Earnings call transcript: Acres Commercial Realty beats Q4 2024 EPS forecast

Acres Commercial Realty Corp (ACR) reported its fourth-quarter 2024 earnings on March 5, 2025, surpassing analysts’ expectations with an earnings per share (EPS) of $0.52, compared to the forecast of $0.36. Despite the earnings beat, the company’s revenue fell slightly short of projections, coming in at $21.43 million against an anticipated $21.96 million. Following the earnings announcement, ACR’s stock experienced a minor dip in after-hours trading, reflecting a 0.05% decrease from its last close. According to InvestingPro analysis, ACR currently appears undervalued based on its Fair Value assessment, with the stock trading at a notably low Price-to-Book ratio of 0.33.

Key Takeaways

• EPS of $0.52 exceeded the forecast of $0.36, marking a positive surprise.
• Revenue missed expectations slightly, totaling $21.43 million.
• ACR’s stock fell by 0.05% in after-hours trading.
• The company reduced its debt-to-equity leverage ratio and increased its book value per share.
• Strong performance in student housing developments with high occupancy rates.

Company Performance

Acres Commercial Realty demonstrated robust financial performance in Q4 2024, highlighted by a significant increase in GAAP net income to $4.1 million, translating to $0.52 per diluted share. The company’s strategic focus on high-quality investments and proactive asset management contributed to these results. Compared to the previous quarter, Earnings Available for Distribution (EAD) doubled to $0.48 per share, reflecting improved operational efficiency.

Financial Highlights

• Revenue: $21.43 million, slightly below expectations.
• EPS: $0.52, a 44% increase over the forecast.
• Net interest income: $8.6 million.
• GAAP book value per share: $28.87, up from $27.92 in Q3.
• Debt-to-equity leverage ratio: 3.0x, reduced from 3.3x.

Earnings vs. Forecast

Acres Commercial Realty’s EPS of $0.52 exceeded the forecast of $0.36, representing a 44% positive earnings surprise. This marks a significant improvement over previous quarters, where earnings were more closely aligned with analyst predictions. The revenue shortfall, however, was minimal, missing the forecast by approximately 2.5%.

Market Reaction

Despite the earnings beat, ACR’s stock experienced a minor decline of 0.05% in after-hours trading, closing at $20.14. This slight drop might be attributed to the revenue miss and broader market trends affecting the commercial real estate sector. The stock remains near its 52-week high of $21.18, indicating investor confidence in the company’s long-term strategy. InvestingPro data shows ACR has delivered an exceptional 87.17% return over the past year, with particularly strong momentum in recent months, as evidenced by a 29.52% gain over the last six months.

Outlook & Guidance

Looking forward, Acres Commercial Realty aims to grow its portfolio to $1.8-$2.0 billion by year-end, targeting mid-teens return on equity (ROE). The company plans to re-leverage its portfolio to historical levels and focus on multifamily, hospitality, and self-storage sectors. Expected EPS for FY2025 is projected at $1.93, with revenue anticipated to reach $89.6 million.

Executive Commentary

Chairman Andrew Fentress emphasized the company’s mission to achieve mid-teens ROEs and maintain an 8-10% EAD range at book value. CEO Mark Vogel noted increased market activity, particularly in refinancing and new loan opportunities, which are expected to drive future growth.

Risks and Challenges

• Potential market volatility affecting commercial real estate values.
• Interest rate fluctuations impacting loan spreads and profitability.
• Execution risks in expanding the loan portfolio and achieving targeted leverage levels.
• Economic downturns potentially affecting occupancy and rent growth in student housing.

Q&A

During the earnings call, analysts inquired about the company’s plans for reinvesting gains from real estate sales and the expected timeline for completing real estate monetization. Management highlighted their strategy to recycle capital back into the loan book and anticipated most monetization efforts to conclude in 2025.

Full transcript - Acres Commercial Realty Corp (ACR) Q4 2024:

Conference Operator: Good day, ladies and gentlemen, and welcome to the Fourth Quarter twenty twenty four Acres Commercial Realty Corp Earnings Conference Call. Currently, all participants are in a listen only mode. Later, we will conduct a question and answer session with instructions to follow at that time. As a reminder, this call is being recorded. I would now like to introduce your host for today’s conference, Kyle Bringle, Vice President, Operations.

You may begin.

Kyle Bringle, Vice President, Operations, Acres Commercial Realty Corp: Good morning, and thank you for joining our call. I would like to highlight that we have posted the fourth quarter twenty twenty four earnings presentation to our website. This presentation contains summary and detailed information about the quarterly results of the company. Before we begin, I want to remind everyone that certain statements made during this call are not based on historical information and may constitute forward looking statements. When used in this conference call, the words believes, anticipates, expects and similar expressions are intended to identify forward looking statements.

