ACRES Commercial Realty Corp
For the period ended Sep 30, 2024. Filed Nov 6, 2024.
View on SEC.govAbout this filing
A company's report for each of its first three quarters. The financial statements are not audited. It shows how the business has moved since the last annual report, and what management says changed.
Sep 30, 2024 · Filed Nov 6, 2024
ACR$12.05-8.1%Stored close · as of Nov 6, 2026
What changed in Management’s Discussion and Analysis?
Read the current filingPrevious report: 10-Q
Period ended 2024-06-30; filed 2024-08-06.
0000950170-24-091713
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of OperationsCurrent report: 10-Q
Period ended 2024-09-30; filed 2024-11-06.
0000950170-24-122460
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of OperationsThe baseline is this issuer’s latest earlier reporting period of the same form that was filed before the current report. A previous 10-Q is a different quarter, not a year-over-year comparison. Amendments are excluded.
Compared 294 previous paragraphs and 326 current paragraphs.
159 unchanged; 118 reworded; 49 added; 17 removed; 0 previous and 0 current paragraphs rearranged.
Tables are not compared: 36 previous and 36 current tables excluded. Dates, whitespace, punctuation and numbering changes are ignored; changes to financial figures remain significant.
A changed paragraph is not evidence that risk increased or decreased. An unchanged paragraph does not establish that risk stayed the same.
Added paragraphs (49)
Current report
Net Change in Interest Expense for the Comparative three and nine months ended September 30, 2024 and 2023:
Current report
Includes amortization expense of $170,000 and $159,000 for the three months ended September 30, 2024 and 2023, respectively.
Current report
Includes amortization expense of $501,000 and $471,000 for the nine months ended September 30, 2024 and 2023, respectively.
Current report
Aggregate operating expenses increased by $584,000 for the comparative three months ended September 30, 2024 and 2023 and decreased by $1.5 million for the comparative nine months ended September 30, 2024 and 2023. We attribute the changes to the following:
Current report
Real estate expenses. The increase of $2.8 million for the three months ended September 30, 2024 and $2.7 million for the nine months ended September 30, 2024 was primarily related to (i) an increase in expenses related to a student housing property that completed construction and became operational in August 2024 and (ii) an incremental increase in expenses from the acquisition of an office building through deed-in-lieu of foreclosure in June 2023, and asset acquisitions in the third quarter of 2024 of a multifamily property and an office property through deed-in-lieu of foreclosure.
Current report
Includes one novated CRE whole loan that resulted from a loan workout.
Current report
During the three and nine months ended September 30, 2024, we recognized interest income of $204,000 and $338,000, respectively, on one CRE whole loan that was placed on nonaccrual status. In both the three and nine months ended September 30, 2023, we recognized interest income of $335,000 on two CRE whole loans that were placed on nonaccrual status.
Current report
Includes $2.4 million and $2.9 million of deferred debt issuance costs at September 30, 2024 and December 31, 2023, respectively.
Current report
Excludes deferred debt issuance costs of $2.4 million.
Current report
Excludes accrued interest payable of $461,000 and deferred debt issuance costs of $1.2 million.
Current report
In November 2024, the Morgan Stanley Facility was extended to November 2025.
Current report
Excludes deferred debt issuance costs of $121,000.
Current report
Excludes deferred debt issuance costs of $405,000.
Current report
Excludes deferred debt issuance costs of $408,000.
Current report
Excludes $280,000 of accrued interest payable.
Current report
Includes $461,000 of accrued interest payable.
Current report
Excludes $689,000 of accrued interest payable.
Current report
Critical Accounting Policies and Estimates
Current report
Our consolidated financial statements are prepared by management in accordance with GAAP. The preparation of financial statements in conformity with GAAP requires that we make estimates and assumptions that may affect the value of our assets or liabilities and disclosure of contingent assets and liabilities at the date of our financial statements and our financial results. We believe that certain of our policies are critical because they require us to make difficult, subjective and complex judgments about matters that are inherently uncertain. The critical policies summarized below relate to valuation of investment securities, accounting for derivative financial instruments and hedging activities, income taxes, allowance for credit losses and variable interest entities (“VIEs”).
Current report
Allowance for Credit Losses
Current report
We maintain an allowance for credit loss on our loans held for investment. CRE loans that are held for investment are carried at cost, net of unamortized acquisition premiums or discounts, loan fees and origination costs as applicable. Effective January 1, 2020, we determine our allowance for credit losses, consistent with GAAP, by measuring CECL on the loan portfolio on a quarterly basis. We utilize a probability of default and loss given default methodology over a reasonable and supportable forecast period after which we revert to the historical mean loss ratio, utilizing a blended approach sourced from our own historical losses and the market losses from an engaged third-party’s database, to be applied for the remaining estimable period. The CECL model requires us to make significant judgments, including: (i) the selection of a reasonable and supportable forecast period, (ii) the selection and weighting of appropriate macroeconomic forecast scenarios, (iii) the determination of the risk characteristics in which to pool financial assets, and (iv) the appropriate historical loss data to use in the model. Unfunded commitments are not considered in the CECL reserve if they are unconditionally cancellable by us.
