Annual Statements Open main menu

ACRES Commercial Realty Corp. - Quarter Report: 2023 March (Form 10-Q)

10-Q

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2023

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _________ to __________

 

Commission File Number: 1-32733

img81404349_0.jpg 

ACRES COMMERCIAL REALTY CORP.

(Exact name of registrant as specified in its charter)

 

Maryland



 

 

20-2287134

(State or other jurisdiction of



 

 

(I.R.S. Employer

incorporation or organization)



 

 

Identification No.)

390 RXR Plaza, Uniondale, New York 11556

(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code: 516-535-0015

Securities registered pursuant to Section 12(b) of the Act:

 

 

 

 

 

Title of each class

 

Trading Symbol(s)

 

Name of each exchange on which registered

Common Stock, $0.001 par value

 

ACR

 

New York Stock Exchange

8.625% Fixed-to-Floating Series C Cumulative Redeemable Preferred Stock

 

ACRPrC

 

New York Stock Exchange

7.875% Series D Cumulative Redeemable Preferred Stock

 

ACRPrD

 

New York Stock Exchange

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

Accelerated filer

Non-accelerated filer

 

Smaller reporting company

 

 

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No

The number of outstanding shares of the registrant’s common stock on May 5, 2023 was 8,589,629 shares.

 

 

 


(Back to Index)

 

ACRES COMMERCIAL REALTY CORP. AND SUBSIDIARIES

INDEX TO QUARTERLY REPORT

ON FORM 10-Q

 

PAGE

PART I

3

Item 1:

Financial Statements

3

Consolidated Balance Sheets – March 31, 2023 (unaudited) and December 31, 2022

3

Consolidated Statements of Operations (unaudited) for the Three Months Ended March 31, 2023 and 2022

5

Consolidated Statements of Comprehensive Loss (unaudited) for the Three Months Ended March 31, 2023 and 2022

6

Consolidated Statements of Changes in Equity (unaudited) for the Three Months Ended March 31, 2023 and 2022

7

Consolidated Statements of Cash Flows (unaudited) for the Three Months Ended March 31, 2023 and 2022

9

Notes to Consolidated Financial Statements – March 31, 2023 (unaudited)

10

Item 2:

Management’s Discussion and Analysis of Financial Condition and Results of Operations

40

Item 3:

Quantitative and Qualitative Disclosures About Market Risk

70

Item 4:

Controls and Procedures

72

PART II

73

Item 1:

Legal Proceedings

73

Item 1A:

Risk Factors

73

Item 2:

Unregistered Sales of Equity Securities and Use of Proceeds

73

Item 6:

Exhibits

74

SIGNATURES

78

 

(Back to Index)

 


(Back to Index)

 

PART I

ITEM 1. FINANCIAL STATEMENTS

ACRES COMMERCIAL REALTY CORP. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share data)

 

 

 

March 31, 2023

 

 

December 31, 2022

 

 

 

(unaudited)

 

 

 

 

ASSETS (1)

 

 

 

 

 

 

Cash and cash equivalents

 

$

87,314

 

 

$

66,232

 

Restricted cash

 

 

33,940

 

 

 

38,579

 

Accrued interest receivable

 

 

12,570

 

 

 

11,969

 

CRE loans

 

 

1,994,790

 

 

 

2,057,590

 

Less: allowance for credit losses

 

 

(23,899

)

 

 

(18,803

)

CRE loans, net

 

 

1,970,891

 

 

 

2,038,787

 

Principal paydowns receivable

 

 

54

 

 

 

 

Loan receivable - related party

 

 

11,200

 

 

 

11,275

 

Investments in unconsolidated entities

 

 

1,548

 

 

 

1,548

 

Properties held for sale

 

 

40,377

 

 

 

53,769

 

Investments in real estate

 

 

130,571

 

 

 

120,968

 

Right of use assets

 

 

20,152

 

 

 

20,281

 

Intangible assets

 

 

8,628

 

 

 

8,880

 

Other assets

 

 

4,314

 

 

 

4,364

 

Total assets

 

$

2,321,559

 

 

$

2,376,652

 

LIABILITIES (2)

 

 

 

 

 

 

Accounts payable and other liabilities

 

$

13,442

 

 

$

10,391

 

Management fee payable - related party

 

 

679

 

 

 

898

 

Accrued interest payable

 

 

4,762

 

 

 

6,921

 

Borrowings

 

 

1,810,767

 

 

 

1,867,033

 

Lease liabilities

 

 

43,837

 

 

 

43,695

 

Distributions payable

 

 

3,262

 

 

 

3,262

 

Accrued tax liability

 

 

 

 

 

113

 

Liabilities held for sale

 

 

3,025

 

 

 

3,025

 

Total liabilities

 

 

1,879,774

 

 

 

1,935,338

 

EQUITY

 

 

 

 

 

 

Preferred stock, par value $0.001: 10,000,000 shares authorized 8.625% Fixed-to-Floating Series C Cumulative Redeemable Preferred Stock, liquidation preference $25.00 per share; 4,800,000 and 4,800,000 shares issued and outstanding

 

 

5

 

 

 

5

 

Preferred stock, par value $0.001: 6,800,000 shares authorized 7.875% Series D Cumulative Redeemable Preferred Stock, liquidation preference $25.00 per share; 4,607,857 and 4,607,857 shares issued and outstanding

 

 

5

 

 

 

5

 

Common stock, par value $0.001: 41,666,666 shares authorized; 8,646,136 and 8,708,100 shares issued and outstanding (including 583,333 and 583,333 unvested restricted shares)

 

 

9

 

 

 

9

 

Additional paid-in capital

 

 

1,174,510

 

 

 

1,174,202

 

Accumulated other comprehensive loss

 

 

(6,001

)

 

 

(6,394

)

Distributions in excess of earnings

 

 

(734,775

)

 

 

(732,359

)

Total stockholders’ equity

 

 

433,753

 

 

 

435,468

 

Non-controlling interests

 

 

8,032

 

 

 

5,846

 

Total equity

 

 

441,785

 

 

 

441,314

 

TOTAL LIABILITIES AND EQUITY

 

$

2,321,559

 

 

$

2,376,652

 

 

 

 

The accompanying notes are an integral part of these statements

(Back to Index)

3


(Back to Index)

 

 

ACRES COMMERCIAL REALTY CORP. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS - (Continued)

(in thousands, except share and per share data)

 

 

 

March 31, 2023

 

 

December 31, 2022

 

 

 

(unaudited)

 

 

 

 

(1) Assets of consolidated variable interest entities (“VIEs”) included in total assets above:

 

 

 

 

 

 

Restricted cash

 

$

33,415

 

 

$

38,180

 

Accrued interest receivable

 

 

8,837

 

 

 

8,184

 

CRE loans, pledged as collateral (3)

 

 

1,462,308

 

 

 

1,456,649

 

Other assets

 

 

87

 

 

 

119

 

Total assets of consolidated VIEs

 

$

1,504,647

 

 

$

1,503,132

 

(2) Liabilities of consolidated VIEs included in total liabilities above:

 

 

 

 

 

 

Accounts payable and other liabilities

 

$

165

 

 

$

93

 

Accrued interest payable

 

 

3,062

 

 

 

3,083

 

Borrowings

 

 

1,234,355

 

 

 

1,233,556

 

Total liabilities of consolidated VIEs

 

$

1,237,582

 

 

$

1,236,732

 

 

(3)
Excludes the allowance for credit losses.

The accompanying notes are an integral part of these statements

(Back to Index)

4


(Back to Index)

 

ACRES COMMERCIAL REALTY CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except share and per share data)

(unaudited)

 

 

 

For the Three Months Ended March 31,

 

 

 

2023

 

 

2022

 

REVENUES

 

 

 

 

 

 

Interest income:

 

 

 

 

 

 

CRE loans

 

$

44,470

 

 

$

22,657

 

Other

 

 

859

 

 

 

19

 

Total interest income

 

 

45,329

 

 

 

22,676

 

Interest expense

 

 

31,375

 

 

 

14,907

 

Net interest income

 

 

13,954

 

 

 

7,769

 

Real estate income

 

 

7,071

 

 

 

3,138

 

Other revenue

 

 

33

 

 

 

16

 

Total revenues

 

 

21,058

 

 

 

10,923

 

OPERATING EXPENSES

 

 

 

 

 

 

General and administrative

 

 

2,979

 

 

 

3,457

 

Real estate expenses

 

 

8,860

 

 

 

4,794

 

Management fees - related party

 

 

1,773

 

 

 

1,682

 

Equity compensation - related party

 

 

894

 

 

 

744

 

Corporate depreciation and amortization

 

 

23

 

 

 

22

 

Provision for (reversal of) credit losses, net

 

 

5,096

 

 

 

(1,802

)

Total operating expenses

 

 

19,625

 

 

 

8,897

 

 

 

 

1,433

 

 

 

2,026

 

OTHER INCOME (EXPENSE)

 

 

 

 

 

 

Loss on extinguishment of debt

 

 

 

 

 

(460

)

Gain on sale of real estate

 

 

745

 

 

 

 

Other income

 

 

110

 

 

 

798

 

Total other income

 

 

855

 

 

 

338

 

INCOME BEFORE TAXES

 

 

2,288

 

 

 

2,364

 

Income tax benefit (expense)

 

 

5

 

 

 

(280

)

NET INCOME

 

 

2,293

 

 

 

2,084

 

Net income allocated to preferred shares

 

 

(4,855

)

 

 

(4,855

)

Net loss allocable to non-controlling interest, net of taxes

 

 

146

 

 

 

 

NET LOSS ALLOCABLE TO COMMON SHARES

 

$

(2,416

)

 

$

(2,771

)

NET LOSS PER COMMON SHARE - BASIC

 

$

(0.28

)

 

$

(0.30

)

NET LOSS PER COMMON SHARE - DILUTED

 

$

(0.28

)

 

$

(0.30

)

WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING - BASIC

 

 

8,500,413

 

 

 

9,096,977

 

WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING - DILUTED

 

 

8,500,413

 

 

 

9,096,977

 

 

 

 

The accompanying notes are an integral part of these statements

(Back to Index)

5


(Back to Index)

 

ACRES COMMERCIAL REALTY CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(in thousands)

(unaudited)

 

 

 

For the Three Months Ended March 31,

 

 

 

2023

 

 

2022

 

Net income

 

$

2,293

 

 

$

2,084

 

Other comprehensive income:

 

 

 

 

 

 

Reclassification adjustments associated with net unrealized losses from interest rate swaps included in net income

 

 

393

 

 

 

456

 

Total other comprehensive income

 

 

393

 

 

 

456

 

Comprehensive income before allocation to preferred shares

 

 

2,686

 

 

 

2,540

 

Net loss allocated to non-controlling interests shares

 

 

146

 

 

 

 

Net income allocated to preferred shares

 

 

(4,855

)

 

 

(4,855

)

Comprehensive loss allocable to common shares

 

$

(2,023

)

 

$

(2,315

)

 

 

 

The accompanying notes are an integral part of these statements

(Back to Index)

6


(Back to Index)

 

ACRES COMMERCIAL REALTY CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(in thousands, except share and per share data)

(unaudited)

 

 

 

Common Stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Series C Preferred Stock

 

 

Series D Preferred Stock

 

 

Additional Paid-In Capital

 

 

Accumulated Other Comprehensive Loss

 

 

Retained Earnings (Distributions in Excess of Earnings)

 

 

Total Stockholders’ Equity

 

 

Non-Controlling Interest

 

 

Total Equity

 

Balance, December 31, 2022

 

 

8,708,100

 

 

$

9

 

 

$

5

 

 

$

5

 

 

$

1,174,202

 

 

$

(6,394

)

 

$

(732,359

)

 

$

435,468

 

 

$

5,846

 

 

$

441,314

 

Purchase and retirement of common stock

 

 

(79,744

)

 

 

 

 

 

 

 

 

 

 

 

(756

)

 

 

 

 

 

 

 

 

(756

)

 

 

 

 

 

(756

)

Stock-based compensation

 

 

17,780

 

 

 

 

 

 

 

 

 

 

 

 

170

 

 

 

 

 

 

 

 

 

170

 

 

 

 

 

 

170

 

Amortization of stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

894

 

 

 

 

 

 

 

 

 

894

 

 

 

 

 

 

894

 

Contributions from non-controlling interests

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,332

 

 

 

2,332

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,439

 

 

 

2,439

 

 

 

(146

)

 

 

2,293

 

Distributions and accrual of cumulative preferred stock dividends

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(4,855

)

 

 

(4,855

)

 

 

 

 

 

(4,855

)

Amortization of terminated derivatives

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

393

 

 

 

 

 

 

393

 

 

 

 

 

 

393

 

Balance, March 31, 2023

 

 

8,646,136

 

 

$

9

 

 

$

5

 

 

$

5

 

 

$

1,174,510

 

 

$

(6,001

)

 

$

(734,775

)

 

$

433,753

 

 

$

8,032

 

 

$

441,785

 

 

The accompanying notes are an integral part of these statements

(Back to Index)

7


(Back to Index)

 

ACRES COMMERCIAL REALTY CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY - (Continued)

(in thousands, except share and per share data)

(unaudited)

 

 

 

Common Stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Series C Preferred Stock

 

 

Series D Preferred Stock

 

 

Additional Paid-In Capital

 

 

Accumulated Other Comprehensive Loss

 

 

Retained Earnings (Distributions in Excess of Earnings)

 

 

Total Stockholders’ Equity

 

 

Non-Controlling Interest

 

 

Total Equity

 

Balance, December 31, 2021

 

 

9,149,079

 

 

$

9

 

 

$

5

 

 

$

5

 

 

$

1,179,863

 

 

$

(8,127

)

 

$

(723,560

)

 

$

448,195

 

 

$

 

 

$

448,195

 

Offering costs

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(37

)

 

 

 

 

 

 

 

 

(37

)

 

 

 

 

 

(37

)

Purchase and retirement of common stock

 

 

(314,552

)

 

 

 

 

 

 

 

 

 

 

 

(3,885

)

 

 

 

 

 

 

 

 

(3,885

)

 

 

 

 

 

(3,885

)

Amortization of stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

744

 

 

 

 

 

 

 

 

 

744

 

 

 

 

 

 

744

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,084

 

 

 

2,084

 

 

 

 

 

 

2,084

 

Distributions and accrual of cumulative preferred stock dividends

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(4,855

)

 

 

(4,855

)

 

 

 

 

 

(4,855

)

Amortization of terminated derivatives

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

456

 

 

 

 

 

 

456

 

 

 

 

 

 

456

 

Balance, March 31, 2022

 

 

8,834,527

 

 

$

9

 

 

$

5

 

 

$

5

 

 

$

1,176,685

 

 

$

(7,671

)

 

$

(726,331

)

 

$

442,702

 

 

$

 

 

$

442,702

 

 

The accompanying notes are an integral part of these statements

(Back to Index)

8


(Back to Index)

ACRES COMMERCIAL REALTY CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

 

 

 

For the Three Months Ended March 31,

 

 

 

2023

 

 

2022

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

Net income

 

$

2,293

 

 

$

2,084

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

Provision for (reversal of) credit losses, net

 

 

5,096

 

 

 

(1,802

)

Depreciation, amortization and accretion

 

 

1,371

 

 

 

3,508

 

Amortization of stock-based compensation

 

 

894

 

 

 

744

 

Loss on the extinguishment of debt

 

 

 

 

 

460

 

Gain on sale of real estate

 

 

(745

)

 

 

 

Changes in operating assets and liabilities:

 

 

198

 

 

 

(3,440

)

Net cash provided by operating activities

 

 

9,107

 

 

 

1,554

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

Origination and purchase of loans

 

 

(29,559

)

 

 

(106,768

)

Principal payments received on loans and leases

 

 

94,064

 

 

 

107,192

 

Investments in real estate

 

 

(8,918

)

 

 

188

 

Proceeds from sale of real estate

 

 

14,309

 

 

 

 

Purchase of furniture and fixtures

 

 

 

 

 

(9

)

Principal payments received on loan - related party

 

 

75

 

 

 

50

 

Net cash provided by investing activities

 

 

69,971

 

 

 

653

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

Repurchase of common stock

 

 

(756

)

 

 

(3,885

)

Proceeds from issuance of preferred shares (net of $37 of underwriting discounts and offering costs)

 

 

 

 

 

(37

)

Proceeds from borrowings:

 

 

 

 

 

 

Senior secured financing facility

 

 

 

 

 

10,150

 

Warehouse financing facilities and repurchase agreements

 

 

12,095

 

 

 

84,992

 

 

 

Payments on borrowings:

 

 

 

 

 

 

Securitizations

 

 

 

 

 

(237,189

)

Senior secured financing facility

 

 

(38,213

)

 

 

(10,150

)

Warehouse financing facilities and repurchase agreements

 

 

(29,450

)

 

 

 

Convertible senior notes

 

 

 

 

 

(39,839

)

Payment of debt issuance costs

 

 

(3,787

)

 

 

(30

)

Proceeds received from non-controlling interests

 

 

2,332

 

 

 

 

Distributions paid on preferred stock

 

 

(4,855

)

 

 

(4,855

)

Net cash used in financing activities

 

 

(62,634

)

 

 

(200,843

)

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS AND RESTRICTED CASH

 

 

16,444

 

 

 

(198,636

)

CASH AND CASH EQUIVALENTS AND RESTRICTED CASH AT BEGINNING OF PERIOD

 

 

104,810

 

 

 

283,931

 

CASH AND CASH EQUIVALENTS AND RESTRICTED CASH AT END OF PERIOD

 

$

121,254

 

 

$

85,295

 

 

The accompanying notes are an integral part of these statements

(Back to Index)

9


(Back to Index)

ACRES COMMERCIAL REALTY CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2023

(unaudited)

 

NOTE 1 - ORGANIZATION

ACRES Commercial Realty Corp., a Maryland corporation, along with its subsidiaries (collectively, the “Company”), is a real estate investment trust (“REIT”) that is primarily focused on originating, holding and managing commercial real estate (“CRE”) mortgage loans and equity investments in commercial real estate properties through direct ownership and joint ventures. The Company’s manager is ACRES Capital, LLC (the “Manager”), a subsidiary of ACRES Capital Corp. (collectively, “ACRES”), a private commercial real estate lender exclusively dedicated to nationwide middle market CRE lending with a focus on multifamily, student housing, hospitality, office and industrial property in top United States (“U.S.”) markets.

The Company has qualified, and expects to qualify in the current fiscal year, as a REIT.

The Company conducts its operations through the use of subsidiaries that it consolidates into its financial statements. The Company’s core assets are consolidated through its investment in ACRES Realty Funding, Inc. (“ACRES RF”), a wholly-owned subsidiary that holds CRE loans, investments in commercial real estate properties and investments in CRE securitizations, which are consolidated as VIEs as discussed in Note 3.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the U.S. (“GAAP”). The consolidated financial statements include the accounts of the Company, majority-owned or controlled subsidiaries and VIEs for which the Company is considered the primary beneficiary. All inter-company transactions and balances have been eliminated in consolidation.

Basis of Presentation

All adjustments necessary to fairly present the Company’s financial position, results of operations and cash flows have been made.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and within the period of financial results. Actual results could differ from those estimates. Estimates affecting the accompanying consolidated financial statements include, but are not limited to, the net realizable and fair values of the Company’s investments and derivatives, the estimated useful lives used to calculate depreciation, the expected lives over which to amortize premiums and accrete discounts, reversals of or provisions for expected credit losses and the disclosure of contingent liabilities.

Cash and Cash Equivalents

Cash and cash equivalents include cash on hand and all highly liquid investments with original maturities of three months or less at the time of purchase. At March 31, 2023 and December 31, 2022, $84.1 million and $63.3 million, respectively, of the reported cash balances exceeded the Federal Deposit Insurance Corporation and Securities Investor Protection Corporation deposit insurance limits of $250,000 per respective depository or brokerage institution. However, all of the Company’s cash deposits are held at multiple, established financial institutions, in multiple accounts associated with its parent and respective consolidated subsidiaries, to minimize credit risk exposure. We have not experienced, and do not expect, any losses on our cash and cash equivalents.

Restricted cash includes required account balance minimums primarily for the Company’s CRE debt securitizations as well as cash held in the syndicated corporate loan collateralized debt obligations (“CDOs”).

(Back to Index)

10


(Back to Index)

 

ACRES COMMERCIAL REALTY CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

MARCH 31, 2023

(unaudited)

 

The following table provides a reconciliation of cash, cash equivalents and restricted cash on the consolidated balance sheets to the total amount shown on the consolidated statements of cash flows (in thousands):

 

 

 

March 31,

 

 

 

2023

 

 

2022

 

Cash and cash equivalents

 

$

87,314

 

 

$

79,561

 

Restricted cash

 

 

33,940

 

 

 

5,734

 

Total cash, cash equivalents and restricted cash shown on the Company’s consolidated statements of cash flows

 

$

121,254

 

 

$

85,295

 

Investment in Real Estate

The Company depreciates investments in real estate and amortizes related intangible assets over the estimated useful lives of the assets as follows:

 

Category

 

Term

Building

 

35 to 40 years

Building improvements

 

8 to 35 years

Site improvements

 

10 years

Tenant improvements

 

Shorter of lease term or expected useful life

Furniture, fixtures and equipment

 

3 to 12 years

Right of use assets

 

7 to 94 years

Intangible assets

 

90 days to 18 years

Lease liabilities

 

7 to 94 years

Income Taxes

The Company recorded a full valuation allowance against its net deferred tax assets (tax effected expense of $20.8 million) at March 31, 2023, as the Company believes it is more likely than not that the deferred tax assets will not be realized. This assessment was based on the Company’s cumulative historical losses and uncertainties as to the amount of taxable income that would be generated in future years by the Company’s taxable REIT subsidiaries.

Earnings per Share

The Company presents both basic and diluted earnings per share (“EPS”). Basic EPS excludes dilution and is computed by dividing net income (loss) allocable to common shareholders by the weighted average number of shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock, where such exercise or conversion would result in a lower EPS amount.

Reference Rate Reform

Historically, the Company has used LIBOR as the benchmark interest rate for its floating-rate whole loans and the Company has been exposed to LIBOR through its floating-rate borrowings. Many of its floating-rate whole loans, CRE securitizations and term warehouse financing facilities included one-month LIBOR as the original contractual benchmark interest rate. The Company's unsecured junior subordinated debentures use three-month LIBOR as the contractual benchmark rate. In March 2021, the United Kingdom’s, or U.K.’s, Financial Conduct Authority (“FCA”) announced that it would cease publication of the one-week and the two-month USD LIBOR immediately after December 31, 2021, and cease publication of the remaining tenors immediately after June 30, 2023. In July 2021, the U.S. Federal Reserve, in conjunction with the Alternative Reference Rates Committee, a steering committee composed of large U.S. financial institutions, identified the Secured Overnight Financing Rate (“SOFR”) as its preferred alternative rate for LIBOR.

All variable rate loans originated by the Company beginning January 1, 2022 have been benchmarked to SOFR. Additionally, all of its floating-rate whole loans contain provisions that provide for the transition of the contractual benchmark rate to an alternative

(Back to Index)

11


(Back to Index)

 

ACRES COMMERCIAL REALTY CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

MARCH 31, 2023

(unaudited)

 

rate. At March 31, 2023, the Company's loan portfolio had a carrying value of $2.0 billion of floating rate loans, all of which have interest rates tied to SOFR.

In September 2021 and January 2022, the term warehouse financing facilities with JPMorgan Chase Bank, N.A. (“JPMorgan Chase”) and Morgan Stanley Mortgage Capital Holdings LLC (“Morgan Stanley”), respectively, were amended to allow for the transition to alternative rates, including rates tied to SOFR, subject to benchmark transition events. Additionally, during the year ended December 31, 2022, the Company entered into a loan agreement to finance the acquisition of a student housing complex, which uses SOFR as its benchmark interest rate. At March 31, 2023, the Company had $1.7 billion of outstanding floating rate borrowings, 78.0% or $1.3 billion of which have interest rates tied to LIBOR and 22.0% or $366.1 million of which have interest rates tied to SOFR.

The Company expects to complete the process of converting its LIBOR-based borrowings to an applicable benchmark interest rate during 2023.

Recent Accounting Standards

Accounting Standards Adopted in 2023

In March 2022, the Financial Accounting Standards Board ("FASB") issued an amendment eliminating certain previously issued accounting guidance for troubled-debt restructurings (“TDRs”) and enhancing disclosure requirements surrounding refinancings, restructurings, and write-offs. Current GAAP provides an exception to the general recognition and measurement guidance for loan restructurings if they meet specific criteria to be considered TDRs. If a modification is a TDR, incremental expected losses are recorded in the allowance for credit losses upon modification and specific disclosures are required. The new amendment eliminates the TDR recognition and measurement guidance and requires the reporting entity to evaluate whether the modification represents a new loan or a continuation of an existing loan, consistent with accounting for other loan modifications. The amendment also requires public business entities to disclose current-period gross write-offs by year of origination for certain financing receivables and net investments in leases. The Company adopted this guidance during the three months ended March 31, 2023 and the adoption did not have a material impact on the Company's consolidated financial statements.

NOTE 3 - VARIABLE INTEREST ENTITIES

The Company has evaluated its loans, investments in unconsolidated entities, liabilities to subsidiary trusts issuing preferred securities (consisting of unsecured junior subordinated notes), securitizations, guarantees and other financial contracts in order to determine if they are variable interests in VIEs. The Company regularly monitors these legal interests and contracts and, to the extent it has determined that it has a variable interest, analyzes the related entity for potential consolidation.

Consolidated VIEs (the Company is the primary beneficiary)

Based on management’s analysis, the Company was the primary beneficiary of five VIEs at both March 31, 2023 and December 31, 2022 (collectively, the “Consolidated VIEs”).

The Consolidated VIEs are CRE securitizations and CDOs that were formed on behalf of the Company to invest in real estate-related securities, commercial mortgage-backed securities (“CMBS”), syndicated corporate loans and corporate bonds and were financed by the issuance of debt securities. By financing these assets with long-term borrowings through the issuance of debt securities, the Company seeks to generate attractive risk-adjusted equity returns and to match the term of its assets and liabilities. The primary beneficiary determination for each of these VIEs was made at each VIE’s inception and is continually assessed.

In April 2022, the Company contributed an initial investment of $13.0 million for a 72.1% interest in Charles Street-ACRES FSU Student Venture, LLC (the “FSU Student Venture”). The FSU Student Venture, a joint venture between the Company and two unrelated third parties, was formed for the purpose of developing a student housing project. The FSU Student Venture was determined not to be a VIE as there was sufficient equity at risk, it does not have disproportionate voting rights and its members all have the following characteristics: (1) the power to direct activities (2) the obligation to absorb losses and (3) the right to receive residual returns. However, the Company consolidated the FSU Student Venture due to its 72.1% interest that provides the Company with unilateral control over all major decisions of the joint venture. The portion of the joint venture that the Company does not own is presented as non-controlling interest at and for the periods presented in the Company’s consolidated financial statements.

(Back to Index)

12


(Back to Index)

 

ACRES COMMERCIAL REALTY CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

MARCH 31, 2023

(unaudited)

 

The Company has exposure to losses on its securitizations to the extent of its investments in the subordinated debt and preferred equity of each securitization. The Company is entitled to receive payments of principal and interest on the debt securities it holds and, to the extent revenues exceed debt service requirements and other expenses of the securitizations, distributions with respect to its preferred equity interests. As a result of consolidation, the debt and equity interests the Company holds in these securitizations have been eliminated; and the Company’s consolidated balance sheets reflect the assets held, debt issued by the securitizations to third parties and any accrued payables to third parties. The Company’s operating results and cash flows include the gross amounts related to the securitizations’ assets and liabilities as opposed to the Company’s net economic interests in the securitizations. Assets and liabilities related to the securitizations are disclosed, in the aggregate, on the Company’s consolidated balance sheets. For a discussion of the debt issued through the securitizations see Note 10.

Creditors of the Company’s Consolidated VIEs have no recourse to the general credit of the Company, nor to each other. During the three months ended March 31, 2023 and 2022, the Company did not provide any financial support to any of its VIEs nor does it have any requirement to do so, although it may choose to do so in the future to maximize future cash flows on such investments by the Company. There are no explicit arrangements that obligate the Company to provide financial support to any of its Consolidated VIEs.

The following table shows the classification and carrying values of assets and liabilities of the Company’s Consolidated VIEs at March 31, 2023 (in thousands):

 

 

 

CRE Securitizations

 

 

Other

 

 

Total

 

ASSETS

 

 

 

 

 

 

 

 

 

Restricted cash

 

$

33,125

 

 

$

290

 

 

$

33,415

 

Accrued interest receivable

 

 

8,837

 

 

 

 

 

 

8,837

 

CRE loans, pledged as collateral (1)

 

 

1,462,308

 

 

 

 

 

 

1,462,308

 

Other assets

 

 

31

 

 

 

56

 

 

 

87

 

Total assets (2)

 

$

1,504,301

 

 

$

346

 

 

$

1,504,647

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES

 

 

 

 

 

 

 

 

 

Accounts payable and other liabilities

 

$

165

 

 

$

 

 

$

165

 

Accrued interest payable

 

 

3,062

 

 

 

 

 

 

3,062

 

Borrowings

 

 

1,234,355

 

 

 

 

 

 

1,234,355

 

Total liabilities

 

$

1,237,582

 

 

$

 

 

$

1,237,582

 

 

(1)
Excludes allowance for credit losses.
(2)
Assets of each of the Consolidated VIEs may only be used to settle the obligations of each respective VIE.

Unconsolidated VIEs (the Company is not the primary beneficiary, but has a variable interest)

Based on management’s analysis, the Company is not the primary beneficiary of the VIEs discussed below since it does not have both (i) the power to direct the activities that most significantly impact the VIE’s economic performance and (ii) the obligation to absorb the losses of the VIE or the right to receive the benefits from the VIE, which could be significant to the VIE. Accordingly, the following VIEs are not consolidated in the Company’s financial statements at March 31, 2023. The Company continuously reassesses whether it is deemed to be the primary beneficiary of its unconsolidated VIEs. The Company’s maximum exposure to risk for each of these unconsolidated VIEs is set forth in the “Maximum Exposure to Loss” column in the table below.

(Back to Index)

13


(Back to Index)

 

ACRES COMMERCIAL REALTY CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

MARCH 31, 2023

(unaudited)

 

Unsecured Junior Subordinated Debentures

The Company has a 100% interest in the common shares of each of Resource Capital Trust I (“RCT I”) and RCC Trust II (“RCT II”), respectively, with a value of $1.5 million in the aggregate, or 3.0% of each trust, at March 31, 2023. RCT I and RCT II were formed for the purposes of providing debt financing to the Company. The Company completed a qualitative analysis to determine whether it is the primary beneficiary of each of the trusts and determined that it was not the primary beneficiary of either trust because it does not have the power to direct the activities most significant to the trusts, which include the collection of principal and interest through servicing rights. Accordingly, neither trust is consolidated into the Company’s consolidated financial statements.

The Company records its investments in RCT I and RCT II’s common shares of $774,000 each as investments in unconsolidated entities using the cost method, recording dividend income when declared by RCT I and RCT II. The trusts each hold subordinated debentures for which the Company is the obligor in the amount of $25.8 million for each of RCT I and RCT II. The debentures were funded by the issuance of trust preferred securities of RCT I and RCT II.