Although the company believes that these forward looking statements are based on reasonable assumptions, such statements are based on management’s current expectations and beliefs and are subject to several trends, risks and uncertainties that could cause actual results to differ materially from those contained in the forward looking statements. These risks and uncertainties are discussed in the company’s reports filed with the SEC, including its reports on Forms eight ks, 10 Q and 10 ks, and in particular, the Risk Factors section of its Form 10 ks. Listeners are cautioned not to place undue reliance on these forward looking statements, which speak only as of the date hereof. The company undertakes no obligation to update any of these forward looking statements. Furthermore, certain non GAAP financial measures may be discussed on this conference call.

A presentation of this information is not intended to be considered in isolation or as a substitute to the financial information presented in accordance with GAAP. Reconciliations of non GAAP financial measures to the most comparable measures prepared in accordance with generally accepted accounting principles are contained in the earnings presentation for the past quarter. With me on the call today are Mark Vogel, President and CEO and Eldren Blackwell, ACR’s CFO. Also available for Q and A is Andrew Fentress, Chairman of ACR. I will now turn the call over to Mark.

Mark Vogel, President and CEO, Acres Commercial Realty Corp: Good morning, everyone, and thank you for joining our call. Today, I will provide an overview of our loan operations, real estate investments and the health of the investment portfolio, while Eldrin Blackwell will discuss the financial statements, liquidity condition, book value and operating results for the fourth quarter twenty twenty four. Of course, we look forward to your questions at the end of our prepared remarks. The Acres team continues to execute on our business plan by developing a pipeline of high quality investments, actively managing the portfolio and continuing to focus on growing earnings and book value for our shareholders. Loan payoffs during the period were $107,500,000 We closed one new commitment of $47,900,000 with an unfunded commitment of $28,400,000 and funded existing loan commitments during the quarter of $6,200,000 producing a net reduction of the loan portfolio of $81,800,000 The weighted average spread of the floating rate loans in our $1,500,000,000 commercial real estate loan portfolio is now 3.73% over one month term SOFR rates.

The portfolio generally continues to perform demonstrating sound and consistent underwriting and proactive asset management. The company ended the quarter with $1,500,000,000 of commercial real estate loans across 53 individual investments and one loan held for sale at $11,100,000 At December 31, our weighted average risk rating was 2.9, an increase from 2.7 at September 30 and there were 12 loans rated four or five, which represented 27% of the par value of our portfolio, an increase of 4% as compared to the end of the third quarter of twenty twenty four. Subsequent to December 31, a four rated loan with a principal balance of $30,000,000 paid off at par, bringing our four or five rated loans to approximately 25% of the par value of our portfolio and our weighted average risk rating to 2.8 on a pro form a basis. We continue to manage several investments in real estate that we expect to monetize that gains in the future. These anticipated gains will be offset by deferred tax assets and we expect to retain the equity and reinvest potential gains into our loan portfolio.

One of those investments, an office property in Pennsylvania was sold during the period for a gain of $7,500,000 In January, we sold a loan on an underperforming hotel in Orlando that was risk rated for at 94% of our basis. We’ve already recorded the impact on book value at December 31 and we will have a charge off to EAD of $700,000 in the first quarter. The sale will allow us to redeploy the capital into new loans. Our student housing development at Florida State University opened in August 2024 at 95% occupancy. Pre leasing for the twenty twenty five-twenty twenty six school year has been tracking well ahead of the current year in terms of both occupancy and rental rates.

One asset’s pre leasing is approximately 20% higher as compared to this time last year, while another asset is seeing near double digit rent growth compared to twenty twenty four, twenty twenty five school year. We are working with our partner to sell the asset and we’ll provide updates in future quarters on the monetization of this asset. As we exit our real estate investments, we expect to redeploy the capital into our CRE loan book and look to increase our levered returns on the portfolio. Along those lines, we are working on the liquidation of our two CRE securitizations structured in 2021. The leverage profile on an aggregate basis declined to 77% at December 31 and we will look to refinance the assets in the first quarter.

We have $2,300,000 of unamortized debt issuance costs as of December 31 and will incur a charge with the acceleration. In summary, the Acres team continues to be focused on the overall quality of the investment portfolio, including investments in real estate with the goal of improving credit quality and recycling capital into performing categories. We will now have ACR’s CFO, Eldrin Blackwell, discuss the financial statements and operating results during the fourth quarter.