Current report
We measure the loan portfolio’s credit losses by grouping loans based on similar risk characteristics under CECL, which is typically based on the loan’s collateral type. We regularly evaluate the risk characteristics of our loan portfolio to determine whether a different pooling methodology is more accurate. Further, if we determine that foreclosure of a loan’s collateral is probable or repayment of the loan is expected through sale or operation of the collateral and the borrower is experiencing financial difficulty, expected credit losses are measured as the difference between the current fair value of the collateral and the amortized cost of the loan. Fair value may be determined based on (i) the present value of estimated cash flows; (ii) the market price, if available; or (iii) the fair value of the collateral less estimated disposition costs.
Current report
While a loan exhibiting credit quality deterioration may remain on accrual status, the loan is placed on nonaccrual status at such time as (i) management believes that scheduled debt service payments will not be met within the coming 12 months; (ii) the loan becomes 90 days past due; (iii) management determines the borrower is incapable of, or has ceased efforts toward, curing the cause of the credit deterioration; or (iv) the net realizable value of the loan’s underlying collateral approximates our carrying value for such loan. While on nonaccrual status, we recognize interest income only when an actual payment is received if a credit analysis supports the borrower’s principal repayment capacity. When a loan is placed on nonaccrual, previously accrued interest is reversed from interest income.
Current report
We utilize the contractual life of our loans to estimate the period over which we measure expected credit losses. Estimates for prepayments and extensions are incorporated into the inputs for our CECL model. Modifications to loan terms, such as a modification in connection with a troubled debt restructuring ("TDR"), where a concession is granted to a borrower experiencing financial difficulty, may result in the extension of the loan’s life and an increase in the allowance for credit losses.
Current report
In order to calculate the historical mean loss ratio applied to the loan portfolio, we utilize historical losses from our full underwriting history, along with the market loss history of a selected population of loans from a third-party’s database that are similar to our loan types, loan sizes, durations, interest rate structure and general LTV profiles. We may make adjustments to the historical loss history for qualitative or environmental factors if we believe there is evidence that the estimate for expected credit losses should be increased or decreased.
Current report
We record write-offs against the allowance for credit losses if we deem that all or a portion of a loan’s balance is uncollectible. If we receive cash in excess of some or all of the amounts we previously wrote off, we record a recovery to increase the allowance for credit losses.
Current report
As part of the evaluation of the loan portfolio, we assess the performance of each loan and assign a risk rating 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 LTV ratios, risk inherent in the loan structure and exit plan. Loans are rated “1” through “5,” from least risk to greatest risk, in connection with this review.
Current report
Investments in Real Estate
Current report
We acquire investments in real estate through direct equity investments and as a result of our lending activities (i.e. through foreclosure or the receipt of the deed-in-lieu of foreclosure on a property). Acquired investments in real estate assets are recorded initially at fair value in accordance with GAAP. We allocate the purchase price of our acquired assets and assumed liabilities based on the relative fair values of the assets acquired and liabilities assumed.
Current report
We evaluate whether property obtained as a result of our lending activities should be identified as held for sale. If a property is determined to be held for sale, all of the acquired assets and assumed liabilities will be recorded in property held for sale on the consolidated balance sheets and recorded at the lower of cost or fair value. Once a property is classified as held for sale, depreciation expense is no longer recorded.
Current report
Investments in real estate are carried net of accumulated depreciation. We depreciate real property, building and tenant improvements and furniture, fixtures, and equipment using the straight-line method over the estimated useful lives of the assets. We amortize any acquired intangible assets using the straight-line method over the estimated useful lives of the intangible assets. We amortize the value allocated to lease right of use assets and related in-place lease liabilities, when determined to be operating leases, using the straight-line method over the remaining lease term. The value allocated to any associated above or below market lease intangible asset or liability is amortized to lease expense over the remaining lease term.
Current report
Ordinary repairs and maintenance are expensed as incurred. Costs related to the improvement of the real property are capitalized and depreciated over their useful lives. Costs related to the development and construction of real property are capitalized to construction in progress during the period beginning with the commencement of development and ending with the completion of construction.
