolio is geographically concentrated in the Southwest (25.7%), Mountain (17.4%), and Southeast (15.9%) regions by carrying value294 - As of June 30, 2025, five CRE whole loans with a total amortized cost of $115.6 million and one mezzanine loan of $4.7 million were in payment default317 Liquidity and Capital Resources Liquidity at June 30, 2025, included $42.7 million in cash; cash decreased due to major refinancing, including a new $939.9 million facility used to repay securitizations, with the company planning to use significant tax assets and suspending common stock distributions - Primary liquidity sources at June 30, 2025, include $42.7 million of unrestricted cash and cash equivalents and $21.9 million of potential proceeds from unlevered financeable CRE loans373 - In March 2025, the company executed a major refinancing, entering a new $939.9 million facility with JPMorgan Chase and using the proceeds to redeem two securitizations (ACR 2021-FL1 and ACR 2021-FL2)384 Tax Loss Carryforwards (in millions) | Tax Asset Item | REIT (QRS) | TRS | | :--- | :--- | :--- | | Net Operating Loss | $32.1 | $60.9 | | Net Capital Loss | $121.9 | $1.0 | - The company has suspended common share distributions to retain liquidity and utilize NOLs, but intends to continue making regular quarterly distributions to preferred stockholders401402 Critical Accounting Policies and Estimates Management identifies key accounting policies requiring significant judgment, including the Allowance for Credit Losses (CECL), valuation of real estate investments, revenue recognition, and determination of Variable Interest Entities - The Allowance for Credit Losses (CECL) is determined using a probability of default and loss given default methodology over a forecast period, reverting to a historical mean loss ratio, requiring significant judgment regarding macroeconomic forecasts and risk pooling410 - Investments in real estate acquired via foreclosure or deed-in-lieu are initially recorded at fair value; if classified as held for sale, they are carried at the lower of cost or fair value, and depreciation ceases417418 - Interest income recognition is suspended for loans that are 90 days past due or when recovery is doubtful, with previously accrued interest reversed when a loan is on nonaccrual status412422 Quantitative and Qualitative Disclosures About Market Risk The company's primary market risks are credit, counterparty, financing, and interest rate risk, managed through underwriting and rate caps; interest rate risk is significant due to floating-rate loans, with a hypothetical 100 basis point rate increase estimated to increase net interest income by $2.7 million - The company is exposed to credit risk from its loan portfolio, mitigated by requiring borrowers to purchase interest rate caps; as of June 30, 2025, 62% of the loan portfolio's par value had interest rate caps or debt service reserves in place435 - Financing risk exists due to reliance on securitizations, term facilities, and warehouse lines, where weakness in financial markets could make lenders unwilling or unable to provide financing438 Hypothetical Interest Rate Sensitivity (Three Months Ended June 30, 2025) | Rate Change | Increase (Decrease) to Net Interest Income (in thousands) | Increase (Decrease) to Net Interest Income Per Share | | :--- | :--- | :--- | | 100 Basis Point Decrease | $(2,060) | $(0.07) | | 100 Basis Point Increase | $2,727 | $0.09 | Controls and Procedures Management concluded that the company's disclosure controls and procedures were effective as of June 30, 2025, with no material changes in 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 June 30, 2025444 - No material changes to the internal control over financial reporting occurred during the quarter ended June 30, 2025445 Part II Legal Proceedings The company is unaware of any legal contingencies that would require accrual or disclosure in the financial statements as of June 30, 2025 - The company is unaware of any legal contingencies that would require disclosure or accrual as of June 30, 2025447 Risk Factors The company reports no material changes to the risk factors previously disclosed in its Annual Report on Form 10-K for the year ended December 31, 2024 - There have been no material changes to the risk factors disclosed in the company's 2024 Annual Report on Form 10-K448 Issuer Purchases of Equity Securities The company continued its share repurchase program, augmented by a $10.0 million authorization in April 2025, repurchasing 491,749 common shares during H1 2025, with $5.4 million remaining available - In April 2025, the Board authorized an additional $10.0 million for the repurchase of common and preferred stock; as of June 30, 2025, $5.4 million remained available under the program449 Monthly Share Repurchases (Jan - Jun 2025) | Period | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | Jan 2025 | 44,306 | $17.38 | | Feb 2025 | 72,858 | $19.31 | | Mar 2025 | 103,024 | $21.35 | | Apr 2025 | 19,622 | $21.70 | | May 2025 | 111,192 | $18.88 | | Jun 2025 | 140,747 | $18.10 | Other Information No director or officer adopted, modified, or terminated a Rule 10b5-1 or non-Rule 10b5-1 trading arrangement during Q2 2025, and the company amended its guarantee agreement with JPMorgan Chase on August 1, 2025 - On August 1, 2025, the company entered into Amendment No. 7 to its Guarantee with JPMorgan Chase to amend the terms of the debt service coverage period452 - No director or officer adopted, modified, or terminated a Rule 10b5-1 trading arrangement during Q2 2025451 Exhibits This section lists all exhibits filed with the Form 10-Q, including articles of incorporation, bylaws, debt indentures, management agreements, compensation plans, various financing agreements, and required certifications