Acres Commercial Realty Corp.
11/09/2026 | Press release | Distributed by Public on 11/09/2026 16:09
Quarterly Report for Quarter Ending September 30, 2026 (Form 10-Q)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
References in this quarterly report to "we," "us" or the "Company" refer to ACRES Commercial Realty Corp. The following discussion and analysis of the Company's financial condition and results of operations should be read in conjunction with the consolidated financial statements and accompanying notes appearing elsewhere in this report. Certain information contained in the discussion and analysis set forth below includes forward-looking statements that involve risks and uncertainties.
Special Note Regarding Forward-Looking Statements
This report contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such forward-looking statements can generally be identified by our use of forward-looking terminology such as "may," "will," "continue," "expect," "intend," "anticipate," "estimate," "believe," "look forward" or other similar words or terms. Because such statements include risks, uncertainties and contingencies, actual results may differ materially from the expectations, intentions, beliefs, plans or predictions of the future expressed or implied by such forward-looking statements. Factors that could cause actual results to differ materially from those anticipated in the forward-looking statements include:
changes in our industry, interest rates, the debt securities markets, real estate markets or the general economy;
increased rates of default and/or decreased recovery rates on our investments;
the performance and financial condition of our borrowers;
our ability to successfully integrate the operations of ACRES Capital, LLC and ACRES Capital Corp. following the completion of the Merger and Internalization (each as defined below) and to achieve the expected cost savings or other benefits therefrom;
our ability to successfully operate as an internally managed company following the Internalization, including our ability to retain key personnel formerly employed by our Manager and to realize the anticipated benefits of internal management in a timely manner, or at all;
the cost and availability of our financings, which depend in part on our asset quality, the nature of our relationships with our lenders and other capital providers, our business prospects and outlook and general market conditions;
the availability and attractiveness of terms of additional debt repurchases;
availability, terms and deployment of short-term and long-term capital;
events giving rise to increases in our current expected credit loss reserve, including the impact of the current economic environment;
availability of, and ability to retain, qualified personnel;
changes in our business strategy;
the degree and nature of our competition;
the resolution of our non-performing and sub-performing assets;
our ability to comply with financial covenants in our debt instruments;
the adequacy of our cash reserves and working capital;
the timing of cash flows, if any, from our investments;
unanticipated increases in financial and other costs, including a rise in interest rates;
our ability to maintain compliance with over-collateralization and interest coverage tests in our collateralized loan obligations ("CLOs");
environmental and/or safety requirements;
our ability to satisfy complex rules in order for us to qualify as a real estate investment trust ("REIT"), for federal income tax purposes and qualify for our exemption under the Investment Company Act of 1940, as amended, and our ability and the ability of our subsidiaries to operate effectively within the limitations imposed by these rules;
legislative and regulatory changes (including changes to laws governing the taxation of REITs or the exemptions from registration as an investment company); and
the factors described in this report and the Company's Annual Report on Form 10-K for the year ended December 31, 2025, including those set forth under the sections captioned "Risk Factors," "Business" and "Management's Discussion and Analysis of Financial Conditions and Results of Operations," as applicable.
We caution you not to place undue reliance on these forward-looking statements, which speak only as of the date of this report. All subsequent written and oral forward-looking statements attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section. Except to the extent required by applicable law or regulation, we undertake no obligation to update these forward-looking statements to reflect events or circumstances after the date of this report or to reflect the occurrence of unanticipated events.
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Overview
We are a Maryland corporation and an internally-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. On August 6, 2026, we completed our acquisition of ACRES Capital Corp. ("ACC") and the internalization of the management function previously performed by ACRES Capital, LLC, our former external manager and a subsidiary of ACC (together with ACC, "ACRES"), a commercial real estate lender historically 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. We continue to draw upon the experience of the ACRES management team, who are now our direct employees, to provide these 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.
Currently, markets are grappling with trade tensions, geopolitical tensions, the risk of increased tariffs, inflation and labor volatility. These market pressures have caused continued disruption in many market segments, including the financial services, real estate and credit markets and these disruptions have affected the availability and the cost of capital. The increase in the cost of capital is expected to cause dislocations in various investment and financing markets in which we participate as we and other market participants adjust to the new financing environment.
Between September 2024 and December 2025, the U.S. Federal Reserve lowered the Federal Funds rate by 1.75% in six rate cuts, reaching its lowest levels since 2022. However, the Federal Reserve reversed course in September 2026, raising the Federal Funds rate by 0.25% to a target range of 3.75% to 4.00%, its first increase since 2023, citing persistent inflationary pressures. The Federal Reserve's updated projections indicate the possibility of additional rate increases before the end of 2026 and into 2027. An increase in rates and borrowing costs may dampen consumer spending and corporate profit growth, which may negatively impact the credit profile of the collateral underlying our loans and our borrowers' ability to sell or refinance in the current market; higher rates would also correlate to an increase in our net income to the extent our floating rate assets exceed our floating rate liabilities. There is also no certainty with respect to the direction, timing, or pace of change for future interest rates.
The multifamily real estate market continues to be a competitive and the market for those assets continues to experience spread compression on newly originated deals. Furthermore, 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 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 stand by their investments in their office properties, their abilities to sell or refinance their positions in the current market and ultimately our financial results.