Current report
We depreciate investments in real estate and amortize intangible assets over the estimated useful lives of the assets as follows:
Current report
Revenue Recognition
Current report
Interest income from our loan portfolio is recognized over the life of each loan using the effective interest method and is recorded on the accrual basis. Premiums and discounts are amortized or accreted into income using the effective yield method. If a loan with a premium or discount is prepaid, we immediately recognize the unamortized portion as a decrease or increase to interest income. In addition, we defer loan origination and extension fees and loan origination costs and recognize them over the life of the related loan with interest income using the straight-line method, which approximates the effective yield method. Income recognition is suspended for loans at the earlier of the date at which payments become 90 days past due or when, in our opinion, a full recovery of principal and income becomes doubtful. When the ultimate collectability of the principal is in doubt, all payments received are applied to principal under the cost recovery method. When the ultimate collectability of the principal is not in doubt, contractual interest is recorded as interest income when received, under the cash method, until an accrual is resumed when the loan becomes contractually current and performance is demonstrated to be resumed.
Current report
Through our investments in real estate, we earn revenue associated with rental operations and hospitality operations, which are presented in real estate income on the consolidated statements of operations.
Current report
Rental operating revenue consists of fixed contractual base rent arising from tenant leases at our office properties under operating leases. Revenue is recognized on a straight-line basis over the non-cancelable terms of the related leases. For leases that have fixed and measurable rent escalations, the difference between such rental income earned and the cash rent due under the provisions of the lease is recorded in our consolidated balance sheets. We move to cash basis operating lease income recognition in the period in which collectability of all lease payments is no longer considered probable. At such time, any uncollectible receivable balance will be written off.
Current report
Hospitality operating revenue consists of amounts derived from hotel operations, including room sales and other hotel revenues. We recognize hospitality operating revenue when guest rooms are occupied, services have been provided or fees have been earned. Revenues are recorded net of any sales, occupancy or other taxes collected from customers on behalf of third parties. The following provides additional detail on room revenue and other operating revenue:
Current report
Room revenue is recognized when our hotel satisfies its performance obligation of providing a hotel room. The hotel reservation defines the terms of the agreement including an agreed-upon rate and length of stay. Payment is typically due and paid in full at the end of the stay with some customers prepaying for their rooms prior to the stay. Payments received from a customer prior to arrival are recorded as an advance deposit and are recognized as revenue at the time of occupancy.
Current report
Other operating revenue is recognized at the time when the goods or services are provided to the customer or when the performance obligation is satisfied. Payment is due at the time that goods or services are rendered or billed.
Showing the first 40 of 49 passages. Open the source sections for the rest.
Removed paragraphs (17)
Previous report
Net Change in Interest Expense for the Comparative three and six months ended June 30, 2024 and 2023:
Previous report
Includes amortization expense of $167,000 and $157,000 for the three months ended June 30, 2024 and 2023, respectively.
Previous report
Includes amortization expense of $331,000 and $311,000 for the six months ended June 30, 2024 and 2023, respectively.
Previous report
Aggregate operating expenses decreased by $2.3 million and $2.1 million for the comparative three and six months ended June 30, 2024 and 2023. We attribute the change to the following:
Previous report
Real estate expenses. The decrease of $756,000 for the three months ended June 30, 2024 was primarily attributable to the acquisition-date accrual of property taxes on a Chicago office property that we acquired through deed-in-lieu of foreclosure in June 2023.
Previous report
Equity compensation - related party. The decrease of $322,000 for the comparative six months ended June 30, 2024 and 2023 was primarily related to the vesting of shares in the second quarter 2024. As these shares fully vest, the expense related to equity compensation - related party decreases.
Previous report
During the three and six months ended June 30, 2024, we recognized interest income of $258,000 and $922,000, respectively, on one CRE whole loan with a principal payment past due greater than 90 days at June 30, 2024. During the three and six months ended June 30, 2023, we recognized interest income of $837,000 and $1.8 million, respectively, on one CRE whole loan with a principal payment past due greater than 90 days at June 30, 2024.
Previous report
Includes three CRE whole loans, with total amortized costs of $88.5 million, that are past due on interest payments at June 30, 2024.
Previous report
Includes $2.6 million and $2.9 million of deferred debt issuance costs at June 30, 2024 and December 31, 2023, respectively.
Previous report
Excludes deferred debt issuance costs of $2.6 million.
Previous report
Excludes accrued interest payable of $452,000 and deferred debt issuance costs of $1.6 million.
Previous report
Excludes deferred debt issuance costs of $155,000.
Previous report
Excludes deferred debt issuance costs of $708,000.
Previous report
Excludes deferred debt issuance costs of $412,000.
Previous report
Excludes $287,000 of accrued interest payable.
Previous report
Includes $452,000 of accrued interest payable.
Previous report
Excludes $168,000 of accrued interest payable.
Reworded paragraphs (118)
Previous wording
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 longer term 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. Our short term strategy is to drive book value ("BV") growth over the coming years by utilizing our NOL carryforwards of $46.6 million and a portion of our net capital loss carryforwards of $121.9 million, each at June 30, 2024. By retaining future earnings, we can grow our investable base and selectively deploy the anticipated capital growth into new whole loan originations at attractive yields, which we expect will grow our earnings available for distribution.