The following table shows the classification, carrying value and maximum exposure to loss with respect to the Company’s unconsolidated VIEs at March 31, 2023 (in thousands):

 

 

 

Unsecured Junior Subordinated Debentures

 

 

Maximum Exposure to Loss

 

ASSETS

 

 

 

 

 

 

Accrued interest receivable

 

$

11

 

 

$

 

Investments in unconsolidated entities

 

 

1,548

 

 

$

1,548

 

Total assets

 

 

1,559

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES

 

 

 

 

 

 

Accrued interest payable

 

 

382

 

 

N/A

 

Borrowings

 

 

51,548

 

 

N/A

 

Total liabilities

 

 

51,930

 

 

 

 

Net (liability) asset

 

$

(50,371

)

 

 

 

 

At March 31, 2023, there were no explicit arrangements or implicit variable interests that could require the Company to provide financial support to any of its unconsolidated VIEs.

NOTE 4 - SUPPLEMENTAL CASH FLOW INFORMATION

The following table summarizes the Company’s supplemental disclosure of cash flow information (in thousands):

 

 

 

For the Three Months Ended March 31,

 

 

 

2023

 

 

2022

 

Supplemental cash flows:

 

 

 

 

 

 

Interest expense paid in cash

 

$

32,028

 

 

$

14,894

 

Income taxes paid in cash

 

 

101

 

 

 

180

 

Non-cash financing activities include the following:

 

 

 

 

 

 

Distributions on preferred stock accrued but not paid

 

$

3,262

 

 

$

3,262

 

 

(Back to Index)

14


(Back to Index)

 

ACRES COMMERCIAL REALTY CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

MARCH 31, 2023

(unaudited)

 

 

NOTE 5 - LOANS

The following is a summary of the Company’s CRE loans held for investment (dollars in thousands, except amounts in footnotes):

 

Description

 

Quantity

 

Principal

 

 

Unamortized (Discount) Premium, net (1)

 

 

Amortized Cost

 

 

Allowance for Credit Losses

 

 

Carrying Value

 

 

Contractual Interest Rates (2)

 

Maturity Dates (3)(4)

At March 31, 2023:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Whole loans (5)(6)

 

78

 

$

2,001,105

 

 

$

(11,015

)

 

$

1,990,090

 

 

$

(19,199

)

 

$

1,970,891

 

 

1M BR plus 2.86% to 1M BR plus 8.61%

 

April 2023 to July 2026

Mezzanine loan (5)

 

1

 

 

4,700

 

 

 

 

 

 

4,700

 

 

 

(4,700

)

 

 

 

 

10.00%

 

June 2028

Total

 

 

 

$

2,005,805

 

 

$

(11,015

)

 

$

1,994,790

 

 

$

(23,899

)

 

$

1,970,891

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At December 31, 2022:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Whole loans (5)(6)

 

81

 

$

2,065,504

 

 

$

(12,614

)

 

$

2,052,890

 

 

$

(14,103

)

 

$

2,038,787

 

 

1M BR plus 2.85% to 1M BR plus 8.50%

 

January 2023 to July 2026

Mezzanine loan (5)

 

1

 

 

4,700

 

 

 

 

 

 

4,700

 

 

 

(4,700

)

 

 

 

 

10.00%

 

June 2028

Total

 

 

 

$

2,070,204

 

 

$

(12,614

)

 

$

2,057,590

 

 

$

(18,803

)

 

$

2,038,787

 

 

 

 

 

 

(1)
Amounts include unamortized loan origination fees of $10.7 million and $12.3 million and deferred amendment fees of $267,000 and $308,000 at March 31, 2023 and December 31, 2022, respectively.
(2)
Benchmark rates ("BR") comprise one-month LIBOR or one-month Term SOFR. At March 31, 2023, all of the Company's whole loans used one-month SOFR. Weighted-average one-month benchmark rates were 4.74% and 4.21% at March 31, 2023 and December 31, 2022, respectively. Additionally, weighted-average benchmark rate floors were 0.66% and 0.68% at March 31, 2023 and December 31, 2022, respectively.
(3)
Maturity dates exclude contractual extension options, subject to the satisfaction of certain terms that may be available to the borrowers.
(4)
Maturity dates exclude three whole loans, with amortized costs of $51.0 million and $51.6 million, in maturity default at March 31, 2023 and December 31, 2022, respectively.
(5)
Substantially all loans are pledged as collateral under various borrowings at March 31, 2023 and December 31, 2022.
(6)
CRE whole loans had $143.6 million and $158.2 million in unfunded loan commitments at March 31, 2023 and December 31, 2022, respectively. These unfunded loan commitments are advanced as the borrowers formally request additional funding and meet certain benchmarks, as permitted under the loan agreement, and any necessary approvals have been obtained.

 

 

(Back to Index)

15


(Back to Index)

 

ACRES COMMERCIAL REALTY CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

MARCH 31, 2023

(unaudited)

 

The following is a summary of the contractual maturities of the Company’s CRE loans held for investment, at amortized cost (in thousands, except amounts in the footnotes):

 

Description

 

2023

 

 

2024

 

 

2025 and Thereafter

 

 

Total

 

At March 31, 2023:

 

 

 

 

 

 

 

 

 

 

 

 

Whole loans (1)

 

$

141,589

 

 

$

924,605

 

 

$

872,935

 

 

$

1,939,129

 

Mezzanine loan

 

 

 

 

 

 

 

 

4,700

 

 

 

4,700

 

Total CRE loans (2)

 

$

141,589

 

 

$

924,605

 

 

$

877,635

 

 

$

1,943,829

 

 

 

 

 

 

 

 

 

 

 

 

 

Description

 

2023

 

 

2024

 

 

2025 and Thereafter

 

 

Total

 

At December 31, 2022:

 

 

 

 

 

 

 

 

 

 

 

 

Whole loans (1)

 

$

268,120

 

 

$

882,175

 

 

$

851,031

 

 

$

2,001,326

 

Mezzanine loan

 

 

 

 

 

 

 

 

4,700

 

 

 

4,700

 

Total CRE loans (2)

 

$

268,120

 

 

$

882,175

 

 

$

855,731

 

 

$

2,006,026

 

 

(1)
Maturity dates exclude three whole loans, with amortized costs of $51.0 million and $51.6 million, in maturity default at March 31, 2023 and December 31, 2022, respectively.
(2)
At March 31, 2023, the amortized costs of the floating-rate CRE whole loans, summarized by contractual maturity assuming full exercise of the extension options, were $58.0 million, $68.5 million and $1.8 billion in 2023, 2024 and 2025 and thereafter, respectively. At December 31, 2022, the amortized costs of the floating-rate CRE whole loans, summarized by contractual maturity assuming full exercise of the extension options, were $113.8 million, $68.6 million and $1.8 billion in 2023, 2024 and 2025 and thereafter, respectively.

At March 31, 2023, 23.2%, 23.1% and 13.9% of the Company’s CRE loan portfolio was concentrated in the Southwest, Southeast and Mountain regions, respectively, based on carrying value, as defined by the National Council of Real Estate Investment Fiduciaries. At December 31, 2022, 23.2%, 21.5% and 16.2% of the Company’s CRE loan portfolio was concentrated in the Southwest, Southeast and Mountain regions, respectively, based on carrying value. At March 31, 2023 and December 31, 2022, no single loan or investment represented more than 10% of the Company’s total assets, and no single investment group generated over 10% of the Company’s revenue.

Principal Paydowns Receivable

Principal paydowns receivable represents loan principal payments that have been received by the Company’s servicers and trustees but have not been remitted to the Company. At March 31, 2023, the Company had loan principal paydowns receivable of $54,000. At December 31, 2022, the Company had no loan principal paydowns receivable.

NOTE 6 - FINANCING RECEIVABLES

The following table shows the activity in the allowance for credit losses for the three months ended March 31, 2023 and the year ended December 31, 2022 (in thousands):

 

 

 

Three Months Ended March 31, 2023

 

 

Year Ended December 31, 2022

 

Allowance for credit losses at beginning of period

 

$

18,803

 

 

$

8,805

 

Provision for credit losses

 

 

5,096

 

 

 

12,295

 

Charge offs

 

 

 

 

 

(2,297

)

Allowance for credit losses at end of period

 

$

23,899

 

 

$

18,803

 

 

During the three months ended March 31, 2023, the Company recorded a provision for expected credit losses of $5.1 million, primarily attributable to modeled increases in expected general portfolio credit risk as well as a general decline in macroeconomic conditions.

(Back to Index)

16


(Back to Index)

 

ACRES COMMERCIAL REALTY CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

MARCH 31, 2023

(unaudited)

 

At March 31, 2023 and December 31, 2022, the Company individually evaluated the following loans:

One office mezzanine loan in the Northeast region with a principal balance of $4.7 million at both March 31, 2023 and December 31, 2022. The Company fully reserved this loan in the fourth quarter of 2022, and it continues to be fully reserved at March 31, 2023. The loan entered payment default in February 2023 and has been placed on nonaccrual status.
One retail loan in the Northeast region, with a principal balance of $8.0 million at both March 31, 2023 and December 31, 2022, for which foreclosure was determined to be probable. The loan was modified in February 2021 to extend its maturity to December 2021 and has since entered into payment default and has been put on nonaccrual status. The loan had an as-is appraised value in excess of its principal and interest balances, and, as such, had no allowance for current expected credit losses (“CECL”) at March 31, 2023 and December 31, 2022, respectively.
One office loan in the Southwest region, with a principal balance of $20.1 million and $20.7 million at March 31, 2023 and December 31, 2022, respectively, for which foreclosure was determined to be probable. The loan had an initial maturity of March 2022, was modified three times to extend its maturity to June 2022 and has since entered into payment default and has been put on nonaccrual status. However, in exchange for payments, comprising principal paydowns, interest payments and the reimbursement of certain legal fees, received between October 2022 and April 2023, the Company has agreed to temporarily defer its right to foreclose on the property until July 2023. Additionally, at both March 31, 2023 and December 31, 2022, this loan had an as-is appraised value in excess of its principal and interest balances, and, as such, had no CECL allowance.

Credit quality indicators

Commercial Real Estate Loans

CRE loans are collateralized by a diversified mix of real estate properties and are assessed for credit quality based on the collective evaluation of several factors, including but not limited to: collateral performance relative to underwritten plan, time since origination, current implied and/or re-underwritten loan-to-collateral value ("LTV") ratios, loan structure and exit plan. Depending on the loan’s performance against these various factors, loans are rated on a scale from 1 to 5, with loans rated 1 representing loans with the highest credit quality and loans rated 5 representing loans with the lowest credit quality. The factors evaluated provide general criteria to monitor credit migration in the Company’s loan portfolio; as such, a loan’s rating may improve or worsen, depending on new information received.

(Back to Index)

17


(Back to Index)

 

ACRES COMMERCIAL REALTY CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

MARCH 31, 2023

(unaudited)

 

The criteria set forth below should be used as general guidelines. Therefore, not every loan will have all of the characteristics described in each category below.

 

 

 

 

 

Risk Rating

Risk Characteristics

1

• Property performance has surpassed underwritten expectations.

• Occupancy is stabilized, the property has had a history of consistently high occupancy, and the property has a diverse and high-quality tenant mix.

2

• Property performance is consistent with underwritten expectations and covenants and performance criteria are being met or exceeded.

• Occupancy is stabilized, near stabilized or is on track with underwriting.

3

• Property performance lags behind underwritten expectations.

• Occupancy is not stabilized and the property has some tenancy rollover.

4

• Property performance significantly lags behind underwritten expectations. Performance criteria and loan covenants have required occasional waivers.

• Occupancy is not stabilized and the property has a large amount of tenancy rollover.

5

• Property performance is significantly worse than underwritten expectations. The loan is not in compliance with loan covenants and performance criteria and may be in default. Expected sale proceeds would not be sufficient to pay off the loan at maturity.

• The property has a material vacancy rate and significant rollover of remaining tenants.

• An updated appraisal is required upon designation and updated on an as-needed basis.

 

All CRE loans are evaluated for any credit deterioration by debt asset management and certain finance personnel on at least a quarterly basis. Mezzanine loans may experience greater credit risks due to their nature as subordinated investments.

For the purpose of calculating the quarterly provision for credit losses under CECL, the Company pools CRE loans based on the underlying collateral property type and utilizes a probability of default and loss given default methodology for approximately one year after which it immediately reverts to a historical mean loss ratio.

Credit risk profiles of CRE loans at amortized cost were as follows (in thousands, except amounts in the footnote):

 

 

 

Rating 1

 

 

Rating 2

 

 

Rating 3

 

 

Rating 4

 

 

Rating 5

 

 

Total (1)

 

At March 31, 2023:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Whole loans, floating-rate

 

$

 

 

$

1,532,268

 

 

 

362,903

 

 

$

43,958

 

 

$

50,961

 

 

$

1,990,090

 

Mezzanine loan

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4,700

 

 

 

4,700

 

Total

 

$

 

 

$

1,532,268

 

 

$

362,903

 

 

$

43,958

 

 

$

55,661

 

 

$

1,994,790

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At December 31, 2022:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Whole loans, floating-rate

 

$

 

 

$

1,635,376

 

 

$

309,491

 

 

$

85,226

 

 

$

22,797

 

 

$

2,052,890

 

Mezzanine loan

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4,700

 

 

 

4,700

 

Total

 

$

 

 

$

1,635,376

 

 

$

309,491

 

 

$

85,226

 

 

$

27,497

 

 

$

2,057,590

 

 

(1)
The total amortized cost of CRE whole loans excluded accrued interest receivable of $12.5 million and $11.9 million at March 31, 2023 and December 31, 2022, respectively.

(Back to Index)

18


(Back to Index)

 

ACRES COMMERCIAL REALTY CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

MARCH 31, 2023

(unaudited)

 

Credit risk profiles of CRE loans by origination year at amortized cost were as follows (in thousands, except amounts in the footnotes):

 

 

 

2023

 

 

2022

 

 

2021

 

 

2020

 

 

2019

 

 

Prior

 

 

Total (1)

 

At March 31, 2023:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Whole loans, floating-rate: (2)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rating 2

 

$

14,759

 

 

$

480,017

 

 

$

944,121

 

 

$

52,722

 

 

$

26,949

 

 

$

13,700

 

 

$

1,532,268

 

Rating 3

 

 

 

 

 

52,619

 

 

 

203,273

 

 

 

34,387

 

 

 

27,887

 

 

 

44,737

 

 

 

362,903

 

Rating 4

 

 

 

 

 

 

 

 

43,958

 

 

 

 

 

 

 

 

 

 

 

 

43,958

 

Rating 5

 

 

 

 

 

 

 

 

 

 

 

 

 

 

42,936

 

 

 

8,025

 

 

 

50,961

 

Total whole loans, floating-rate

 

 

14,759

 

 

 

532,636

 

 

 

1,191,352

 

 

 

87,109

 

 

 

97,772

 

 

 

66,462

 

 

 

1,990,090

 

Mezzanine loan (rating 5)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4,700

 

 

 

4,700

 

Total

 

$

14,759

 

 

$

532,636

 

 

$

1,191,352

 

 

$

87,109

 

 

$

97,772

 

 

$

71,162

 

 

$

1,994,790

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current Period Gross Write-Offs (3)

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2022

 

 

2021

 

 

2020

 

 

2019

 

 

2018

 

 

Prior

 

 

Total (1)

 

At December 31, 2022:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Whole loans, floating-rate: (2)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rating 2

 

$

526,606

 

 

$

1,003,060

 

 

$

64,944

 

 

$

26,977

 

 

$

13,789

 

 

$

 

 

$

1,635,376

 

Rating 3

 

 

 

 

 

192,490

 

 

 

44,657

 

 

 

27,881

 

 

 

44,463

 

 

 

 

 

 

309,491

 

Rating 4

 

 

 

 

 

 

 

 

 

 

 

20,742

 

 

 

64,484

 

 

 

 

 

 

85,226

 

Rating 5

 

 

 

 

 

 

 

 

 

 

 

22,797

 

 

 

 

 

 

 

 

 

22,797

 

Total whole loans, floating-rate

 

 

526,606

 

 

 

1,195,550

 

 

 

109,601

 

 

 

98,397

 

 

 

122,736

 

 

 

 

 

 

2,052,890

 

Mezzanine loan (rating 5)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4,700

 

 

 

 

 

 

4,700

 

Total

 

$

526,606

 

 

$

1,195,550

 

 

$

109,601

 

 

$

98,397

 

 

$

127,436

 

 

$

 

 

$

2,057,590

 

 

(1)
The total amortized cost of CRE whole loans excluded accrued interest receivable of $12.5 million and $11.9 million at March 31, 2023 and December 31, 2022, respectively.
(2)
Acquired CRE whole loans are grouped within each loan’s year of origination.
(3)
There were no charge-offs during the three months ended March 31, 2023.

At both March 31, 2023 and December 31, 2022, the Company had one additional mezzanine loan included in other assets held for sale that had no carrying value.

(Back to Index)

19


(Back to Index)

 

ACRES COMMERCIAL REALTY CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

MARCH 31, 2023

(unaudited)

 

Loan Portfolio Aging Analysis

The following table presents the CRE loan portfolio aging analysis at the dates indicated for CRE loans at amortized cost (in thousands, except amounts in footnotes):

 

 

 

30-59 Days

 

 

60-89 Days

 

 

Greater than 90
Days
(1)

 

 

Total Past Due

 

 

Current (2)

 

 

Total Loans Receivable (3)

 

 

Total Loans > 90 Days and Accruing

 

At March 31, 2023:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Whole loans, floating-rate

 

$

 

 

$

 

 

$

50,961

 

 

$

50,961

 

 

$

1,939,129

 

 

$

1,990,090

 

 

$

 

Mezzanine loan (4)

 

 

4,700

 

 

 

 

 

 

 

 

 

4,700

 

 

 

 

 

 

4,700

 

 

 

 

Total

 

$

4,700

 

 

$

 

 

$

50,961

 

 

$

55,661

 

 

$

1,939,129

 

 

$

1,994,790

 

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At December 31, 2022:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Whole loans, floating-rate

 

$

 

 

$

 

 

$

28,767

 

 

$

28,767

 

 

$

2,024,123

 

 

$

2,052,890

 

 

$

 

Mezzanine loan (4)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4,700

 

 

 

4,700

 

 

 

 

Total

 

$

 

 

$

 

 

$

28,767

 

 

$

28,767

 

 

$

2,028,823

 

 

$

2,057,590

 

 

$

 

 

(1)
During the three months ended March 31, 2023 and 2022, the Company recognized interest income of $1.1 million and $641,000, respectively, on three CRE whole loans with a principal payment past due greater than 90 days at March 31, 2023.
(2)
Includes one CRE whole loan, with an amortized cost of $22.8 million, in maturity default at December 31, 2022.
(3)
The total amortized cost of CRE whole loans excluded accrued interest receivable of $12.5 million and $11.9 million at March 31, 2023 and December 31, 2022, respectively.
(4)
Fully reserved at both March 31, 2023 and December 31, 2022.

At March 31, 2023, the Company had three CRE whole loans, with total amortized costs of $51.0 million, and one mezzanine loan, with a total amortized cost of $4.7 million, in payment default. At December 31, 2022, the Company had three CRE whole loans, with total amortized costs of $51.6 million, in payment default.

Modifications

During the three months ended March 31, 2023, the Company did not enter into any loan modifications for borrowers that are experiencing financial difficulty.

During the three months ended March 31, 2022, the Company entered into one agreement that extended one CRE whole loan, with a total amortized cost of $21.8 million, which represented 1.1% of the total amortized cost of the portfolio.

NOTE 7 - INVESTMENTS IN REAL ESTATE AND OTHER ACQUIRED ASSETS AND ASSUMED LIABILITIES

At March 31, 2023, the Company held investments in five real estate properties, four of which are included in investments in real estate, and one of which is included in properties held for sale on the consolidated balance sheets.

In February 2023, the Company sold a hotel property in the Northeast region that was previously designated as a property held for sale. The hotel property sold for $15.1 million with selling costs of $845,000, resulting in a gain of $745,000.

(Back to Index)

20


(Back to Index)

 

ACRES COMMERCIAL REALTY CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

MARCH 31, 2023

(unaudited)

 

The following table summarizes the book value of the Company’s investments in real estate and properties held for sale (in thousands, except amounts in the footnotes):

 

 

March 31, 2023

 

 

December 31, 2022

 

 

 

Cost Basis

 

 

Accumulated Depreciation & Amortization

 

 

Carrying Value

 

 

Cost Basis

 

 

Accumulated Depreciation & Amortization

 

 

Carrying Value

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investments in real estate, equity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investments in real estate (1)

 

$

133,522

 

 

$

(2,951

)

 

$

130,571

 

 

$

123,219

 

 

$

(2,251

)

 

$

120,968

 

Right of use assets (2)(3)

 

 

19,664

 

 

 

(273

)

 

 

19,391

 

 

 

19,664

 

 

 

(205

)

 

 

19,459

 

Intangible assets (4)

 

 

11,474

 

 

 

(2,846

)

 

 

8,628

 

 

 

11,474

 

 

 

(2,594

)

 

 

8,880

 

Subtotal

 

 

164,660

 

 

 

(6,070

)

 

 

158,590

 

 

 

154,357

 

 

 

(5,050

)

 

 

149,307

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investments in real estate from lending activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Properties held for sale (5)

 

 

40,377

 

 

 

 

 

 

40,377

 

 

 

53,769

 

 

 

 

 

 

53,769

 

Total

 

 

205,037

 

 

 

(6,070

)

 

 

198,967

 

 

 

208,126

 

 

 

(5,050

)

 

 

203,076

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investments in real estate, equity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage payable

 

 

18,089

 

 

 

207

 

 

 

18,296

 

 

 

18,089

 

 

 

155

 

 

 

18,244

 

Other liabilities

 

 

247

 

 

 

(192

)

 

 

55

 

 

 

247

 

 

 

(183

)

 

 

64

 

Lease liabilities (3)(6)

 

 

43,260

 

 

 

(226

)

 

 

43,034

 

 

 

43,260

 

 

 

(393

)

 

 

42,867

 

Subtotal (7)

 

 

61,596

 

 

 

(211

)

 

 

61,385

 

 

 

61,596

 

 

 

(421

)

 

 

61,175

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investments in real estate from lending activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities held for sale

 

 

3,025

 

 

 

 

 

 

3,025

 

 

 

3,025

 

 

 

 

 

 

3,025

 

Total

 

 

64,621

 

 

 

(211

)

 

 

64,410

 

 

 

64,621

 

 

 

(421

)

 

 

64,200

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total net investments in real estate and properties held for sale (8)

 

$

140,416

 

 

 

 

 

$

134,557

 

 

$

143,505

 

 

 

 

 

$

138,876

 

 

(1)
Includes $38.4 million of land, which is not depreciable, at March 31, 2023 and December 31, 2022, respectively.
(2)
Primarily comprises a $19.0 million right of use asset, associated with an acquired ground lease of $42.6 million (see below) accounted for as an operating lease at March 31, 2023 and December 31, 2022. Amortization is booked to real estate expenses on the consolidated statements of operations.
(3)
Refer to Note 8 for additional information on the Company’s remaining operating leases.
(4)
Primarily comprises a franchise intangible of $5.1 million and $5.3 million, a management contract of $3.1 million, and a customer list of $357,000 and $427,000 at March 31, 2023 and December 31, 2022, respectively.
(5)
At December 31, 2022, properties held for sale included two properties originally acquired in November 2020 and July 2022. At March 31, 2023, only the property acquired in November 2020 was in property held for sale.
(6)
Primarily comprises a $42.6 million ground lease with a remaining term of 93 years. Lease expenses for the three months ended March 31, 2023 were $661,000.
(7)
Excludes $2.2 million of deferred debt issuance costs on construction loans that can be drawn upon subsequent to March 31, 2023.
(8)
Excludes items of working capital, either acquired or assumed.

(Back to Index)

21


(Back to Index)

 

ACRES COMMERCIAL REALTY CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

MARCH 31, 2023

(unaudited)

 

The Company acquired a ground lease with its equity investment in a hotel property in April 2022. This ground lease has an associated above-market lease intangible liability. The ground lease confers the Company the right to use the land on which its hotel operates, and the ground lease payments increase 3.00% per year until 2116. The Company acquired the original 99-year lease with 94 years remaining during the second quarter of 2022. At March 31, 2023, 93 years remain in its term.

The Company recorded lease payments of $426,000 for the three months ended March 31, 2023. The Company recorded amortization of $51,000 during the three months ended March 31, 2023 related to the right of use asset and accretion of $610,000 during the three months ended March 31, 2023 related to its ground lease liability.

During the three months ended March 31, 2023 and 2022, the Company recorded amortization expense of $252,000 and $1.2 million, respectively, on its intangible assets. The Company expects to record amortization expense of $1.3 million, $1.2 million, $1.1 million, $1.0 million and $1.0 million during the 2023, 2024, 2025, 2026 and 2027 fiscal years, respectively, on its intangible assets.

NOTE 8 - LEASES

In addition to the ground lease discussed in Note 7, the Company has operating leases for office space and office equipment. The leases have terms that expire between January 2024 and September 2029. The leases on the office space and office equipment contain options for early termination granted to the Company and the lessor. Lease payments are determined as follows:

Office space: payments are made on a fixed schedule, escalating annually, and also include the Company’s responsibility for a percentage of increases in the building’s property taxes and operating expenses over the base year.
Office equipment: payments are made on a fixed schedule.

The following table summarizes the Company’s operating leases (in thousands):

 

 

 

March 31, 2023

 

 

December 31, 2022

 

Operating Leases:

 

 

 

 

 

 

Right of use assets

 

$

761

 

 

$

822

 

Lease liabilities

 

$

(803

)

 

$

(828

)

 

 

 

 

 

 

 

Weighted average remaining lease term:

 

6.5 years

 

 

6.7 years

 

Weighted average discount rate (1):

 

 

8.70

%

 

 

8.71

%

 

(1)
The market discount rate is used, when readily determinable, in calculating the present value of lease payments for the operating lease liability. Otherwise, the incremental borrowing rate on the commencement date is used.

 

The following table summarizes the Company’s operating lease costs and cash payments for the periods presented (in thousands):

 

 

 

Three Months Ended March 31, 2023

 

 

Three Months Ended March 31, 2022

 

Lease Cost:

 

 

 

 

 

 

Operating lease cost

 

$

75

 

 

$

24

 

 

 

 

 

 

 

 

Other Information:

 

 

 

 

 

 

Cash paid for amounts included in the measurement of lease liabilities

 

 

 

 

 

 

Operating cash flows from operating leases

 

$

37

 

 

$

23

 

 

(Back to Index)

22


(Back to Index)

 

ACRES COMMERCIAL REALTY CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

MARCH 31, 2023

(unaudited)

 

 

The following table summarizes the Company’s operating leases cash flow obligations on an undiscounted, annual basis (in thousands):

 

 

 

Operating Leases

 

2023

 

$

115

 

2024

 

 

155

 

2025

 

 

159

 

2026

 

 

163

 

2027

 

 

167

 

Thereafter

 

 

303

 

Subtotal

 

 

1,062

 

Less: impact of discount

 

 

(259

)

Total

 

$

803

 

 

NOTE 9 - INVESTMENTS IN UNCONSOLIDATED ENTITIES

The Company’s investments in unconsolidated entities at March 31, 2023 and December 31, 2022 comprised a 100% interest in the common shares of RCT I and RCT II with a value of $1.5 million in the aggregate, or 3.0% of each trust. The Company records its investments in RCT I’s and RCT II’s common shares as investments in unconsolidated entities using the cost method, recording dividend income when declared by RCT I and RCT II.

During the three months ended March 31, 2023, the Company recorded dividends from its investments in RCT I’s and RCT II’s common shares, reported in other revenue on the consolidated statement of operations, of $33,000. During the three months ended March 31, 2022, the Company recorded dividends of $16,000.

(Back to Index)

23


(Back to Index)

 

ACRES COMMERCIAL REALTY CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

MARCH 31, 2023

(unaudited)

 

NOTE 10 - BORROWINGS

The Company historically has financed the acquisition of its investments, including investment securities and loans, through the use of secured and unsecured borrowings. Certain information with respect to the Company’s borrowings is summarized in the following table (dollars in thousands, except amounts in the footnotes):

 

 

 

Principal Outstanding

 

Unamortized Issuance Costs and Discounts

 

Outstanding Borrowings

 

Weighted Average Borrowing Rate

 

Weighted Average Remaining Maturity

 

Value of Collateral

At March 31, 2023:

 

 

 

 

 

 

 

 

 

 

 

 

ACR 2021-FL1 Senior Notes

 

$675,223

 

$3,430

 

$671,793

 

6.20%

 

13.2 years

 

802,643

ACR 2021-FL2 Senior Notes

 

567,000

 

4,438

 

562,562

 

6.51%

 

13.8 years

 

700,000

Senior secured financing facility

 

53,336

 

3,481

 

49,855

 

8.54%

 

4.7 years

 

127,185

CRE - term warehouse financing facilities (1)

 

313,493

 

2,217

 

311,276

 

7.32%

 

1.6 years

 

434,695

Mortgage payable

 

18,710

 

414

 

18,296

 

8.58%

 

2.0 years

 

25,400

Construction loans

 

 

2,225

 

(2,225)

 

 

 

5.75% Senior Unsecured Notes

 

150,000

 

2,338

 

147,662

 

5.75%

 

3.4 years

 

Unsecured junior subordinated debentures

 

51,548

 

 

51,548

 

8.93%

 

13.4 years

 

Total

 

$1,829,310

 

$18,543

 

$1,810,767

 

6.62%

 

10.3 years

 

$2,089,923

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Principal Outstanding

 

Unamortized Issuance Costs and Discounts

 

Outstanding Borrowings

 

Weighted Average Borrowing Rate

 

Weighted Average Remaining Maturity

 

Value of Collateral

At December 31, 2022:

 

 

 

 

 

 

 

 

 

 

 

 

ACR 2021-FL1 Senior Notes

 

$675,223

 

$3,826

 

$671,397

 

5.81%

 

13.5 years

 

802,643

ACR 2021-FL2 Senior Notes

 

567,000

 

4,841

 

562,159

 

6.13%

 

14.1 years

 

700,000

Senior secured financing facility

 

91,549

 

3,659

 

87,890

 

7.94%

 

5.0 years

 

196,837

CRE - term warehouse financing facilities (1)

 

330,849

 

2,561

 

328,288

 

6.85%

 

1.8 years

 

453,550

Mortgage payable

 

18,710

 

466

 

18,244

 

8.08%

 

2.3 years

 

25,400

5.75% Senior Unsecured Notes

 

150,000

 

2,493

 

147,507

 

5.75%

 

3.6 years

 

Unsecured junior subordinated debentures

 

51,548

 

 

51,548

 

8.52%

 

13.7 years

 

Total

 

$1,884,879

 

$17,846

 

$1,867,033

 

6.29%

 

10.3 years

 

$2,178,430

 

(1)
Principal outstanding includes accrued interest payable of $879,000 and $894,000 at March 31, 2023 and December 31, 2022, respectively.