In response, we continue to manage corporate liquidity actively and responsibly, manage our CRE assets through a solutions-based approach with our borrowers and manage our daily operations in light of changing macroeconomic circumstances. Our management team also continuously monitors for new capital opportunities and selectively executes on agreements that are expected to enhance our returns.
On August 6, 2026 (the "Closing"), we completed the Merger (as defined below) and Internalization (as defined below) transactions pursuant to the terms of the Agreement and Plan of Merger (the "Merger Agreement") by and among us and ACRES Holdings Sub LLC ("Merger Sub"), our subsidiary, on the one hand, and ACC and ACRES Capital LLC, a subsidiary of ACC and our former external manager (the "Manager"), on the other hand. Pursuant to the terms of the Merger Agreement, ACC merged with and into Merger Sub, with Merger Sub continuing as the surviving company and our wholly-owned subsidiary (the "Merger"). As a result of the Merger, among other things, (i) we acquired the Manager, (ii) the Manager ceased to perform any outside management services for us, (iii) we and the Manager terminated the existing Fourth Amended and Restated Management Agreement, dated as of July 31, 2020, as amended, by and among us, the Manager and ACC (the "Management Agreement"), for no additional consideration, and (iv) we became internally managed (the "Internalization"). In connection with the Closing, we issued approximately 7.5 million shares of our common stock to former ACC stockholders as Merger consideration, resulting in a net increase of approximately 6.3 million shares of our common stock outstanding after giving effect to the elimination of shares held by ACC in consolidation. We also assumed ACC's credit facility, with $185.0 million outstanding at Closing, and completed a private placement of $200.0 million aggregate principal amount of 8.625% Senior Secured Notes due 2031 (the "8.625% Senior Secured Notes"), the proceeds of which were used in part to refinance $150.0 million of our previously outstanding 5.75% Senior Unsecured Notes due 2026 (the "5.75% Senior Unsecured Notes") and for general corporate purposes. Being internally managed further aligns the interests of our seasoned management team with those of our stockholders. Along with the Manager's CRE lending platform, the Merger is expected to enhance our financial profile through
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the recognition of third-party fee income earned from an evergreen fund vehicle, separately managed accounts and a growing insurance platform, diversifying our earnings and supporting greater stability in earnings available for distribution.
The Merger and Internalization materially affected the comparability of our results of operations, financial condition and cash flows for the three and nine months ended September 30, 2026 as compared to the corresponding periods in 2025. The results of operations of ACC have been included in our condensed consolidated financial statements only for the period beginning August 6, 2026, the closing date of the Merger and Internalization. Accordingly, our results for the three and nine months ended September 30, 2026 include only a partial period of activity from the acquired management, servicing and related businesses, while the comparable 2025 periods do not include such activity.
The consolidation of the Consolidated Fund significantly increases the reported amounts of consolidated assets, liabilities, revenues, expenses and cash flows; however, the economic ownership interests of third-party investors in the Consolidated Fund are reflected as non-controlling interests. Accordingly, the Consolidated Fund's gross revenues, expenses and cash flows should not be viewed as having the same economic effect on our common stockholders as revenues, expenses and cash flows generated by wholly-owned operations.
Following the Closing, we became internally managed, the Manager became our wholly-owned subsidiary, and the Manager's personnel became our employees. As a result, our post-closing results reflect changes in the nature and presentation of our revenues and expenses, including the elimination of external base management fees and incentive compensation payable to a third-party manager, the addition of employee compensation and other operating costs previously borne by the Manager, and the inclusion of third-party management, servicing and related fee income generated by the acquired platform.
In addition, after the Merger and Internalization, we evaluate our business through three reportable segments: Principal Investing, Investment Management and Strategic Holdings. Prior to the Merger and Internalization, we reported one operating segment, CRE operations. These changes should be considered when reviewing the period-to-period comparisons below, as our historical results may not be indicative of our future operating results or financial condition.
The discussion below is based on our historical results of operations and financial condition as presented in the unaudited condensed consolidated financial statements included in this Quarterly Report. The results of ACC are included beginning August 6, 2026, and our historical results for periods prior to that date do not include the acquired management, servicing and related activities. Accordingly, the discussion below should be read with the comparability considerations described above and the notes to the unaudited condensed consolidated financial statements.
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, 2026, we originated ten new CRE floating-rate whole loans, purchased one new CRE floating-rate whole loan and purchased a participation in an existing CRE floating-rate whole loan, with total commitments of $530.9 million and funded $42.1 million of loan commitments. These increases were offset by loan payoffs and sales during the nine months ended September 30, 2026 in the amount of $239.1 million and unfunded commitments of $25.2 million, producing a net increase to the portfolio of $308.7 million. During the year ended December 31, 2025, we originated 14 new CRE floating-rate whole loans, with total commitments of $733.0 million, one new $15.0 million CRE mezzanine loan, one new $9.3 million CRE preferred equity investment and net funded commitments of $3.1 million. Loan payoffs and sales during the year ended December 31, 2025 were $418.9 million, producing a net increase to the portfolio of $341.5 million.
Our CRE loan portfolio, which had carrying values of $2.1 billion and $1.8 billion at September 30, 2026 and December 31, 2025, respectively, comprised:
•
First mortgage loans, which we refer to as whole loans. These loans are typically secured by first liens on CRE property, including the following property types: multifamily, student housing, hospitality, office, self-storage, mixed-use and retail. All but four of our CRE whole loans were current on contractual payments at September 30, 2026.