Current wording
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 properties 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 longer term 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. Our short term strategy is to drive book value ("BV") growth over the coming years by utilizing our NOL carryforwards of $32.1 million and a portion of our net capital loss carryforwards of $121.9 million, each at September 30, 2024. By retaining future earnings, we can grow our investable base and selectively deploy the anticipated capital growth into new whole loan originations at attractive yields, which we expect will grow our earnings available for distribution.
Previous wording
The U.S. Federal Reserve raised the Federal Funds rate by 5.25% in 11 rate hikes between March 2022 and July 2023 to combat inflation. While the U.S Federal Reserve has signaled they may lower rates in 2024, there is no certainty with respect to the timing and pace of potential decreases or if such decreases will occur. Interest rates may remain at or near recent highs, which creates further uncertainty for the economy and our borrowers. A rising interest rate environment generally correlates to increases in our net income. However, increases in interest rates may adversely affect our existing borrowers and could lead to nonperformance, i.e. the borrower’s inability to pay debt service. Additionally, rising rates and increasing costs may discourage consumer spending and slow corporate profit growth, which may negatively impact the collateral underlying our loans and impact our borrowers' ability to sell or refinance in the current market.
Current wording
The U.S. Federal Reserve raised the Federal Funds rate by 5.25% in 11 rate hikes between March 2022 and July 2023 to combat inflation. While the U.S Federal Reserve has lowered rates in September 2024, there is no certainty with respect to the timing and pace of potential future decreases or if such decreases will continue to occur. Interest rates may remain at or near recent highs, which creates further uncertainty for the economy and our borrowers. A rising interest rate environment generally correlates to increases in our net income. However, increases in interest rates may adversely affect our existing borrowers and could lead to nonperformance, i.e. the borrower’s inability to pay debt service. Lowering rates and decreasing costs may encourage consumer spending and accelerate corporate profit growth, which may positively impact the collateral underlying our loans and positively impact our borrowers' ability to sell or refinance in the current market.
Previous wording
Additionally, the office property market continues to experience high vacancies, slower leasing activity and current tenants reevaluating their needs for physical office space due to remote-work trends across the country. These factors, coupled with inflation, higher interest rates projected longer than originally expected and dislocations in market liquidity, have converged to create higher levels of uncertainty surrounding property values, which in turn, also negatively impact borrowers' ability and willingness to financially support and standby their investments in their office properties, their abilities to sell or refinance their positions in the current market and ultimately our financial results.
Current wording
Additionally, the office property market continues to experience high vacancies, slower leasing activity and current tenants reevaluating their needs for physical office space due to remote-work trends across the country. These factors, coupled with inflation, historically higher interest rates and dislocations in market liquidity, have converged to create higher levels of uncertainty surrounding property values, which in turn, also negatively impact borrowers' ability and willingness to financially support and standby their investments in their office properties, their abilities to sell or refinance their positions in the current market and ultimately our financial results.
Previous wording
We originate transitional floating-rate CRE loans with a target size of between $10.0 million and $100.0 million. During the six months ended June 30, 2024, we did not originate new floating-rate CRE loans. Loan payoffs during the six months ended June 30, 2024 were $152.0 million, offset by net funded commitments of $20.7 million, producing a net decrease to the portfolio of $131.3 million. During the year ended December 31, 2023, we selectively originated three floating-rate CRE whole loans with total commitments of $68.2 million. Loan payoffs during the year ended December 31, 2023 were $293.1 million, offset by net funded commitments of $40.5 million, producing a net decrease to the portfolio of $184.4 million.
Current wording
We originate transitional floating-rate CRE loans with a target size between $10.0 million and $100.0 million. During the nine months ended September 30, 2024, we did not originate any new floating-rate CRE loans. Loan payoffs during the nine months ended September 30, 2024 were $270.1 million, along with loan foreclosures of $37.7 million, offset by net funded commitments of $28.1 million, producing a net decrease to the portfolio of $279.7 million. During the year ended December 31, 2023, we selectively originated three floating-rate CRE whole loans with total commitments of $68.2 million. Loan payoffs during the year ended December 31, 2023 were $293.1 million, offset by net funded commitments of $40.5 million, producing a net decrease to the portfolio of $184.4 million.
Previous wording
Our CRE loan portfolio, which had carrying values of $1.7 billion and $1.8 billion at June 30, 2024 and December 31, 2023, respectively, comprised:
Current wording
Our CRE loan portfolio, which had carrying values of $1.5 billion and $1.8 billion at September 30, 2024 and December 31, 2023, respectively, comprised:
Previous wording
While the CRE whole loans included in the CRE loan portfolio are substantially composed of floating-rate loans benchmarked to the one-month Term 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.
