ACR - ACRES Commercial Realty's Commons Pay Nothing Whilst The Preferreds Offer A 10.65% Yield

2023-04-20 08:43:25 ET

Summary

• ACRES suspended its commons dividend and has opted for share buybacks in response to the persistent discount to its book value.
• The company bought back 98,000 shares, worth around $934,000, during its fiscal 2022 fourth quarter.
• Income-seeking shareholders should consider the fixed-to-floating Series C preferreds, which currently offer a 10.65% yield on cost and float next year.

ACRES Commercial Realty ( ACR ) suspended its quarterly dividend payments at the onset of the pandemic and has simply not paid out anything since then to render the mortgage REIT a relative pariah in the dividend space. The payouts had declined precipitously just before the pandemic hit, and externally managed ACRES has now pivoted its capital return strategy to maintaining the dividend to its preferreds whilst periodically buying back shares of its common stock.

Indeed, at its current $82 million market cap, ACRES is down 26% over the last year to depress its price to book to new lows. This currently stands at 0.18x , around 83% lower than its peer group median. To be clear here, ACRES is currently trading at around 20 cents on the dollar, has suspended its dividends for three years, and only bought back $934,000 worth of shares during its fiscal 2022 fourth quarter as part of its new capital return strategy. Hence, the bullish play here is a return of the commons to parity, especially as current macroeconomic headwinds normalize.

A Huge Discount To Tangible Book Value

Such a move won't be straightforward, with the discount being persistent even when the dividends were not suspended. Essentially, ACRES is trading as a permanently impaired mREIT against its portfolio of floating-rate multifamily loans. This isn't the usual mREIT with mortgage-backed securities and collateralized loan obligations, ACRES is focused on originating, holding, and managing commercial real estate mortgage loans.

This REIT has concentrated its commercial loans on multifamily properties, an admittedly attractive positioning that's bolstered with 100% of its loans being floating to entirely mitigate interest rate risk. Office and Hotel form the next two largest lending property types at 13.2% and 8.7% respectively. The mREIT is also diversified across the US, with Texas, Arizona, and Florida constituting its largest states.

ACRES' earnings for its fiscal 2022 fourth quarter were mixed, with revenue of $23.24 million growing by 50.5% over the year-ago quarter countered by a GAAP EPS loss of $0.87. Hence, even as revenue beat consensus estimates by $2.44 million, EPS was negative and a $1 miss on consensus. ACRES originated an $18 million new multifamily loan commitment during the fourth quarter. This was set against loan payoffs of $114.6 million to produce a net $74.6 million decrease in the size of its portfolio.

The mREIT's commercial loan portfolio was valued at $2.1 billion as of the end of the fourth quarter and came with a weighted average spread of 3.78% over one-month SOFR with the new loan being completed at a 4.8% spread. Crucially, ACRES expects to maintain an investment portfolio that's between $2 billion to $2.3 billion through 2023.

The mREIT's tangible book value came in at $426.6 million for its fiscal 2022 fourth quarter, down from $444.3 million in the year-ago comp. However, TBV per share for the recent fourth quarter at $52.50 was a growth of 4.17% from $50.40 in the year-ago comp. The divergence between TBV figures comes down to the mREIT's share buybacks, which have seen the number of common shares outstanding decline at a steady pace over the last two years.

The 10.65% Yielding Series C Preferreds

I think the play here is ACRES Commercial Realty 8.625% Fixed-to-Floating Series C Cumulative Preferred Stock ( ACR.PC ). These pay out a $2.16 coupon for a 10.65% yield on cost and are also currently trading at a discount to their par value. Critically, their quarterly coupon payments have been maintained through the pandemic and the subsequent disruption that the common shareholders have experienced.

They're currently swapping hands for $20.26 per share, around a 19% discount to their $25 redemption value to set a favourable backdrop for prospective investors. Further, these will float from the end of July 2024 at a rate equal to three-month LIBOR plus a spread of 5.927% per year but subject to an 8.625% minimum. For some context, the three-month LIBOR currently stands at 5.24% which would imply an 11.18% aggregate yield.

Total returns place the Series C ahead of the commons. They're down 12.46% over the last year versus a loss of 25.8% for the commons. This performance divergence stands is reflected over the last three years and stands to be reflected through 2023 as the preferreds offer a more likely return to par. Preferreds are typically firmly anchored to their redemption prices, with any divergences being temporary, assuming the underlying firm remains financially sound and the macroeconomic conditions are favourable. It's hard to see ACRES closing its large discount, as it has proved near-permanent. Hence, with mREIT investors seeking income and not capital returns, the preferreds might offer value here.

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