•
Mezzanine debt that is senior to borrower's equity but is subordinated to other third-party debt. These loans are subordinated CRE loans, usually secured by a pledge of the borrower's equity ownership in the entity that owns the property or by a second lien mortgage on the property. At both September 30, 2026 and December 31, 2025, no individual mezzanine loans were included in CRE loans held for investment on our consolidated balance sheet.
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•
Preferred equity investments that are subordinate to first mortgage loans and mezzanine debt. These investments may be subject to more credit risk than subordinated debt but provide the potential for higher returns upon a liquidation of the underlying property and are typically structured to provide some credit enhancement differentiating it from the common equity in such investments. At September 30, 2026 and December 31, 2025, we had one preferred equity investment included in CRE loans held for investment with a carrying value of $9.9 million and $9.2 million, respectively. We also hold the first mortgage CRE whole loan on the underlying collateral for this investment.
We generate our income primarily from the spread between the revenues we receive from our assets and the cost to finance our ownership of those assets, including corporate debt.
While the CRE whole loans included in the CRE loan portfolio are substantially composed of floating-rate loans benchmarked to the 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.
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, 2026, 62% of the par value of our CRE loan portfolio had interest rate caps or funded debt service reserves in place. Our interest rate caps have a weighted-average maturity of 15 months.
At September 30, 2026, our par-value $2.1 billion floating-rate CRE loan portfolio had a weighted average benchmark floor of 2.33%. At December 31, 2025, our par value $1.8 billion floating rate CRE loan portfolio had a weighted average benchmark floor of 1.78%. With the current trend of decreasing benchmark rates, we have seen the coupons on all of our floating-rate assets and debt decrease 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 decrease in interest rates resulted in a decrease in our net interest income. See "Interest Rate Risk" in "Item 3: Quantitative and Qualitative Disclosures About Market Risk."
Our portfolio comprises loans with a diverse array of collateral types and locations. Multifamily continues to comprise the majority of our portfolio, with 80.9% of our portfolio allocated to multifamily at September 30, 2026 and 81.9% at December 31, 2025. The following charts show our portfolio allocation at carrying value by property type at September 30, 2026 and December 31, 2025:
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From time to time, we may acquire real estate property through direct equity investments or as a result of our lending activities. We did not acquire any real estate property in the three months ended September 30, 2026.
At September 30, 2026, the net carrying value of our net real estate-related assets and liabilities was $96.2 million on five properties owned, four of which are included in investments in real estate and one of which is included in properties held for sale on our consolidated balance sheets. We reclassified two properties in the third quarter of 2026 to properties held for investment.
We use leverage to enhance our returns. The cost of borrowings to finance our investments is a significant part of our expenses. Our net interest income depends on our ability to control these expenses relative to our revenue. Our CRE loans may initially be financed with term facilities, such as CRE loan warehouse financing facilities, in anticipation of their ultimate securitization. We ultimately seek to finance our CRE loans through the use of non-recourse long-term, match-funded CRE debt securitizations.
At September 30, 2026 and December 31, 2025, our financing arrangements were as follows (dollars in thousands):
|
Outstanding Borrowings |
Percentage of Borrowings |
|||||||
|
At September 30, 2026 |
||||||||
|
CRE debt securitization (1)(2) |
$ |
874,011 |
44.2 |
% |
||||
|
CRE - term reinvestment financing facility (1)(3) |
582,758 |
29.4 |
% |
|||||
|
CRE - term warehouse financing facilities(1) |
68,818 |
3.5 |
% |
|||||
|
Mortgage payable(1) |
21,032 |
1.1 |
% |
|||||
|
Corporate credit facility |
185,000 |
9.3 |
% |
|||||
|
8.625% Senior Secured Notes |
195,397 |
9.9 |
% |
|||||
|
Unsecured junior subordinated debentures |
51,548 |
2.6 |
% |
|||||
|
Total |
$ |
1,978,564 |
100.0 |
% |
||||
|
Outstanding Borrowings |
Percentage of Borrowings |
|||||||
|
At December 31, 2025: |
||||||||
|
CRE - term reinvestment financing facility (1)(2) |
$ |
728,167 |
47.1 |
% |
||||
|
CRE - term warehouse financing facilities(1) |
533,862 |
34.6 |
% |
|||||
|
Senior secured financing facility(1) |
61,645 |
4.0 |
% |
|||||
|
Mortgage payable(1) |
20,185 |
1.3 |
% |
|||||
|
5.75% Senior Unsecured Notes |
149,531 |
9.7 |
% |
|||||
|
Unsecured junior subordinated debentures |
51,548 |
3.3 |
% |
|||||
|
Total |
$ |
1,544,938 |
100.0 |
% |
||||
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(1)
Represents an asset-specific borrowing.
(2)
Our CRE debt securitization provides a 30 month reinvestment period that allows us to reinvest CRE loan payoffs and principal paydown proceeds into the securitization, pending certain eligibility criteria are met and rating agency approval is obtained. The reinvestment period expires in August 2028.
(3)
Our CRE - term reinvestment financing facility provides for a two-year reinvestment period that allows us to reinvest CRE loan payoffs and principal paydown proceeds into the reinvestment facility, pending certain eligibility criteria are met.