Current wording
While the CRE whole loans included in the CRE loan portfolio are substantially composed of floating-rate loans benchmarked to the one-month Term Secured Overnight Financing Rate ("Term 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.
Previous wording
In a business environment where benchmark 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 June 30, 2024, 86% of the par value of our CRE loan portfolio had interest rate caps in place with a weighted-average maturity of four months.
Current wording
In a business environment where benchmark 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 certain 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 September 30, 2024, 76% of the par value of our CRE loan portfolio had interest rate caps or funded debt service reserves in place with a weighted-average maturity of six months.
Previous wording
At June 30, 2024, our par-value $1.7 billion floating-rate CRE loan portfolio had a weighted average benchmark floor of 0.75%, while at December 31, 2023, this floor was 0.70%. With the trend of rising benchmark rates, 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 resulted in an increase in our net interest income. See "Interest Rate Risk" in "Item 3: Quantitative and Qualitative Disclosures About Market Risk."
Current wording
At September 30, 2024, our par-value $1.6 billion floating-rate CRE loan portfolio had a weighted average benchmark floor of 0.85%, while at December 31, 2023, this floor was 0.70%. With the historical trend of rising benchmark rates, 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 resulted in an increase in our net interest income, which was offset due to the decrease in our floating-rate CRE loan portfolio. See "Interest Rate Risk" in "Item 3: Quantitative and Qualitative Disclosures About Market Risk."
Previous wording
From time to time, we may acquire real estate property through direct equity investments or as a result of our lending activities. During the first quarter of 2024, we acquired an office property located in the East North Central region via deed-in-lieu of foreclosure that, at acquisition, had a cost basis of $14.0 million and a fair value of $20.3 million. We recognized a $5.8 million gain upon converting the loan to real estate owned and immediately contributed the property into a joint venture with an unrelated third-party, seeking to maximize the property's value through a multifamily conversion. We reported this investment as an investment in an unconsolidated entity on our consolidated balance sheet at June 30, 2024.
Current wording
From time to time, we may acquire real estate property through direct equity investments or as a result of our lending activities. During the first quarter of 2024, we acquired an office property located in the East North Central region via deed-in-lieu of foreclosure that, at acquisition, had a cost basis of $14.0 million and a fair value of $20.3 million. We recognized a $5.8 million gain upon converting the loan to real estate owned and immediately contributed the property into a joint venture with an unrelated third-party, seeking to maximize the property's value through a multifamily conversion. In the third quarter of 2024, we acquired a multifamily property in the Southwest region via foreclosure that, at acquisition, had a cost basis of $30.9 million. No gain or loss was recognized upon conversion of the CRE loan to real estate investment owned, and the property was immediately contributed to a joint venture with an unrelated third-party. We reported this investment as an investment in an unconsolidated entity on our consolidated balance sheet at September 30, 2024. Additionally, we acquired two properties via foreclosure in the third quarter of 2024 that are held as investments in real estate. The first is an office complex located in the Southwest region that, at acquisition, had a fair value of $17.5 million. We recognized a $2.8 million net unrealized gain upon converting the CRE loan to real estate owned. The second acquisition is a multi-family property located in the Southeast region with a cost basis of $9.4 million. No gain or loss occurred upon conversion of the CRE loan to real estate owned.
Previous wording
At June 30, 2024, the net carrying value of our net real estate-related assets and liabilities was $161.1 million on six properties owned, four of which are included in investments in real estate and two of which are included in properties held for sale on our consolidated balance sheets. The existence of net capital loss carryforwards available until December 31, 2025 allows for potential future capital gains on certain of these investments to be shielded from income taxes.
Current wording
At September 30, 2024, the net carrying value of our net real estate-related assets and liabilities was $194.5 million on eight properties owned, four of which are included in investments in real estate and four of which are included in properties held for sale on our consolidated balance sheets. The existence of net capital loss carryforwards available until December 31, 2025 allows for potential future capital gains on certain of these investments to be shielded from income taxes.
Previous wording
We reevaluate our current expected credit losses ("CECL") allowance quarterly, incorporating our current expectations of macroeconomic factors considered in the determination of our CECL reserves. At June 30, 2024, the CECL allowance on our CRE loan portfolio was $35.0 million, or 2.0% of our $1.7 billion loan portfolio. During the six months ended June 30, 2024, we recorded a provision for credit losses primarily attributable to worsening macroeconomic factors, including, but not limited to, higher interest rates lasting longer than expected pressuring CRE pricing, offset, in part, by a decrease in modeled credit risk resulting from payoffs and net improvements in property-level performance.