 

Securitizations

The following table sets forth certain information with respect to the Company’s consolidated securitizations at March 31, 2023 (in thousands, except amount in footnotes):

 

 

Closing Date

 

Maturity Date

 

Reinvestment Period End (1)

 

Total Note Paydowns from Closing Date through March 31, 2023

 

ACR 2021-FL1

 

May 2021

 

June 2036

 

May 2023

 

$

 

ACR 2021-FL2

 

December 2021

 

January 2037

 

December 2023

 

$

 

 

(1)
The reinvestment period is the period in which principal proceeds received may be used to acquire CRE loans for reinvestment into the securitization.

The investments held by the Company’s securitizations collateralize the securitizations’ borrowings and, as a result, are not available to the Company, its creditors, or stockholders. All senior notes of the securitizations held by the Company at both March 31, 2023 and December 31, 2022 were eliminated in consolidation.

(Back to Index)

24


(Back to Index)

 

ACRES COMMERCIAL REALTY CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

MARCH 31, 2023

(unaudited)

 

XAN 2020-RSO8

In March 2020, the Company closed Exantas Capital Corp. 2020-RSO8, Ltd. (“XAN 2020-RSO8”), a $522.6 million CRE debt securitization transaction that provided financing for CRE loans. In March 2022, the Company exercised the optional redemption of XAN 2020-RSO8, and all of the outstanding senior notes were paid off from the sales proceeds of certain of the securitization’s assets.

XAN 2020-RSO9

In September 2020, the Company closed Exantas Capital Corp. 2020-RSO9, Ltd. (“XAN 2020-RSO9”), a $297.0 million CRE debt securitization transaction that provided financing for CRE loans. In February 2022, the Company exercised the optional redemption of XAN 2020-RSO9, and all of the outstanding senior notes were paid off from the sales proceeds of certain of the securitization’s assets.

ACR 2021-FL1

In May 2021, the Company closed ACRES Commercial Realty 2021-FL1 Issuer, Ltd. (“ACR 2021-FL1”), a $802.6 million CRE debt securitization transaction that provided financing for CRE loans. ACR 2021-FL1 issued a total of $675.2 million of non-recourse, floating-rate notes to third parties at par. Additionally, ACRES RF retained 100% of the Class F and Class G notes and a subsidiary of ACRES RF retained 100% of the outstanding preference shares. The preference shares are subordinated in right of payment to all other securities issued by ACR 2021-FL1. ACR 2021-FL1 includes a reinvestment period, which ends in May 2023, that allows it to acquire CRE loans for reinvestment into the securitization using uninvested principal proceeds. All of the notes issued mature in June 2036, although the Company has the right to call the notes beginning on the payment date in May 2023 and thereafter.

ACR 2021-FL2

In December 2021, the Company closed ACRES Commercial Realty 2021-FL2 Issuer, Ltd. (“ACR 2021-FL2”), a CRE debt securitization transaction that can finance up to $700.0 million of CRE loans. ACR 2021-FL2 issued a total of $567.0 million of non-recourse, floating-rate notes to third parties at par. Additionally, ACRES RF retained 100% of the Class F and Class G notes and a subsidiary of ACRES RF retained 100% of the outstanding preference shares. The preference shares are subordinated in right of payment to all other securities issued by ACR 2021-FL2. ACR 2021-FL2 included a 180-day ramp up acquisition period that allowed it to acquire CRE loans using unused proceeds from the issuance of the non-recourse floating-rate notes. Additionally, ACR 2021-FL2 includes a reinvestment period, which ends in December 2023, that allows it to acquire CRE loans for reinvestment into the securitization using uninvested principal proceeds. All of the notes issued mature in January 2037, although the Company has the right to call the notes beginning on the payment date in December 2023 and thereafter.

(Back to Index)

25


(Back to Index)

 

ACRES COMMERCIAL REALTY CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

MARCH 31, 2023

(unaudited)

 

Financing Arrangements

Borrowings under the Company’s senior secured financing facility, term warehouse financing facilities, mortgage payable and construction loans are guaranteed by the Company or one or more of its subsidiaries. The following table sets forth certain information with respect to the Company’s financing arrangements (dollars in thousands, except amounts in footnotes):

 

 

 

March 31, 2023

 

December 31, 2022

 

 

Outstanding Borrowings

 

 

Value of Collateral

 

 

Number of Positions as Collateral

 

 

Weighted Average Interest Rate

 

Outstanding Borrowings

 

 

Value of Collateral

 

 

Number of Positions as Collateral

 

 

Weighted Average Interest Rate

Senior Secured Financing Facility

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Massachusetts Mutual Life Insurance Company (1)

 

$

49,855

 

 

$

127,185

 

 

 

6

 

 

8.54%

 

$

87,890

 

 

$

196,837

 

 

 

8

 

 

7.94%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CRE - Term Warehouse Financing Facilities (2)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

JPMorgan Chase Bank, N.A. (3)

 

 

178,723

 

 

 

246,740

 

 

 

10

 

 

7.25%

 

 

186,783

 

 

 

255,095

 

 

 

11

 

 

6.74%

Morgan Stanley Mortgage Capital Holdings LLC (4)

 

 

132,553

 

 

 

187,955

 

 

 

9

 

 

7.41%

 

 

141,505

 

 

 

198,455

 

 

 

10

 

 

7.00%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage Payable

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Readycap Commercial, LLC (5)

 

 

18,296

 

 

 

25,400

 

 

 

1

 

 

8.58%

 

 

18,244

 

 

 

25,400

 

 

 

1

 

 

8.08%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction Loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Oceanview Life and Annuity Company (6)

 

 

(2,225

)

 

N/A

 

 

N/A

 

 

—%

 

 

 

 

 

 

 

 

 

 

—%

Total

 

$

377,202

 

 

$

587,280

 

 

 

 

 

 

 

$

434,422

 

 

$

675,787

 

 

 

 

 

 

 

(1)
Includes $3.5 million and $3.7 million of deferred debt issuance costs at March 31, 2023 and December 31, 2022, respectively.
(2)
Outstanding borrowings include accrued interest payable.
(3)
Includes $993,000 and $1.1 million of deferred debt issuance costs at March 31, 2023 and December 31, 2022, respectively.
(4)
Includes $1.2 million and $1.4 million of deferred debt issuance costs at March 31, 2023 and December 31, 2022, respectively.
(5)
Includes $414,000 and $466,000 of deferred debt issuance costs at March 31, 2023 and December 31, 2022, respectively.
(6)
Includes $2.2 million of deferred debt issuance costs at March 31, 2023.

The following table shows information about the amount at risk under the Company's financing arrangements (dollars in thousands):

 

 

 

Amount at Risk (1)

 

 

Weighted Average Remaining Maturity

 

Weighted Average Interest Rate

At March 31, 2023:

 

 

 

 

 

 

 

Senior Secured Financing Facility (1)

 

 

 

 

 

 

 

Massachusetts Mutual Life Insurance Company

 

$

74,052

 

 

4.7 years

 

8.54%

CRE - Term Warehouse Financing Facilities (1)

 

 

 

 

 

 

 

JPMorgan Chase Bank, N. A.

 

$

68,674

 

 

1.6 years

 

7.25%

Morgan Stanley Mortgage Capital Holdings LLC

 

$

55,478

 

 

1.6 years

 

7.41%

Mortgage Payable (2)

 

 

 

 

 

 

 

Readycap Commercial, LLC

 

$

6,596

 

 

2.0 years

 

8.58%

 

(1)
Equal to the total of the estimated fair value of securities or loans sold and accrued interest receivable, minus the total of the warehouse financing agreement liabilities and accrued interest payable.
(2)
Equal to the total of the estimated fair value of real estate property investment financed, minus the total of the mortgage payable agreement liability and accrued interest payable.

(Back to Index)

26


(Back to Index)

 

ACRES COMMERCIAL REALTY CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

MARCH 31, 2023

(unaudited)

 

The Company was in compliance with all financial covenants in each of the respective agreements at March 31, 2023 and December 31, 2022.

Senior Secured Financing Facility

On July 31, 2020, an indirect, wholly owned subsidiary (“Holdings”), along with its direct wholly owned subsidiary (the “Borrower”), of the Company entered into a $250.0 million Loan and Servicing Agreement (the “MassMutual Loan Agreement”) with MassMutual and the other lenders party thereto (the “Lenders”). The asset-based revolving loan facility (the “MassMutual Facility”) provided under the MassMutual Loan Agreement has been used to finance the Company’s core CRE lending business. The MassMutual Facility initially had an interest rate of 5.75% per annum payable monthly and initially matured on July 31, 2027.

In December 2022, Holdings, the Borrower and the Lenders entered into an Amended and Restated Loan and Servicing Agreement, which amends and restates the MassMutual Loan Agreement, and reflects a senior secured term loan facility, not to exceed $500.0 million, composed of individual loan series issued upon mutual agreement of the Borrower and Lenders. Each loan series will be available for three months after the closing date agreed upon by the Borrower and Lender (“Commitment Period”), subject to the maximum dollar amount agreed upon for that series. The Commitment Period is subject to immediate termination upon the occurrence of an event of default. Each loan series will have a final maturity of five years from the issuance date for the loan series unless an additional time is mutually agreed upon by the Lenders and Borrower. The advance rate on portfolio assets will be mutually agreed upon by the Lenders and Borrower. Each loan series will have its own mutually agreed upon interest rate equal to one-month Term SOFR plus the applicable spread.

CRE - Term Warehouse Financing Facilities

In April 2018, an indirect, wholly-owned subsidiary of the Company entered into a master repurchase agreement (the “Barclays Facility”) with Barclays Bank PLC (“Barclays”) to finance the origination of CRE loans. In February 2022, such subsidiary entered into the Third Amendment to Master Repurchase Agreement (the “Barclays Amendment”) with Barclays, which amended the Barclays Facility to add market terms regarding the replacement of LIBOR upon determination of a benchmark transition event. In October 2022, the Barclays Facility matured.

In October 2018, an indirect, wholly-owned subsidiary of the Company entered into a master repurchase agreement (the “JPMorgan Chase Facility”) with JP Morgan Chase to finance the origination of CRE loans. At March 31, 2023, this facility has been amended five times to amend various terms. The JPMorgan Chase Facility has a maximum facility amount of $250.0 million, charges interest of one-month benchmark plus market spreads and has an initial maturity date of October 2024.

In November 2021, an indirect, wholly-owned subsidiary of the Company entered into a master repurchase and securities contract agreement (the “Morgan Stanley Facility”) with Morgan Stanley Mortgage Capital Holdings LLC (“Morgan Stanley”) to finance the origination of CRE loans. At March 31, 2023, this facility has been amended two times to amend various terms. The Morgan Stanley Facility has a maximum facility amount of $250.0 million, charges interest of one-month Term SOFR plus market spreads and matures in November 2024. The Company also has the right to request a one-year extension.

Mortgage Payable

In April 2022, Chapel Drive West, LLC, a wholly owned subsidiary of the FSU Student Venture, entered into a Loan Agreement (the “Mortgage”) with Readycap Commercial, LLC (“Readycap”) to finance the acquisition of a student housing complex. The Mortgage is interest only and has a maximum principal balance of $20.4 million, of which, $18.7 million was advanced in the initial funding. Initially, the Mortgage charged interest of 30-day average SOFR plus a spread of 3.80%. In October 2022, the Mortgage was amended to charge interest of one-month Term SOFR plus a spread of 3.80%. The Mortgage matures in April 2025, subject to two one-year extension options.

The Mortgage contains events of default, subject to certain materiality thresholds and grace periods, customary for this type of financing arrangement. The remedies for such events of default are also customary for this type of transaction.

(Back to Index)

27


(Back to Index)

 

ACRES COMMERCIAL REALTY CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

MARCH 31, 2023

(unaudited)

 

Construction Loans

In January 2023, Chapel Drive East, LLC, a wholly owned subsidiary of the FSU Student Venture, entered into a loan agreement (the "Construction Loan Agreement") with Oceanview Life and Annuity Company ("Oceanview") to finance the construction of a student housing complex (the "Construction Loan"). The Construction Loan is interest only and has a maximum principal balance of $48.0 million. The Construction Loan charges one-month Term SOFR plus a spread of 6.00% and matures in February 2025, subject to three one-year extension options.

In addition to the Construction Loan, Chapel Drive East, LLC, entered into a financing agreement with Florida Pace Funding Agency to fund energy efficient building improvements and has a maximum principal balance of $15.5 million. This agreement charges fixed interest of 7.26% and matures in July 2053. The Company does not guarantee this financing agreement.

In connection with the Company's investment in the student housing complex, ACRES RF entered into guarantees related to the Construction Loan. Pursuant to the guarantees, Jason Pollack, Frank Dellaglio and ACRES RF (collectively, the "Guarantors"), for the benefit of Oceanview, provided limited "bad boy" guaranties to Oceanview pursuant to the Construction Loan Agreement until the earlier of the payment in full of the indebtedness or the date of a sale of the property pursuant to a foreclosure of the mortgage or deed or other transfer in lieu of foreclosure is accepted by Oceanview. The Guarantors also entered into a Completion Guaranty Agreement for the benefit of Oceanview to guaranty the timely completion of the project in accordance with the Construction Loan Agreement, as well as a Carry Guaranty Agreement, for the benefit of Oceanview to guaranty and unconditional payment by Chapel Drive East, LLC of all customary or necessary costs and expenses incurred in connection with the operation, maintenance and management of the property and an Environmental Indemnity Agreement jointly and severally in favor of Oceanview whereby the Guarantors serving as Indemnitors provided environmental representations and warranties, covenants and indemnifications (collectively the "Guaranties"). The Guaranties include certain financial covenants required of ACRES RF, including required net worth and liquidity requirements.

Corporate Debt

4.50% Convertible Senior Notes

The Company issued $143.8 million aggregate principal of its 4.50% convertible senior notes due 2022 (“4.50% Convertible Senior Notes”) in August 2017, of which $55.8 million was repurchased in 2021.

During the three months ended March 31, 2022, the Company repurchased $39.8 million of its 4.50% Convertible Senior Notes, resulting in a charge to earnings of $574,000, comprising an extinguishment of debt charge of $460,000 in connection with the acceleration of the market discount and interest expense of $114,000 in connection with the acceleration of deferred debt issuance costs. In August 2022, the remaining $48.2 million of the 4.50% Convertible Senior Notes were paid off upon maturity at par.

During the three months ended March 31, 2022, without consideration for incremental, accelerated amortization expense associated with the partial redemptions of the Convertible Senior Notes, the effective interest rate was 7.43%.

5.75% Senior Unsecured Notes Due 2026

On August 16, 2021, the Company issued $150.0 million of its 5.75% senior unsecured notes due 2026 (the “5.75% Senior Unsecured Notes”) pursuant to its Indenture, dated August 16, 2021 (the “Base Indenture”), between it and Wells Fargo, now Computershare Trust Company, N.A. (“CTC”), as trustee (the “Trustee”), as supplemented by the First Supplemental Indenture, dated August 16, 2021, between it and Wells Fargo, now CTC, (the “Supplemental Indenture” and, together with the Base Indenture, the “Indenture”). Prior to May 15, 2026, the Company may at its option redeem the 5.75% Senior Unsecured Notes, in whole or in part, at a redemption price equal to the sum of (i) 100% of the principal amount of the notes to be redeemed, plus accrued and unpaid interest to, but not including, the redemption date, and (ii) a make-whole premium. On or after May 15, 2026, the Company may at its option redeem the 5.75% Senior Unsecured Notes, at any time, in whole or in part, on not less than 15 nor more than 60 days’ prior notice, at a redemption price equal to 100% of the principal amount of the 5.75% Senior Unsecured Notes to be redeemed, plus accrued and unpaid interest to, but not including, the redemption date.

(Back to Index)

28


(Back to Index)

 

ACRES COMMERCIAL REALTY CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

MARCH 31, 2023

(unaudited)

 

Unsecured Junior Subordinated Debentures

During 2006, the Company formed RCT I and RCT II for the sole purpose of issuing and selling capital securities representing preferred beneficial interests. RCT I and RCT II are not consolidated into the Company’s consolidated financial statements because the Company is not deemed to be the primary beneficiary of these entities. In connection with the issuance and sale of the capital securities, the Company issued junior subordinated debentures to RCT I and RCT II of $25.8 million each, representing the Company’s maximum exposure to loss. The debt issuance costs associated with the junior subordinated debentures for RCT I and RCT II were included in borrowings and were amortized into interest expense on the consolidated statements of operations using the effective yield method over a ten year period.

There were no unamortized debt issuance costs associated with the junior subordinated debentures for RCT I and RCT II outstanding at March 31, 2023 and December 31, 2022. The interest rates for RCT I and RCT II, at March 31, 2023, were 9.11% and 8.75%, respectively. The interest rates for RCT I and RCT II, at December 31, 2022, were 8.68% and 8.36%, respectively.

Contractual maturity dates of the Company’s borrowings’ principal outstanding by category and year are presented in the table below (in thousands):

 

 

 

Total

 

 

2024

 

 

2025

 

 

2026

 

 

2027

 

 

2028 and Thereafter

 

At March 31, 2023:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CRE securitizations

 

$

1,242,223

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

1,242,223

 

Senior Secured Financing Facility

 

 

53,336

 

 

 

 

 

 

 

 

 

 

 

 

53,336

 

 

 

 

CRE - term warehouse financing facilities (1)

 

 

313,493

 

 

 

313,493

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage payable

 

 

18,710

 

 

 

 

 

 

18,710

 

 

 

 

 

 

 

 

 

 

5.75% Senior Unsecured Notes

 

 

150,000

 

 

 

 

 

 

 

 

 

150,000

 

 

 

 

 

 

 

Unsecured junior subordinated debentures

 

 

51,548

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

51,548

 

Total

 

$

1,829,310

 

 

$

313,493

 

 

$

18,710

 

 

$

150,000

 

 

$

53,336

 

 

$

1,293,771

 

 

(1)
Includes accrued interest payable in the balances of principal outstanding.

NOTE 11 - SHARE ISSUANCE AND REPURCHASE

In May 2021, and subsequently in June 2021, the Company issued a total of 4.6 million shares of 7.875% Series D Cumulative Redeemable Preferred Stock (“Series D Preferred Stock”) at a public offering price of $25.00 per share. The Company received net proceeds of $110.4 million after $4.6 million of underwriting discounts and other offering expenses. Dividends are payable quarterly in arrears at the end of January, April, July and October. The Series D Preferred Stock has no maturity date and the Company is not required to redeem the Series D Preferred Stock at any time. On or after May 21, 2026, the Company may, at its option, redeem the Series D Preferred Stock, in whole or part, at any time and from time to time, for cash at $25.00 per share, plus accrued and unpaid dividends, if any, to the redemption date.

On October 4, 2021, the Company and the Manager entered into an Equity Distribution Agreement with JonesTrading Institutional Services LLC, as placement agent (“JonesTrading”), pursuant to which the Company may issue and sell from time to time up to 2.2 million shares of the Series D Preferred Stock. Sales of the Series D Preferred Stock may be made in transactions that are deemed to be “at the market” offerings, as defined in Rule 415 of the Securities Act of 1933, as amended, including without limitation, sales made directly on the New York Stock Exchange, on any other existing trading market for the shares or to or through a market maker. Subject to the terms of the Company’s notice, JonesTrading may also sell the shares by any other method permitted by law, including but not limited to in privately negotiated transactions. The Company will pay JonesTrading a commission up to 3.0% of the gross proceeds from the sales of the Series D Preferred Stock pursuant to the agreement. The terms and conditions of the agreement include various representations and warranties, conditions to closing, indemnification rights and obligations of the parties and termination provisions. During the three months ended March 31, 2023, the Company did not issue any Series D Preferred Stock through this agreement. During the year ended December 31, 2022, the Company did not issue any Series D Preferred Stock through this agreement.

(Back to Index)

29


(Back to Index)

 

ACRES COMMERCIAL REALTY CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

MARCH 31, 2023

(unaudited)

 

On or after July 30, 2024, the Company may, at its option, redeem its 8.625% Fixed-to-Floating Series C Cumulative Redeemable Preferred Stock (“Series C Preferred Stock”), in whole or in part, at any time and from time to time, for cash at $25.00 per share, plus accrued and unpaid dividends, if any, to the redemption date. Effective July 30, 2024 and thereafter, the Company will pay cumulative dividends on the Series C Preferred Stock at a floating rate equal to three-month LIBOR plus 5.927% per annum based on the $25.00 liquidation preference, provided that such floating rate shall not be less than the initial rate of 8.625% at any date of determination.

At March 31, 2023, the Company had 4.8 million shares of Series C Preferred Stock and 4.6 million shares of Series D Preferred Stock outstanding, with weighted average issuance prices, excluding offering costs, of $25.00.

In March 2016, the board of directors (the “Board”) approved a securities repurchase plan, and in November 2020, the Board reauthorized and approved the continued use of this plan to repurchase up to $20.0 million of the outstanding shares of the Company’s common stock. Additionally, the Board authorized the Company to enter into written trading plans under Rule 10b5-1 of the Securities Exchange Act of 1934 (the “Exchange Act”). In July 2021, the authorized amount was fully utilized.

In November 2021, the Board authorized and approved the continued use of its existing share repurchase plan to repurchase an additional $20.0 million of the outstanding shares of the Company's common stock. Under the share repurchase plan, the Company intends to repurchase shares through open market purchases, privately negotiated transactions, block purchases or otherwise in accordance with applicable federal securities laws, including Rule 10b-18 and 10b5-1 of the Exchange Act.

During the three months ended March 31, 2023 and 2022, the Company repurchased $756,000 and $3.9 million of its common stock, respectively, representing 79,744 and 314,552 shares, respectively. At March 31, 2023, $6.5 million remains available under this repurchase plan.

On July 31, 2020, the Company entered into a Note and Warrant Purchase Agreement (the “Note and Warrant Purchase Agreement”) with Oaktree Capital Management, L.P. (“Oaktree”) and Massachusetts Mutual Life Insurance Company (“MassMutual”) pursuant to which the Company may issue to Oaktree and MassMutual from time to time up to $125.0 million aggregate principal amount of 12.00% Senior Unsecured Notes. In connection with the Note and Warrant Purchase Agreement, the 12.00% Senior Unsecured Notes give Oaktree and MassMutual warrants to purchase an aggregate of up to 1,166,653 shares of common stock at an exercise price of $0.03 per share, subject to certain potential adjustments. On July 31, 2020, concurrently with the issuance of the 12.00% Senior Unsecured Notes, the Company issued to Oaktree warrants to purchase 391,995 shares of common stock for an aggregate purchase price of $42.0 million and issued to MassMutual warrants to purchase 74,666 shares of common stock for an aggregate purchase price of $8.0 million. The warrants are recorded in additional paid-in capital on the consolidated balance sheets at their fair value of $3.1 million at issuance. The warrants are immediately exercisable on issuance and expire seven years from the issuance date. The warrants can be exercised with cash or as a net exercise. In July 2022, MassMutual exercised their warrants to purchase 74,666 shares.

NOTE 12 - SHARE-BASED COMPENSATION

In June 2021, the Company’s shareholders approved the ACRES Commercial Realty Corp. Third Amended and Restated Omnibus Equity Compensation Plan (the “Omnibus Plan”) and the ACRES Commercial Realty Corp. Manager Incentive Plan (the “Manager Plan” and together with the Omnibus Plan, the “Plans”). The Omnibus Plan was amended to (i) increase the number of shares authorized for issuance by an additional 1,100,000 shares of common stock, less any shares of common stock issued or subject to awards granted under the Manager Plan; and (ii) extend the expiration date of the Omnibus Plan from June 2029 to June 2031. The maximum number of shares that may be subject to awards granted under the Plans, determined on a combined basis, is 1,700,817 shares of common stock.

During the three months ended March 31, 2023 and 2022, the Company recognized stock-based compensation expense of $894,000 and $744,000, respectively.

(Back to Index)

30


(Back to Index)

 

ACRES COMMERCIAL REALTY CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

MARCH 31, 2023

(unaudited)

 

The following table summarizes the Company’s restricted common stock transactions:

 

 

 

Manager

 

 

Directors

 

 

Total Number of Shares

 

 

Weighted-Average Grant-Date Fair Value

 

Unvested shares at January 1, 2023

 

 

524,999

 

 

 

58,334

 

 

 

583,333

 

 

$

14.22

 

Issued

 

 

17,780

 

 

 

 

 

 

17,780

 

 

 

9.45

 

Vested

 

 

(17,780

)

 

 

 

 

 

(17,780

)

 

 

9.45

 

Forfeited

 

 

 

 

 

 

 

 

 

 

 

 

Unvested shares at March 31, 2023

 

 

524,999

 

 

 

58,334

 

 

 

583,333

 

 

$

14.22

 

 

The unvested restricted common stock shares are expected to vest during the following years:

 

 

 

Shares

 

2023

 

 

166,658

 

2024

 

 

166,658

 

2025

 

 

166,671

 

2026

 

 

83,346

 

Total

 

 

583,333

 

 

The shares issued during the three months ended March 31, 2023, pertaining to the fourth quarter 2022 incentive compensation shares, vested fully upon issuance pursuant to the Management Agreement. At March 31, 2023, total unrecognized compensation costs relating to unvested restricted stock was $3.6 million based on the grant date fair value of shares granted. The cost is expected to be recognized over a weighted average period of 2.7 years.

Under the Company’s Fourth Amended and Restated Management Agreement, as amended (“Management Agreement”), incentive compensation is paid quarterly. Up to 75% of the incentive compensation is paid in cash and at least 25% is paid in the form of an award of common stock, recorded in management fees on the consolidated statements of operations. During the three months ended March 31, 2023, the Company incurred incentive compensation payable to the Manager of $129,000, of which 50% was payable at quarter end in cash and 50%, representing 6,875 shares, was payable at quarter end in common stock. No incentive compensation was paid to the Manager for the three months ended March 31, 2022.

The Omnibus Plan and the Manager Plan are administered by the compensation committee of the Company's Board (the “Compensation Committee”). In 2020, the Compensation Committee and the Board created parameters for equity awards, whereby they are no longer discretionary but are now based upon the Company’s achievement of performance parameters using book value of the common stock as the appropriate benchmark. See Note 16 for a description of awards made under the Manager Plan.

(Back to Index)

31


(Back to Index)

 

ACRES COMMERCIAL REALTY CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

MARCH 31, 2023

(unaudited)

 

NOTE 13 - EARNINGS PER SHARE

The following table presents a reconciliation of basic and diluted losses per common share for the periods presented (dollars in thousands, except per share amounts):

 

 

 

For the Three Months Ended March 31,

 

 

 

2023

 

 

2022

 

Net income

 

$

2,293

 

 

$

2,084

 

Net income allocated to preferred shares

 

 

(4,855

)

 

 

(4,855

)

Net loss allocable to non-controlling interest, net of taxes

 

 

146

 

 

 

 

Net loss allocable to common shares

 

$

(2,416

)

 

$

(2,771

)

 

 

 

 

 

 

 

Weighted average number of common shares outstanding:

 

 

 

 

 

 

Weighted average number of common shares outstanding - basic

 

 

8,108,418

 

 

 

8,630,316

 

Weighted average number of warrants outstanding (1)

 

 

391,995

 

 

 

466,661

 

Total weighted average number of common shares outstanding - basic

 

 

8,500,413

 

 

 

9,096,977

 

Effect of dilutive securities - unvested restricted stock

 

 

 

 

 

 

Weighted average number of common shares outstanding - diluted

 

 

8,500,413

 

 

 

9,096,977

 

 

 

 

 

 

 

 

Net loss per common share - basic

 

$

(0.28

)

 

$

(0.30

)

Net loss per common share - diluted

 

$

(0.28

)

 

$

(0.30

)

 

(1)
See Note 11 for further details regarding the warrants.

NOTE 14 - DISTRIBUTIONS

In order to qualify as a REIT, the Company must currently distribute at least 90% of its taxable income. In addition, the Company must distribute 100% of its taxable income in order to not be subject to corporate federal income taxes on retained income. The Company anticipates it will distribute substantially all of its taxable income to its stockholders. Because taxable income differs from cash flow from operations due to non-cash revenues or expenses (such as provisions for loan and lease losses and depreciation) and tax loss carryforwards, in certain circumstances the Company may generate operating cash flow in excess of its distributions or, alternatively, may be required to borrow funds to make sufficient distribution payments.

The Company’s 2023 distributions are, and will be, determined by the Company's Board, which will also consider the composition of any distributions declared, including the option of paying a portion in cash and the balance in additional shares of common stock.

For the three months ended March 31, 2023 and 2022, the Company did not pay any common share distributions.

(Back to Index)

32


(Back to Index)

 

ACRES COMMERCIAL REALTY CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

MARCH 31, 2023

(unaudited)

 

The following tables present distributions declared (on a per share basis) for the three months ended March 31, 2023 and the year ended December 31, 2022 with respect to the Company's Series C Preferred Stock and Series D Preferred Stock:

 

 

 

Series C Preferred Stock

 

 

Series D Preferred Stock

 

 

 

Date Paid

 

Total Distribution Paid

 

 

Distribution Per Share

 

 

Date Paid

 

Total Distribution Paid

 

 

Distribution Per Share

 

 

 

 

 

(in thousands)

 

 

 

 

 

 

 

(in thousands)

 

 

 

 

2023

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31

 

May 1

 

$

2,587

 

 

$

0.5390625

 

 

May 1

 

$

2,268

 

 

$

0.4921875

 

2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31

 

January 30, 2023

 

$

2,587

 

 

$

0.5390625

 

 

January 30, 2023

 

$

2,268

 

 

$

0.4921875

 

September 30

 

October 31

 

 

2,587

 

 

 

0.5390625

 

 

October 31

 

 

2,268

 

 

 

0.4921875

 

June 30

 

August 1

 

 

2,588

 

 

 

0.5390625

 

 

August 1

 

 

2,268

 

 

 

0.4921875

 

March 31

 

May 2

 

 

2,588

 

 

 

0.5390625

 

 

May 2

 

 

2,268

 

 

 

0.4921875

 

 

NOTE 15 - ACCUMULATED OTHER COMPREHENSIVE LOSS

The following table presents the changes in net unrealized loss on derivatives, the sole component of accumulated other comprehensive loss, for the three months ended March 31, 2023 (in thousands):

 

 

 

Accumulated Other Comprehensive Loss - Net Unrealized Loss on Derivatives

 

Balance at January 1, 2023

 

$

(6,394

)

Amounts reclassified from accumulated other comprehensive loss (1)

 

 

393

 

Balance at March 31, 2023

 

$

(6,001

)

 

(1)
Amounts reclassified from accumulated other comprehensive loss are reclassified to interest expense on the Company’s consolidated statements of operations.

NOTE 16 - RELATED PARTY TRANSACTIONS

Relationship with ACRES Capital Corp. and certain of its Subsidiaries. The Manager is a subsidiary of ACRES Capital Corp., of which Andrew Fentress, the Company’s Chairman, serves as Managing Partner and Mark Fogel, the Company’s President, Chief Executive Officer and Director, serves as Chief Executive Officer and President. Mr. Fentress and Mr. Fogel are also shareholders and board members of ACRES Capital Corp.

