Earnings call transcript: Acres Commercial Realty misses Q1 2025 expectations

Acres Commercial Realty Corp (ACR) reported a disappointing financial performance for the first quarter of 2025, missing both earnings and revenue forecasts. The company reported an earnings per share (EPS) loss of $0.80, significantly below the forecasted EPS of $0.33. Revenue also fell short, coming in at $17 million against a forecast of $21.84 million. Following the announcement, ACR’s stock price decreased by 1.45%, closing at $19.05, down from the previous day’s close of $19.33. Despite the quarterly miss, InvestingPro analysis suggests the stock is currently undervalued, with a strong financial health score of 2.52 (GOOD) and impressive year-over-year total return of 43%.

Key Takeaways

• Acres Commercial Realty reported a net loss of $5.9 million, translating to an EPS loss of $0.80.
• Revenue fell short of expectations, totaling $17 million compared to the forecast of $21.84 million.
• The company’s stock price declined by 1.45% in response to the earnings report.
• A new $940 million financing facility was secured with JPMorgan.
• The company plans to grow its portfolio by $300-500 million by year-end.

Company Performance

Acres Commercial Realty experienced a challenging first quarter, with financial results falling below analyst expectations. The company reported a net loss of $5.9 million, or $0.80 per diluted share. This performance marks a significant downturn compared to previous quarters, reflecting broader challenges in the commercial real estate sector. According to InvestingPro data, the company maintains strong fundamentals with a price-to-book ratio of just 0.3 and liquid assets significantly exceeding short-term obligations, as evidenced by a current ratio of 67.05. Get access to 8 more exclusive ProTips and comprehensive analysis with an InvestingPro subscription.

Financial Highlights

• Revenue: $17 million, below the forecast of $21.84 million.
• Earnings per share: Loss of $0.80, compared to the forecast of $0.33.
• Net interest income: $5.6 million.
• GAAP book value per share: $28.50, down from $28.87 at the end of December.

Earnings vs. Forecast

Acres Commercial Realty’s earnings per share were significantly below expectations, with a reported loss of $0.80 compared to the forecasted profit of $0.33. This represents a negative surprise of over 340%, highlighting a substantial deviation from analyst predictions. Revenue also fell short, coming in at $17 million against a forecast of $21.84 million, marking a notable miss.

Market Reaction

In response to the earnings miss, Acres Commercial Realty’s stock price fell by 1.45%, closing at $19.05. This decline reflects investor disappointment in the company’s financial performance. The stock remains well within its 52-week range, with a high of $23.81 and a low of $12.33, indicating that while the reaction was negative, it was not extreme.

Outlook & Guidance

Despite the challenging quarter, Acres Commercial Realty remains optimistic about future growth. The company expects to expand its portfolio by $300-500 million by the end of the year. Management anticipates that the first quarter will be the lowest point of the year, with plans to ramp up securitization in the second half. InvestingPro analysts project the company will be profitable this year, with an EPS forecast of $2.20 for FY2025. Dive deeper into ACR’s potential with InvestingPro’s exclusive Fair Value analysis and comprehensive Pro Research Report, part of our coverage of 1,400+ US stocks.

Executive Commentary

Andrew Fentress, Chairman, stated, "The investment landscape is attractive," suggesting confidence in future opportunities. CEO Mark Vogel emphasized the company’s active deal pipeline, noting, "We are quoting deals more so than ever at this point." Vogel also highlighted the company’s growth ambitions, stating, "We expect to grow the portfolio... somewhere between $300,000,000 and $500,000,000."

Risks and Challenges

• Market volatility could impact the company’s ability to secure favorable deals.
• The broader economic environment and interest rate fluctuations may affect real estate valuations.
• The company’s reliance on a concentrated loan portfolio presents potential risks if market conditions worsen.

Acres Commercial Realty’s first-quarter results underscore the challenges facing the commercial real estate sector. While the company has outlined an ambitious growth strategy, it will need to navigate a complex market environment to achieve its goals.

Full transcript - Acres Commercial Realty Corp (ACR) Q1 2025:

Conference Operator: As a reminder, this call is being recorded. I would now like to introduce your host for today’s conference, Kyle Brinjal, Vice President, Operations. You may go ahead.

Kyle Brinjal, Vice President, Operations, ACR: Good morning, and thank you for joining our call. I would like to highlight that we have posted the first quarter twenty twenty five 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 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.

Our 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 Elgin 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, ACR: 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 Eldon Blackwell will discuss the financial statements, liquidity condition, book value, and operating results for the first quarter twenty twenty five. 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 focusing on growing earnings and book value for our shareholders. Loan payoffs during the period were $115,900,000 We closed one new commitment of $15,000,000 and funded existing loan commitments during the quarter of $12,000,000 producing a net reduction of the loan portfolio of 109,600,000 In addition, we sold two loans during the period, including a loan reported as held for sale at 12/31/2024 for $31,700,000 in proceeds.