Current wording
We reevaluate our current expected credit losses ("CECL") allowance quarterly, incorporating our current expectations of macroeconomic factors considered in the determination of our CECL reserves. At September 30, 2024, the CECL allowance on our CRE loan portfolio was $34.7 million, or 2.2% of our $1.6 billion loan portfolio. During the nine months ended September 30, 2024, we recorded a net provision for credit losses primarily attributable to worsening macroeconomic factors, including, but not limited to, higher interest rates lasting longer than expected pressuring CRE pricing, offset, in part, by a decrease in modeled credit risk resulting from payoffs and net improvements in property-level performance.
Previous wording
Additionally, the decline in our CECL reserves from our highest reserve balance at 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 June 30, 2024 of $35.0 million, or 2.0% 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 only 8.8% of the portfolio, at June 30, 2024, being originated prior to the fourth quarter of 2020) as well as the increased 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, and our percentage allocation of our CRE loan portfolio to multifamily has grown from 58.4% at June 30, 2020 to 79.4% at June 30, 2024.
Current wording
Additionally, the decline in our CECL reserves from our highest reserve balance at 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 September 30, 2024 of $34.7 million, or 2.2% 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 only 8.6% of the portfolio, at September 30, 2024, being originated prior to the fourth quarter of 2020) as well as the increased 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, and our percentage allocation of our CRE loan portfolio to multifamily has grown from 58.4% at June 30, 2020 to 79.4% at September 30, 2024.
Previous wording
Common stock book value was $27.20 per share at June 30, 2024, a $0.55 per share increase from December 31, 2023.
Current wording
Common stock book value was $27.92 per share at September 30, 2024, a $1.27 per share increase from December 31, 2023.
Previous wording
Our net income allocable to common shares for the three months ended June 30, 2024 was $1.7 million or $0.22 per share-basic ($0.21 per share-diluted) as compared to net income allocable to common shares for the three months ended June 30, 2023 of $817,000 or $0.10 per share-basic ($0.10 per share-diluted). Our net income allocable to common shares for the six months ended June 30, 2024 was $2.2 million, or $0.29 per share-basic ($0.28 per share-diluted), as compared to net loss allocable to common shares for the six months ended June 30, 2023 of $1.6 million, or $0.19 per share-basic ($0.19 per share-diluted).
Current wording
Our net income allocable to common shares for the three months ended September 30, 2024 was $2.8 million or $0.37 per share-basic ($0.36 per share-diluted) as compared to net income allocable to common shares for the three months ended September 30, 2023 of $2.9 million or $0.34 per share-basic ($0.33 per share-diluted). Our net income allocable to common shares for the nine months ended September 30, 2024 was $5.0 million, or $0.65 per share-basic ($0.63 per share-diluted), as compared to net income allocable to common shares for the nine months ended September 30, 2023 of $1.3 million, or $0.15 per share-basic ($0.15 per share-diluted).
Previous wording
The following tables analyze the change in interest income and interest expense for the comparative three and six months ended June 30, 2024 and 2023 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):
Current wording
The following tables analyze the change in interest income and interest expense for the comparative three and nine months ended September 30, 2024 and 2023 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):
Previous wording
Includes a decrease in fee income of $393,000 recognized on our CRE whole loans that was due to changes in volume.
Current wording
Includes a decrease in fee income of $146,000 recognized on our CRE whole loans that was due to changes in volume.
Previous wording
Percent change is calculated as the net change divided by the respective interest income or interest expense for the six months ended June 30, 2023.
Current wording
Percent change is calculated as the net change divided by the respective interest income or interest expense for the nine months ended September 30, 2023.
Previous wording
Includes a decrease in fee income of $734,000 recognized on our CRE whole loans that was due to changes in volume.
Current wording
Includes a decrease in fee income of $880,000 recognized on our CRE whole loans that was due to changes in volume.
Previous wording
Net Change in Interest Income for the Comparative three and six months ended June 30, 2024 and 2023:
Current wording
Net Change in Interest Income for the Comparative three and nine months ended September 30, 2024 and 2023:
Previous wording
Aggregate interest income decreased by $6.1 million and $8.8 million for the comparative three and six months ended June 30, 2024 and 2023, respectively. We attribute the change to the following:
Current wording
Aggregate interest income decreased by $8.9 million and $17.7 million for the comparative three and nine months ended September 30, 2024 and 2023, respectively. We attribute the change to the following:
Previous wording
CRE whole loans. The decrease of $6.0 million and $8.6 million for the comparative three and six months ended June 30, 2024 and 2023 was primarily attributable to a decrease in total par value of our CRE portfolio, offset, in part, by an increase in the benchmark rate over the comparative periods.
Current wording
CRE whole loans. The decrease of $8.9 million for the comparative three months ended September 30, 2024 and 2023 was primarily attributable to a decrease in total par value of our CRE portfolio resulting from loan payoffs and foreclosures and the benchmark rate over the comparative period. The decrease of $17.5 million for the comparative nine months ended September 30, 2024 and 2023 was primarily attributable to a decrease in total par value of our CRE portfolio, offset, in part, by an increase in the benchmark rate over the comparative period.