Effective on July 31, 2020, the Company has a Management Agreement with the Manager pursuant to which the Manager provides the day-to-day management of the Company’s operations and receives management fees. For the three months ended March 31, 2023 and 2022, the Manager earned base management fees of $1.6 million and $1.7 million, respectively. For the three months ended March 31, 2023, the Manager earned incentive management fees of $129,000, of which 50% was payable in cash and 50% was payable in common stock. No incentive compensation was earned for the three months ended March 31, 2022.

At March 31, 2023 and December 31, 2022, $550,000 and $558,000, respectively, of base management fees were payable by the Company to the Manager. At March 31, 2023 and December 31, 2022, $129,000 and $340,000, respectively, of incentive management fees were payable by the Company to the Manager.

(Back to Index)

33


(Back to Index)

 

ACRES COMMERCIAL REALTY CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

MARCH 31, 2023

(unaudited)

 

The Manager and its affiliates provided the Company with a Chief Financial Officer and a sufficient number of additional accounting, finance, tax and investor relations professionals. The Company reimbursed the Manager’s expenses for (a) the wages, salaries and benefits of the Chief Financial Officer, and (b) a portion of the wages, salaries and benefits of accounting, finance, tax, legal and investor relations professionals, in proportion to such personnel’s percentage of time allocated to the Company’s operations. The Company reimbursed out-of-pocket expenses and certain other costs incurred by the Manager that related directly to the Company’s operations.

For the three months ended March 31, 2023, the Company reimbursed the Manager $902,000 for all such compensation and costs. For the three months ended March 31, 2022, the Company reimbursed the Manager $2.0 million for all such compensation and costs. At March 31, 2023 and December 31, 2022, the Company had payables to the Manager pursuant to the Management Agreement totaling $439,000 and $179,000, respectively, related to such compensation and costs. The Company’s base management fee payable and expense reimbursements payable were recorded in management fee payable and accounts payable and other liabilities on the consolidated balance sheets, respectively.

On July 31, 2020, ACRES RF, a direct, wholly owned subsidiary of the Company, provided a $12.0 million loan (the “ACRES Loan”) to ACRES Capital Corp. evidenced by the promissory note from ACRES Capital Corp.

The ACRES Loan accrues interest at 3.00% per annum payable monthly. The monthly amortization payment is $25,000. The ACRES Loan matures in July 2026, subject to two one-year extensions (at ACRES Capital Corp.’s option) subject to the payment of a 0.5% extension fee to ACRES RF on the outstanding principal amount of the ACRES Loan.

During the three months ended March 31, 2023 and 2022, the Company recorded interest income of $84,000 and $87,000, respectively, on the ACRES Loan in other income (expense) on the consolidated statements of operations. At March 31, 2023 and December 31, 2022, the ACRES Loan had a principal balance of $11.2 million and $11.3 million, respectively, recorded in loan receivable - related party on the consolidated balance sheets. At March 31, 2023 and December 31, 2022, the ACRES Loan had no accrued interest receivable.

During the year ended December 31, 2022, the Company originated one CRE whole loan with a par value of $38.6 million that was refinanced from a loan originated by affiliates of the Manager. The Company did not originate any loans that were refinanced from loans originated by affiliates of the Manager during the three months ended March 31, 2023. During the year ended December 31, 2022, the Company acquired 100% equity in one property for $38.6 million, that previously served as collateral for a loan held by an affiliate of the Manager prior to the acquisition.

At March 31, 2023, the Company retained equity in two securitization entities that were structured for the Company by the Manager. Under the Management Agreement, the Manager was not separately compensated by the Company for executing these transactions and was not separately compensated for managing the securitization entities and their assets.

During the year ended December 31, 2022, the Company co-originated and entered into joint funding agreements with ACRES Loan Origination, LLC, an affiliate of ACRES Capital Corp. and the Manager, on four loan originations, with total initial fundings of $97.2 million.

Relationship with ACRES Capital Servicing LLC. Under the MassMutual Loan Agreement, ACRES Capital Servicing LLC (“ACRES Capital Servicing”), an affiliate of ACRES Capital Corp. and the Manager, serves as the portfolio servicer. Additionally, ACRES Capital Servicing served as the special servicer of XAN 2020-RSO8 and XAN 2020-RSO9 and serves as special servicer of ACRES Commercial Realty 2021-FL1 Issuer, Ltd. (“ACR 2021-FL1”) and ACRES Commercial Realty 2021-FL2 Issuer, Ltd. (“ACR 2021-FL2”).

During the three months ended March 31, 2023, ACRES Capital Servicing received no portfolio servicing fees and earned $45,000 in special servicing fees, of which $35,000 was recorded as a reduction to interest income in the consolidated statement of operations. During the three months ended March 31, 2022, ACRES Capital Servicing received no portfolio servicing fees or special servicing fees.

Relationship with ACRES Collateral Manager, LLC. ACRES Collateral Manager, LLC, an affiliate of ACRES Capital Corp. and the Manager, serves as the collateral manager of ACR 2021-FL1 and ACR 2021-FL2, a role for which it waived its fee.

(Back to Index)

34


(Back to Index)

 

ACRES COMMERCIAL REALTY CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

MARCH 31, 2023

(unaudited)

 

Relationship with ACRES Development Management, LLC. ACRES Development Management, LLC (“DevCo”) is a wholly owned subsidiary of ACRES Capital Corp., the parent of the Manager. DevCo acts in various capacities as a co-developer or owner’s representative for direct equity investments within the Company’s portfolio. In November 2021, December 2021 and April 2022, the joint venture entities of the three CRE equity investments acquired through direct investment entered into development agreements with DevCo (the “Development Agreements”). Pursuant to the Development Agreements, DevCo agreed to manage the development of the projects associated with each equity investment in accordance with a development standard in exchange for fees equal to between 1.25% and 1.5% of all project costs. During the three months ended March 31, 2023, $54,000 in fees were incurred and paid to DevCo for services rendered under the Development Agreements. No fees were incurred or paid to DevCo for services rendered under the Development Agreements during the three months ended March 31, 2022.

Relationship with ACRES Share Holdings, LLC. During the three months ended March 31, 2023, the Company issued 17,780 shares to ACRES Share Holdings, LLC in connection with the fourth quarter 2022 incentive compensation. The shares vested fully upon issuance pursuant to the Management Agreement.

In June 2021, the Company’s Manager Plan was approved by its shareholders, which authorized up to 1,100,000 shares of common stock for issuance to the Manager (less shares of common stock issued or subject to awards under the Omnibus Plan). There were no shares issued under this plan for the three months ended March 31, 2023. During the year ended December 31, 2022, the Company issued 299,999 restricted shares to ACRES Share Holdings, LLC under the Manager Plan that will vest 25% each year on the anniversary of the issuance date over four years. See Note 12 for additional details.

NOTE 17 - FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company had no financial instruments carried at fair value on a recurring basis at March 31, 2023 and December 31, 2022.

The Company is required to disclose the fair value of financial instruments for which it is practicable to estimate that value. The fair values of the Company’s short-term financial instruments such as cash and cash equivalents, restricted cash, accrued interest receivable, principal paydowns receivable, accrued interest payable and distributions payable approximate their carrying values on the consolidated balance sheets. The fair values of the Company’s assets and liabilities are estimated as follows:

CRE whole loans. The fair values of the Company’s loans held for investment are measured by discounting the expected future cash flows using the current interest rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. Par values of loans with variable interest rates are expected to approximate fair value unless evidence of credit deterioration exists, in which case the fair value approximates the par value less the loan’s allowance estimated through individual evaluation. Fair values of loans with fixed rates are calculated using the net present values of future cash flows, discounted at market rates. The Company’s floating-rate CRE loans had interest rates from 7.56% to 13.31% and 7.03% to 12.67% at March 31, 2023 and December 31, 2022, respectively.

CRE mezzanine loan. Historically, this was measured by discounting the expected remaining cash flows using the current interest rates at which similar instruments would be originated for the same remaining maturity. The Company’s mezzanine loan was discounted at a rate of 10.00%. The Company's mezzanine loan had no carrying or fair value at March 31, 2023 or December 31, 2022.

Loan receivable- related party. This is estimated using a discounted cash flow model.

Senior notes in CRE securitizations. These are estimated using a discounted cash flow model with implied yields based on trades for similar securities.

Senior secured financing facility, warehouse financing facilities, mortgage payable and construction loan. These are variable-rate debt instruments indexed to either LIBOR or Term SOFR that reset periodically and as a result, their carrying value approximates their fair value, excluding deferred debt issuance costs.

5.75% Senior Unsecured Notes and Junior subordinated notes. These are estimated by using a discounted cash flow model.

(Back to Index)

35


(Back to Index)

 

ACRES COMMERCIAL REALTY CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

MARCH 31, 2023

(unaudited)

 

The fair values of the Company’s remaining financial and non-financial assets that are not reported at fair value on the consolidated balance sheets are reported in the following table (in thousands):

 

 

 

 

 

 

Fair Value Measurements

 

 

 

Carrying Value

 

 

Fair Value

 

 

Quoted Prices in Active Markets for Identical Assets of Liabilities
(Level 1)

 

 

Significant Other Observable Inputs
(Level 2)

 

 

Significant Unobservable Inputs
(Level 3)

 

At March 31, 2023:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CRE whole loans

 

$

1,970,891

 

 

$

2,001,105

 

 

$

 

 

$

 

 

$

2,001,105

 

Loan receivable - related party

 

 

11,200

 

 

 

8,385

 

 

 

 

 

 

 

 

 

8,385

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Senior notes in CRE securitizations

 

 

1,234,355

 

 

 

1,178,414

 

 

 

 

 

 

 

 

 

1,178,414

 

Senior secured financing facility

 

 

49,855

 

 

 

53,336

 

 

 

 

 

 

 

 

 

53,336

 

Warehouse financing facilities

 

 

311,276

 

 

 

313,493

 

 

 

 

 

 

 

 

 

313,493

 

Mortgage payable

 

 

18,296

 

 

 

18,710

 

 

 

 

 

 

 

 

 

18,710

 

Construction loan (1)

 

 

(2,225

)

 

 

 

 

 

 

 

 

 

 

 

 

5.75% Senior Unsecured Notes

 

 

147,662

 

 

 

132,090

 

 

 

 

 

 

 

 

 

132,090

 

Junior subordinated notes

 

 

51,548

 

 

 

33,663

 

 

 

 

 

 

 

 

 

33,663

 

At December 31, 2022:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CRE whole loans

 

$

2,038,787

 

 

$

2,065,504

 

 

$

 

 

$

 

 

$

2,065,504

 

Loan receivable - related party

 

 

11,275

 

 

 

9,672

 

 

 

 

 

 

 

 

 

9,672

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Senior notes in CRE securitizations

 

 

1,233,556

 

 

 

1,179,313

 

 

 

 

 

 

 

 

 

1,179,313

 

Senior secured financing facility

 

 

87,890

 

 

 

91,549

 

 

 

 

 

 

 

 

 

91,549

 

Warehouse financing facilities

 

 

328,288

 

 

 

330,848

 

 

 

 

 

 

 

 

 

330,848

 

Mortgage payable

 

 

18,244

 

 

 

18,710

 

 

 

 

 

 

 

 

 

18,710

 

5.75% Senior Unsecured Notes

 

 

147,507

 

 

 

138,435

 

 

 

 

 

 

 

 

 

138,435

 

Junior subordinated notes

 

 

51,548

 

 

 

35,821

 

 

 

 

 

 

 

 

 

35,821

 

 

(1)
Deferred debt issuance costs related to the acquisition of a construction loan that has not been drawn on and has no fair value.

 

NOTE 18 - MARKET RISK AND DERIVATIVE INSTRUMENTS

The Company is affected by changes in certain market conditions. These changes in market conditions may adversely impact the Company’s financial performance and are referred to as “market risks.” When deemed appropriate, the Company used derivatives as a risk management tool to mitigate the potential impact of certain market risks. The primary market risks managed by the Company through the use of derivative instruments were interest rate risk and market price risk.

The Company also historically managed its interest rate risk with interest rate swaps. Interest rate swaps are contracts between two parties to exchange cash flows based on specified underlying notional amounts, assets and/or indices.

The Company seeks to manage the extent to which net income changes as a function of changes in interest rates by matching adjustable-rate assets with variable-rate borrowings.

The Company classified its interest rate swap contracts as cash flow hedges, which are hedges that eliminate the risk of changes in the cash flows of a financial asset or liability.

(Back to Index)

36


(Back to Index)

 

ACRES COMMERCIAL REALTY CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

MARCH 31, 2023

(unaudited)

 

The Company terminated all of its interest rate swap positions associated with its financed CMBS portfolio in April 2020. At termination, the Company realized a loss of $11.8 million. At March 31, 2023 and December 31, 2022, the Company had losses of $6.2 million and $6.6 million, respectively, recorded in accumulated other comprehensive loss, which will be amortized into earnings over the remaining life of the debt. During the three months ended March 31, 2023, the Company recorded amortization expense of $416,000, reported in interest expense on the consolidated statements of operations. During the three months ended March 31, 2022, the Company recorded amortization expense of $479,000, reported in interest expense on the consolidated statements of operations.

At March 31, 2023 and December 31, 2022, the Company had an unrealized gain of $233,000 and $256,000, respectively, attributable to two terminated interest rate swaps in accumulated other comprehensive loss on the consolidated balance sheets, to be accreted into earnings over the remaining life of the debt. For each of the three months ended March 31, 2023 and 2022, the Company recorded accretion income, reported in interest expense on the consolidated statements of operations, of $23,000 to accrete the accumulated other comprehensive income on the terminated swap agreements.

The Company’s prior origination of fixed-rate CRE whole loans exposed it to market pricing risk in connection with the fluctuations of market interest rates. As market interest rates increase or decrease, the fair value of the fixed-rate CRE whole loans will decrease or increase accordingly. In order to mitigate this market price risk, the Company entered into interest rate swap contracts in which it pays a fixed rate of interest in exchange for a variable rate of interest, usually three-month LIBOR. Unrealized gains and losses on the value of these swap contracts were recorded in other income (expense) on the consolidated statements of operations. In December 2020, these interest rate swap contracts were terminated.

The following table presents the effect of the derivative instruments on the consolidated statements of operations for the three months ended March 31, 2023 and 2022 (in thousands):

 

 

 

 

 

Realized and Unrealized Gain (Loss) (1)

 

 

 

Consolidated Statements of Operations Location

 

Three Months Ended March 31, 2023

 

 

Three Months Ended March 31, 2022

 

Interest rate swap contracts, hedging

 

Interest expense

 

$

(393

)

 

$

(456

)

 

(1)
Negative values indicate a decrease to the associated consolidated statement of operations line items.

(Back to Index)

37


(Back to Index)

 

ACRES COMMERCIAL REALTY CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

MARCH 31, 2023

(unaudited)

 

NOTE 19 - OFFSETTING OF FINANCIAL ASSETS AND LIABILITIES

The following table presents a summary of the Company’s offsetting of financial liabilities and derivative liabilities (in thousands, except amounts in footnotes):

 

 

 

(i)
Gross Amounts

 

 

(ii)
Gross Amounts Offset on the

 

 

(iii) = (i) - (ii)
Net Amounts of Liabilities Presented on the

 

 

(iv)
Gross Amounts Not Offset on the Consolidated Balance Sheets

 

 

 

 

 

 

of Recognized Liabilities

 

 

Consolidated Balance Sheets

 

 

Consolidated Balance Sheets

 

 

Financial Instruments (1)

 

 

Cash Collateral Pledged

 

 

(v) = (iii) - (iv)
Net Amount

 

At March 31, 2023:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Term warehouse financing facilities (2)

 

$

311,276

 

 

$

 

 

$

311,276

 

 

$

311,276

 

 

$

 

 

$

 

At December 31, 2022:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Term warehouse financing facilities (2)

 

$

328,288

 

 

$

 

 

$

328,288

 

 

$

328,288

 

 

$

 

 

$

 

 

(1)
Amounts represent financial instruments pledged that are available to be offset against liability balances associated with term warehouse financing facilities, repurchase agreements and derivatives.
(2)
The combined fair values of loans pledged against the Company’s various term warehouse financing facilities and repurchase agreements was $434.7 million and $453.6 million at March 31, 2023 and December 31, 2022, respectively.

All balances associated with warehouse financing facilities are presented on a gross basis on the Company’s consolidated balance sheets.

Certain of the Company’s warehouse financing facilities are governed by underlying agreements that generally provide for a right of offset in the event of default or in the event of a bankruptcy of either party to the transaction.

NOTE 20 - COMMITMENTS AND CONTINGENCIES

The Company may become involved in litigation on various matters due to the nature of the Company’s business activities. The resolution of these matters may result in adverse judgments, fines, penalties, injunctions and other relief against the Company as well as monetary payments or other agreements and obligations. In addition, the Company may enter into settlements on certain matters in order to avoid the additional costs of engaging in litigation. Except as discussed below, the Company is unaware of any contingencies arising from such litigation that would require accrual or disclosure in the consolidated financial statements at March 31, 2023.

Primary Capital Mortgage, LLC (“PCM”) is subject to potential litigation related to claims for repurchases or indemnifications on loans that PCM has sold to third parties. At both March 31, 2023 and December 31, 2022, no such litigation demand was outstanding. Reserves for such potential litigation demands are included in the reserve for mortgage repurchases and indemnifications that totaled $1.2 million at both March 31, 2023 and December 31, 2022, respectively. The reserves for mortgage repurchases and indemnifications are included in liabilities held for sale on the consolidated balance sheets.

The Company did not have any general litigation reserve at March 31, 2023 or December 31, 2022.

Other Contingencies

PCM is subject to additional claims for repurchases or indemnifications on loans that PCM has sold to investors. At March 31, 2023 and December 31, 2022, outstanding demands for indemnification, repurchase or make whole payments totaled $3.3 million. The Company’s estimated exposure for such outstanding claims, as well as unasserted claims, is included in its reserve for mortgage repurchases and indemnifications.

(Back to Index)

38


(Back to Index)

 

ACRES COMMERCIAL REALTY CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

MARCH 31, 2023

(unaudited)

 

Other Guarantees

In January 2023, Chapel Drive East, LLC, a wholly owned subsidiary of the FSU Student Venture, entered into a loan agreement (the "Construction Loan Agreement") with Oceanview Life and Annuity Company ("Oceanview") to finance the construction of a student housing complex (the "Construction Loan").

In connection with the Company's investment in the student housing complex, ACRES RF entered into guarantees related to the Construction Loan. Pursuant to the guarantees, Jason Pollack, Frank Dellaglio and ACRES RF (collectively, the "Guarantors"), for the benefit of Oceanview, provided limited "bad boy" guaranties to Oceanview pursuant to the Construction Loan Agreement until the earlier of the payment in full of the indebtedness or the date of a sale of the property pursuant to a foreclosure of the mortgage or deed or other transfer in lieu of foreclosure is accepted by Oceanview. The Guarantors also entered into a Completion Guaranty Agreement for the benefit of Oceanview to guaranty the timely completion of the project in accordance with the Construction Loan Agreement, as well as a Carry Guaranty Agreement, for the benefit of Oceanview to guaranty and unconditional payment by Chapel Drive East, LLC of all customary or necessary costs and expenses incurred in connection with the operation, maintenance and management of the property and an Environmental Indemnity Agreement jointly and severally in favor of Oceanview whereby the Guarantors serving as Indemnitors provided environmental representations and warranties, covenants and indemnifications (collectively the "Guaranties"). The Guaranties include certain financial covenants required of ACRES RF, including required net worth and liquidity requirements.

Unfunded Commitments

Unfunded commitments on the Company’s originated CRE loans generally fall into two categories: (1) pre-approved capital improvement projects and (2) new or additional construction costs subject, in each case, to the borrower meeting specified criteria. Upon completion of the improvements or construction, the Company would receive additional interest income on the advanced amount. Whole loans had $143.6 million and $158.2 million in unfunded loan commitments at March 31, 2023 and December 31, 2022, respectively.

Additionally, the Company has commitments related to its construction of a student housing complex. The Company committed to a total funding of $24.3 million, of which $8.5 million was unfunded at March 31, 2023.

NOTE 21 - SUBSEQUENT EVENTS

The Company has evaluated subsequent events through the filing of this report and determined that there have not been any events, other than those described in Note 6 and Note 12, that have occurred that would require adjustments to or disclosures in the consolidated financial statements.

(Back to Index)

39


(Back to Index)

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

References in this quarterly report to “we,” “us” or the “Company” refer to ACRES Commercial Realty Corp. The following discussion and analysis of the Company’s financial condition and results of operations should be read in conjunction with the consolidated financial statements and accompanying notes appearing elsewhere in this report. Certain information contained in the discussion and analysis set forth below includes forward-looking statements that involve risks and uncertainties.

Special Note Regarding Forward-Looking Statements

This report contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such forward-looking statements can generally be identified by our use of forward-looking terminology such as “may,” “will,” “continue,” “expect,” “intend,” “anticipate,” “estimate,” “believe,” “look forward” or other similar words or terms. Because such statements include risks, uncertainties and contingencies, actual results may differ materially from the expectations, intentions, beliefs, plans or predictions of the future expressed or implied by such forward-looking statements. For information identifying important factors that could cause actual results to differ materially from those anticipated in the forward-looking statements, including, without limitation, factors impacting whether we will be able to maintain our sources of liquidity and whether we will be able to identify sufficient suitable investments to increase our originations, please refer to the Risk Factors section of the Company’s Annual Report on Form 10-K for the year ended December 31, 2022 filed with the U.S. Securities and Exchange Commission (the “SEC”). Except as expressly required by applicable securities law, the Company disclaims any intention or obligation to update or revise any forward-looking statements whether as a result of new information, future events or otherwise.

Overview

We are a Maryland corporation and an externally managed real estate investment trust (“REIT”) that is primarily focused on originating, holding and managing commercial real estate (“CRE”) mortgage loans and equity investments in commercial real estate properties through direct ownership and joint ventures. Our manager is ACRES Capital, LLC (our “Manager”), a subsidiary of ACRES Capital Corp. (collectively, “ACRES”), a private commercial real estate lender exclusively dedicated to nationwide middle market CRE lending with a focus on multifamily, student housing, hospitality, office and industrial property in top United States (“U.S.”) markets. Our Manager draws upon the management team of ACRES and its collective investment experience to provide its services. Our objective is to provide our stockholders with total returns over time, including quarterly distributions and capital appreciation, while seeking to manage the risks associated with our investment strategies as well as to maximize long-term stockholder value by maintaining stability through our available liquidity and diversified CRE loan portfolio.

In December 2019, a novel strain of coronavirus (“COVID-19”) was identified. The resulting spread of COVID-19 throughout the globe led the World Health Organization to designate COVID-19 as a pandemic and numerous countries, including the U.S, to declare national emergencies. Many countries responded to the initial and ensuing outbreaks of COVID-19 by instituting quarantines and restrictions on travel and limiting operations of non-essential offices and retail centers, which resulted in the closure or remote operation of non-essential businesses, increased rates of unemployment and market disruption in connection with the economic uncertainty. The aforementioned quarantines and travel restrictions contributed significantly to economic disruptions across the country that directly impacted our borrowers and their ability to pay and to stay current with their debt obligations in 2020 and 2021, causing significant increases in our provisions for credit losses. During the height of the pandemic, we used a variety of legal and structural options to manage credit risk effectively, including through forbearance and extension provisions or other agreements.

Due in large part to the development and distribution of vaccines and other treatments, the U.S. and other countries around the world have eased or removed restrictions entirely, financial markets are more liquid, collateral performance has improved and unemployment rates have stabilized to some degree; as such, at March 31, 2023, we have substantially reversed provisions for credit losses related to macroeconomic factors impacted by COVID-19. For additional discussion with respect to the potential impact of COVID-19 on our liquidity and capital resources, see “Liquidity and Capital Resources.”

Currently, domestic and global markets are grappling with managing rising inflation rates, supply chain disruptions and energy market dislocations. These additional market pressures are manifesting themselves in higher consumer prices and have led domestic and global monetary policy makers to raise historically low short-term interest rates at rates much faster than originally anticipated by domestic and global financial markets in hopes of containing inflation and staving off or tempering an economic recession. The U.S. Federal Reserve has raised the Federal Funds rate by 5.00% in ten rate hikes between March 2022 and May 2023 to combat inflation, and more rate hikes may be expected to occur in the near future. These increases in the cost of capital and goods are expected to cause

(Back to Index)

40


(Back to Index)

 

short-term dislocations in various investment and financing markets in which we participate as we and other market participants adjust to the new financing environment.

We continuously monitor the effects of domestic and global events, including but not limited to the current and expected impacts of inflation, labor shortages, supply chain matters and rising interest rates, on our operations and financial position to ensure that we remain responsive and adaptable to the dynamic changes in our operating environment. However, it is inherently difficult to accurately assess the continuing impact of domestic or global macroeconomic events on our revenues, profitability and financial position. In response, we continue to actively and responsibly manage corporate liquidity and operations in light of changing macroeconomic circumstances, and our Manager continuously monitors for new capital opportunities and executes on agreements that are expected to enhance our returns.

We target originating transitional floating-rate CRE loans between $10.0 million and $100.0 million. In March 2020, due to the market disruptions caused by the COVID-19 pandemic, we halted loan originations to manage our liquidity. In conjunction with the capital commitments secured through the ACRES acquisition, we resumed originating floating-rate CRE loans in November 2020. During the year ended December 31, 2022, we originated 19 floating-rate CRE whole loans with total commitments of $610.8 million. Loan payoffs during the year ended December 31, 2022 were $399.6 million and net unfunded commitments were $21.2 million, producing a net increase to the portfolio of $190.0 million. During the three months ended March 31, 2023, we originated one floating-rate CRE whole loan, with a total commitment of $16.0 million. Loan payoffs during the three months ended March 31, 2023 were $94.1 million and net funded commitments were $13.7 million, producing a net decrease to the portfolio of $64.4 million.

Our CRE loan portfolio, which had $2.0 billion carrying values at both March 31, 2023 and December 31, 2022, comprised:

First mortgage loans, which we refer to as whole loans. These loans are typically secured by first liens on CRE property, including the following property types: multifamily, office, hotel, self-storage, retail, student housing, manufactured housing, industrial, healthcare and mixed-use. At both March 31, 2023 and December 31, 2022, our whole loans had a carrying value of $2.0 billion or 100.0% of the CRE loan portfolio. All but three of our CRE whole loans were current on contractual payments at March 31, 2023, one of which was made current with respect to debt service in April 2023.
Mezzanine debt is senior to the borrower’s equity but is subordinated to other third-party debt. These loans are subordinated CRE loans, usually secured by a pledge of the borrower’s equity ownership in the entity that owns the property or by a second lien mortgage on the property. At both March 31, 2023 and December 31, 2022, our mezzanine loans had no carrying value.

We generate our income primarily from the spread between the revenues we receive from our assets and the cost to finance our ownership of those assets, including corporate debt.

While the CRE whole loans included in the CRE loan portfolio are substantially composed of floating-rate loans benchmarked to the Secured Overnight Financing Rate (“SOFR”), asset yields are protected through the use of benchmark floors and minimum interest periods that typically range from 12 to 18 months at the time of a loan’s origination. Our benchmark floors provide asset yield protection when the benchmark rate falls below an in-place benchmark floor. Our net investment returns are enhanced by a decline in the cost of our floating-rate liabilities that do not have benchmark floors. Our net investment returns will be negatively impacted by the rising cost of our floating-rate liabilities that do not have floors until the benchmark rate is above the benchmark floor, at which point our floating-rate loans and floating-rate liabilities will be match funded, effectively locking in our net interest margin until the benchmark floor rate is activated again or the floating-rate loan is paid off or refinanced.

In a business environment where benchmark interest rates are increasing significantly, cash flows of the CRE assets underlying our loans may not be sufficient to pay debt service on our loans, which could result in non-performance or default. We partially mitigate this risk by generally requiring our borrowers to purchase interest rate cap agreements with non-affiliated, well-capitalized third parties and by selectively requiring our borrowers to have and maintain debt service reserves. These interest rate caps generally mature prior to the maturity date of the loan and the borrowers are required to pay to extend them. In most cases the sponsors will need to fund additional equity into the properties to cover these costs as the property may not generate sufficient cash flow to pay these costs. At March 31, 2023, 93.5% of the par value of our CRE loan portfolio had interest rate caps in place with a weighted-average maturity of 0.9 years.

(Back to Index)

41


(Back to Index)

 

At March 31, 2023, our $2.0 billion floating-rate CRE loan portfolio, at par, which includes one whole loan without a benchmark floor, had a weighted average benchmark floor of 0.66%. At December 31, 2022, our par-value $2.1 billion floating-rate CRE loan portfolio, which included one loan without a benchmark floor, had a weighted average benchmark floor of 0.68%. With the trend of rising benchmark interest rates in 2022 and 2023, we have seen the coupons on all of our floating-rate assets and debt rise accordingly. Because we have equity invested in each floating-rate loan, and because in all instances the benchmark interest rates are above our loan floors, the rise in interest rates expected by the market will result in an increase in our net interest income. See “Interest Rate Risk” in “Item 3: Quantitative and Qualitative Disclosures About Market Risk.”

(Back to Index)

42


(Back to Index)

 

Our portfolio comprises loans with a diverse array of collateral types. We increased our multifamily portfolio allocation to 76.2% at March 31, 2023 up from 75.2% at December 31, 2022. The following charts show our portfolio allocation by property type at March 31, 2023 and December 31, 2022:

img81404349_1.jpgimg81404349_2.jpg 

From time to time, we may acquire real estate property through direct equity investments or as a result of our lending activities. At March 31, 2023, the total carrying value of our net real estate-related assets and liabilities was $97.2 million on four properties owned. The existence of net capital loss carryforwards available until December 31, 2025, allows for potential future capital gains on these investments to be shielded from income taxes. Additionally, at March 31, 2023, our investments in real estate comprise one hotel property with a carrying value of $37.4 million, classified as property held for sale of $40.4 million offset by liabilities held for sale of $3.0 million.

We use leverage to enhance our returns. The cost of borrowings to finance our investments is a significant part of our expenses. Our net interest income depends on our ability to control these expenses relative to our revenue. Our CRE loans may initially be financed with term facilities, such as CRE loan warehouse financing facilities, in anticipation of their ultimate securitization. We ultimately seek to finance our CRE loans through the use of non-recourse long-term, match-funded CRE debt securitizations.

Our asset-specific borrowings comprised CRE debt securitizations, term warehouse financing facilities, senior secured financing facility, mortgage payable and construction loans. In May 2021, we closed ACRES Commercial Realty 2021-FL1 Issuer, Ltd.

(Back to Index)

43


(Back to Index)

 

(“ACR 2021-FL1”), a new CRE debt securitization financing $802.6 million of CRE loans with $675.2 million of non-recourse, floating-rate notes at a weighted average cost of one-month LIBOR plus 1.49%. Simultaneously, we executed the optional redemption on Exantas Capital Corp. 2019-RSO7, Ltd. (“XAN 2019-RSO7”) and paid off the remaining notes. In December 2021, we closed ACRES Commercial Realty 2021-FL2 Issuer, Ltd. (“ACR 2021-FL2”), a new CRE debt securitization financing $700.0 million of CRE loans with $567.0 million of non-recourse, floating-rate notes at a weighted average cost of one-month LIBOR plus 1.80%. Each of these 2021 CLOs provides for a two-year reinvestment period that allows us to reinvest CRE loan payoffs and principal paydown proceeds into the securitizations, pending certain eligibility criteria are met and rating agency approval is obtained. The reinvestment feature of the securitizations will allow us to extend the securitizations’ financing lives at favorable interest rates through the reinvestment of loan payoff proceeds into new loans.