Eldren Blackwell, CFO, Acres Commercial Realty Corp: Thank you and good morning everyone. GAAP net income allocable to common shares in the fourth quarter was $4,100,000 or $0.52 per share diluted. GAAP net income for the quarter included $8,600,000 in net interest income, a net loss on real estate operations of $2,300,000 which included depreciation of $1,400,000 and as Mark previously mentioned a gain of $7,500,000 or $0.95 per share resulting from the sale of our interest in a real estate property. We saw a decrease in current expected credit losses or CECL reserves of $1,200,000 or $0.15 per share as compared to a decrease in CECL reserves during the February The $1,200,000 fourth quarter reversal of CECL reserves was primarily driven by loan payoffs and improvements in expected macroeconomic factors offset by an increase in model credit risk resulting from worsening property level performance on certain loans and a direct charge off of 700,000 to the reserve related to the Orlando hotel loan Mark previously discussed, which was sold in the first quarter of twenty twenty five. The total balance for credit losses at December 31 was $32,800,000 and represented 2.2% or two twenty basis points on our $1,500,000,000 loan portfolio at par and comprised $4,700,000 in specific reserves and $28,100,000 in general credit reserves.

Earnings available for distribution or EAD for the quarter twenty twenty four was 0.48 per share as compared to $0.24 per share for the third quarter. The difference primarily resulted from a $0.67 increase to EAD from previously mentioned gain on sale property and was offset by $0.24 decrease in net interest income driven by loan payoffs and a decline in SOFR, a $0.15 decrease in real estate operation and a $0.03 increase in operating expenses. GAAP book value per share was $28.87 on December 31 versus $27.92 on September 30. During the fourth quarter, we purchased $2,300,000 from our previous repurchase plan and our board approved an additional $5,000,000 on our buyback program. In total, we used $2,500,000 to repurchase 155,000 common shares at an approximate 43% discount to book value on December 31.

There was approximately $4,800,000 remaining on the board approved program at year end. Available liquidity at December 31 was $76,900,000 which comprised $56,700,000 of unrestricted cash and $20,200,000 of projected financing available on unlevered asset. Our GAAP debt to equity leverage ratio slightly decreased to three times at December 31 from 3.3 times at September 3, primarily as a result of payoffs and our two remaining CRE securitizations and our recourse debt leverage ratio remained consistent at 1.1 times at both December 31 and September 30. At the end of Q4, the company’s net operating loss carry forward was $32,100,000 or approximately $4.31 per share. As Mark indicated, we will have some one time charge events in the first quarter of twenty twenty five.

As we transact on some of our assets, refinance our delevered CLOs and begin to reinvest the proceeds into our CRE loan book, we expect to see our EAD profile trend up from a low point in the early part of twenty twenty five. With that, I will turn the call to Andrew Fentress for closing remarks.

Andrew Fentress, Chairman, Acres Commercial Realty Corp: Thank you, Eldren. We are at an important inflection point in the management strategy for the company. As discussed, we’re actively monetizing the equity investments made to utilize the NOL inherited from when we took over management in August of twenty twenty. We expect to redeploy that equity capital into the loan book through active origination activity. We also expect to re leverage the portfolio through the CRE CLO market and take leverage back to historical leverage of between 3.54 turns.

Our mission is to drive mid teens ROEs that net down to a run rate 8% to 10% EAD range at book value. As always, careful origination and active asset management are the cornerstones of our approach to creating sound book value. As the above transition unfolds over the next couple of quarters, there will be some noise associated with DDI and other charges and it will take time to re leverage the book. We are close and we are confident in the team. We will get to our stated objectives.

We are respectful of your confidence in us and look forward to your questions. Operator, this concludes our opening remarks and I’ll turn the call back over for questions. Thank you.

Conference Operator: Thank We’ll take our first question from Matthew Ertner with Jones Trading. Please go ahead. Your line is open.

Matthew Ertner, Analyst, Jones Trading: Hey, good morning guys. Thanks for taking the question. So looking at Slide eight, it looks like there’s a little over $100,000,000 in payoffs that are expected to occur this year based on fully extended loans. Do you guys expect any additional payoffs to come through from some of those two rated loans? And then if you could, could you kind of give a little guidance in terms of portfolio growth and what you’re targeting there on kind of a net basis?

Mark Vogel, President and CEO, Acres Commercial Realty Corp: Yes. We do expect more payoffs on some of the higher rated loans. In fact, we’ve already had during Q1 a few more payoffs than were expected. So I would anticipate that given the fact that many of our properties are starting to stabilize, the fact that there is some a lot of availability in the bridge loan market to refinance loans, there’s certainly a higher level of payoffs. But we expect to roll those back into our loan book very quickly.