Previous wording
Other. The decrease of $71,000 and $185,000 for the comparative three and six months ended June 30, 2024 and 2023 was primarily attributable to a decrease in restricted cash in our CRE securitizations, offset, in part, by an increase in yields on our interest earning money market accounts.
Current wording
Other. The decrease of $52,000 and $237,000 for the comparative three and nine months ended September 30, 2024 and 2023, respectively, was primarily attributable to a decrease in restricted cash in our CRE securitizations, offset, in part, by an increase in yields on our interest earning money market accounts.
Previous wording
Aggregate interest expense decreased by $2.1 million and $2.3 million for the comparative three and six months ended June 30, 2024 and 2023. We attribute the change to the following:
Current wording
Aggregate interest expense decreased by $4.7 million and $7.0 million for the comparative three and nine months ended September 30, 2024 and 2023, respectively. We attribute the change to the following:
Previous wording
Securitized borrowings. The net decrease of $599,000 for the comparative three months ended June 30, 2024 and 2023 was primarily attributable to paydowns on our borrowings. The net increase of $1.2 million for the comparative six months ended June 30, 2024 and 2023 was primarily attributable to an increase in the benchmark rate over the comparative periods, offset, in part, by paydowns on our borrowings.
Current wording
Securitized borrowings. The net decrease of $3.2 million and $2.0 million for the comparative three and nine months ended September 30, 2024 and 2023, respectively, was primarily attributable to paydowns on our borrowings, offset, in part, by an increase in the benchmark rate over the comparative periods.
Previous wording
Senior secured financing facility. The increase of $291,000 and $410,000 for the comparative three and six months ended June 30, 2024 and 2023 was primarily attributable to an increase in borrowings and the benchmark rate over the comparative periods.
Current wording
Senior secured financing facility. The increase of $258,000 and $669,000 for the comparative three and nine months ended September 30, 2024 and 2023, respectively, was primarily attributable to an increase in borrowings and the benchmark rate over the comparative periods.
Previous wording
CRE - term warehouse financing facilities. The decrease of $1.9 million and $4.1 million for the comparative three and six months ended June 30, 2024 and 2023 were primarily attributable to paydowns on our borrowings.
Current wording
CRE - term warehouse financing facilities. The decrease of $1.8 million and $5.9 million for the comparative three and nine months ended September 30, 2024 and 2023, respectively, were primarily attributable to paydowns on our borrowings.
Previous wording
Unsecured junior subordinated debentures. The increase of $62,000 and $184,000 for the comparative three and six months ended June 30, 2024 and 2023 was primarily attributable to an increase in the benchmark rate over the comparative periods.
Current wording
Unsecured junior subordinated debentures. The increase of $5,000 and $189,000 for the comparative three and nine months ended September 30, 2024 and 2023, respectively, was primarily attributable to an increase in the benchmark rate over the comparative periods.
Previous wording
The following tables present the average net yield and average cost of funds for the three and six months ended June 30, 2024 and 2023 (dollars in thousands, except amounts in footnotes):
Current wording
The following tables present the average net yield and average cost of funds for the three and nine months ended September 30, 2024 and 2023 (dollars in thousands, except amounts in footnotes):
Previous wording
Includes fee income of $1.5 million and $1.9 million recognized on our floating-rate CRE whole loans for the three months ended June 30, 2024 and 2023, respectively.
Current wording
Includes fee income of $1.9 million and $2.0 million recognized on our floating-rate CRE whole loans for the three months ended September 30, 2024 and 2023, respectively.
Previous wording
Includes net amortization expense of $397,000 for each of the three months ended June 30, 2024 and 2023 on 20 terminated interest rate swap agreements 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.
Current wording
Includes net amortization expense of $402,000 for the three months ended September 30, 2024 and 2023, respectively, on 20 terminated interest rate swap agreements 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.
Previous wording
Includes fee income of $3.2 million and $3.9 million on our floating-rate CRE whole loans for the six months ended June 30, 2024 and 2023, respectively.
Current wording
Includes fee income of $5.1 million and $6.0 million on our floating-rate CRE whole loans for the nine months ended September 30, 2024 and 2023, respectively.
Previous wording
Includes amortization expense of $2.7 million for each of the six months ended June 30, 2024 and 2023 on our interest-bearing liabilities collateralized by CRE whole loans.
Current wording
Includes amortization expense of $4.0 million for the nine months ended September 30, 2024 and 2023, respectively, on our interest-bearing liabilities collateralized by CRE whole loans.