In February 2022 and March 2022, we exercised the optional redemptions of Exantas Capital Corp. 2020-RSO8, Ltd. (“XAN 2020-RSO8”) and Exantas Capital Corp. 2020-RSO9, Ltd. (“XAN 2020-RSO9”), respectively, and all of the outstanding senior notes were paid off from the sales proceeds of certain of the securitizations’ assets.

At March 31, 2023 and December 31, 2022, we had an outstanding balance of $1.2 billion on CRE debt securitizations, or 68.2% and 66.1%, respectively, of total outstanding borrowings. At March 31, 2023 and December 31, 2022, we had outstanding balances on our term warehouse financing facilities of $311.3 million and $328.3 million, respectively, or 17.2% and 17.6%, respectively, of total outstanding borrowings. At March 31, 2023 and December 31, 2022, we had outstanding borrowings on our senior secured financing facility of $49.9 million and $87.9 million, respectively, or 2.8% and 4.7%, respectively, of total outstanding borrowings. At March 31, 2023 and December 31, 2022, we had $18.3 million and $18.2 million, respectively, of outstanding borrowings on our mortgage payable, or 1.0% and 1.0%, respectively, of total outstanding borrowings. At March 31, 2023, we had two construction loans that have not been drawn upon.

In February 2022, we repurchased $39.8 million par value of our 4.50% convertible senior notes due 2022 (“4.50% Convertible Senior Notes”). In conjunction with the repurchase, we accelerated $460,000 of the convertible note discount, which was recorded as an extinguishment of debt cost, and $114,000 of deferred debt issuance costs, which were recorded in interest expense. In August 2022, the remaining $48.2 million of outstanding notes were paid off upon maturity at par.

In January 2020, we adopted updated accounting guidance that replaced the incurred loss approach with the CECL model for the determination of our allowance for loan losses. We reevaluate our CECL allowance quarterly, incorporating our current expectations of macroeconomic factors considered in the determination of our CECL reserves. At March 31, 2023, the CECL allowance on our CRE loan portfolio was $23.9 million, or 1.2% of our $2.0 billion loan portfolio. At December 31, 2022, the CECL allowance on our CRE loan portfolio was $18.8 million, or 0.9% of our $2.1 billion loan portfolio.

During the three months ended March 31, 2023, we recorded a provision for credit losses primarily attributable to modeled increases in expected general portfolio credit risk and, to a lesser extent, to a general decline in macroeconomic conditions. For the year ended December 31, 2022, we recorded a net provision for credit losses, which at the time, reflected changes in macroeconomic conditions and a specific, full reserve on one mezzanine loan with a par value of $4.7 million, which was delinquent with respect to debt service.

Additionally, the steady decline in our CECL reserves from our highest reserve balance in June 30, 2020 of $61.1 million, or 3.4% of the par balance of our CRE loan portfolio, to our current reserve balance at March 31, 2023 of $23.9 million, or 1.2% of the par balance of our CRE loan portfolio, has been due to the following: the successful resolution of our individually evaluated loans with specific reserves, the overall newer vintage of our CRE loan portfolio (with 11.6% of the portfolio, at March 31, 2023, being originated prior to the fourth quarter of 2020) as well as the increasing percentage allocation of our CRE loan portfolio to multifamily loans over time. Multifamily loans have historically had the lowest credit losses of any asset class for us and as a sample population in the third-party model that we use to support our CECL reserves. Our percentage allocation of our CRE loan portfolio to multifamily has grown from 58.4% at June 30, 2020 to 76.2% at March 31, 2023.

During the three months ended March 31, 2023, we recorded no charge-offs.

We historically used derivative financial instruments, including interest rate swaps, to hedge a portion of the interest rate risk associated with our borrowings. In April 2020, we terminated all interest rate hedges in conjunction with the disposition of our financed commercial mortgage-backed securities (“CMBS”) portfolio. At March 31, 2023 and December 31, 2022, we had unrealized losses in connection with the terminated hedges of $6.2 million and $6.6 million, respectively, which will be amortized into interest expense over the remaining life of the debt. During the three months ended March 31, 2023, we recognized amortization expense on these terminated contracts of $416,000.

(Back to Index)

44


(Back to Index)

 

Common stock book value was $24.51 per share at March 31, 2023, a $0.03 per share decrease from December 31, 2022, primarily resulting from the accretive benefit of our board of directors, or our Board-approved common stock repurchase program, offset by net losses from operations incurred during the quarter.

Impact of Reference Rate Reform

As discussed in the “Overview” section above, at March 31, 2023, all of our CRE whole loans are benchmarked to one-month Term SOFR and our asset-specific borrowings are primarily benchmarked to one-month LIBOR and one-month Term SOFR. In March 2021, the United Kingdom’s Financial Conduct Authority announced that it would cease publication of the one-week and two-month USD LIBOR immediately after December 31, 2021 and cease publication of the remaining tenors immediately after June 30, 2023. In July 2021, the U.S. Federal Reserve, in conjunction with the Alternative Reference Rates Committee, a steering committee comprised of large U.S. financial institutions, has identified SOFR as its preferred alternative rate for LIBOR.

All variable rate loans originated by us beginning January 1, 2022 have been benchmarked to SOFR. Additionally, all of our floating-rate whole loans contain provisions that provide for the transition of the contractual benchmark interest rate to an alternative rate. At March 31, 2023, our loan portfolio had a carrying value of $2.0 billion of floating rate loans, all of which have interest rates tied to SOFR.

In September 2021 and January 2022, the term warehouse financing facilities with JPMorgan Chase Bank, N.A. (“JPMorgan Chase”) and Morgan Stanley Mortgage Capital Holdings LLC (“Morgan Stanley”), respectively, were amended to allow for the transition to alternative rates, including rates tied to SOFR, subject to benchmark transition events. Additionally, during the year ended December 31, 2022, we entered into a loan agreement to finance the acquisition of a student housing complex, which uses SOFR as its benchmark interest rate. At March 31, 2023, we had $1.7 billion of floating rate borrowings, 78.0% or $1.3 billion of which have interest rates tied to LIBOR and 22.0% or $366.1 million of which have interest rates tied to SOFR.

We expect to complete the process of converting our LIBOR-based borrowings to an applicable benchmark interest rate during 2023.

The transition from LIBOR to SOFR or to another alternative rate may result in financial market disruptions and significant increases in benchmark interest rates, resulting in increased financing costs to us, any of which could have an adverse effect on our business, results of operations, financial condition, and the market price of our common stock. Further discussion of the risk related to ongoing reference rate reform is provided in the section entitled “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022.

Results of Operations

Our net loss allocable to common shares for the three months ended March 31, 2023 was $2.4 million or $0.28 per share-basic ($0.28 per share-diluted), as compared to net loss allocable to common shares for the three months ended March 31, 2022 of $2.8 million, or $0.30 per share-basic ($0.30 per share-diluted).

(Back to Index)

45


(Back to Index)

 

Net Interest Income

The following tables analyze the change in interest income and interest expense for the comparative three months ended March 31, 2023 and 2022 by changes in volume and changes in rates. The changes attributable to the combined changes in volume and rate have been allocated proportionately, based on absolute values, to the changes due to volume and changes due to rates (dollars in thousands, except amounts in footnotes):

 

 

 

Three Months Ended March 31, 2023 Compared to Three Months Ended March 31, 2022

 

 

 

 

 

 

 

 

 

Due to Changes in

 

 

 

Net Change

 

 

Percent Change (1)

 

 

Volume

 

 

Rate

 

Increase (decrease) in interest income:

 

 

 

 

 

 

 

 

 

 

 

 

CRE whole loans (2)

 

$

21,946

 

 

 

97

%

 

$

2,075

 

 

$

19,871

 

Legacy CRE loan

 

 

(29

)

 

 

(100

)%

 

 

(29

)

 

 

 

CRE mezzanine loan

 

 

(104

)

 

 

(89

)%

 

 

 

 

 

(104

)

Other

 

 

840

 

 

 

4,421

%

 

 

(5

)

 

 

845

 

Total increase in interest income

 

 

22,653

 

 

 

100

%

 

 

2,041

 

 

 

20,612

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Increase (decrease) in interest expense:

 

 

 

 

 

 

 

 

 

 

 

 

Securitized borrowings: (3)

 

 

 

 

 

 

 

 

 

 

 

 

XAN 2020-RSO8 Senior Notes

 

 

(1,208

)

 

 

(100

)%

 

 

(1,208

)

 

 

 

XAN 2020-RSO9 Senior Notes

 

 

(956

)

 

 

(100

)%

 

 

(956

)

 

 

 

ACR 2021-FL1 Senior Notes

 

 

7,352

 

 

 

231

%

 

 

 

 

 

7,352

 

ACR 2021-FL2 Senior Notes

 

 

6,174

 

 

 

194

%

 

 

 

 

 

6,174

 

Senior secured financing facility (3)

 

 

1,043

 

 

 

203

%

 

 

1,021

 

 

 

22

 

CRE - term warehouse financing facilities (3)

 

 

5,074

 

 

 

490

%

 

 

2,990

 

 

 

2,084

 

4.50% Convertible Senior Notes (3)

 

 

(1,356

)

 

 

(100

)%

 

 

(1,356

)

 

 

 

5.75% Senior Unsecured Notes (3)

 

 

10

 

 

 

0

%

 

 

10

 

 

 

 

12.00% Senior Unsecured Notes (3)

 

 

(178

)

 

 

(100

)%

 

 

(178

)

 

 

 

Unsecured junior subordinated debentures

 

 

576

 

 

 

107

%

 

 

 

 

 

576

 

Hedging

 

 

(63

)

 

 

(14

)%

 

 

(63

)

 

 

 

Total increase in interest expense

 

 

16,468

 

 

 

110

%

 

 

260

 

 

 

16,208

 

Net increase in net interest income

 

$

6,185

 

 

 

 

 

$

1,781

 

 

$

4,404

 

 

(1)
Percent change is calculated as the net change divided by the respective interest income or interest expense for the three months ended March 31, 2022.
(1)
Includes an increase in fee income of $11,000 recognized on our CRE whole loans that was due to changes in volume.
(2)
Includes decreases in amortization expense of $1.1 million, $106,000, $595,000 and $178,000 on our securitized borrowings, CRE - term warehouse financing facilities, 4.50% Convertible Senior Notes and 12.00% senior unsecured notes, respectively, and increases in amortization expense of $30,000 and $10,000 on our senior secured financing facility and 5.75% Senior Unsecured Notes, respectively, that were due to changes in volume.

Net Change in Interest Income for the Comparative three months ended March 31, 2023 and 2022:

Aggregate interest income increased by $22.7 million for the comparative three months ended March 31, 2023 and 2022. We attribute the changes to the following:

CRE whole loans. The increase of $21.9 million for the comparative three months ended March 31, 2023 and 2022 was primarily attributable to an increase in the benchmark rates over the comparative periods, and to a lessor extent, a net increase in the size of the total loan portfolio.

Net Change in Interest Expense for the Comparative three months ended March 31, 2023 and 2022:

Aggregate interest expense increased by $16.5 million for the comparative three months ended March 31, 2023 and 2022. We attribute the changes to the following:

Securitized borrowings. The net increase of $11.4 million for the comparative three months ended March 31, 2023 and 2022, respectively, was primarily attributable to an increase in benchmark rates over the comparative periods. The increase was partially offset by the liquidations of XAN 2020-RSO8 and XAN 2020-RSO9.

(Back to Index)

46


(Back to Index)

 

Senior secured financing facility. The increase of $1.0 million for the comparative three months ended March 31, 2023 and 2022 was primarily attributable to increased utilization of the senior secured financing facility.

CRE - term warehouse financing facilities. The increase of $5.1 million for the comparative three months ended March 31, 2023 and 2022 was attributable to the increased utilization of these facilities as well as an increase in benchmark rates over the comparative periods.

4.50% Convertible Senior Notes. The decrease of $1.4 million for the comparative three months ended March 31, 2023 and 2022 was primarily attributable to the redemption of the remaining $88.0 million of these notes during the year ended December 31, 2022.

Unsecured junior subordinated debentures. The increase of $576,000 for the comparative three months ended March 31, 2023 and 2022 was attributable to an increase in the benchmark interest rate for our unsecured junior subordinated debentures, over the comparative periods.

(Back to Index)

47


(Back to Index)

 

Average Net Yield and Average Cost of Funds:

The following tables present the average net yield and average cost of funds for the three months ended March 31, 2023 and 2022 (dollars in thousands, except amounts in footnotes):

 

 

 

Three Months Ended March 31, 2023

 

 

Three Months Ended March 31, 2022

 

 

 

Average Amortized Cost

 

 

Interest Income (Expense)

 

 

Average Net Yield (Cost of Funds) (1)

 

 

Average Amortized Cost

 

 

Interest Income (Expense)

 

 

Average Net Yield (Cost of Funds) (1)

 

Interest-earning assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CRE whole loans, floating-rate (2)

 

$

2,011,599

 

 

$

44,457

 

 

 

8.96

%

 

$

1,883,227

 

 

$

22,511

 

 

 

4.85

%

Legacy CRE loan

 

 

 

 

 

 

 

 

%

 

 

640

 

 

 

29

 

 

 

18.08

%

CRE mezzanine loan

 

 

4,700

 

 

 

13

 

 

 

1.09

%

 

 

4,700

 

 

 

117

 

 

 

9.96

%

Other

 

 

111,119

 

 

 

859

 

 

 

3.14

%

 

 

136,673

 

 

 

19

 

 

 

0.06

%

Total interest income/average net yield

 

 

2,127,418

 

 

 

45,329

 

 

 

8.64

%

 

 

2,025,240

 

 

 

22,676

 

 

 

4.54

%

Interest-bearing liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Collateralized by:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CRE whole loans (3)

 

 

1,621,061

 

 

 

(27,556

)

 

 

(6.89

)%

 

 

1,481,354

 

 

 

(10,077

)

 

 

(2.67

)%

General corporate debt:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unsecured junior subordinated debentures

 

 

51,548

 

 

 

(1,115

)

 

 

(8.65

)%

 

 

51,548

 

 

 

(539

)

 

 

(4.18

)%

4.50% Convertible Senior Notes (4)

 

 

 

 

 

 

 

 

%

 

 

67,076

 

 

 

(1,356

)

 

 

(8.09

)%

5.75% Senior Unsecured Notes (5)

 

 

147,585

 

 

 

(2,311

)

 

 

(6.35

)%

 

 

146,986

 

 

 

(2,301

)

 

 

(6.35

)%

12.00% Senior Unsecured Notes (6)(7)

 

 

 

 

 

 

 

 

%

 

 

 

 

 

(178

)

 

 

%

Hedging (8)

 

 

 

 

 

(393

)

 

 

%

 

 

 

 

 

(456

)

 

 

%

Total interest expense/average cost of funds

 

 

1,820,194

 

 

 

(31,375

)

 

 

(6.90

)%

 

 

1,746,964

 

 

 

(14,907

)

 

 

(3.23

)%

Total net interest income

 

 

 

 

$

13,954

 

 

 

 

 

 

 

 

$

7,769

 

 

 

 

 

(1)
Average net yield includes net amortization/accretion and fee income and is computed based on average amortized cost.
(2)
Includes fee income of $2.1 million on our floating-rate CRE whole loans for both the three months ended March 31, 2023 and 2022.
(3)
Includes amortization expense of $1.3 million and $2.5 million for the three months ended March 31, 2023 and 2022, respectively, on our interest-bearing liabilities collateralized by CRE whole loans.
(4)
Includes amortization expense of $595,000 for the three months ended March 31, 2022.
(5)
Includes amortization expense of $155,000 and $145,000 for the three months ended March 31, 2023 and 2022, respectively.
(6)
Includes amortization expense of $178,000 for the three months ended March 31, 2022.
(7)
The outstanding par balance of our 12.00% Senior Unsecured Notes was redeemed in full in August 2021. At any time and from time to time prior to July 31, 2022, we were permitted to elect to issue up to $75.0 million of principal of additional notes. The interest expense incurred during the three months ended March 31, 2022 comprised amortization of deferred debt issuance costs on the remaining availability.
(8)
Includes net amortization expense of $393,000 and $456,000 for the three months ended March 31, 2023 and 2022, respectively, on 20 and 22 terminated interest rate swap agreements, respectively, that were in net loss positions at the time of termination. The remaining net losses, reported in accumulated other comprehensive loss on the consolidated balance sheets, will be accreted over the remaining life of the debt.

Real Estate Income and Other Revenue

The following table sets forth information relating to our real estate income and other revenue for the periods presented (dollars in thousands):

 

 

 

For the Three Months Ended March 31,

 

 

 

 

 

 

 

 

 

2023

 

 

2022

 

 

Dollar Change

 

 

Percent Change

 

Real estate income and other revenue:

 

 

 

 

 

 

 

 

 

 

 

 

Real estate income

 

$

7,071

 

 

$

3,138

 

 

$

3,933

 

 

 

125

%

Other revenue

 

 

33

 

 

 

16

 

 

 

17

 

 

 

106

%

Total

 

$

7,104

 

 

$

3,154

 

 

$

3,950

 

 

 

125

%

 

 

Aggregate real estate income and other revenue increased by $4.0 million for the comparative three months ended March 31, 2023 and 2022. We primarily attribute the changes to the acquisition of two revenue-generating properties in the second quarter of 2022. Additionally, real estate income at our hotel property acquired in 2020 benefited from increased personal and business travel resulting from lifted COVID-19 restrictions that occurred late in the spring of 2022. In the third quarter 2022, we received the deed-in-lieu of foreclosure on a hotel property that also contributed to the increase in real estate income for two of the three months ended March 31, 2023 prior to being sold.

(Back to Index)

48


(Back to Index)

 

Operating Expenses

The following tables set forth information relating to our operating expenses for the periods presented (dollars in thousands):

 

 

 

For the Three Months Ended March 31,

 

 

 

 

 

 

 

 

 

2023

 

 

2022

 

 

Dollar Change

 

 

Percent Change

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

General and administrative

 

$

2,979

 

 

$

3,457

 

 

$

(478

)

 

 

(14

)%

Real estate expenses

 

 

8,860

 

 

 

4,794

 

 

 

4,066

 

 

 

85

%

Management fees - related party

 

 

1,773

 

 

 

1,682

 

 

 

91

 

 

 

5

%

Equity compensation - related party

 

 

894

 

 

 

744

 

 

 

150

 

 

 

20

%

Corporate depreciation and amortization

 

 

23

 

 

 

22

 

 

 

1

 

 

 

5

%

Provision for (reversal of) credit losses, net

 

 

5,096

 

 

 

(1,802

)

 

 

6,898

 

 

 

383

%

Total

 

$

19,625

 

 

$

8,897

 

 

$

10,728

 

 

 

121

%

 

Aggregate operating expenses increased by $10.7 million for the comparative three months ended March 31, 2023 and 2022. We attribute the changes to the following:

General and administrative. General and administrative expenses decreased by $478,000 for the comparative three months ended March 31, 2023 and 2022. The following table summarizes the information relating to our general and administrative expenses for the periods presented (dollars in thousands):

 

 

 

For the Three Months Ended March 31,

 

 

 

 

 

 

 

 

 

2023

 

 

2022

 

 

Dollar Change

 

 

Percent Change

 

General and administrative

 

 

 

 

 

 

 

 

 

 

 

 

Professional services

 

$

1,520

 

 

$

1,892

 

 

$

(372

)

 

 

(20

)%

Wages and benefits

 

 

391

 

 

 

360

 

 

 

31

 

 

 

9

%

D&O insurance

 

 

319

 

 

 

356

 

 

 

(37

)

 

 

(10

)%

Operating expenses

 

 

268

 

 

 

159

 

 

 

109

 

 

 

69

%

Director fees

 

 

206

 

 

 

337

 

 

 

(131

)

 

 

(39

)%

Dues and subscriptions

 

 

203

 

 

 

205

 

 

 

(2

)

 

 

(1

)%

Tax penalties, interest & franchise tax

 

 

66

 

 

 

139

 

 

 

(73

)

 

 

(53

)%

Travel

 

 

6

 

 

 

9

 

 

 

(3

)

 

 

(33

)%

Total

 

$

2,979

 

 

$

3,457

 

 

$

(478

)

 

 

(14

)%

 

The decrease in general and administrative expense for the comparative three months ended March 31, 2023 and 2022 was primarily attributable to a decrease in professional services in connection with (i) legal expenses incurred during the three months ended March 31, 2022 pertaining to the liquidation of 2020-RSO8 and 2020-RSO9 compounded by reimbursement from a borrower for legal costs during the three months ended March 31, 2023 and (ii) the timing of CRE valuations for the year end audit.

Real estate expenses. The increase of $4.1 million for the comparative three months ended March 31, 2023 and 2022 was primarily attributable to the acquisition of two properties, a hotel and a student housing complex in April 2022, as well as increased operating expenses incurred on a hotel property acquired in November 2020 due to growth in its operations in the current year and incremental operating expenses incurred on a hotel property on which we received the deed-in-lieu of foreclosure in July 2022. The increase for the comparative three months was partially offset by the sale of an office property in September 2022, as well as a decrease in depreciation expense on one office property acquired in October 2021 over the comparative periods.

Provision for (reversal of) credit losses, net. The provision for credit losses of $5.1 million for the three months ended March 31, 2023 was primarily attributable to modeled increases in expected general portfolio credit risk as well as a general decline in macroeconomic conditions. The reversal of credit losses of $1.8 million for the three months ended March 31, 2022 was attributable to overall, general improvements in expected macroeconomic conditions and improvements in property-level operations on loan collateral.

(Back to Index)

49


(Back to Index)

 

Other Income (Expense)

The following table sets forth information relating to our other income (expense) incurred for the periods presented (dollars in thousands):

 

 

 

For the Three Months Ended March 31,

 

 

 

 

 

 

 

 

 

2023

 

 

2022

 

 

Dollar Change

 

 

Percent Change

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

Loss on extinguishment of debt

 

$

 

 

$

(460

)

 

$

460

 

 

 

(100

)%

Gain on sale of real estate

 

 

745

 

 

 

 

 

 

745

 

 

 

100

%

Other income

 

 

110

 

 

 

798

 

 

 

(688

)

 

 

(86

)%

Total

 

$

855

 

 

$

338

 

 

$

517

 

 

 

153

%

 

Aggregate other income increased $517,000 for the comparative three months ended March 31, 2023 and 2022. We attribute the changes to the following:

Loss on extinguishment of debt. There were no losses on extinguishment of debt in the three months ended March 31, 2023. The loss of $460,000 for the three months ended March 31, 2022 was attributable to non-cash losses in connection with the ratable acceleration of the 4.50% Convertible Senior Notes' market discount due to the partial redemption of our 4.50% Convertible Senior Notes in February 2022.

Gain on sale of real estate. The increase of $745,000 for the comparative three months ended March 31, 2023 and 2022 was attributed to the sale of a hotel property in the Northeast region in February 2023 that generated $745,000 of non-recurring gains.

Other Income. The decrease of $688,000 during the comparative three months ended March 31, 2023 and 2022, was primarily attributable to a loan recovery received on a middle market loan that was previously charged off during the three months ended March 31, 2022. During the three months ended March 31, 2023, no loan recoveries occurred.

(Back to Index)

50


(Back to Index)

 

Financial Condition

Summary

Our total assets were $2.3 billion and $2.4 billion at March 31, 2023 and December 31, 2022, respectively.

Investment Portfolio

The tables below summarize the amortized cost and net carrying amount of our investment portfolio, classified by asset type, at March 31, 2023 and December 31, 2022 as follows (dollars in thousands, except amounts in footnotes):

 

At March 31, 2023

 

Amortized Cost

 

 

Net Carrying Amount (1)

 

 

Percent of Portfolio

 

 

Weighted Average Coupon

Loans held for investment:

 

 

 

 

 

 

 

 

 

 

 

CRE whole loans, floating-rate

 

$

1,990,090

 

 

$

1,970,891

 

 

 

93.55

%

 

8.62%

CRE mezzanine loan

 

 

4,700

 

 

 

 

 

 

0.00

%

 

10.00%

 

 

 

1,994,790

 

 

 

1,970,891

 

 

 

93.55

%

 

 

Other investments:

 

 

 

 

 

 

 

 

 

 

 

Investments in unconsolidated entities

 

 

1,548

 

 

 

1,548

 

 

 

0.07

%

 

N/A (4)

Investments in real estate (2)

 

 

97,205

 

 

 

97,205

 

 

 

4.61

%

 

N/A (4)

Property held for sale (3)

 

 

37,352

 

 

 

37,352

 

 

 

1.77

%

 

N/A (4)

 

 

 

136,105

 

 

 

136,105

 

 

 

6.45

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total investment portfolio

 

$

2,130,895

 

 

$

2,106,996

 

 

 

100.00

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At December 31, 2022

 

Amortized Cost

 

 

Net Carrying Amount (1)

 

 

Percent of Portfolio

 

 

Weighted Average Coupon

Loans held for investment:

 

 

 

 

 

 

 

 

 

 

 

CRE whole loans, floating-rate

 

$

2,052,890

 

 

$

2,038,787

 

 

 

93.56

%

 

7.99%

CRE mezzanine loan

 

 

4,700

 

 

 

 

 

 

0.00

%

 

10.00%

 

 

 

2,057,590

 

 

 

2,038,787

 

 

 

93.56

%

 

 

Other investments:

 

 

 

 

 

 

 

 

 

 

 

Investments in unconsolidated entities

 

 

1,548

 

 

 

1,548

 

 

 

0.07

%

 

N/A (4)

Investments in real estate (2)

 

 

88,132

 

 

 

88,132

 

 

 

4.04

%

 

N/A (4)

Property held for sale (3)

 

 

50,744

 

 

 

50,744

 

 

 

2.33

%

 

N/A (4)

 

 

 

140,424

 

 

 

140,424

 

 

 

6.44

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total investment portfolio

 

$

2,198,014

 

 

$

2,179,211

 

 

 

100.00

%

 

 

 

(1)
Net carrying amount includes an allowance for credit losses of $23.9 million and $18.8 million at March 31, 2023 and December 31, 2022, respectively.
(2)
Includes real estate-related right of use assets of $19.4 million and $19.5 million, mortgage payable of $18.3 million and $18.2 million, intangible assets of $8.6 million and $8.9 million, lease liabilities of $43.0 million and $42.9 million and other liabilities of $55,000 and $64,000 at March 31, 2023 and December 31, 2022, respectively.
(3)
Includes property held for sale-related liabilities of $3.0 million at both March 31, 2023 and December 31, 2022.
(4)
There are no stated rates associated with these investments.

CRE loans. During the three months ended March 31, 2023, we originated a $16.0 million floating-rate CRE whole loan commitment (of which $1.2 million was an unfunded loan commitment), funded $14.9 million of previously unfunded loan commitments and received $94.1 million in proceeds from loan payoffs and paydowns.

(Back to Index)

51


(Back to Index)

 

The following is a summary of our loans (dollars in thousands, except amounts in footnotes):

 

Description

 

Quantity

 

Principal

 

 

Unamortized (Discount) Premium, net (1)

 

 

Amortized Cost

 

 

Allowance for Credit Losses

 

 

Carrying Value

 

 

Contractual Interest Rates (2)

 

Maturity Dates (3)(4)

At March 31, 2023:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Whole loans (5)(6)

 

78

 

$

2,001,105

 

 

$

(11,015

)

 

$

1,990,090

 

 

$

(19,199

)

 

$

1,970,891

 

 

1M BR plus 2.86% to 1M BR plus 8.61%

 

April 2023 to July 2026

Mezzanine loan (5)

 

1

 

 

4,700

 

 

 

 

 

 

4,700

 

 

 

(4,700

)

 

 

 

 

10.00%

 

June 2028

Total

 

 

 

$

2,005,805

 

 

$

(11,015

)

 

$

1,994,790

 

 

$

(23,899

)

 

$

1,970,891

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At December 31, 2022:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Whole loans (5)(6)

 

81

 

$

2,065,504

 

 

$

(12,614

)

 

$

2,052,890

 

 

$

(14,103

)

 

$

2,038,787

 

 

1M BR plus 2.85% to 1M BR plus 8.50%

 

January 2023 to July 2026

Mezzanine loan (5)

 

1

 

 

4,700

 

 

 

 

 

 

4,700

 

 

 

(4,700

)

 

 

 

 

10.00%

 

June 2028

Total

 

 

 

$

2,070,204

 

 

$

(12,614

)

 

$

2,057,590

 

 

$

(18,803

)

 

$

2,038,787

 

 

 

 

 

 

(1)
Amounts include unamortized loan origination fees of $10.7 million and $12.3 million and deferred amendment fees of $267,000 and $308,000 at March 31, 2023 and December 31, 2022, respectively.
(2)
Benchmark rates ("BR") comprise one-month LIBOR or one-month Term SOFR. At March 31, 2023, all of our whole loans used one-month SOFR. Weighted-average one-month benchmark rates were 4.74% and 4.21% at March 31, 2023 and December 31, 2022, respectively. Additionally, weighted-average benchmark rate floors were 0.66% and 0.68% at March 31, 2023 and December 31, 2022, respectively.
(3)
Maturity dates exclude contractual extension options, subject to the satisfaction of certain terms that may be available to the borrowers.
(4)
Maturity dates exclude three whole loans, with amortized costs of $51.0 million and $51.6 million, in maturity default at March 31, 2023 and December 31, 2022, respectively.
(5)
Substantially all loans are pledged as collateral under various borrowings at March 31, 2023 and December 31, 2022.
(6)
CRE whole loans had $143.6 million and $158.2 million in unfunded loan commitments at March 31, 2023 and December 31, 2022, respectively. These unfunded loan commitments are advanced as the borrowers formally request additional funding and meet certain benchmarks, as permitted under the loan agreement, and any necessary approvals have been obtained.

At March 31, 2023, 23.2%, 23.1% and 13.9% of our CRE loan portfolio was concentrated in the Southwest, Southeast and Mountain regions, respectively, based on carrying value, as defined by the NCREIF. At December 31, 2022, 23.2%, 21.5% and 16.2% of our CRE loan portfolio was concentrated in the Southwest, Southeast and Mountain regions, respectively, based on carrying value. At March 31, 2023 and December 31, 2022, no single loan or investment represented more than 10% of our total assets and no single investment group generated over 10% of our revenue.

Investments in unconsolidated entities. Our investments in unconsolidated entities at March 31, 2023 and December 31, 2022 comprised a 100% interest in the common shares of Resource Capital Trust I (“RCT I”) and RCC Trust II (“RCT II”), with a value of $1.5 million in the aggregate, or 3.0% of each trust. We record our investments in RCT I’s and RCT II’s common shares as investments in unconsolidated entities using the cost method, recording dividend income when declared by RCT I and RCT II.

We recorded dividends from our investments in RCT I’s and RCT II’s common shares, reported in other revenue on the consolidated statement of operations, of $33,000 during the three months ended March 31, 2023. During the three months ended March 31, 2022, we recorded dividends of $16,000.