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, 2026, the CECL allowance on our CRE loan portfolio was $29.4 million, or 1.4% of our $2.1 billion loan portfolio. During the nine months ended September 30, 2026, we recorded a net provision for credit losses primarily attributable to a decline in macroeconomic factors both generally and locally as they relate to our CRE loans, compounded by increased modeled credit risk in our loan portfolio.
At December 31, 2025, the CECL allowance on our CRE loan portfolio was $20.4 million, or 1.1% of our $1.8 billion loan portfolio. During the year ended December 31, 2025, we recorded a reversal of credit losses primarily driven by net improvements in the modeled credit risk of our loan portfolio as well as loan payoffs. These reversals were offset by a general decline in projected macroeconomic factors. We also recorded a charge-off of $4.7 million for one mezzanine loan that was fully reserved for in 2022.
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, 2026 of $29.4 million, or 1.4% of the par balance of our CRE loan portfolio, was attributable to the following: the successful resolution of our individually evaluated loans with specific reserves, except for the charge-off noted above, the overall newer vintage of our CRE loan portfolio (with only 6.5% of the portfolio, at September 30, 2026, 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 at carrying value has grown from 58.4% at June 30, 2020 to 80.9% at September 30, 2026.
Common stock book value was $16.81 per share at September 30, 2026, a $13.20 per share decrease from December 31, 2025. (See "Balance Sheet - Book Value Reconciliation" section below for further discussion)
Results of Operations
Our net loss allocable to common shares for the three months ended September 30, 2026 was $56.3 million, or ($5.16) per share-basic (($5.16) per share-diluted) as compared to net income allocable to common shares for the three months ended September 30, 2025 of $9.8 million or $1.38 per share-basic ($1.34 per share-diluted). Our net loss allocable to common shares for the nine months ended September 30, 2026 was $69.9 million, or ($8.65) per share-basic (($8.65) per share-diluted), as compared to net income allocable to common shares for the nine months ended September 30, 2025 of $3.2 million, or $0.44 per share-basic ($0.42 per share-diluted).
Segment Results
Following the Merger and Internalization, we evaluate our business through three reportable segments: Principal Investing, Investment Management and Strategic Holdings. Prior to the Merger and Internalization, we reported one operating segment, CRE lending operations. Accordingly, segment results for the three and nine months ended September 30, 2026 include the Investment Management and Strategic Holdings segments only for the period beginning August 6, 2026, and comparable segment information for the prior-year period is limited.
Principal Investing. Our Principal Investing segment originates, holds and manages commercial real estate mortgage loans and related assets. Segment results for the three and nine months ended September 30, 2026 were primarily affected by net interest income, loan repayments, CECL provision and borrowing costs.
Investment Management. Our Investment Management segment includes the management, servicing and related activities acquired in the Merger and Internalization. Segment results for the post-closing period were driven primarily by management, servicing and related fee income, partially offset by other operating expenses associated with the internalized platform. Results for this segment may vary in future periods based on assets under management, servicing volumes, transaction activity, fund performance, capital raising and retention of key personnel.
Strategic Holdings. Our Strategic Holdings segment includes equity method investments. Segment results for the post-closing period were primarily affected by income/loss from strategic investments and fair value changes. Because this segment was added as part of the Merger and Internalization and was included only from August 6, 2026, results for the three and nine months ended September 30, 2026 are not necessarily indicative of future results.
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Net Interest Income
The following tables analyze the change in interest income and interest expense for the comparative three and nine months ended September 30, 2026 and 2025 by changes in volume and changes in rates. The changes attributable to the combined changes in volume and rate have been allocated proportionately, based on absolute values, to the changes due to volume and changes due to rates (dollars in thousands, except amounts in footnotes):
|
Three Months Ended September 30, 2026 Compared to Three Months Ended September 30, 2025 |
||||||||||||||||
|
Due to Changes in |
||||||||||||||||
|
Net Change |
Percent Change (1) |
Volume |
Rate |
|||||||||||||
|
Increase (decrease) in interest income: |
||||||||||||||||
|
CRE whole loans (2) |
$ |
9,805 |
36 |
% |
$ |
14,202 |
$ |
(4,397 |
) |
|||||||
|
CRE mezzanine loans |
(687 |
) |
(100 |
)% |
(687 |
) |
- |
|||||||||
|
CRE preferred equity loan |
266 |
100 |
% |
266 |
- |
|||||||||||
|
Other |
13 |
5 |
% |
48 |
(35 |
) |
||||||||||
|
Total increase (decrease) in interest income |
9,397 |
33 |
% |
13,829 |
(4,432 |
) |
||||||||||
|
Increase (decrease) in interest expense: |
||||||||||||||||
|
Securitized borrowings |
12,481 |
100 |
% |
12,481 |
- |
|||||||||||
|
Senior secured financing facility |
(944 |
) |
(63 |
)% |
(909 |
) |
(35 |
) |
||||||||
|
CRE - term warehouse financing facilities |
(405 |
) |
(31 |
)% |
(237 |
) |
(168 |
) |
||||||||
|
CRE - term reinvestment financing facility |
(4,739 |
) |
(36 |
)% |
(3,431 |
) |
(1,308 |
) |
||||||||
|
5.75% Senior Unsecured Notes |
(1,188 |
) |
(51 |
)% |
(1,188 |
) |
- |
|||||||||
|
Unsecured junior subordinated debentures |
(70 |
) |
(6 |
)% |
- |
(70 |
) |
|||||||||
|
Hedging (3) |
(154 |
) |
(38 |
)% |
(154 |
) |
- |
|||||||||
|
Total increase (decrease) in interest expense |
4,981 |
25 |
% |
6,562 |
(1,581 |
) |
||||||||||
|
Net increase (decrease) in net interest income |
$ |
4,416 |
$ |
7,267 |
$ |
(2,851 |
) |
|||||||||
(1)
Percent change is calculated as the net change divided by the respective interest income or interest expense for the three months ended September 30, 2025.