Previous wording
Includes net amortization expense of $794,000 and $790,000 for the six months ended June 30, 2024 and 2023, respectively, on 20 terminated interest rate swap agreements 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.
Current wording
Includes net amortization expense of $1.2 million for the nine months ended September 30, 2024 and 2023, respectively, on 20 terminated interest rate swap agreements 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.
Previous wording
Aggregate real estate income and other revenue increased by $1.3 million and $1.6 million for the comparative three and six months ended June 30, 2024 and 2023. The increase in the comparative three and six months was attributed to: (i) incremental increase in revenues from the acquisition of an office building through deed-in-lieu of foreclosure in June 2023, (ii) increased revenues from a hotel property that had increased occupancy and rental rates for both the comparative three and six month periods, partially offset by (iii) the loss of revenues from the sale of a hotel property in February 2023 for the comparative three-month period.
Current wording
Aggregate real estate income and other revenue increased by $2.5 million and $4.1 million for the comparative three and nine months ended September 30, 2024 and 2023. The increase in the comparative three and nine months was attributed to: (i) incremental increase in revenues from the acquisition of an office building through deed-in-lieu of foreclosure in June 2023, and asset acquisitions in the third quarter of 2024 of a multifamily property and an office property through foreclosures, (ii) increased revenues from a hotel property that had increased occupancy and rental rates for both the comparative three and nine month periods and (iii) an increase in revenue related to a student housing property that completed construction and became operational in August 2024.
Previous wording
General and administrative. General and administrative expenses increased by $8,000 and $284,000 for the comparative three and six months ended June 30, 2024 and 2023. The following table summarizes the information relating to our general and administrative expenses for the periods presented (dollars in thousands):
Current wording
General and administrative. General and administrative expenses increased by $184,000 and $468,000 for the comparative three and nine months ended September 30, 2024 and 2023, respectively. The following table summarizes the information relating to our general and administrative expenses for the periods presented (dollars in thousands):
Previous wording
The increase in general and administrative expense for the comparative three and six months ended June 30, 2024 and 2023 was primarily attributable to an increase in professional services in connection with legal expenses incurred pertaining to CRE loan workouts and the timing of our interim audit billings.
Current wording
The increase in general and administrative expense for the comparative three and nine months ended September 30, 2024 and 2023 was primarily attributable to an increase related to the increase in professional services due to timing of the audit expense accrual.
Previous wording
Provision for credit losses. The provision for credit losses of $1.3 million for the three months ended June 30, 2024 and $6.2 million for the six months ended June 30, 2024 were primarily driven by worsening macroeconomic factors due to higher interest rates longer than expected offset by a decrease in modeled credit risk for improved property-level performance and loan payoffs. Please refer to the "Financing Receivables" section for more information on our provision for credit losses.
Current wording
Provision for credit losses. The decrease in the provision for credit losses of $2.3 million for the three months ended September 30, 2024 and $3.8 million for the nine months ended September 30, 2024 were primarily driven by a decrease in modeled credit risk for improved property performance and loan payoffs offset by an increase in reserves from macroeconomic factors this quarter. Please refer to the "Financing Receivables" section for more information on our provision for credit losses.
Previous wording
Aggregate other income increased $1.2 million and $6.2 million for the comparative three and six months ended June 30, 2024 and 2023. We attribute the change to the following:
Current wording
Aggregate other income increased $2.8 million and $9.1 million for the comparative three and nine months ended September 30, 2024 and 2023, respectively. We attribute the change to the following:
Previous wording
Gain on sale of real estate. The decrease of $745,000 during the comparative six months ended June 30, 2024 and 2023 was primarily attributed to the sale of a hotel property in the Northeast region in February 2023 that generated a non-recurring gain of $745,000. No sales of real estate occurred in the six months ended June 30, 2024.
Current wording
Gain on sale of real estate. The decrease of $745,000 during the comparative nine months ended September 30, 2024 and 2023 was primarily attributed to the sale of a hotel property in the Northeast region in February 2023 that generated a non-recurring gain of $745,000. No sales of real estate occurred in the nine months ended September 30, 2024.
Previous wording
Gain on conversion of real estate. The increase of $5.8 million during the comparative six months ended June 30, 2024 and 2023 was primarily attributed to the completion of a deed-in-lieu of foreclosure that generated a non-recurring gain of $5.8 million as the fair value of the property exceeded the amortized cost basis of the loan.
Current wording
Gain on conversion of real estate. The increase of $2.8 million and $8.6 million during the comparative three and nine months ended September 30, 2024 and 2023, respectively, was primarily attributed to the completion of one deed-in-lieu of foreclosure that generated a non-recurring gain of $5.8 million, in the first quarter of 2024, and a foreclosure in the third quarter of 2024 that generated an unrealized gain of $2.8 million, as the fair value of the properties exceeded the amortized cost basis of the loans.
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