Investments in real estate and property held for sale. At March 31, 2023, we held investments in five real estate properties, four of which are included in investments in real estate and one of which is included in properties held for sale on the consolidated balance sheets.

In February 2023, we sold a hotel property in the Northeast region that we previously designated as a property held for sale. The hotel property sold for $15.1 million with selling costs of $845,000, resulting in a gain of $745,000.

(Back to Index)

52


(Back to Index)

 

The following table summarizes the book value of our investments in real estate and related intangible assets at March 31, 2023 and December 31, 2022 (in thousands, except amounts in the footnotes):

 

 

 

March 31, 2023

 

 

December 31, 2022

 

 

 

Cost Basis

 

 

Accumulated Depreciation & Amortization

 

 

Carrying Value

 

 

Cost Basis

 

 

Accumulated Depreciation & Amortization

 

 

Carrying Value

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investments in real estate, equity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investments in real estate (1)

 

$

133,522

 

 

$

(2,951

)

 

$

130,571

 

 

$

123,219

 

 

$

(2,251

)

 

$

120,968

 

Right of use assets (2)(3)

 

 

19,664

 

 

 

(273

)

 

 

19,391

 

 

 

19,664

 

 

 

(205

)

 

 

19,459

 

Intangible assets (4)

 

 

11,474

 

 

 

(2,846

)

 

 

8,628

 

 

 

11,474

 

 

 

(2,594

)

 

 

8,880

 

Subtotal

 

 

164,660

 

 

 

(6,070

)

 

 

158,590

 

 

 

154,357

 

 

 

(5,050

)

 

 

149,307

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investments in real estate from lending activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Properties held for sale (5)

 

 

40,377

 

 

 

 

 

 

40,377

 

 

 

53,769

 

 

 

 

 

 

53,769

 

Total

 

 

205,037

 

 

 

(6,070

)

 

 

198,967

 

 

 

208,126

 

 

 

(5,050

)

 

 

203,076

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investments in real estate, equity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage payable

 

 

18,089

 

 

 

207

 

 

 

18,296

 

 

 

18,089

 

 

 

155

 

 

 

18,244

 

Other liabilities

 

 

247

 

 

 

(192

)

 

 

55

 

 

 

247

 

 

 

(183

)

 

 

64

 

Lease liabilities (3)(6)

 

 

43,260

 

 

 

(226

)

 

 

43,034

 

 

 

43,260

 

 

 

(393

)

 

 

42,867

 

Subtotal (7)

 

 

61,596

 

 

 

(211

)

 

 

61,385

 

 

 

61,596

 

 

 

(421

)

 

 

61,175

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investments in real estate from lending activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities held for sale

 

 

3,025

 

 

 

 

 

 

3,025

 

 

 

3,025

 

 

 

 

 

 

3,025

 

Total

 

 

64,621

 

 

 

(211

)

 

 

64,410

 

 

 

64,621

 

 

 

(421

)

 

 

64,200

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total net investments in real estate and properties held for sale (8)

 

$

140,416

 

 

 

 

 

$

134,557

 

 

$

143,505

 

 

 

 

 

$

138,876

 

 

(1)
Includes $38.4 million of land, which is not depreciable, at March 31, 2023 and December 31, 2022, respectively.
(2)
Primarily comprises a $19.0 million right of use asset, associated with an acquired ground lease of $42.6 million accounted for as an operating lease at March 31, 2023 and December 31, 2022. Amortization is booked to real estate expenses on the consolidated statements of operations.
(3)
Refer to Note 8 in the Notes to the Consolidated Financial Statements for additional information on our remaining operating leases.
(4)
Primarily comprises a franchise intangible of $5.1 million and $5.3 million, a management contract of $3.1 million and a customer list of $357,000 and $427,000 at March 31, 2023 and December 31, 2022, respectively.
(5)
At December 31, 2022, properties held for sale included two properties originally acquired in November 2020 and July 2022. At March 31, 2023, the property acquired in November 2020 was in property held for sale.
(6)
Primarily comprises a $42.6 million ground lease at a hotel property with a remaining term of 93 years. Lease expenses for the three months ended March 31, 2023 were $661,000.
(7)
Excludes $2.2 million of deferred debt issuance costs on construction loans that can be drawn upon subsequent to March 31, 2023.
(8)
Excludes items of working capital, either acquired or assumed.

(Back to Index)

53


(Back to Index)

 

Financing Receivables

The following tables show the activity in the allowance for credit losses for the three months ended March 31, 2023 and year ended December 31, 2022 (in thousands):

 

 

 

Three Months Ended March 31, 2023

 

 

Year Ended December 31, 2022

 

Allowance for credit losses at beginning of period

 

$

18,803

 

 

$

8,805

 

Provision for credit losses

 

 

5,096

 

 

 

12,295

 

Charge offs

 

 

 

 

 

(2,297

)

Allowance for credit losses at end of period

 

$

23,899

 

 

$

18,803

 

 

During the three months ended March 31, 2023, we recorded provisions for expected credit losses of $5.1 million, primarily attributable to modeled increases in expected general portfolio credit risk and, to a lesser extent, a general decline in macroeconomic conditions.

At March 31, 2023 and December 31, 2022, we individually evaluated the following loans:

One office mezzanine loan in the Northeast region with a principal balance of $4.7 million at both March 31, 2023 and December 31, 2022. We fully reserved this loan in the fourth quarter of 2022, and it continues to be fully reserved at March 31, 2023. The loan entered payment default in February 2023 and has been placed on nonaccrual status.
One retail loan in the Northeast region, with a principal balance of $8.0 million at both March 31, 2023 and December 31, 2022, for which foreclosure was determined to be probable. The loan was modified in February 2021 to extend the loan's maturity to December 2021 and has since entered into payment default and has been put on nonaccrual status. The loan had an as-is appraised value in excess of its principal and interest balances, and, as such, had no allowance for current expected credit losses (“CECL”) at March 31, 2023 and December 31, 2022, respectively.
One office loan in the Southwest region, with a principal balance of $20.1 million and $20.7 million at March 31, 2023 and December 31, 2022, respectively, for which foreclosure was determined to be probable. The loan had an initial maturity of March 2022, was modified three times to extend its maturity to June 2022 and has since entered into payment default and has been put on nonaccrual status. However, in exchange for payments, comprising principal paydowns, interest payments and the reimbursement of certain legal fees, received between October 2022 and April 2023, we have agreed to temporarily defer our right to foreclose on the property until July 2023. Additionally, at both March 31, 2023 and December 31, 2022, this loan had an as-is appraised value in excess of its principal and interest balances, and, as such, had no CECL allowance.

Credit quality indicators

Commercial Real Estate Loans

CRE loans are collateralized by a diversified mix of real estate properties and are assessed for credit quality based on the collective evaluation of several factors, including but not limited to: collateral performance relative to underwritten plan, time since origination, current implied and/or re-underwritten loan-to-collateral value (“LTV”) ratios, loan structure and exit plan. Depending on the loan’s performance against these various factors, loans are rated on a scale from 1 to 5, with loans rated 1 representing loans with the highest credit quality and loans rated 5 representing loans with the lowest credit quality. Loans are rated a 2 at origination. The factors evaluated provide general criteria to monitor credit migration in our loan portfolio; as such, a loan’s rating may improve or worsen, depending on new information received.

(Back to Index)

54


(Back to Index)

 

The criteria set forth below should be used as general guidelines and, therefore, not every loan will have all of the characteristics described in each category below.

 

Risk Rating

Risk Characteristics

1

• Property performance has surpassed underwritten expectations.

• Occupancy is stabilized, the property has had a history of consistently high occupancy, and the property has a diverse and high quality tenant mix.

2

• Property performance is consistent with underwritten expectations and covenants and performance criteria are being met or exceeded.

• Occupancy is stabilized, near stabilized or is on track with underwriting.

3

• Property performance lags behind underwritten expectations.

• Occupancy is not stabilized and the property has some tenancy rollover.

4

• Property performance significantly lags behind underwritten expectations. Performance criteria and loan covenants have required occasional waivers.

• Occupancy is not stabilized and the property has a large amount of tenancy rollover.

5

• Property performance is significantly worse than underwritten expectations. The loan is not in compliance with loan covenants and performance criteria and may be in default. Expected sale proceeds would not be sufficient to pay off the loan at maturity.

• The property has a material vacancy rate and significant rollover of remaining tenants.

• An updated appraisal is required upon designation and updated on an as-needed basis.

All CRE loans are evaluated for any credit deterioration by debt asset management and certain finance personnel on at least a quarterly basis. Mezzanine loans may experience greater credit risks due to their nature as subordinated investments.

For the purpose of calculating the quarterly provision for credit losses under CECL, we pool CRE loans based on the underlying collateral property type and utilize a probability of default and loss given default methodology for approximately one year after which we immediately revert to a historical mean loss ratio.

Credit risk profiles of CRE loans at amortized cost were as follows (in thousands, except amounts in the footnotes):

 

 

 

Rating 1

 

 

Rating 2

 

 

Rating 3

 

 

Rating 4

 

 

Rating 5

 

 

Total (1)

 

At March 31, 2023:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Whole loans, floating-rate

 

$

 

 

$

1,532,268

 

 

 

362,903

 

 

$

43,958

 

 

$

50,961

 

 

$

1,990,090

 

Mezzanine loan

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4,700

 

 

 

4,700

 

Total

 

$

 

 

$

1,532,268

 

 

$

362,903

 

 

$

43,958

 

 

$

55,661

 

 

$

1,994,790

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At December 31, 2022:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Whole loans, floating-rate

 

$

 

 

$

1,635,376

 

 

$

309,491

 

 

$

85,226

 

 

$

22,797

 

 

$

2,052,890

 

Mezzanine loan

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4,700

 

 

 

4,700

 

Total

 

$

 

 

$

1,635,376

 

 

$

309,491

 

 

$

85,226

 

 

$

27,497

 

 

$

2,057,590

 

 

(1)
The total amortized cost of CRE loans excluded accrued interest receivable of $12.5 million and $11.9 million at March 31, 2023 and December 31, 2022, respectively.

(Back to Index)

55


(Back to Index)

 

Credit risk profiles of CRE loans by origination year at amortized cost were as follows (in thousands, except amounts in footnotes):

 

 

 

2023

 

 

2022

 

 

2021

 

 

2020

 

 

2019

 

 

Prior

 

 

Total (1)

 

At March 31, 2023:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Whole loans, floating-rate: (2)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rating 2

 

$

14,759

 

 

$

480,017

 

 

$

944,121

 

 

$

52,722

 

 

$

26,949

 

 

$

13,700

 

 

$

1,532,268

 

Rating 3

 

 

 

 

 

52,619

 

 

 

203,273

 

 

 

34,387

 

 

 

27,887

 

 

 

44,737

 

 

 

362,903

 

Rating 4

 

 

 

 

 

 

 

 

43,958

 

 

 

 

 

 

 

 

 

 

 

 

43,958

 

Rating 5

 

 

 

 

 

 

 

 

 

 

 

 

 

 

42,936

 

 

 

8,025

 

 

 

50,961

 

Total whole loans, floating-rate

 

 

14,759

 

 

 

532,636

 

 

 

1,191,352

 

 

 

87,109

 

 

 

97,772

 

 

 

66,462

 

 

 

1,990,090

 

Mezzanine loan (rating 5)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4,700

 

 

 

4,700

 

Total

 

$

14,759

 

 

$

532,636

 

 

$

1,191,352

 

 

$

87,109

 

 

$

97,772

 

 

$

71,162

 

 

$

1,994,790

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current Period Gross Write-Offs (3)

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2022

 

 

2021

 

 

2020

 

 

2019

 

 

2018

 

 

Prior

 

 

Total (1)

 

At December 31, 2022:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Whole loans, floating-rate: (2)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rating 2

 

$

526,606

 

 

$

1,003,060

 

 

$

64,944

 

 

$

26,977

 

 

$

13,789

 

 

$

 

 

$

1,635,376

 

Rating 3

 

 

 

 

 

192,490

 

 

 

44,657

 

 

 

27,881

 

 

 

44,463

 

 

 

 

 

 

309,491

 

Rating 4

 

 

 

 

 

 

 

 

 

 

 

20,742

 

 

 

64,484

 

 

 

 

 

 

85,226

 

Rating 5

 

 

 

 

 

 

 

 

 

 

 

22,797

 

 

 

 

 

 

 

 

 

22,797

 

Total whole loans, floating-rate

 

 

526,606

 

 

 

1,195,550

 

 

 

109,601

 

 

 

98,397

 

 

 

122,736

 

 

 

 

 

 

2,052,890

 

Mezzanine loan (rating 5)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4,700

 

 

 

 

 

 

4,700

 

Total

 

$

526,606

 

 

$

1,195,550

 

 

$

109,601

 

 

$

98,397

 

 

$

127,436

 

 

$

 

 

$

2,057,590

 

 

(1)
The total amortized cost of CRE loans excluded accrued interest receivable of $12.5 million and $11.9 million at March 31, 2023 and December 31, 2022, respectively.
(2)
Acquired CRE whole loans are grouped within each loan’s year of origination.
(3)
There were no charge-offs during the three months ended March 31, 2023.

At both March 31, 2023 and December 31, 2022, we had one additional mezzanine loan included in other assets held for sale that had no carrying value.

(Back to Index)

56


(Back to Index)

 

Loan Portfolio Aging Analysis

The following table presents the CRE loan portfolio aging analysis as of the dates indicated for CRE loans at amortized cost (in thousands, except amounts in footnotes):

 

 

 

30-59 Days

 

 

60-89 Days

 

 

Greater than 90
Days
(1)

 

 

Total Past Due

 

 

Current (2)

 

 

Total Loans Receivable (3)

 

 

Total Loans > 90 Days and Accruing

 

At March 31, 2023:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Whole loans, floating-rate

 

$

 

 

$

 

 

$

50,961

 

 

$

50,961

 

 

$

1,939,129

 

 

$

1,990,090

 

 

$

 

Mezzanine loan (4)

 

 

4,700

 

 

 

 

 

 

 

 

 

4,700

 

 

 

 

 

 

4,700

 

 

 

 

Total

 

$

4,700

 

 

$

 

 

$

50,961

 

 

$

55,661

 

 

$

1,939,129

 

 

$

1,994,790

 

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At December 31, 2022:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Whole loans, floating-rate

 

$

 

 

$

 

 

$

28,767

 

 

$

28,767

 

 

$

2,024,123

 

 

$

2,052,890

 

 

$

 

Mezzanine loan (4)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4,700

 

 

 

4,700

 

 

 

 

Total

 

$

 

 

$

 

 

$

28,767

 

 

$

28,767

 

 

$

2,028,823

 

 

$

2,057,590

 

 

$

 

 

(1)
During the three months ended March 31, 2023 and 2022,, we recognized interest income of $1.1 million and $641,000, respectively, on three loans with a principal payment past due greater than 90 days at March 31, 2023.
(2)
Includes one whole loan with an amortized cost of $22.8 million, in maturity default at December 31, 2022.
(3)
The total amortized cost of CRE loans excluded accrued interest receivable of $12.5 million and $11.9 million at March 31, 2023 and December 31, 2022, respectively.
(4)
Fully reserved at both March 31, 2023 and December 31, 2022.

At March 31, 2023, we had three CRE whole loans, with total amortized costs of $51.0 million, and one mezzanine loan, with a total amortized cost of $4.7 million, in payment default. One CRE whole loan was made current with respect to debt service in April 2023. At December 31, 2022, we had three CRE whole loans, with total amortized costs of $51.6 million, in payment default.

Modifications

During the three months ended March 31, 2023, we did not enter into any loan modifications for borrowers that are experiencing financial difficulty.

During the three months ended March 31, 2022, we entered into one agreement that extended one CRE whole loan, with a total amortized cost of $21.8 million, which represented 1.1% of the total amortized cost of the portfolio.

Restricted Cash

At March 31, 2023, we had restricted cash of $33.9 million, which consisted of $33.4 million of restricted cash held within our five consolidated securitization entities and $525,000 held in escrow for deposits or tax payments at our real estate properties. At December 31, 2022, we had restricted cash of $38.6 million, which consisted of $38.2 million held within our five consolidated securitization entities and $400,000 held in escrow for deposits or tax payments at our real estate properties or pledged with minimum reserve balance requirements. The decrease of $4.7 million was primarily attributable to net loan purchase activity within two of our consolidated securitization entities.

Accrued Interest Receivable

The following table summarizes our accrued interest receivable at March 31, 2023 and December 31, 2022 (in thousands):

 

 

 

March 31, 2023

 

 

December 31, 2022

 

 

Net Change

 

Accrued interest receivable from loans

 

$

12,462

 

 

$

11,936

 

 

$

526

 

Accrued interest receivable from promissory note, escrow, sweep and reserve accounts

 

 

108

 

 

 

33

 

 

 

75

 

Total

 

$

12,570

 

 

$

11,969

 

 

$

601

 

 

(Back to Index)

57


(Back to Index)

 

 

The increase of $601,000 in accrued interest receivable was primarily attributable to rising benchmark rates.

Other Assets

The following table summarizes our other assets at March 31, 2023 and December 31, 2022 (in thousands):

 

 

 

March 31, 2023

 

 

December 31, 2022

 

 

Net Change

 

Tax receivables and prepaid taxes

 

$

202

 

 

$

224

 

 

$

(22

)

Other receivables

 

 

906

 

 

 

1,086

 

 

 

(180

)

Other prepaid expenses

 

 

2,200

 

 

 

2,181

 

 

 

19

 

Fixed assets - non real estate

 

 

350

 

 

 

326

 

 

 

24

 

Other assets, miscellaneous

 

 

656

 

 

 

547

 

 

 

109

 

Total

 

$

4,314

 

 

$

4,364

 

 

$

(50

)

 

The decrease of $50,000 in other assets was primarily attributable to receivables held at our real estate properties and miscellaneous receivables from our real estate properties acquired in 2022 offset by the purchase of other assets at our real estate properties.

Deferred Tax Assets

At March 31, 2023 and December 31, 2022, our net deferred tax asset was zero, resulting from a full valuation allowance of $20.8 million and $21.2 million, respectively, on our deferred tax asset as we believed it was more likely than not that some or all of the deferred tax assets would not be realized. We will continue to evaluate our ability to realize the tax benefits associated with deferred tax assets by analyzing forecasted taxable income using both historical and projected future operating results, the reversal of existing temporary differences, taxable income in prior carry back years (if permitted) and the availability of tax planning strategies.

Derivative Instruments

Historically, we sought to mitigate the potential impact on net income (loss) of adverse fluctuations in interest rates incurred on our borrowings by entering into hedging agreements. We classified our interest rate hedges as cash flow hedges, which are hedges that eliminate the risk of changes in the cash flows of a financial asset or liability.

We terminated interest rate swap positions associated with our prior financed CMBS portfolio in April 2020. At termination, we realized a loss of $11.8 million. At March 31, 2023 and December 31, 2022, we had a loss of $6.2 million and $6.6 million, respectively, recorded in accumulated other comprehensive loss, which will be amortized into earnings over the remaining life of the debt. During the three months ended March 31, 2023, we recorded amortization expense of $416,000 reported in interest expense on the consolidated statements of operations. During the three months ended March 31, 2022, we recorded amortization expense of $479,000, reported in interest expense on the consolidated statements of operations.

At March 31, 2023 and December 31, 2022, we had unrealized gains of $233,000 and $256,000, respectively, attributable to two terminated interest rate swaps, in accumulated other comprehensive loss on the consolidated balance sheets, to be accreted into earnings over the remaining life of the debt. During both the three months ended March 31, 2023 and 2022, we recorded accretion income, reported in interest expense on the consolidated statements of operations, of $23,000, to accrete the accumulated other comprehensive income on the terminated swap agreements.

The following tables present the effect of derivative instruments on our consolidated statements of operations for the three months ended March 31, 2023 and 2022 (in thousands):

 

 

 

 

 

Realized and Unrealized Gain (Loss) (1)

 

 

 

Consolidated Statements of Operations Location

 

Three Months Ended March 31, 2023

 

 

Three Months Ended March 31, 2022

 

Interest rate swap contracts, hedging

 

Interest expense

 

$

(393

)

 

$

(456

)

 

(1)
Negative values indicate a decrease to the associated consolidated statement of operations line items.

(Back to Index)

58


(Back to Index)

 

Financing Arrangements

Borrowings under our senior secured financing facility, term warehouse financing facilities, mortgage payable and construction loans are guaranteed by us or one or more of our subsidiaries. The following table sets forth certain information with respect to our financing arrangements (dollars in thousands, except amounts in footnotes):

 

 

 

March 31, 2023

 

December 31, 2022

 

 

Outstanding Borrowings

 

 

Value of Collateral

 

 

Number of Positions as Collateral

 

 

Weighted Average Interest Rate

 

Outstanding Borrowings

 

 

Value of Collateral

 

 

Number of Positions as Collateral

 

 

Weighted Average Interest Rate

Senior Secured Financing Facility

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Massachusetts Mutual Life Insurance Company (1)

 

$

49,855

 

 

$

127,185

 

 

 

6

 

 

8.54%

 

$

87,890

 

 

$

196,837

 

 

 

8

 

 

7.94%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CRE - Term Warehouse Financing Facilities (2)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

JPMorgan Chase Bank, N.A. (3)

 

 

178,723

 

 

 

246,740

 

 

 

10

 

 

7.25%

 

 

186,783

 

 

 

255,095

 

 

 

11

 

 

6.74%

Morgan Stanley Mortgage Capital Holdings LLC (4)

 

 

132,553

 

 

 

187,955

 

 

 

9

 

 

7.41%

 

 

141,505

 

 

 

198,455

 

 

 

10

 

 

7.00%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage Payable

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Readycap Commercial, LLC (5)

 

 

18,296

 

 

 

25,400

 

 

 

1

 

 

8.58%

 

 

18,244

 

 

 

25,400

 

 

 

1

 

 

8.08%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction Loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Oceanview Life and Annuity Company (6)

 

 

(2,225

)

 

N/A

 

 

N/A

 

 

—%

 

 

 

 

 

 

 

 

 

 

—%

Total

 

$

377,202

 

 

$

587,280

 

 

 

 

 

 

 

$

434,422

 

 

$

675,787

 

 

 

 

 

 

 

(1)
Includes $3.5 million and $3.7 million of deferred debt issuance costs at March 31, 2023 and December 31, 2022, respectively.
(2)
Outstanding borrowings include accrued interest payable.
(3)
Includes $993,000 and $1.1 million of deferred debt issuance costs at March 31, 2023 and December 31, 2022, respectively.
(4)
Includes $1.2 million and $1.4 million of deferred debt issuance costs at March 31, 2023 and December 31, 2022, respectively.
(5)
Includes $414,000 and $466,000 of deferred debt issuance costs at March 31, 2023 and December 31, 2022, respectively.
(6)
Includes $2.2 million of deferred debt issuance costs at March 31, 2023.

We were in compliance with all covenants in the respective agreements at March 31, 2023 and December 31, 2022.

Senior Secured Financing Facility

In July 2020, an indirect, wholly-owned subsidiary of ours (“Holdings”), along with its direct wholly-owned subsidiary (the “Borrower”), entered into a $250.0 million loan and servicing agreement (the “MassMutual Loan Agreement”) with Massachusetts Mutual Life Insurance Company (“MassMutual”) and the other lenders party thereto (the “Lenders”) to finance our core CRE lending business. The MassMutual Facility initially had an interest rate of 5.75% per annum payable monthly and initially matured on July 31, 2027.

In December 2022, Holdings, the Borrower and the Lenders entered into an Amended and Restated Loan and Servicing Agreement, which amends and restates the MassMutual Loan Agreement, and reflects a senior secured term loan facility, not to exceed $500.0 million, composed of individual loan series issued upon mutual agreement of the Borrower and Lenders. Each loan series will be available for three months after the closing date agreed upon by the Borrower and Lender (“Commitment Period”), subject to the maximum dollar amount agreed upon for that series. The Commitment Period is subject to immediate termination upon the occurrence of an event of default. Each loan series will have a final maturity of five years from the issuance date for the loan series unless an additional time is mutually agreed upon by the Lenders and Borrower. The advance rate on portfolio assets will be mutually agreed upon by the Lenders and Borrower. Each loan series will have its own mutually agreed upon interest rate equal to one-month Term SOFR plus the applicable spread.

(Back to Index)

59


(Back to Index)

 

CRE - Term Warehouse Financing Facilities

In April 2018, an indirect, wholly-owned subsidiary of ours entered into a master repurchase agreement (the “Barclays Facility”) with Barclays Bank PLC (“Barclays”) to finance the origination of CRE loans. In February 2022, such subsidiary entered into the Third Amendment to Master Repurchase Agreement (the “Barclays Amendment”) with Barclays, which amended the Barclays Facility to add market terms regarding the replacement of LIBOR upon determination of a benchmark transition event. In October 2022, the Barclays Facility matured.

In October 2018, an indirect, wholly-owned subsidiary of ours entered into a master repurchase agreement (the “JPMorgan Chase Facility”) with JP Morgan Chase to finance the origination of CRE loans. At March 31, 2023, this facility has been amended five times to amend various terms. The JPMorgan Chase Facility has a maximum facility amount of $250.0 million, charges interest of one-month benchmark plus market spreads and has an initial maturity date of October 2024.

In November 2021, an indirect, wholly-owned subsidiary of ours entered into a master repurchase and securities contract agreement (the “Morgan Stanley Facility”) with Morgan Stanley Mortgage Capital Holdings LLC (“Morgan Stanley”) to finance the origination of CRE loans. At March 31, 2023, this facility has been amended two times to amend various terms. The Morgan Stanley Facility has a maximum facility amount of $250.0 million, charges interest of one-month Term SOFR plus market spreads and matures in November 2024. We also have the right to request a one-year extension.

Mortgage Payable

In April 2022, Chapel Drive West, LLC, a wholly owned subsidiary of Charles Street – ACRES FSU Student Venture, LLC entered into a Loan Agreement (the “Mortgage”) with Readycap Commercial, LLC (“Readycap”) to finance the acquisition of a student housing complex. The Mortgage is interest only and has a maximum principal balance of $20.4 million, of which, $18.7 million was advanced in the initial funding. The Mortgage charges interest of one-month Term SOFR plus a spread of 3.80% and matures in April 2025, subject to two one-year extension options.

The Mortgage contains events of default, subject to certain materiality thresholds and grace periods, customary for this type of financing arrangement. The remedies for such events of default are also customary for this type of transaction.

Construction Loans

In January 2023, Chapel Drive East, LLC, a wholly owned subsidiary of the FSU Student Venture, entered into a loan agreement (the "Construction Loan Agreement") with Oceanview Life and Annuity Company ("Oceanview") to finance the construction of a student housing complex (the "Construction Loan"). The Construction Loan is interest only and has a maximum principal balance of $48.0 million. The Construction Loan charges one-month Term SOFR plus a spread of 6.00% and matures in February 2025, subject to three one-year extension options.

In addition to the Construction Loan, Chapel Drive East, LLC, entered into a financing agreement with Florida Pace Funding Agency to fund energy efficient building improvements and has a maximum principal balance of $15.5 million. This agreement charges fixed interest of 7.26% and matures in July 2053. We do not guarantee this financing agreement.

In connection with our investment in the student housing complex, ACRES RF entered into guarantees related to the Construction Loan. Pursuant to the guarantees, Jason Pollack, Frank Dellaglio and ACRES RF (collectively, the "Guarantors"), for the benefit of Oceanview, provided limited "bad boy" guaranties to Oceanview pursuant to the Construction Loan Agreement until the earlier of the payment in full of the indebtedness or the date of a sale of the property pursuant to a foreclosure of the mortgage or deed or other transfer in lieu of foreclosure is accepted by Oceanview. The Guarantors also entered into a Completion Guaranty Agreement for the benefit of Oceanview to guaranty the timely completion of the project in accordance with the Construction Loan Agreement, as well as a Carry Guaranty Agreement, for the benefit of Oceanview to guaranty and unconditional payment by Chapel Drive East, LLC of all customary or necessary costs and expenses incurred in connection with the operation, maintenance and management of the property and an Environmental Indemnity Agreement jointly and severally in favor of Oceanview whereby the Guarantors serving as Indemnitors provided environmental representations and warranties, covenants and indemnifications (collectively the "Guaranties"). The Guaranties include certain financial covenants required of ACRES RF, including required net worth and liquidity requirements.

Securitizations

At March 31, 2023, we retained equity in two CRE loan securitizations that we executed, as follows:

(Back to Index)

60


(Back to Index)

 

ACR 2021-FL1

In May 2021, we closed ACR 2021-FL1, an $802.6 million CRE debt securitization transaction that provided financing for CRE loans. ACR 2021-FL1 includes a reinvestment period, which ends in May 2023, that allows it to acquire CRE loans for reinvestment into the securitization using uninvested principal proceeds. ACR 2021-FL1 issued a total of $675.2 million of non-recourse, floating-rate notes to third parties at par. We retained 100% of the Class F and Class G notes in addition to 100% of the outstanding preference shares. The preference shares are subordinated in right of payment to all other securities issued by ACR 2021-FL1. All notes issued mature in June 2036, although we have the right to call the notes beginning on the payment date in May 2023 and thereafter.

ACR 2021-FL2

In December 2021, we closed ACR 2021-FL2, a CRE debt securitization transaction that can finance up to $700.0 million of CRE loans. ACR 2021-FL2 includes a reinvestment period, which ends in December 2023, that allows it to acquire CRE loans for reinvestment into the securitization using uninvested principal proceeds. The reinvestment period included a 180-day ramp-up acquisition period that allowed it to acquire CRE loans using unused proceeds from the issuance of the non-recourse floating-rate notes. ACR 2021-FL2 issued a total of $567.0 million of non-recourse, floating-rate notes to third parties at par. We retained 100% of the Class F and Class G notes in addition to 100% of the outstanding preference shares. The preference shares are subordinated in right of payment to all other securities issued by ACR 2021-FL2. All notes issued mature in January 2037, although we have the right to call the notes beginning on the payment date in December 2023 and thereafter.

Corporate Debt

4.50% Convertible Senior Notes

We issued $143.8 million aggregate principal of our 4.50% Convertible Senior Notes in August 2017, of which $55.8 million was repurchased in 2021.

In February 2022, we repurchased $39.8 million of our 4.50% Convertible Senior Notes, resulting in a charge to earnings of $574,000, comprising an extinguishment of debt charge of $460,000 in connection with the acceleration of the market discount and interest expense of $114,000 in connection with the acceleration of deferred debt issuance costs. In August 2022, the remaining $48.2 million of the 4.50% Convertible Senior Notes were paid off upon maturity at par.

5.75% Senior Unsecured Notes Due 2026

On August 16, 2021, we issued $150.0 million of our 5.75% senior unsecured notes due 2026 (the “5.75% Senior Unsecured Notes”) pursuant to our Indenture, dated August 16, 2021 (the “Base Indenture”), between Wells Fargo, now Computershare Trust Company, N.A. (“CTC”), as trustee (the “Trustee”), and us as supplemented by the First Supplemental Indenture, dated August 16, 2021, between Wells Fargo, now CTC, and us (the “Supplemental Indenture” and, together with the Base Indenture, the “Indenture”). Prior to May 15, 2026, we may at our option redeem the 5.75% Senior Unsecured Notes, in whole or in part, at a redemption price equal to the sum of (i) 100% of the principal amount of the notes to be redeemed, plus accrued and unpaid interest to, but not including, the redemption date, and (ii) a make-whole premium.