The weighted average spread of the floating rate loans in our $1,400,000,000 commercial real estate loan portfolio is now 3.67% over one month term SOFR rates. The portfolio generally continues to perform, demonstrating sound and consistent underwriting and proactive asset management. Company ended the quarter with $1,400,000,000 of commercial real estate loans across 48 individual investments. Our weighted average risk rating was 2.9 at the end of both Q1 twenty twenty five and Q4 twenty twenty four, and the number of loans rated four zero five decreased by one from 12 at the end of last year to 11 at the end of this quarter. In March, we sold a $20,600,000 loan at par on an underperforming sub storage facility in Miami that had a poor risk rating.

This quarter, we also had a charge off to EAD of $700,000 or $0.10 per share related to a loan we sold on an underperforming hotel in Orlando that was held for sale at December 31. Continue to manage several investments in real estate that we expect to monetize at gains in the future. These anticipated gains will be offset by deferred tax assets. We will provide updates in future quarters on the monetization of these assets. As we exit our real estate investments and the loan portfolio continues to amortize, we expect to redeploy capital into attractive CRE loans.

As always, we will seek to optimize our portfolio leverage in order to drive equity returns. During the quarter, we closed a new $940,000,000 financing facility with JPMorgan. The facility includes a two year reinvestment period that will provide for reinvestment of principal proceeds from asset repayments into qualifying replacement assets. Facility allowed us to refinance collateral from our two twenty twenty one CRE securitizations, pay off a majority of the balances on our warehouse lines. As a result of the financing, we incurred a non recurring charge of $1,500,000 or $0.20 per share related to unamortized debt issuance costs at the two CRE securitizations.

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 new investments to enhance shareholder value. We will now have ACR’s CFO, Eldrin Blackwell, discuss the financial statements and operating results during the quarter.

Elgin Blackwell, CFO, ACR: Thank you, and good morning, everyone. GAAP net loss allocable to common shares in the first quarter was $5,900,000 or $0.80 per share diluted. GAAP net loss for the quarter included $5,600,000 in net interest income and net loss on real estate operations of $2,000,000 which included depreciation of $1,000,000 We saw a decrease in current expected credit losses or CECL reserves of $1,700,000 or zero two three dollars per share as compared to a decrease in CECL reserves during the fourth quarter of $1,200,000 The first quarter twenty twenty five reversal in CECL of $1,700,000 was primarily driven by loan payoffs. The total allowance for credit losses at March 31 was $31,100,000 and represented 2.26% or two twenty six basis points on our $1,400,000,000 loan portfolio at par and comprised $4,700,000 in specific reserves and $26,400,000 in general reserves. Earnings available for distribution or EAD for the quarter for the first quarter of twenty twenty five was a loss of $0.86 per share as compared to earnings of $0.48 per share for the fourth quarter.

Quarter over quarter, EAD saw a $0.41 decrease in net interest income, a $0.10 decrease from the realized loss on a loan held for sale, and a $09 decrease from real estate operation. The decreases in net interest income were driven by loan payoffs, SOFR declines, and the aforementioned DDI accelerations related to the refinancing of our two CRE securitization. The decreases in real estate operations are primarily due to seasonality in operation. GAAP book value per share was $28.5 on March 31 versus $28.87 on December 31. Additionally, during the quarter, we used $4,400,000 to repurchase 220,000 common shares at an approximate 30% discount to book value on March 30 approximately $426,000 remaining on the board approved program at quarter end.

Available liquidity at March 31 was $87,000,000 which comprised $66,000,000 of unrestricted cash and $21,000,000 of projected financing available on unlevered assets. Our GAAP debt to equity leverage ratio slightly decreased to 2.9 times at March 31 from three times at December 31, primarily resulting from loan payoffs. And our recourse debt leverage ratio increased to 2.9 times at March 31 from 1.1 times at December 31, primarily as a result of the liquidation of our two CRE securitizations and the closing of our new financing facility. At the end of Q1, the company’s net operating loss carryforwards were $32,100,000 or approximately $4.44 per share. And with that, I will now turn the call to Andrew Fentress for closing remarks.

Andrew Fentress, Chairman, ACR: Thank you, Eldrin. As previously discussed, the smaller portfolio size, seasonal expenses, onetime DDI charges related to the recent refinancing of FL1, FL2 securitizations, and seasonally slow hospitality drove negative performance in the quarter. We expect Q1 to represent a trough on the portfolio size. Our plan is to utilize capital from recent loan repayments, proceeds from asset sales and available liquidity from our lending partners to ramp the securitization in the second half of the year. The investment landscape is attractive.

We’re actively closing new loans across the Acres platform. As has been the foundation of our philosophy, credit quality of the current portfolio remains strong, and we continue to monitor each of the names for any changes to our underwriting. We look forward to your questions and speaking with you over the coming weeks. This concludes our opening remarks. I’ll now turn the call back over to the operator for questions.

Conference Operator: Thank you. Our first question will come from Matthew Erdner with Jones Trading. Your line is open.