(2)
Includes an increase in fee income of $246,000 recognized on our CRE whole loans that was due to changes in volume.
(3)
Net decrease is due to a portion of the terminated swaps being fully amortized as of December 31, 2025.
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|
Nine Months Ended September 30, 2026 Compared to Nine Months Ended September 30, 2025 |
||||||||||||||||
|
Due to Changes in |
||||||||||||||||
|
Net Change |
Percent Change (1) |
Volume |
Rate |
|||||||||||||
|
Increase (decrease) in interest income: |
||||||||||||||||
|
CRE whole loans (2) |
$ |
24,281 |
29 |
% |
$ |
36,818 |
$ |
(12,537 |
) |
|||||||
|
CRE mezzanine loans |
(1,429 |
) |
(100 |
)% |
(1,429 |
) |
- |
|||||||||
|
CRE preferred equity loan |
770 |
100 |
% |
770 |
- |
|||||||||||
|
Other |
978 |
119 |
% |
910 |
68 |
|||||||||||
|
Total increase (decrease) in interest income |
24,600 |
29 |
% |
37,069 |
(12,469 |
) |
||||||||||
|
Increase (decrease) in interest expense: |
||||||||||||||||
|
Securitized borrowings: |
||||||||||||||||
|
ACR 2026-FL4 Senior Notes |
30,925 |
100 |
% |
30,925 |
- |
|||||||||||
|
ACR 2021-FL1 Senior Notes |
(6,535 |
) |
(100 |
)% |
(6,535 |
) |
- |
|||||||||
|
ACR 2021-FL2 Senior Notes |
(6,554 |
) |
(100 |
)% |
(6,554 |
) |
- |
|||||||||
|
Senior secured financing facility |
(494 |
) |
(11 |
)% |
(263 |
) |
(231 |
) |
||||||||
|
CRE - term warehouse financing facilities |
613 |
12 |
% |
1,419 |
(806 |
) |
||||||||||
|
CRE - term reinvestment financing facility |
(1,662 |
) |
(6 |
)% |
1,340 |
(3,002 |
) |
|||||||||
|
5.75% Senior Unsecured Notes |
(1,166 |
) |
(17 |
)% |
(1,166 |
) |
- |
|||||||||
|
Unsecured junior subordinated debentures |
(233 |
) |
(7 |
)% |
- |
(233 |
) |
|||||||||
|
Hedging (3) |
(305 |
) |
(26 |
)% |
(305 |
) |
- |
|||||||||
|
Total increase (decrease) in interest expense |
14,589 |
23 |
% |
18,861 |
(4,272 |
) |
||||||||||
|
Net increase (decrease) in net interest income |
$ |
10,011 |
$ |
18,208 |
$ |
(8,197 |
) |
|||||||||
(1)
Percent change is calculated as the net change divided by the respective interest income or interest expense for the nine months ended September 30, 2025.
(2)
Includes an increase in fee income of $1.0 million recognized on our CRE whole loans that was due to changes in volume.
(3)
Net decrease is due to a portion of the terminated swaps being fully amortized as of December 31, 2025.
Net Change in Interest Income for the Comparative three and nine months ended September 30, 2026 and 2025:
Aggregate interest income increased by $9.4 million and $24.6 million for the comparative three and nine months ended September 30, 2026 and 2025. We attribute the change to the following:
CRE whole loans. The increase of $9.8 million and $24.3 million for the comparative three and nine months ended September 30, 2026 and 2025 was primarily attributable to an increase in the daily average par value of our CRE portfolio resulting from loan production, offset by a decrease in the benchmark rate over the comparative period.
CRE mezzanine loans. The decrease of $687,000 and $1.4 million for the comparative three and nine months ended September 30, 2026 and 2025 was attributable to the origination and payoff of a mezzanine loan during the fiscal year 2025.
CRE preferred equity loan. The increase of $266,000 and $770,000 for the comparative three and nine months ended September 30, 2026 and 2025 was attributable to the origination of a preferred equity loan in September 2025.
Other. The increase of $13,000 and $978,000 for the comparative three and nine months ended September 30, 2026 and 2025, was primarily attributable to an increase in restricted cash from the close of our new CRE securitization, ACRES Commercial Realty 2026-FL4 Issuer, LLC ("ACR 2026-FL4"), and increase in yields on our interest earning money market accounts during the first quarter of fiscal year 2026.