Unsecured Junior Subordinated Debentures

During 2006, we formed RCT I and RCT II for the sole purpose of issuing and selling capital securities representing preferred beneficial interests. RCT I and RCT II are not consolidated into our consolidated financial statements because we are not deemed to be the primary beneficiary of these entities. In connection with the issuance and sale of the capital securities, we issued junior subordinated debentures to RCT I and RCT II of $25.8 million each, representing our maximum exposure to loss. The debt issuance costs associated with the junior subordinated debentures for RCT I and RCT II were included in borrowings and were amortized into interest expense on the consolidated statements of operations using the effective yield method over a ten year period.

There were no unamortized debt issuance costs associated with the junior subordinated debentures for RCT I and RCT II outstanding at March 31, 2023 and December 31, 2022. The interest rates for RCT I and RCT II, at March 31, 2023, were 9.11% and 8.75%, respectively. The interest rates for RCT I and RCT II, at December 31, 2022, were 8.68% and 8.36%, respectively.

(Back to Index)

61


(Back to Index)

 

Equity

Total equity at March 31, 2023 was $441.8 million and gave effect to $393,000 of net realized losses on our terminated cash flow hedges, shown as a component of accumulated other comprehensive loss. Equity at December 31, 2022 was $441.3 million and gave effect to $6.4 million of net unrealized losses on our terminated cash flow hedges, shown as a component of accumulated other comprehensive loss. The increase in stockholders’ equity during the three months ended March 31, 2023 was primarily attributable to contributions from non-controlling interests, partially offset by distributions on our preferred stock in excess of earnings as well as common stock repurchases.

Balance Sheet - Book Value Reconciliation

The following table rolls forward our common stock book value for the three months ended March 31, 2023 (in thousands, except per share data and amounts in footnotes):

 

 

Three Months Ended March 31, 2023

 

 

 

Total Amount

 

 

Per Share Amount

 

Common stock book value at beginning of period (1)

 

$

208,976

 

 

$

24.54

 

Net loss allocable to common shares (2)

 

 

(2,416

)

 

 

(0.29

)

Change in other comprehensive income on derivatives

 

 

393

 

 

 

0.05

 

Repurchase of common stock (3)

 

 

(756

)

 

 

0.14

 

Net impact to equity of share-based compensation

 

 

1,066

 

 

 

0.07

 

Total net decrease

 

 

(1,713

)

 

 

(0.03

)

Common stock book value at end of period (4)

 

$

207,263

 

 

$

24.51

 

 

 

 

 

 

 

 

 

(1)
Per share calculations exclude unvested restricted stock, as disclosed on our consolidated balance sheets, of 583,333 shares at both March 31, 2023 and December 31, 2022, and include warrants to purchase up to 391,995 shares of common stock at March 31, 2023 and December 31, 2022, respectively. The denominators for the calculations were 8,454,798 and 8,516,762 shares at March 31, 2023 and December 31, 2022, respectively.
(2)
The per share amounts are calculated with the denominator referenced in footnote (1) at March 31, 2023. We calculated net loss per common share-diluted of $0.28 using the weighted average diluted shares outstanding during the three months ended March 31, 2023.
(3)
In November 2021, our Board authorized and approved the continued use of our existing share repurchase program to repurchase up to $20.0 million of our outstanding common stock. We purchased 1.2 million shares for $13.6 million through March 31, 2023. Because we repurchased our common stock at significant discounts to book value, these repurchases were accretive to per share book value since the inception of the program. For the three months ended March 31, 2023, $756,000, or 80,000 shares, were repurchased under the reauthorized plan.
(4)
We calculated common stock book value as total stockholders’ equity of $433.8 million less preferred stock equity of $226.5 million at March 31, 2023.

Management Agreement Equity

Our monthly base management fee, as defined in our Management Agreement, is equal to the greater of (i) 1/12 of the amount of our equity multiplied by 1.50% or (ii) $442,000 through July 31, 2022 and is calculated and paid monthly in arrears.

The following table summarizes the calculation of equity, as defined in the Management Agreement (in thousands):

 

 

 

Amount

 

At March 31, 2023:

 

 

 

Proceeds from capital stock issuances, net (1)

 

$

1,330,472

 

Retained earnings, net (2)

 

 

(650,045

)

Payments for repurchases of capital stock

 

 

(240,239

)

Total

 

$

440,188

 

 

 

(1)
Deducts underwriting discounts and commissions and other expenses and costs relating to such issuances.
(2)
Excludes non-cash equity compensation expense incurred to date.

Earnings Available for Distribution

Earnings Available for Distribution (“EAD”) is a non-GAAP financial measure intended to supplement our financial results computed in accordance with accounting principles generally accepted in the United States of America (“GAAP”), and we believe EAD will serve as a useful indicator for investors in evaluating our performance and ability to pay dividends.

(Back to Index)

62


(Back to Index)

 

EAD excludes the effects of certain transactions and adjustments in accordance with GAAP that we believe are not necessarily indicative of our current CRE loan portfolio and other CRE-related investments and operations. EAD excludes income (loss) from all non-core assets such as commercial finance, middle market lending, residential mortgage lending, certain legacy CRE loans and other non-CRE assets designated as assets held for sale at the initial measurement date of December 31, 2016.

EAD, for reporting purposes, is defined as GAAP net income (loss) allocable to common shares, excluding (i) non-cash equity compensation expense, (ii) unrealized gains and losses, (iii) non-cash provisions for credit losses, (iv) non-cash impairments on securities, (v) non-cash amortization of discounts or premiums associated with borrowings, (vi) net income or loss from a limited partnership interest owned at the initial measurement date, (vii) net income or loss from non-core assets, (viii) real estate depreciation and amortization, (ix) foreign currency gains or losses and (x) income or loss from discontinued operations. EAD may also be adjusted periodically to exclude certain one-time events pursuant to changes in GAAP and certain non-cash items.

Although pursuant to the Management Agreement we calculate incentive compensation using EAD that excludes incentive compensation payable to our Manager, we include incentive compensation payable to our Manager in calculating EAD for reporting purposes.

The following table provides a reconciliation from GAAP net loss allocable to common shares to EAD allocable to common shares for the periods presented (in thousands, except per share data and amounts in the footnotes):

 

 

 

For the Three Months Ended March 31,

 

 

 

2023

 

 

Per Share
Data

 

 

2022

 

 

Per Share
Data

 

Net loss allocable to common shares - GAAP

 

$

(2,416

)

 

$

(0.28

)

 

$

(2,771

)

 

$

(0.30

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Reconciling items from continuing operations:

 

 

 

 

 

 

 

 

 

 

 

 

Non-cash equity compensation expense

 

 

894

 

 

 

0.10

 

 

 

744

 

 

 

0.08

 

Non-cash provision for (reversal of) CRE credit losses

 

 

5,096

 

 

 

0.59

 

 

 

(1,802

)

 

 

(0.20

)

Real estate depreciation and amortization

 

 

954

 

 

 

0.11

 

 

 

1,391

 

 

 

0.15

 

Non-cash amortization of discounts or premiums associated with borrowings

 

 

 

 

 

 

 

 

847

 

 

 

0.09

 

Net income from non-core assets (1)

 

 

(26

)

 

 

 

 

 

(656

)

 

 

(0.07

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Reconciling items from CRE assets:

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income on legacy CRE assets (1)

 

 

 

 

 

 

 

 

(29

)

 

 

 

Earnings Available for Distribution allocable to common shares

 

$

4,502

 

 

$

0.52

 

 

$

(2,276

)

 

$

(0.25

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares - diluted on Earnings Available for Distribution allocable to common shares

 

 

8,702

 

 

 

 

 

 

9,097

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings Available for Distribution per common share - diluted

 

$

0.52

 

 

 

 

 

$

(0.25

)

 

 

 

 

(1)
Non-core assets are investments and securities owned by us at the initial measurement date in (i) commercial finance, (ii) middle market lending, (iii) residential mortgage lending, (iv) legacy CRE loans designated as held for sale and (v) other non-CRE assets included in assets held for sale.

EAD in accordance with the Management Agreement, which excludes incentive compensation payable, was $4.6 million, or $0.53 per common share outstanding, for the three months ended March 31, 2023. Incentive compensation payable was $129,000 for the three months ended March 31, 2023.

Incentive Compensation Hurdle

Prior to the quarter ended December 31, 2022, in accordance with the Management Agreement, incentive compensation was earned by our Manager when our EAD (as defined in the Management Agreement) for such quarter exceeded an amount equal to: (1) the weighted average of (a) book value (as defined in the Management Agreement) as of the end of such quarter divided by 10,293,783 shares and (b) the price per share (including the conversion price, if applicable) paid for common shares in each offering (or issuance, upon the conversion of convertible securities) by us subsequent to September 30, 2017, in each case at the time of issuance, multiplied by (2) the greater of (a) 1.75% and (b) 0.4375% plus one-fourth of the ten year treasury rate, as defined in the Management Agreement, for such quarter (the “Incentive Compensation Hurdle”).

(Back to Index)

63


(Back to Index)

 

Commencing with the quarter ended December 31, 2022, incentive compensation was calculated and payable in arrears in an amount, not less than zero, equal to:

(i)
for the first full calendar quarter ended December 31, 2022, the product of (a) 20% and (b) the excess of (i) our EAD (as defined in the Management Agreement) for such calendar quarter, over (ii) the product of (A) our book value equity (as defined in the Management Agreement) as of the end of such calendar quarter, and (B) 7% per annum;
(ii)
for each of the second, third and fourth full calendar quarters following the calendar quarter ending December 31, 2022, the excess of (1) the product of (a) 20% and (b) the excess of (i) our EAD (as defined in the Management Agreement) for the calendar quarter(s) following September 30, 2022, over (ii) the product of (A) our book value equity (as defined in the Management Agreement) in the calendar quarter(s) following September 30, 2022, and (B) 7% per annum, over (2) the sum of any incentive compensation paid to our Manager with respect to the prior calendar quarter(s) following September 30, 2022 (other than the most recent calendar quarter); and
(iii)
for each calendar quarter thereafter, the excess of (1) the product of (a) 20% and (b) the excess of (i) our EAD (as defined in the Management Agreement) for the previous 12-month period, over (ii) the product of (A) our book value equity (as defined in the Management Agreement) in the previous 12-month period, and (B) 7% per annum, over (2) the sum of any incentive compensation paid to our Manager with respect to the first three calendar quarters of such previous 12-month period; provided, however, that no incentive compensation shall be payable with respect to any calendar quarter unless EAD (as defined in the Management Agreement) for the 12 most recently completed calendar quarters (or such lesser number of completed calendar quarters from September 30, 2022) in the aggregate is greater than zero.

The following table summarizes the calculation of the Incentive Compensation Hurdle for the three months ended March 31, 2023 (dollars in thousands, except per share data):

 

Book Value Equity

 

Amount

 

Stockholders' equity less equity attributable to any outstanding preferred stock at December 31, 2022

 

$

216,026

 

Cumulative EAD from and after October 1, 2022 to the end of the most recently completed calendar quarter

 

 

10,190

 

Amount paid to repurchase common stock after October 1, 2022

 

 

(1,689

)

Incentive Compensation paid after October 1, 2022

 

 

(339

)

Book value equity at March 31, 2023

 

$

224,188

 

Incentive Compensation Hurdle (1)

 

$

7,847

 

 

 

 

 

Average closing price of 30 day period ending three days prior to issuance date

 

$

9.39

 

 

(1)
Calculated as book value equity at March 31, 2023 multiplied by 7% per annum.

The amount by which EAD (as defined in the Management Agreement) for the calendar quarters following September 30, 2022 exceeds the Incentive Compensation Hurdle is multiplied by 20% to arrive at incentive compensation for the quarter.

Liquidity and Capital Resources

Liquidity is a measurement of our ability to meet potential cash requirements, including ongoing commitments to pay dividends, fund investments, repay borrowings and provide for other general business needs, including payment of our base management fee and incentive compensation. Our ability to meet our on-going liquidity needs is subject to our ability to generate cash from operating activities and our ability to maintain and/or obtain additional debt financing and equity capital together with the funds referred to below.

During the three months ended March 31, 2023, our principal sources of liquidity were: (i) gross proceeds of $32.1 million from CRE whole loan purchases by our managed CRE securitization ACR 2021-FL1, (ii) net proceeds of $30.6 million from repayments on our CRE portfolio, (iii) gross proceeds of $14.3 million from the sale of a real estate property, (iv) gross proceeds of $12.1 million from our CRE - term financing facilities and, (v) proceeds of $9.9 million from the purchase of loan advances by our managed CRE securitizations ACR 2021-FL1 and ACR 2021-FL2. These sources of liquidity were offset by our paydowns on our senior secured and term warehouse facilities, deployments in CRE whole loans and real estate investments, repurchases of common stock, distributions on our preferred stock and ongoing operating expenses and substantially resulted in the $87.3 million of unrestricted cash we held at March 31, 2023.

The outstanding balance of our loan to ACRES Capital Corp., the parent of our Manager, was $11.2 million and $11.3 million at March 31, 2023 and December 31, 2022, respectively. The note bears interest at 3.00% per annum, payable monthly, and matures in July 2026, subject to two one-year extensions, at ACRES Capital Corp.’s option, and amortizes at a rate of $25,000 per month.

(Back to Index)

64


(Back to Index)

 

We utilize a variety of financing arrangements to finance certain assets. We generally utilize the following five types of financing arrangements:

1.
Senior Secured Financing Facility: Our senior secured financing facility allows us to borrow against loans and real estate investments that we own. This facility has an individual floating rate loan series structure that have a three month commitment period after the financing is approved by the lender, subject to the maximum dollar amount agreed upon for the series. Each floating rate loan series will have mutually agreed upon terms including (i) total commitment, including the capacity to fund future funding commitments, where applicable; (ii) advance rate on portfolio assets; (iii) interest rate composed of one-month Term SOFR plus a market rate spread; and (iv) maturity date of five years from the issuance date for the loan series unless an additional time is mutually agreed upon by the parties. The facility has a maximum portfolio LTV of 85% and contains customary events of default, subject to certain materiality thresholds and grace periods, customary for this type of financing arrangement.
2.
Term Warehouse Financing Facilities (CRE loans): Term warehouse financing facilities effectively allow us to borrow against loans that we own. Under these agreements, we transfer loans to a counterparty and agree to purchase the same loans from the counterparty at a price equal to the transfer price plus interest. The counterparty retains the sole discretion over both whether to purchase the loan from us and, subject to certain conditions, the collateral value of such loan for purposes of determining whether we are required to pay margin to the counterparty. Generally, if the lender determines (subject to certain conditions) that the value of the collateral in a repurchase transaction has decreased by more than a defined minimum amount, we would be required to repay any amounts borrowed in excess of the product of (i) the revised collateral or market value multiplied by (ii) the applicable advance rate. During the term of these agreements, we receive the principal and interest on the related loans and pay interest to the counterparty.
3.
Securitizations: We seek non-recourse long-term financing from securitizations of our investments in CRE loans. The securitizations generally involve a senior portion of our loan but may involve the entire loan. Securitization generally involves transferring notes to a special purpose vehicle (or the issuing entity), which then issues one or more classes of non-recourse notes pursuant to the terms of an indenture. The notes are secured by the pool of assets. In exchange for the transfer of assets to the issuing entity, we receive cash proceeds from the sale of non-recourse notes. Securitizations of our portfolio investments might magnify our exposure to losses on those portfolio investments because the retained subordinate interest in any particular overall loan would be subordinate to the loan components sold and we would, therefore, absorb all losses sustained with respect to the overall loan before the owners of the senior notes experience any losses with respect to the loan in question.
4.
Mortgage payable: We have entered into a loan agreement to finance the acquisition of a student housing complex. This loan is interest only and has a maximum principal balance, most of which was advanced in the initial funding. The loan agreement contains events of default, subject to certain materiality thresholds and grace periods, customary for this type of financing arrangement. The remedies for such events of default are also customary for this type of transaction.
5.
Construction loans: We have entered into a construction loan agreement to finance the construction of a student housing complex. This loan is interest only and has a maximum principal balance of $48.0 million. The loan agreement contains events of default, subject to certain materiality thresholds and grace periods, customary for this type of financing arrangement. The remedies for such events of default are also customary for this type of transaction. Additionally, we have entered into a financing agreement to fund energy efficient building improvements at this student housing complex, with a maximum principal balance of $15.5 million.

The issuances of ACR 2021-FL1 and ACR 2021-FL2 include 24-month reinvestment periods ending in May 2023 and December 2023, respectively, that allow us to reinvest CRE loan payoffs and paydowns into the securitizations upon the satisfaction of certain eligibility and reinvestment criteria along with rating agency approval. The reinvestment features of the securitizations will allow us to extend the securitizations’ financing capabilities at attractive weighted-average rates by increasing the useful lives of the senior notes through the reinvestment of loan proceeds into new loans. We are also able to acquire future funding participations of the collateral in the securitizations during the reinvestment period.

We were in compliance with all of our covenants at March 31, 2023 in accordance with the terms provided in agreements with our lenders.

(Back to Index)

65


(Back to Index)

 

We are continuing to monitor the COVID-19 pandemic and its impact on us, the borrowers underlying our commercial real estate-related loans (and their tenants), our financing sources, and the economy as a whole. Because the severity, magnitude and duration of the COVID-19 pandemic and its economic consequences are uncertain, rapidly changing and difficult to predict, the pandemic’s impact on our operations and liquidity remains uncertain and difficult to predict. Further discussion of the potential impacts on us from the COVID-19 pandemic is provided in the section entitled “Risk Factors-Impact of Current Economic Conditions” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022.

At March 31, 2023, we had a senior secured financing facility, term warehouse financing facilities, mortgage payable and construction loans as summarized below (in thousands, except amounts in footnotes):

 

 

 

Execution Date

 

Maturity Date

 

Maximum Capacity

 

 

Facility Principal
Outstanding

 

 

Availability

 

Senior Secured Financing Facility (1)

 

 

 

 

 

 

 

 

 

 

 

 

 

Massachusetts Mutual Life Insurance Company

 

July 2020

 

December 2027

 

$

500,000

 

 

$

53,336

 

 

$

446,664

 

CRE - Term Warehouse Financing Facilities (2)

 

 

 

 

 

 

 

 

 

 

 

 

 

JPMorgan Chase Bank, N.A.

 

October 2018

 

October 2024

 

 

250,000

 

 

 

179,139

 

 

 

70,861

 

Morgan Stanley Mortgage Capital Holdings LLC

 

November 2021

 

November 2024

 

 

250,000

 

 

 

133,476

 

 

 

116,524

 

Mortgage Payable (3)

 

 

 

 

 

 

 

 

 

 

 

 

 

Readycap Commercial, LLC

 

April 2022

 

April 2025

 

 

20,375

 

 

 

18,710

 

 

 

1,665

 

Construction Loans (4)

 

 

 

 

 

 

 

 

 

 

 

 

 

Oceanview Life and Annuity Company

 

January 2023

 

February 2025

 

 

48,000

 

 

 

 

 

 

48,000

 

Florida Pace Funding Agency

 

January 2023

 

January 2053

 

 

15,500

 

 

 

 

 

 

15,500

 

Total

 

 

 

 

 

 

 

 

$

384,661

 

 

 

 

 

(1)
Facility principal outstanding excludes deferred debt issuance costs of $3.5 million at March 31, 2023. In December 2022, we amended the previous revolving fixed rate credit facility to a floating rate term loan series structure. Each loan series will have a maturity date of five years from the issuance date for the loan series.
(2)
Facilities principal outstanding excludes accrued interest payable of $879,000 and deferred debt issuance costs of $2.2 million at March 31, 2023.
(3)
Mortgage payable excludes deferred debt issuance costs of $414,000 at March 31, 2023.
(4)
Facility principal outstanding excludes deferred debt issuance costs of $2.2 million at March 31, 2023.

The following table summarizes the average principal outstanding during the three months ended March 31, 2023 and December 31, 2022 and the principal outstanding on our financing arrangements at March 31, 2023 and December 31, 2022 (in thousands, except amounts in footnotes):

 

 

 

Three Months Ended March 31, 2023

 

 

March 31, 2023

 

 

Three Months Ended December 31, 2022

 

 

December 31, 2022

 

 

 

Average Principal Outstanding

 

 

Principal Outstanding (1)(2)(3)

 

 

Average Principal Outstanding

 

 

Principal Outstanding (1)(2)

 

Financing Arrangement

 

 

 

 

 

 

 

 

 

 

 

 

Senior secured financing facility

 

$

66,844

 

 

$

53,336

 

 

$

88,795

 

 

$

91,549

 

Term warehouse financing facilities - CRE loans

 

 

326,214

 

 

 

312,615

 

 

 

359,829

 

 

 

329,955

 

Mortgage payable

 

 

18,710

 

 

 

18,710

 

 

 

18,710

 

 

 

18,710

 

Total

 

$

411,768

 

 

$

384,661

 

 

$

467,334

 

 

$

440,214

 

 

(1)
Excludes accrued interest payable on the senior secured financing facility collateralized by CRE loans and investments in real estate of $215,000 and $202,000 at March 31, 2023 and December 31, 2022, respectively. Also excludes deferred debt issuance costs on the senior secured financing facility of $3.5 million and $3.7 million at March 31, 2023 and December 31, 2022, respectively.
(2)
Excludes accrued interest payable on term warehouse financing facilities collateralized by CRE loans of $879,000 and $894,000 and deferred debt issuance costs of $2.2 million and $2.6 million at March 31, 2023 and December 31, 2022, respectively.
(3)
Excludes deferred debt issuance costs on mortgage payable of $414,000 and $466,000 at March 31, 2023 and December 31, 2022, respectively.

(Back to Index)

66


(Back to Index)

 

The following table summarizes the maximum month-end principal outstanding on our financing arrangements during the periods presented (in thousands):

 

 

 

Maximum Month-End Principal Outstanding During the

 

 

 

Three Months Ended March 31, 2023

 

 

Year Ended December 31, 2022

 

Financing Arrangement

 

 

 

 

 

 

Senior secured financing facility

 

$

63,314

 

 

$

94,549

 

Term warehouse financing facilities - CRE loans

 

 

333,834

 

 

 

392,716

 

Mortgage payable

 

 

18,710

 

 

 

18,710

 

 

Historically, we have financed the acquisition of our investments through collateralized debt obligations ("CDO") and securitizations that essentially match the maturity and repricing dates of these financing vehicles with the maturities and repricing dates of our investments. In the past, we have derived substantial operating cash from our equity investments in our CDOs and securitizations, which will cease if the CDOs and securitizations fail to meet certain tests. Through March 31, 2023, we did not experience difficulty in maintaining our existing CDO and securitization financing and passed all of the critical tests required by these financings.

The following table sets forth the distributions received by us and coverage test summaries for our active securitizations for the periods presented (in thousands, except amount in the footnotes):

 

 

 

Cash Distributions

 

 

Overcollateralization Cushion (1)

 

 

Annualized Interest Coverage Cushion (2)(3)

 

 

 

Name

 

For the Three Months Ended March 31, 2023

 

 

For the Year Ended December 31, 2022

 

 

At March 31, 2023

 

 

At the Initial Measurement Date

 

 

At March 31, 2023

 

 

Reinvestment Period End (4)

ACR 2021-FL1

 

$

5,772

 

 

$

21,141

 

 

$

6,758

 

 

$

6,758

 

 

$

18,776

 

 

May 2023

ACR 2021-FL2

 

 

4,341

 

 

 

14,537

 

 

 

5,652

 

 

 

5,652

 

 

 

10,933

 

 

December 2023

 

(1)
Overcollateralization cushion represents the amount by which the collateral held by the securitization issuer exceeds the minimum amount required.
(2)
Interest coverage includes annualized amounts based on the most recent trustee statements.
(3)
Interest coverage cushion represents the amount by which annualized interest income expected exceeds the annualized amount payable on our active securitizations.
(4)
The reinvestment period is the period in which principal proceeds received before the end of the period may be used to acquire CRE loans or the funded commitments of existing collateral for reinvestment into the securitization.

The following table sets forth the distributions received by us and liquidation details for our liquidated securitizations for the periods presented (in thousands):

 

 

 

Cash Distributions

 

 

Liquidation Details

 

Name

 

For the Three Months Ended March 31, 2023

 

 

For the Year Ended December 31,
2022

 

 

Liquidation Date

 

Remaining Assets at the Liquidation Date (1)

 

XAN 2020-RSO9 (2)

 

$

 

 

$

14,308

 

 

February 2022

 

$

111,335

 

XAN 2020-RSO8

 

 

 

 

 

1,628

 

 

March 2022

 

 

171,225

 

 

(1)
The remaining assets at the liquidation date were distributed to us in exchange for our notes owned and preference shares in the respective securitization.
(2)
Cash distributions for the year ended December 31, 2022 included a principal distribution on our preference share at liquidation of $13.5 million for XAN 2020-RSO9.

At March 31, 2023, our liquidity consisted of $87.3 million of unrestricted cash and cash equivalents, $32.9 million of reinvestment cash at our CRE securitizations and $10.4 million of unlevered financeable CRE loans.

(Back to Index)

67


(Back to Index)

 

Our leverage ratio, defined as the ratio of borrowings to total equity, may vary as a result of the various funding strategies we use. At March 31, 2023 and December 31, 2022, our leverage ratio was 4.1 and 4.2 times, respectively. The leverage ratio decreased during the period due to the net decrease in borrowings while being offset by net decrease to total equity.

Net Operating Losses and Loss Carryforwards

The following table sets forth the net operating losses and loss carryforwards for the periods presented (in millions):

 

 

 

Tax Year Recognized

 

REIT (QRS) Tax Loss Carryforwards

 

 

TRS Tax Loss Carryforwards

 

Tax Asset Item

 

 

 

Operating

 

 

Capital

 

 

Operating

 

 

Capital

 

Net Operating Loss Carryforwards:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cumulative as of 2021

 

2021 Return

 

$

46.6

 

 

$

 

 

$

60.1

 

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Capital Loss Carryforwards:

 

 

 

 

 

 

 

 

 

 

 

 

 

Cumulative as of 2021

 

2021 Return

 

 

 

 

 

121.9

 

 

 

 

 

 

1.0

 

Total tax asset estimates

 

 

$

46.6

 

 

$

121.9

 

 

$

60.1

 

 

$

1.0

 

Useful life

 

 

 

Unlimited

 

 

5 years

 

 

Various

 

 

5 years

 

 

During the year ended December 31, 2021, we generated $1.1 million of taxable income which was offset by our cumulative net operating losses (“NOL”), leaving $46.6 million to carry forward to future years. NOL can generally be carried forward to offset both ordinary taxable income and capital gains in future years. The Tax Cuts and Jobs Act (“TCJA”) along with revisions made by the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act reduced the deduction for NOLs to 80% of taxable income and granted an indefinite carryforward period.

Additionally, $15.0 million of net capital gains was reported on our tax return for the year ended December 31, 2021. This was offset with our cumulative total net capital losses, leaving $121.9 million to carry forward to future years. No capital losses expired during 2022 or 2021.

We also have tax assets in our taxable REIT subsidiaries (“TRS”). These tax assets are analyzed and disclosed quarterly in our financial statements. At March 31, 2023, our TRSs have $39.9 million of pre-TCJA NOLs, some of which are set to expire beginning in 2044, $20.2 million of NOLs with an indefinite carryforward period and $1.0 million of net capital losses.

Distributions

We did not pay distributions on our common shares during the three months ended March 31, 2023 as we were focused on prudently retaining and managing sufficient excess liquidity in connection with the economic impact of the COVID-19 pandemic. As a result of losses during 2020, we received significant NOL carryforwards and net capital loss carryforwards, as finalized in our 2020 tax return. We intend to retain taxable income by utilizing our NOL carryforwards and expect to generate capital gains to use a portion of our net capital loss carryforwards, thereby growing book value and our investable equity base. As we continue to take steps necessary to stabilize our earnings available for distribution, our Board will establish a plan for the prudent resumption of the payment of common share distributions. No assurance, however, can be given as to the amounts or timing of future distributions as such distributions are subject to our earnings, financial condition, capital requirements and such other factors as our Board deems relevant.

We intend to continue to make regular quarterly distributions to holders of our preferred stock.

U.S. federal income tax law generally requires that a REIT distribute at least 90% of its REIT taxable income annually, determined without regard to the deduction for dividends paid and excluding net capital gains, and that it pay tax at regular corporate rates to the extent that it annually distributes less than 100% of its taxable income. Before we pay any dividend, whether for U.S. federal income tax purposes or otherwise, we must first meet both our operating and debt service requirements on our repurchase agreements and other debt payable. If our cash available for distribution is less than our taxable income, we could be required to sell assets or borrow funds to make cash distributions, or we may make a portion of the required distribution in the form of a taxable stock distribution or distribution of debt securities.

(Back to Index)

68


(Back to Index)

 

Contractual Obligations and Commitments

 

 

 

Contractual Commitments

 

 

 

(dollars in thousands, except amounts in footnotes)

 

 

 

Payments due by Period

 

 

 

Total

 

 

Less than 1 year

 

 

1 - 3 years

 

 

3 - 5 years

 

 

More than 5 years

 

At March 31, 2023:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CRE securitizations

 

$

1,242,223

 

 

$

 

 

$

 

 

$

 

 

$

1,242,223

 

Senior secured financing facility (1)

 

 

53,336

 

 

 

 

 

 

 

 

 

53,336

 

 

 

 

CRE - term warehouse financing facilities (2)

 

 

313,493

 

 

 

 

 

 

313,493

 

 

 

 

 

 

 

Mortgage payable (3)

 

 

18,710

 

 

 

 

 

 

18,710

 

 

 

 

 

 

 

5.75% Senior Unsecured Notes (4)

 

 

150,000

 

 

 

 

 

 

 

 

 

150,000

 

 

 

 

Unsecured junior subordinated debentures (5)

 

 

51,548

 

 

 

 

 

 

 

 

 

 

 

 

51,548

 

Lease liabilities (6)

 

 

855,763

 

 

 

1,595

 

 

 

5,531

 

 

 

6,044

 

 

 

842,593

 

Unfunded commitments on CRE loans (7)

 

 

143,575

 

 

 

22,653

 

 

 

120,922

 

 

 

 

 

 

 

Base management fees (8)

 

 

6,603

 

 

 

6,603

 

 

 

 

 

 

 

 

 

 

Total

 

$

2,835,251

 

 

$

30,851

 

 

$

458,656

 

 

$

209,380

 

 

$

2,136,364

 

 

(1)
Excludes $215,000 of accrued interest payable at March 31, 2023.
(2)
Includes $879,000 of accrued interest payable at March 31, 2023.
(3)
Excludes $94,000 of accrued interest payable at March 31, 2023.
(4)
Excludes $30.2 million of interest expense payable through maturity in August 2026.
(5)
Excludes $25.4 million and $26.5 million of estimated interest expense payable through maturity, in June 2036 and October 2036, respectively.
(6)
Lease liabilities includes a ground rent lease for a hotel property with a term of 93 years and an annual growth rate of 3%.
(7)
Unfunded commitments on our originated CRE loans generally fall into two categories: (i) pre-approved capital improvement projects and (ii) new or additional construction costs subject, in each case, to the borrower meeting specified criteria. Upon completion of the improvements or construction, we would receive additional interest income on the advanced amount. At March 31, 2023, we had unfunded commitments on 57 CRE whole loans.
(8)
Base management fees presented are based on an estimate of base management fees payable to our Manager over the next 12 months. Our Management Agreement also provides for an incentive compensation arrangement that is based on operating performance. The incentive compensation is not a fixed and determinable amount, and therefore it is not included in this table.

