ACRES Commercial Realty(ACR) - 2023 Q1 - Quarterly Report

Part I - Financial Information Financial Statements 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] - Net cash provided by investing activities was $70.0 million, primarily due to $94.1 million in principal payments received on loans[28] - Net cash used in financing activities was $62.6 million, driven by payments on borrowings[28] Notes to Consolidated Financial Statements 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] - As of March 31, 2023, all of the company's $2.0 billion floating-rate loans have transitioned to SOFR[46] - 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] 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] - As of March 31, 2023, $6.5 million remains available under the repurchase plan[155] Management's Discussion and Analysis of Financial Condition and Results of Operations 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] - Loan payoffs were $94.1 million, resulting in a net portfolio decrease of $64.4 million[217] - The CECL allowance for the CRE loan portfolio was $23.9 million (1.2% of the portfolio) at March 31, 2023[231] - This is up from $18.8 million (0.9%) at year-end 2022, reflecting increased credit risk and macroeconomic decline[232] 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 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] - As of March 31, 2023, 93.5% of the par value of the CRE loan portfolio had such caps in place[367] 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 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] - 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] Part II - Other Information Legal Proceedings 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] Risk Factors 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] Unregistered Sales of Equity Securities and Use of Proceeds 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] Exhibits 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] - 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][389][391]