Net Change in Interest Expense for the Comparative three and nine months ended September 30, 2026 and 2025:
Aggregate interest expense increased by $5.0 million and $14.6 million for the comparative three and nine months ended September 30, 2026 and 2025. We attribute the change to the following:
Securitized borrowings. The net increase of $12.5 million and $17.8 million for the comparative three and nine months ended September 30, 2026 and 2025 was primarily attributable to the issuance of our ACR 2026-FL4 securitization, offset by the redemptions of our ACR 2021-FL1 and ACR 2021-FL2 securitizations and a decrease in borrowings and the benchmark rate over the comparative periods.
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Senior secured financing facility. The decrease of $944,000 and $494,000 for the comparative three and nine months ended September 30, 2026 and 2025, was primarily attributable to the payoff of our senior secured facility in August 2026.
CRE - term warehouse financing facilities. The decrease of $405,000 for the comparative three months ended September 30, 2026 and 2025 was primarily attributable to a decrease in the average daily borrowings balance and benchmark rate. The increase of $613,000 for the comparative nine months ended September 30, 2026 and 2025, was primarily attributable to an increase in the average daily borrowings balance during the first quarter of fiscal year 2026, offset by a decrease in the benchmark rate over the comparative periods.
CRE - term reinvestment financing facility. The decrease of $4.7 million and $1.7 million for the comparative three and nine months ended September 30, 2026 and 2025 was attributable to a decrease in borrowings and benchmark rate.
5.75% Senior Unsecured Notes. The decrease of $1.2 million for the comparative three and nine months ended September 30, 2026 and 2025 was attributable to the payoff of the 5.75% Senior Unsecured Notes in conjunction with the close of the 8.625% Senior Secured Notes in August 2026.
Unsecured junior subordinated debentures. The decrease of $70,000 and $233,000 for the comparative three and nine months ended September 30, 2026 and 2025 was primarily attributable to a decrease in the benchmark rate over the comparative periods.
Hedging. The decrease of $154,000 and $305,000 for the comparative three and nine months ended September 30, 2026 and 2025 was attributable to a portion of our terminated swaps being fully amortized.
Average Net Yield and Average Cost of Funds:
The following tables present the average net yield and average cost of funds for the three and nine months ended September 30, 2026 and 2025 (dollars in thousands, except amounts in footnotes):
|
Three Months Ended September 30, 2026 |
Three Months Ended September 30, 2025 |
|||||||||||||||||||||||
|
Average Amortized Cost |
Interest Income (Expense) |
Average Net Yield (Cost of Funds) (1) |
Average Amortized Cost |
Interest Income (Expense) |
Average Net Yield (Cost of Funds) (1) |
|||||||||||||||||||
|
Interest-earning assets |
||||||||||||||||||||||||
|
CRE whole loans, floating-rate (2) |
$ |
2,121,260 |
$ |
37,174 |
6.95 |
% |
$ |
1,321,391 |
$ |
27,369 |
8.22 |
% |
||||||||||||
|
CRE mezzanine loans |
- |
- |
- |
% |
19,419 |
686 |
13.82 |
% |
||||||||||||||||
|
CRE preferred equity loan |
10,020 |
265 |
10.51 |
% |
- |
- |
- |
% |
||||||||||||||||
|
Other |
33,510 |
246 |
2.90 |
% |
27,478 |
233 |
3.37 |
% |
||||||||||||||||
|
Total interest income/average net yield |
2,164,790 |
37,685 |
6.90 |
% |
1,368,288 |
28,288 |
8.20 |
% |
||||||||||||||||
|
Interest-bearing liabilities |
||||||||||||||||||||||||
|
Collateralized by: |
||||||||||||||||||||||||
|
CRE whole loans (3) |
1,529,654 |
(22,453 |
) |
(5.82 |
)% |
953,121 |
(16,058 |
) |
(6.62 |
)% |
||||||||||||||
|
General corporate debt: |
||||||||||||||||||||||||
|
5.75% Senior Unsecured Notes (4) |
78,238 |
(1,148 |
) |
(5.82 |
)% |
149,257 |
(2,336 |
) |
(6.21 |
)% |
||||||||||||||
|
Unsecured junior subordinated debentures |
51,548 |
(1,050 |
) |
(7.97 |
)% |
51,548 |
(1,121 |
) |
(8.51 |
)% |
||||||||||||||
|
Hedging (5) |
- |
(247 |
) |
- |
% |
- |
(402 |
) |
- |
% |
||||||||||||||
|
Total interest expense/average cost of funds |
1,659,440 |
(24,898 |
) |
(5.89 |
)% |
1,153,926 |
(19,917 |
) |
(6.65 |
)% |
||||||||||||||
|
Total net interest income |
$ |
12,787 |
$ |
8,371 |
||||||||||||||||||||
(1)
Average net yield includes net amortization/accretion and fee income and is computed based on average amortized cost.
(2)
Includes fee income of $1.2 million and $908,000 recognized on our floating-rate CRE whole loans for the three months ended September 30, 2026 and 2025, respectively.
(3)
Includes amortization expense of $955,000 and $677,000 for the three months ended September 30, 2026 and 2025, respectively, on our interest-bearing liabilities collateralized by CRE whole loans.
(4)
Includes amortization expense of $94,000 and $180,000 for the three months ended September 30, 2026 and 2025, respectively.
(5)
Includes net amortization expense of $247,000 and $402,000 for the three months ended September 30, 2026 and 2025, respectively, on 17 and 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.