Ultimately, we expect that by the end of the year, our portfolio will be somewhere in the range of $1,800,000,000 to $2,000,000,000 up from where it is today $1,500,000,000

Matthew Ertner, Analyst, Jones Trading: Great. That’s helpful. And then I guess in terms of opportunities, what are you guys seeing out there? I know you just mentioned bridge, but as the target still kind of do increase multifamily, I guess just what are you guys seeing out in the market right now?

Mark Vogel, President and CEO, Acres Commercial Realty Corp: We’re seeing a lot more activity in the market for sure. I think it was obviously pretty quiet over the last couple of years. We’re seeing a lot of multifamily refinancings for loans coming out of construction. And at the same time, there’s other asset classes, which are attracted to us, where we’re seeing certainly improved fundamentals, whether that’s hospitality or self storage. There’s just a lot coming in the door more so than expected.

So we’ll be able to pick and choose some pretty good assets along the way.

Matthew Ertner, Analyst, Jones Trading: Yes, that’s helpful. And then last one for me. As you guys kind of de lever and refinance the CLOs, are you guys expecting to kind of have a reinvestment there to leave it open for future loan originations that you guys do make?

Andrew Fentress, Chairman, Acres Commercial Realty Corp: Yes, absolutely. So the new structures will include a revolving period of at least twenty four months. So that will give the company some flexibility to add names in the future while tying up liabilities at pretty attractive levels here.

Matthew Ertner, Analyst, Jones Trading: Great. Thank you guys.

Andrew Fentress, Chairman, Acres Commercial Realty Corp: Thank you.

Conference Operator: Thank you. We will move next with Chris Mueller with Citizens Bank. Please go ahead. Your line is open.

Chris Mueller, Analyst, Citizens Bank: Hey guys. Thanks for taking the question and congrats on a nice finish to a challenging year. So I guess you guys are in a really good position to grow your book value as you continue to harvest these gains from the REO in addition to share buybacks and both those were really nicely accretive in the fourth quarter. And that’s really not something we’re seeing in the rest of the group. So I guess this has been a long strategy you guys have been working on and it’s nice to see it start playing out.

So I guess my question would be is on the rest of the REO, are you guys expecting gains anywhere near what you saw on the office sale because that could really lead to some nice book value gains over the next year or two. So just any thoughts on the magnitude of those potential gains going forward would be really helpful.

Andrew Fentress, Chairman, Acres Commercial Realty Corp: Yes. So we’ve been purposely careful and not guiding too specifically in terms of where we think those sales are going to land. But I would echo what you’ve said, which is we believe and we’ve said in the comments that there’s going to be some future gain. And most importantly, when those gains are realized that that capital gets recycled back into the loan book using the facilities that we’re now creating. So I think that the strategy is the same as what we’ve discussed and you’ll see it play out over the next couple of quarters.

And then we’ll be out of that part of our strategy and history around making those investments and beat squarely back into the full time loan making business.

Chris Mueller, Analyst, Citizens Bank: Got it. And do you expect that to be mostly wrapped up in 2025 or could some of those properties slip to ’26?

Andrew Fentress, Chairman, Acres Commercial Realty Corp: I would say it would be largely completed in 2025.

Chris Mueller, Analyst, Citizens Bank: Got it. And then just the last one I have here, it’s a little housekeeping one. So the increase in real estate expenses quarter over quarter, does that include some selling costs or is there something else going on in that line item?

Eldren Blackwell, CFO, Acres Commercial Realty Corp: No, this is Owen speaking. For the most part, there were a bunch of cleanup items. We call them one time items and we don’t expect to see them in 2025, but mostly cleanup. We’ve got some new managers in there. We’ve been hitting hard for properties to better understand the stabilized cost structures.

So for the most part, I would just say we’re not looking forward to having those kinds of expenses in that expense in 2025.

Chris Mueller, Analyst, Citizens Bank: Got it. So 4Q is probably not a good run rate to use going forward though. That’s very helpful. Thanks for taking the questions.

Andrew Fentress, Chairman, Acres Commercial Realty Corp: Sure thing.

Conference Operator: Thank you. And it appears that we have no further questions at this time. I will turn the call back to Andrew for closing remarks.

Andrew Fentress, Chairman, Acres Commercial Realty Corp: Thank you, operator, and thank you everyone for joining. We look forward to following up with you, if not before, at our next quarterly call.

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