Matthew Erdner, Analyst, Jones Trading: Hey, good morning guys. Thanks for taking the question. Could you talk a little bit about the more of the portfolio and the payoffs that occurred during the quarter? Know, were those expected to come through or some of them early?

Mark Vogel, President and CEO, ACR: Hey Matt, this is Mark. No, those were expected to come through. We had five loan payoffs, for through refinancing into permanent vehicles. One of them was an asset that was sold. And then as we indicated, we had one note that we sold, actually two notes that we sold during the quarter and that really represents the entire amount of the payoffs, but none were not expected.

Matthew Erdner, Analyst, Jones Trading: Got it, and then as kind of a follow-up to that, fully extended, it looks there’s 101,000,000 for the remainder of the year. Should we expect a little more kind of maybe towards the back half, some early payments, I guess, so to speak? And then as that occurs, what should we expect in terms of portfolio growth? Because spreads kind of tighten there in terms of, I guess, multifamily lending. So I guess, what are the opportunities you guys are seeing now?

And just kind of talk about where you’d like to see the portfolio to get that securitization off?

Mark Vogel, President and CEO, ACR: Yeah, great question. Look, think payoffs are good, it shows that we have a healthy portfolio and we do expect that there will be more payoffs throughout the year through refinancings or sales of assets. You know, the multi family market is very healthy and I think because of that you’re going to see sales and refinancings across the board with all lenders. We expect to grow the portfolio though despite the payoffs, as I indicated last quarter, our expectation is that through the end of the year we’ll have net growth in the portfolio somewhere between 300,000,000 and 500,000,000. There’s certainly opportunity in multi family, but we don’t limit ourselves to just that asset class, we are looking across the board at assets like student housing and self storage and retail, but multi family will continue to be the bulk of what we do on a go forward basis.

Matthew Erdner, Analyst, Jones Trading: Got it, that’s helpful, thank you guys.

Conference Operator: Thank you, our next question will come from Chris Muller with Citizens Capital Markets. Your line is open.

Chris Muller, Analyst, Citizens Capital Markets: Hey guys, thanks for taking the questions. So I wanted to start on the loan sales and I think I heard Mark, I think you said that one of the loans was sold at par, but I didn’t catch the other loan. So was that sold below par and just any details you could give us would be helpful.

Mark Vogel, President and CEO, ACR: Yes, yes. The one was sold at par during the quarter. The other one was on a non performing hotel property where we were offered 94¢ on the dollar. We took a $700,000 loss on that asset and it was, in my view, the right thing to do as opposed to letting the asset continue to not perform within our portfolio.

Chris Muller, Analyst, Citizens Capital Markets: Got it. That’s helpful. And then I guess looking at the income statement, you guys touched on this a little bit in your prepared remarks, but it looks like the real estate expenses jumped and REO was kind of a drag on first quarter earnings. Can you talk us through that dynamic? Is it mostly seasonality?

And then just a second part of that question, should we expect to see any REO sales in 2025 or is that looking too far ahead?

Mark Vogel, President and CEO, ACR: Yeah, the drag is, in Q1 I think if you went back to last year, you’d see the same dynamic. It’s a seasonality issue with respect to the hotels that we own. You’ll see, I think as we go forward in Q2, Q3 and Q4, that that will flip over to sort of a flat or positive number versus a loss on REO operations. As

Elgin Blackwell, CFO, ACR: far

Mark Vogel, President and CEO, ACR: as sales of assets go, we are actively in the market with several of our real estate investments. I don’t have anything to report right now, but my expectation is that in the next quarter or maybe the following quarter we will have something more to report.

Chris Muller, Analyst, Citizens Capital Markets: Got it, very helpful. If I could just squeeze one more just on your comments for the last question. So I guess with the expectations of 300 to $500,000,000 of growth in 2025, how’s the pipeline looking and have you seen any impacts on the pipeline given some of the recent market volatility?

Mark Vogel, President and CEO, ACR: No, in fact, the pipeline has been stronger than ever. Think there’s a lot of opportunities out there. We are quoting deals more so than ever at this point. Think, in fact the volatility has caused some of the lenders to move to the sidelines and wait which is pushing a lot more deals our way in the ways of those that are continuing to be active. We see a lot of really good opportunities and we are absolutely quoting three to four deals a day and I expect that growth will not be a problem along the lines of what I mentioned earlier.

Chris Muller, Analyst, Citizens Capital Markets: Yeah, that’s great to hear. Look forward to seeing the story play out this year and thanks for taking the questions.

Mark Vogel, President and CEO, ACR: Thank you.

Conference Operator: It appears we have no further questions at this time. I’ll now turn the program back over to our presenters for any additional or closing remarks.

Mark Vogel, President and CEO, ACR: Thank you everyone for joining our call. We look forward to gathering again in Q2.

Conference Operator: Thank you ladies and gentlemen. This concludes today’s event. You may now disconnect.

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