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(Back to Index)
|
Nine Months Ended September 30, 2026 |
Nine Months Ended September 30, 2025 |
|||||||||||||||||||||||
|
Average Amortized Cost |
Interest Income (Expense) |
Average Net Yield (Cost of Funds) (1) |
Average Amortized Cost |
Interest Income (Expense) |
Average Net Yield (Cost of Funds) (1) |
|||||||||||||||||||
|
Interest-earning assets |
||||||||||||||||||||||||
|
CRE whole loans, floating-rate (2) |
$ |
2,037,039 |
$ |
107,874 |
7.08 |
% |
$ |
1,364,348 |
$ |
83,593 |
8.19 |
% |
||||||||||||
|
CRE mezzanine loans |
- |
- |
- |
% |
15,062 |
1,428 |
12.51 |
% |
||||||||||||||||
|
CRE preferred equity loan |
9,766 |
769 |
10.53 |
% |
- |
- |
- |
% |
||||||||||||||||
|
Other |
63,569 |
1,802 |
3.79 |
% |
35,120 |
824 |
3.14 |
% |
||||||||||||||||
|
Total interest income/average net yield |
2,110,374 |
110,445 |
7.00 |
% |
1,414,530 |
85,845 |
8.11 |
% |
||||||||||||||||
|
Interest-bearing liabilities |
||||||||||||||||||||||||
|
Collateralized by: |
||||||||||||||||||||||||
|
CRE whole loans (3) |
1,538,629 |
(68,072 |
) |
(5.92 |
)% |
987,674 |
(51,778 |
) |
(7.01 |
)% |
||||||||||||||
|
General corporate debt: |
||||||||||||||||||||||||
|
5.75% Senior Unsecured Notes (4) |
125,630 |
(5,836 |
) |
(6.21 |
)% |
149,080 |
(7,001 |
) |
(6.28 |
)% |
||||||||||||||
|
Unsecured junior subordinated debentures |
51,548 |
(3,099 |
) |
(7.93 |
)% |
51,548 |
(3,333 |
) |
(8.53 |
)% |
||||||||||||||
|
Hedging (5) |
- |
(886 |
) |
- |
% |
- |
(1,192 |
) |
- |
% |
||||||||||||||
|
Total interest expense/average cost of funds |
1,715,807 |
(77,893 |
) |
(6.00 |
)% |
1,188,302 |
(63,304 |
) |
(6.98 |
)% |
||||||||||||||
|
Total net interest income |
$ |
32,552 |
$ |
22,541 |
||||||||||||||||||||
(1)
Average net yield includes net amortization/accretion and fee income and is computed based on average amortized cost.
(2)
Includes fee income of $3.6 million and $2.6 million recognized on our floating-rate CRE whole loans for the nine months ended September 30, 2026 and 2025, respectively.
(3)
Includes amortization expense of $3.8 million and $4.1 million for the nine months ended September 30, 2026 and 2025, respectively, on our interest-bearing liabilities collateralized by CRE whole loans.
(4)
Includes amortization expense of $469,000 and $533,000 for the nine months ended September 30, 2026 and 2025, respectively.
(5)
Includes net amortization expense of $886,000 and $1.2 million for the nine months ended September 30, 2026 and 2025, respectively, on 17 and 20 terminated interest rate swap agreements, respectively, that were in net loss positions at the time of termination. The remaining net losses, reported in accumulated other comprehensive loss on the consolidated balance sheets, will be accreted over the remaining life of the debt.
Real Estate Income and Other Revenue
The following table sets forth information relating to our real estate income and other revenue for the periods presented (dollars in thousands):
|
For the Three Months Ended September 30, |
||||||||||||||||
|
2026 |
2025 |
Dollar Change |
Percent Change |
|||||||||||||
|
Real estate income and other revenue: |
||||||||||||||||
|
Real estate income - Hospitality |
$ |
9,579 |
$ |
8,179 |
$ |
1,400 |
17 |
% |
||||||||
|
Real estate income - Rental |
1,673 |
4,453 |
(2,780 |
) |
(62 |
)% |
||||||||||
|
Fee and other income |
152 |
- |
152 |
100 |
% |
|||||||||||
|
Other revenue |
31 |
34 |
(3 |
) |
(9 |
)% |
||||||||||
|
Total |
$ |
11,435 |
$ |
12,666 |
$ |
(1,231 |
) |
(10 |
)% |
|||||||
|
For the Nine Months Ended September 30, |
||||||||||||||||
|
2026 |
2025 |
Dollar Change |
Percent Change |
|||||||||||||
|
Real estate income and other revenue: |
||||||||||||||||
|
Real estate income - Hospitality |
$ |
25,296 |
$ |
23,822 |
$ |
1,474 |
6 |
% |
||||||||
|
Real estate income - Rental |
4,933 |
13,449 |
(8,516 |
) |
(63 |
)% |
||||||||||
|
Fee and other income |
152 |
- |
152 |
100 |
% |
|||||||||||
|
Other revenue |
93 |
100 |
(7 |
) |
(7 |
)% |
||||||||||
|
Total |
$ |
30,474 |
$ |
37,371 |
$ |
(6,897 |
) |
(18 |
)% |
|||||||
Aggregate real estate income and other revenue decreased by $1.2 million and $6.9 million for the comparative three and nine months ended September 30, 2026 and 2025
Real estate income - hospitality and rental: The decrease in aggregate real estate income in the comparative three and nine months of $1.4 million and $7.0 million was attributed to: (i) a decrease in revenue related to a student housing property that was sold in September 2025 and (ii) a decrease in revenue at an office property that was sold in December 2025, partially offset by an increase in revenues at our hospitality properties that had increased occupancy and rates in the comparative period.