Off-Balance Sheet Arrangements

General

At March 31, 2023, we did not maintain any relationships with unconsolidated entities or financial partnerships that were established for the purpose of facilitating off-balance sheet arrangements or contractually narrow or limited purposes, although we do have interests in unconsolidated entities not established for those purposes. Except as set forth below, at March 31, 2023, we had not guaranteed obligations of any unconsolidated entities or entered into any commitment or letter of intent to provide additional funding to any such entities.

Unfunded Commitments

In the ordinary course of business, we make commitments to borrowers whose loans are in our CRE loan portfolio to provide additional loan funding in the future. Disbursement of funds pursuant to these commitments is subject to the borrower meeting pre-specified criteria. These commitments are subject to the same underwriting requirements and ongoing portfolio maintenance as are the on-balance sheet financial investments that we hold. Since these commitments may expire without being drawn upon, the total commitment amount does not necessarily represent future cash requirements. Whole loans had $143.6 million and $158.2 million in unfunded loan commitments at March 31, 2023 and December 31, 2022, respectively. Unfunded commitments are not considered in the CECL reserve if they are unconditionally cancellable.

Additionally, we have commitments related to our construction of a student housing complex. We committed to a total funding of $24.3 million, of which $8.5 million was unfunded at March 31, 2023.

Guarantees and Indemnifications

In the ordinary course of business, we may provide guarantees and indemnifications that contingently obligate us to make payments to the guaranteed or indemnified party based on changes in the value of an asset, liability or equity security of the guaranteed or indemnified party. As such, we may be obligated to make payments to a guaranteed party based on another entity’s failure to perform or achieve specified performance criteria, or we may have an indirect guarantee of the indebtedness of others.

(Back to Index)

69


(Back to Index)

 

In January 2023, Chapel Drive East, LLC, a wholly owned subsidiary of the FSU Student Venture, entered into a loan agreement (the "Construction Loan Agreement") with Oceanview Life and Annuity Company ("Oceanview") to finance the construction of a student housing complex (the "Construction Loan").

In connection with our investment in the student housing complex, ACRES RF entered into guarantees related to the Construction Loan. Pursuant to the guarantees, Jason Pollack, Frank Dellaglio and ACRES RF (collectively, the "Guarantors"), for the benefit of Oceanview, provided limited "bad boy" guaranties to Oceanview pursuant to the Construction Loan Agreement until the earlier of the payment in full of the indebtedness or the date of a sale of the property pursuant to a foreclosure of the mortgage or deed or other transfer in lieu of foreclosure is accepted by Oceanview. The Guarantors also entered into a Completion Guaranty Agreement for the benefit of Oceanview to guaranty the timely completion of the project in accordance with the Construction Loan Agreement, as well as a Carry Guaranty Agreement, for the benefit of Oceanview to guaranty and unconditional payment by Chapel Drive East, LLC of all customary or necessary costs and expenses incurred in connection with the operation, maintenance and management of the property and an Environmental Indemnity Agreement jointly and severally in favor of Oceanview whereby the Guarantors serving as Indemnitors provided environmental representations and warranties, covenants and indemnifications (collectively the "Guaranties"). The Guaranties include certain financial covenants required of ACRES RF, including required net worth and liquidity requirements.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

At March 31, 2023, the primary components of our market risk were credit risk, counterparty risk, financing risk, and interest rate risk, as described below. While we do not seek to avoid risk completely, we do seek to assume risk that can be quantified from historical experience, to actively manage that risk, to earn sufficient compensation to justify assuming that risk and to maintain capital levels consistent with the risk we undertake or to which we are exposed.

Credit Risks

Our loans and investments are subject to credit risk. The performance and value of our loans and investments depend upon the sponsors’ ability to operate the properties that serve as our collateral so that they produce cash flows adequate to pay interest and principal due to us. To monitor this risk, ACRES Capital, LLC’s asset management team reviews our investment portfolios and in certain instances is in regular contact with our borrowers, monitoring performance of the collateral and enforcing our rights as necessary.

In addition, we are exposed to the risks generally associated with the commercial real estate (“CRE”) market, including variances in occupancy rates, capitalization rates, absorption rates, and other macroeconomic factors beyond our control. We seek to manage these risks through our underwriting and asset management processes.

The COVID-19 pandemic significantly impacted the CRE markets as numerous state, local, and federal regulations were issued that imposed restrictions on travel and economic activity to contain the spread of the contagion, causing reduced occupancy, requests from tenants for rent deferral or abatement, and delays in construction and development projects. While many of these restrictions have been lifted, the reduced economic activity experienced during the COVID-19 pandemic could still severely impact borrowers’ businesses, financial condition and liquidity and may result in borrowers being unwilling or unable to meet their obligations to us in part or in full.

In a business environment where benchmark interest rates are increasing significantly, cash flows of the CRE assets underlying our loans may not be sufficient to pay debt service on our loans, which could result in non-performance or default. We partially mitigate this risk by generally requiring our borrowers to purchase interest rate cap agreements with non-affiliated, well-capitalized third parties and by selectively requiring our borrowers to have and maintain debt service reserves. These interest rate caps generally mature prior to the maturity date of the loan and the borrowers are required to pay to extend them. In most cases the sponsors will need to fund additional equity into the properties to cover these costs as the property may not generate sufficient cash flow to pay these costs. At March 31, 2023, 93.5% of the par value of our CRE loan portfolio had interest rate caps in place with a weighted-average maturity of 0.9 years.

These macroeconomic conditions may persist into the future and impair our borrowers’ ability to comply with the terms under our loan agreements. We maintain a robust asset management relationship with our borrowers and have utilized these relationships to address the potential impacts of the COVID-19 pandemic, rising interest rates and other macroeconomic factors on our loans secured by properties experiencing cash flow pressure. While we believe the principal amounts of our loans are generally adequately protected by underlying collateral value, there is a risk that we will not realize the entire principal value of certain investments. In order to mitigate that risk, we have proactively engaged with our borrowers, particularly with those with near-term maturities, in order to maximize recovery.

(Back to Index)

70


(Back to Index)

 

Counterparty Risk

The nature of our business requires us to hold our cash and cash equivalents and obtain financing from with various financial institutions. This exposes us to the risk that these financial institutions may not fulfill their obligations to us under these various contractual arrangements. We mitigate this exposure by depositing our cash and cash equivalents and entering into financing agreements with high credit-quality institutions.

Financing Risk

We finance our target assets using our CRE debt securitizations, a senior secured financing facility and warehouse financing facilities. Over time, as market conditions change, we may use other forms of leverage in addition to these methods of financing. Weakness or volatility in the financial markets, the CRE and mortgage markets or the economy generally, such as through the impact of the COVID-19 pandemic, could adversely affect one or more of our lenders or potential lenders and could cause one or more of our lenders or potential lenders to be unwilling or unable to provide us with financing, or to decrease the amount of our available financing, or to increase the costs of that financing.

Interest Rate Risk

Our business model is such that rising interest rates will increase our net income, while declining interest rates will decrease net income, subject to the impact of interest rate floors. At March 31, 2023, 99.8% of our CRE loan portfolio by par value earned a floating rate of interest and may be financed with liabilities that both pay interest at floating rates and that are fixed. Floating-rate loans financed with fixed rate liabilities have a negative correlation with declining interest rates to the extent of our financing. The remaining 0.2% of our CRE loan portfolio by par value earned a fixed rate of interest and may be financed with liabilities that pay interest at fixed rates. To the extent that interest rate floors on our floating-rate CRE loans are in the money, our net interest will have a negative correlation with rising interest rates to the extent of those interest rate floors. Our floating-rate loan portfolio of $2.0 billion had a weighted-average benchmark floor of 0.66% at March 31, 2023.

The following table estimates the hypothetical impact on our net interest income assuming an immediate increase or decrease of 100 basis points in the applicable interest rate benchmark (in thousands, except per share data):

 

 

 

 

Three Months Ended March 31, 2023

 

At March 31, 2023

 

 

100 Basis Point Decrease (4)

 

 

100 Basis Point Increase

 

Net Assets Subject to Interest Rate Sensitivity (1)(2)(3)

 

 

Decrease to Net Interest Income

 

 

Decrease to Net Interest Income Per Share

 

 

Increase to Net Interest Income

 

 

Increase to Net Interest Income Per Share

 

$

341,383

 

 

$

(808

)

 

$

(0.09

)

 

$

865

 

 

$

0.10

 

 

(1)
Includes our floating-rate CRE loans at March 31, 2023.
(2)
Includes amounts outstanding on our securitizations, CRE term warehouse financing facilities, senior secured financing facility and unsecured junior subordinated debentures.
(3)
Certain of our floating rate loans are subject to a benchmark floor.
(4)
Decrease in rates assumes the applicable benchmark rate does not fall below 0%.

Risk Management

To the extent consistent with maintaining our status as a REIT, we seek to manage our interest rate risk exposure to protect our variable rate debt against the effects of major interest rate changes. We generally seek to manage our interest rate risk by monitoring and adjusting, if necessary, the reset index and interest rate related to our borrowings.

(Back to Index)

71


(Back to Index)

 

ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Securities Exchange Act of 1934 reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

Under the supervision of our Chief Executive Officer and Chief Financial Officer, we have carried out an evaluation of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective at the reasonable assurance level.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting during the quarter ended March 31, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

(Back to Index)

72


(Back to Index)

 

PART II

We may become involved in litigation on various matters due to the nature of our business activities. The resolution of these matters may result in adverse judgments, fines, penalties, injunctions and other relief against us as well as monetary payments or other agreements and obligations. In addition, we may enter into settlements on certain matters in order to avoid the additional costs of engaging in litigation. Except as discussed below, we are unaware of any contingencies arising from such litigation that would require accrual or disclosure in the consolidated financial statements at March 31, 2023.

Our subsidiary, Primary Capital Mortgage, LLC (“PCM”), is subject to potential litigation related to claims for repurchases or indemnifications on loans that PCM has sold to third parties. At March 31, 2023 and December 31, 2022, no such litigation demand was outstanding. Reserves for such litigation demands are included in the reserve for mortgage repurchases and indemnifications that totaled $1.2 million at both March 31, 2023 and December 31, 2022. The reserves for mortgage repurchases and indemnifications are included in liabilities held for sale on the consolidated balance sheets. At March 31, 2023, we have substantially completed disposing of PCM’s business.

ITEM 1A. RISK FACTORS

As of the date of this report, there have been no material changes to the risk factors disclosed in our Annual Report on Form 10-K for the year ended December 31, 2022 filed with the Securities and Exchange Commission (“SEC”), except we may disclose changes to such factors or disclose additional factors from time to time in our future filings with the SEC.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Issuer Purchases of Equity Securities

In March 2016, our Board approved our securities repurchase program. In November 2020, our Board authorized and approved the continued use of our existing share repurchase program in order to repurchase up to $20.0 million of our outstanding shares of common stock. In July 2021, the authorized amount was fully utilized and in November 2021, our Board authorized and approved the continued use of our existing share repurchase program to repurchase an additional $20.0 million of our outstanding common stock.

The following table presents information about our common stock repurchases made during the three months ended March 31, 2023 in accordance with our repurchase program (dollars in thousands, except per share data):

 

 

 

Common Stock

 

 

 

Total Number of Shares Purchased

 

 

Average Price Paid per Share (1)

 

 

Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs

 

 

Approximate Dollar Value of Shares that may yet be Purchased under the Plans or Programs

 

January 19, 2023 - January 31, 2023

 

 

9,822

 

 

$

9.78

 

 

 

9,822

 

 

$

7,121

 

February 1, 2023 - February 28, 2023

 

 

24,754

 

 

 

9.48

 

 

 

24,754

 

 

 

6,887

 

March 1, 2023 - March 31, 2023

 

 

45,168

 

 

 

9.39

 

 

 

45,168

 

 

 

6,464

 

 

(1)
The average price paid per share as reflected above includes broker fees and commissions.

 

(Back to Index)

73


(Back to Index)

 

ITEM 6. EXHIBITS

 

Exhibit No.

 

Description

2.1

 

Asset Purchase Agreement, dated June 6, 2017, by and among Stearns Lending, LLC, Primary Capital Mortgage, LLC, and Resource Capital Corp. (10)

3.1(a)

 

Amended and Restated Articles of Incorporation of Resource Capital Corp. (1)

3.1(b)

 

Articles of Amendment to Restated Certificate of Incorporation of Resource Capital Corp. (9)

3.1(c)

 

Articles Supplementary 8.625% Fixed-to-Floating Series C Cumulative Redeemable Preferred Stock. (7)

3.1(d)

 

Articles Supplementary 7.875% Series D Cumulative Redeemable Preferred Stock, as corrected. (24)

3.1(e)

 

Articles of Amendment, effective May 25, 2018. (12)

3.1(f)

 

Articles of Amendment, effective February 16, 2021. (21)

3.1(g)

 

Articles of Amendment, effective May 28, 2021. (25)

3.2

 

Fourth Amended and Restated Bylaws of ACRES Commercial Realty Corp. (21)

4.1(a)

 

Form of Certificate for Common Stock for Resource Capital Corp. (1)

4.1(b)

 

Form of Certificate for 8.625% Fixed-to-Floating Series C Cumulative Redeemable Preferred Stock. (7)

4.1(c)

 

Form of Certificate for 7.875% Series D Cumulative Redeemable Preferred Stock. (24)

4.2(a)

 

Junior Subordinated Indenture between Resource Capital Corp. and Wells Fargo Bank, N.A., dated May 25, 2006. (2)

4.2(b)

 

Amendment to Junior Subordinated Indenture and Junior Subordinated Note due 2036 between Resource Capital Corp. and Wells Fargo Bank, N.A., dated October 26, 2009 and effective September 30, 2009. (6)

4.3(a)

 

Amended and Restated Trust Agreement among Resource Capital Corp., Wells Fargo Bank, N.A., Wells Fargo Delaware Trust Company and the Administrative Trustees named therein, dated May 25, 2006. (2)

4.3(b)

 

Amendment to Amended and Restated Trust Agreement and Preferred Securities Certificate among Resource Capital Corp., Wells Fargo Bank, N.A. and the Administrative Trustees named therein, dated October 26, 2009 and effective September 30, 2009. (6)

4.4

 

Junior Subordinated Note due 2036 in the principal amount of $25,774,000, dated October 26, 2009. (6)

4.5(a)

 

Junior Subordinated Indenture between Resource Capital Corp. and Wells Fargo Bank, N.A., dated September 29, 2006. (3)

4.5(b)

 

Amendment to Junior Subordinated Indenture and Junior Subordinated Note due 2036 between Resource Capital Corp. and Wells Fargo Bank, N.A., dated October 26, 2009 and effective September 30, 2009. (6)

4.6(a)

 

Amended and Restated Trust Agreement among Resource Capital Corp., Wells Fargo Bank, N.A., Wells Fargo Delaware Trust Company and the Administrative Trustees named therein, dated September 29, 2006. (3)

4.6(b)

 

Amendment to Amended and Restated Trust Agreement and Preferred Securities Certificate among Resource Capital Corp., Wells Fargo Bank, N.A. and the Administrative Trustees named therein, dated October 26, 2009 and effective September 30, 2009. (6)

4.7

 

Junior Subordinated Note due 2036 in the principal amount of $25,774,000, dated October 26, 2009. (6)

4.8

 

Description of Registrant’s Securities Registered Pursuant to Section 12 of the Securities Exchange Act of 1934. (35)

4.9(a)

 

Base Indenture, dated August 16, 2021, between the Company and the Trustee. (28)

4.9(b)

 

First Supplemental Indenture, dated August 16, 2021, between the Company and the Trustee. (28)

4.9(c)

 

Form of 5.75% Senior Note due 2026 (included in Exhibit 4.9(b)).

10.1(a)

 

Fourth Amended and Restated Management Agreement, dated as of July 31, 2020, by and among Exantas Capital Corp., ACRES Capital, LLC and ACRES Capital Corp. (16)

10.1(b)

 

First Amendment to Fourth Amended and Restated Management Agreement, dated as of February 16, 2021, by and among ACRES Commercial Realty Corp. f/k/a Exantas Capital Corp., ACRES Capital, LLC and ACRES Capital Corp. (22)

10.1(c)

 

Second Amendment to Fourth Amended and Restated Management Agreement, dated as of May 6, 2022, by and among ACRES Commercial Realty Corp. f/k/a Exantas Capital Corp., ACRES Capital, LLC and ACRES Capital Corp. (36)

10.2(a)

 

Second Amended and Restated Omnibus Equity Compensation Plan. (14)

10.2(b)

 

Amendment No. 1 to the Exantas Capital Corp. Second Amended and Restated Omnibus Equity Compensation Plan. (17)

10.2(c)

 

Third Amended and Restated Omnibus Equity Compensation Plan. (23)

10.2(d)

 

Form of Stock Award Agreement. (8)

10.2(e)

 

Form of Stock Award Agreement (for employees with Resource America, Inc. employment agreements). (8)

10.3

 

Form of Indemnification Agreement. (11)

10.4(a)

 

Loan and Servicing Agreement, dated as of July 31, 2020, among RCC Real Estate SPE Holdings LLC, as Holdings, RCC Real Estate SPE 9 LLC, as the Borrower, Massachusetts Mutual Life Insurance Company and the other Lenders from time to time party thereto, Wells Fargo Bank, National Association, as the Administrative Agent, Massachusetts Mutual Life Insurance Company, as the Facility Servicer, ACRES Capital Servicing LLC, as the Portfolio Asset Servicer, and Wells Fargo Bank, National Association, as the Collateral Custodian. (16)

10.4(b)

 

First Amendment to Loan and Servicing Agreement, dated as of September 16, 2020, among RCC Real Estate SPE Holdings LLC, RCC Real Estate SPE 9 LLC, Massachusetts Mutual Life Insurance Company and Wells Fargo Bank, National Association, as the Administrative Agent. (18)

(Back to Index)

74


(Back to Index)

 

10.4(c)

 

Second Amendment to Loan and Servicing Agreement, dated as of May 25, 2021, among RCC Real Estate SPE Holdings LLC, RCC Real Estate SPE 9 LLC, Massachusetts Mutual Life Insurance Company and Wells Fargo Bank, National Association as the Administrative Agent. (27)

10.4(d)

 

Third Amendment to Loan and Servicing Agreement, dated as of August 16, 2021, among RCC Real Estate SPE Holdings LLC, RCC Real Estate SPE 9 LLC, the Lenders party thereto and Massachusetts Mutual Life Insurance Company and Wells Fargo Bank, National Association as the Administrative Agent.(33)

10.4(e)

 

Fourth Amendment to Loan and Servicing Agreement, dated as of April 12, 2022, among RCC Real Estate SPE Holdings LLC, RCC Real Estate SPE 9 LLC, the Lenders party thereto and Massachusetts Mutual Life Insurance Company and Wells Fargo Bank, National Association as the Administrative Agent. (36)

10.4(f)

 

Fifth Amendment to Loan and Servicing Agreement, dated as of July 26, 2022, among RCC Real Estate SPE Holdings LLC, RCC Real Estate SPE 9 LLC, the Lenders party thereto and Massachusetts Mutual Life Insurance Company and Wells Fargo Bank, National Association as the Administrative Agent. (37)

10.4(g)

 

Sixth Amendment to Loan and Servicing Agreement, dated as of August 29, 2022, among RCC Real Estate SPE Holdings LLC, RCC Real Estate SPE 9 LLC, the Lenders party thereto and Massachusetts Mutual Life Insurance Company and Wells Fargo Bank, National Association as the Administrative Agent. (38)

10.4(h)

 

Guaranty, dated as of July 31, 2020, by Exantas Capital Corp., and each of Exantas Real Estate Funding 2018-RSO6 Investor, LLC, Exantas Real Estate Funding 2019-RSO7 Investor, LLC, and Exantas Real Estate Funding 2020-RSO8 Investor, LLC, in favor of the Secured Parties. (16)

10.4(i)

 

Amended and Restated Loan and Servicing Agreement, dated as of December 22, 2022, among RCC Real Estate SPE Holdings LLC, RCC Real Estate SPE 9 LLC, Plymouth Meeting Holdings, LLC, Exantas Phili Holdings, LLC, ACRES Real Estate TRS 9 LLC, Massachusetts Mutual Life Insurance Company and ACRES Capital Servicing. (40)

10.4(j)

 

Guaranty, dated May 25, 2021 between Exantas Phili Holdings, LLC in favor of the Secured Parties. (36)

10.4(k)

 

Guaranty, dated May 25, 2021 between 65 E. Wacker Holdings, LLC in favor of the Secured Parties. (36)

10.4(l)

 

Guaranty, dated May 25, 2021 between Plymouth Meeting Holdings, LLC in favor of the Secured Parties. (36)

10.4(m)

 

Pledge and Guaranty Agreement, dated August 16, 2021 between ACRES Real Estate TRS 9 LLC in favor of the Secured Parties. (36)

10.4(n)

 

Guaranty, dated April 12, 2022 between Appleton Hotel Holdings, LLC and Appleton Hotel Leasing, LLC in favor of the Secured Parties. (36)

10.5(a)

 

Note and Warrant Purchase Agreement, dated as of July 31, 2020, by and among Exantas Capital Corp. and the Purchasers signatory thereto. (16)

10.5(b)

 

Agreement between the Company, OCM XAN Holdings PT, LLC and the Massachusetts Mutual Life Insurance Company, dated August 18, 2021. (29)

10.5(c)

 

Amendment No. 1 to Note and Warrant Purchase Agreement, dated January 31, 2022, between ACRES Commercial Realty Corp. and the Purchasers signatory thereto. (34)

10.6

 

Promissory Note, dated as of July 31, 2020, issued by ACRES Capital Corp. to RCC Real Estate, Inc. (16)

10.7(a)

 

Manager Incentive Plan. (23)

10.7(b)

 

Form of Stock Award Agreement Under the Manager Incentive Plan. (26)

10.8

 

Equity Distribution Agreement, dated October 4, 2021, by and among ACRES Commercial Realty Corp., ACRES Capital, LLC and JonesTrading Institutional Services LLC. (31)

10.9(a)

 

Building Loan Agreement, dated as of January 24, 2023 between Chapel Drive East, LLC and Oceanview Life and Annuity Company. (42)

10.9(b)

 

Guaranty Agreement executed January 24, 2023 by Jason Pollack, Frank Dellaglio and ACRES Realty Funding, Inc. for the benefit of Oceanview Life and Annuity Company. (39)

10.9(c)

 

Completion Guaranty Agreement executed January 24, 2023 by Jason Pollack, Frank Dellaglio and ACRES Realty Funding, Inc. for the benefit of Oceanview Life and Annuity Company. (39)

10.9(d)

 

Carry Guaranty Agreement executed January 24, 2023 by Jason Pollack, Frank Dellaglio and ACRES Realty Funding, Inc. for the benefit of Oceanview Life and Annuity Company. (39)

10.9(e)

 

Environmental Indemnity Agreement executed January 24, 2023 by Jason Pollack, Frank Dellaglio and ACRES Realty Funding, Inc. in favor of Oceanview Life and Annuity Company. (39)

31.1

 

Rule 13a-14(a)/Rule 15d-14(a) Certification of Chief Executive Officer.

31.2

 

Rule 13a-14(a)/Rule 15d-14(a) Certification of Chief Financial Officer.

32.1

 

Certification Pursuant to 18 U.S.C. Section 1350.

32.2

 

Certification Pursuant to 18 U.S.C. Section 1350.

99.1(a)

 

Master Repurchase Agreement for $250,000,000 between RCC Real Estate SPE 8, LLC, as Seller, and JPMorgan Chase Bank, National Association, as Buyer, dated October 26, 2018. (13)

99.1(b)

 

First Amendment to Uncommitted Master Repurchase Agreement dated as of August 14, 2020 between RCC Real Estate SPE 8, LLC and JPMorgan Chase Bank, National Association. (20)

99.1(c)

 

Amendment No. 2 to Master Repurchase Agreement, dated September 1, 2021 between RCC Real Estate SPE 8, LLC and JPMorgan Chase Bank, National Association. (30)

99.1(d)

 

Amendment No. 3 to Master Repurchase Agreement and Guarantee Agreement, dated October 26, 2021 between RCC Real Estate SPE 8, LLC, JPMorgan Chase Bank, National Association and ACRES Commercial Realty Corp., as guarantor (32)

(Back to Index)

75


(Back to Index)

 

99.1(e)

 

Guarantee made by Exantas Capital Corp., as guarantor, in favor of JPMorgan Chase Bank, National Association, dated October 26, 2018. (13)

99.1(f)

 

First Amendment to Guarantee Agreement, dated May 6, 2020, between Exantas Capital Corp. and JPMorgan Chase Bank, National Association. (15)

99.1(g)

 

Amendment No. 2 To Guarantee Agreement, dated October 2, 2020 between Exantas Capital Corp. and JPMorgan Chase Bank, National Association. (19)

99.1(h)

 

Amendment No. 4 To Guarantee Agreement, dated November 17, 2022 between ACRES Commercial Realty Corp. and JPMorgan Chase Bank, National Association. (41)

99.2(a)

 

Master Repurchase and Securities Contract Agreement between ACRES Real Estate SPE 10, LLC, as Seller, and Morgan Stanley Mortgage Capital Holdings LLC, as Administrative Agent, dated November 3, 2021. (33)

99.2(b)

 

First Amendment to Master Repurchase and Securities Contract Agreement, dated January 28, 2022, between ACRES Real Estate SPE 10, LLC and Morgan Stanley Mortgage Capital Holdings LLC, as Administrative Agent. (34)

99.2(c)

 

Guaranty made by ACRES Commercial Realty Corp., as Guarantor, in favor of Morgan Stanley Mortgage Capital Holdings LLC, dated November 3, 2021. (33)

99.2(d)

 

Amendment No. 1 to Guaranty, dated November 18, 2022 between ACRES Commercial Realty Corp. and Morgan Stanley Mortgage Capital Holdings LLC. (41)

99.3

 

Material Federal Income Tax Considerations. (42)

101.INS

 

Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.

101.SCH

 

Inline XBRL Taxonomy Extension Schema Document.

101.CAL

 

Inline XBRL Taxonomy Extension Calculation Linkbase Document.

101.DEF

 

Inline XBRL Taxonomy Extension Definition Linkbase Document.

101.LAB

 

Inline XBRL Taxonomy Extension Label Linkbase Document.

101.PRE

 

Inline XBRL Taxonomy Extension Presentation Linkbase Document.

104

 

Cover Page Interactive Data File.

 

 

(Back to Index)

76


(Back to Index)

 

 

(1)

Filed previously as an exhibit to the Company’s Registration Statement on Form S-11, Registration No. 333-126517.

(2)

Filed previously as an exhibit to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2006.

(3)

Filed previously as an exhibit to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2006.

(4)

Filed previously as an exhibit to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2013.

(5)

Filed previously as an exhibit to the Company’s Current Report on Form 8-K filed on June 26, 2014.

(6)

Filed previously as an exhibit to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2009.

(7)

Filed previously as an exhibit to the Company’s Registration Statement on Form 8-A filed on June 9, 2014.

(8)

Filed previously as an exhibit to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2014.

(9)

Filed previously as an exhibit to the Company’s Current Report on Form 8-K filed on September 1, 2015.

(10)

Filed previously as an exhibit to the Company’s Current Report on Form 8-K filed on June 8, 2017.

(11)

Filed previously as an exhibit to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2017.

(12)

Filed previously as an exhibit to the Company’s Current Report on Form 8-K filed on May 25, 2018.

(13)

Filed previously as an exhibit to the Company’s Current Report on Form 8-K filed on October 30, 2018.

(14)

Filed previously as an exhibit to the Company’s Proxy Statement filed on April 18, 2019.

(15)

Filed previously as an exhibit to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2020.

(16)

Filed previously as an exhibit to the Company’s Current Report on Form 8-K filed on August 3, 2020.

(17)

Filed previously as an exhibit to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2020.

(18)

Filed previously as an exhibit to the Company’s Current Report on Form 8-K filed on September 22, 2020.

(19)

Filed previously as an exhibit to the Company’s Current Report on Form 8-K filed on October 7, 2020.

(20)

Filed previously as an exhibit to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2020.

(21)

Filed previously as an exhibit to the Company’s Current Report on Form 8-K filed on February 18, 2021.

(22)

Filed previously as an exhibit to the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.

(23)

Filed previously as an exhibit to the Company’s Proxy Statement filed on April 12, 2021.

(24)

Filed previously as an exhibit to the Company’s Current Report on Form 8-K filed on May 21, 2021.

(25)

Filed previously as an exhibit to the Company’s Current Report on Form 8-K filed on June 1, 2021.

(26)

Filed previously as an exhibit to the Company’s Current Report on Form 8-K filed on June 9, 2021.

(27)

Filed previously as an exhibit to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2021.

(28)

Filed previously as an exhibit to the Company’s Current Report on Form 8-K filed on August 17, 2021.

(29)

Filed previously as an exhibit to the Company’s Current Report on Form 8-K filed on August 20, 2021.

(30)

Filed previously as an exhibit to the Company’s Current Report on Form 8-K filed on September 2, 2021.

(31)

Filed previously as an exhibit to the Company’s Current Report on Form 8-K filed on October 7, 2021.

(32)

Filed previously as an exhibit to the Company’s Current Report on Form 8-K filed on October 29, 2021.

(33)

Filed previously as an exhibit to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2021.

(34)

Filed previously as an exhibit to the Company’s Current Report on Form 8-K filed on February 3, 2022.

(35)

Filed previously as an exhibit to the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.

(36)

Filed previously as an exhibit to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2022.

(37)

Filed previously as an exhibit to the Company’s Current Report on Form 8-K filed on July 27, 2022.

(38)

Filed previously as an exhibit to the Company’s Current Report on Form 8-K filed on August 30, 2022.

(39)

Filed previously as an exhibit to the Company’s Current Report on Form 8-K filed on January 25, 2023.

(40)

Filed previously as an exhibit to the Company’s Current Report on Form 8-K filed on December 22, 2022.

(41)

 

Filed previously as an exhibit to the Company’s Current Report on Form 8-K filed on November 18, 2022.

(42)

 

Filed previously as an exhibit to the Company’s Annual Report on Form 10-K for the year ended December 31, 2022.

 

(Back to Index)

77


(Back to Index)

 

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

ACRES COMMERCIAL REALTY CORP.

 

(Registrant)

May 8, 2023

By:

/s/ Mark Fogel

Mark Fogel

President & Chief Executive Officer

May 8, 2023

By:

/s/ David J. Bryant

David J. Bryant

Senior Vice President

Chief Financial Officer and Treasurer

May 8, 2023

By:

/s/ Eldron C. Blackwell

Eldron C. Blackwell

Vice President

Chief Accounting Officer

 

(Back to Index)

78