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Fee and other income: The Merger and Internalization added management, servicing and related activities that were not included in our historical results prior to August 6, 2026. Beginning at the Closing, our results include fee income generated by the acquired ACC platform, including fees from third-party management and servicing arrangements, the management of ACRES Mortgage Fund, Ltd. ("AMF") and other accounts, and related insurance and strategic platform activities, to the extent such fees are earned from third parties and are not eliminated in consolidation.
For the period from August 6, 2026 through September 30, 2026, we recognized $2.0 million of fee and other income attributable to the acquired management, servicing and related activities, of which $1.8 million of such fees are related to AMF and are eliminated in consolidation to a net fee and other income of $152,000.
A portion of the fee income generated by the acquired platform is recurring in nature, including management fees and servicing fees, while other fee income may be transactional or performance-based and may vary based on assets under management, loan origination and repayment activity, capital raising, investment realizations, and market conditions. We expect fee income from these activities to be influenced by our ability to retain and grow third-party assets under management, maintain servicing relationships, and execute on our strategic initiatives following the Internalization. Because management, servicing and related activities was added as part of the Merger and Internalization and was included only from August 6, 2026, results for the three and nine months ended September 30, 2026 are not necessarily indicative of future results.
Operating Expenses
The following tables set forth information relating to our operating expenses for the periods presented (dollars in thousands):
|
For the Three Months Ended September 30, |
||||||||||||||||
|
2026 |
2025 |
Dollar Change |
Percent Change |
|||||||||||||
|
Operating expenses: |
||||||||||||||||
|
General and administrative |
$ |
4,189 |
$ |
2,490 |
$ |
1,699 |
68 |
% |
||||||||
|
Compensation and benefits |
2,436 |
- |
2,436 |
100 |
% |
|||||||||||
|
Real estate expenses - Hospitality |
14,590 |
7,960 |
6,630 |
83 |
% |
|||||||||||
|
Real estate expenses - Rental |
4,143 |
7,495 |
(3,352 |
) |
(45 |
)% |
||||||||||
|
Management fees - related party |
613 |
1,581 |
(968 |
) |
(61 |
)% |
||||||||||
|
Equity compensation |
115 |
374 |
(259 |
) |
(69 |
)% |
||||||||||
|
Corporate depreciation and amortization |
- |
19 |
(19 |
) |
(100 |
)% |
||||||||||
|
Merger and internalization costs |
38,282 |
- |
38,282 |
100 |
% |
|||||||||||
|
Corporate interest expense |
5,236 |
- |
5,236 |
100 |
% |
|||||||||||
|
Provision for (reversal of) credit losses, net |
8,295 |
(3,960 |
) |
12,255 |
309 |
% |
||||||||||
|
Total |
$ |
77,899 |
$ |
15,959 |
$ |
61,940 |
388 |
% |
||||||||
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(Back to Index)
|
For the Nine Months Ended September 30, |
||||||||||||||||
|
2026 |
2025 |
Dollar Change |
Percent Change |
|||||||||||||
|
Operating expenses: |
||||||||||||||||
|
General and administrative |
$ |
9,984 |
$ |
8,385 |
$ |
1,599 |
19 |
% |
||||||||
|
Compensation and benefits |
2,436 |
- |
2,436 |
100 |
% |
|||||||||||
|
Real estate expenses - Hospitality |
30,709 |
24,793 |
5,916 |
24 |
% |
|||||||||||
|
Real estate expenses - Rental |
8,257 |
17,353 |
(9,096 |
) |
(52 |
)% |
||||||||||
|
Management fees - related party |
3,738 |
4,813 |
(1,075 |
) |
(22 |
)% |
||||||||||
|
Equity compensation |
5,548 |
1,774 |
3,774 |
213 |
% |
|||||||||||
|
Corporate depreciation and amortization |
- |
57 |
(57 |
) |
(100 |
)% |
||||||||||
|
Merger and internalization costs |
43,393 |
- |
43,393 |
100 |
% |
|||||||||||
|
Corporate interest expense |
5,236 |
- |
5,236 |
100 |
% |
|||||||||||
|
Provision for (reversal of) credit losses, net |
9,011 |
(6,457 |
) |
15,468 |
240 |
% |
||||||||||
|
Total |
$ |
118,312 |
$ |
50,718 |
$ |
67,594 |
133 |
% |
||||||||
Aggregate operating expenses increased by $61.9 million for the comparative three months ended September 30, 2026 and 2025 and increased by $67.6 million for the comparative nine months ended September 30, 2026 and 2025. We attribute the changes to the following:
General and administrative. General and administrative expenses increased by $1.7 million and $1.6 million for the comparative three and nine months ended September 30, 2026 and 2025. The following table summarizes the information relating to our general and administrative expenses for the periods presented (dollars in thousands):
|
For the Three Months Ended September 30, |
||||||||||||||||
|
2026 |
2025 |
Dollar Change |
Percent Change |
|||||||||||||
|
General and administrative |
||||||||||||||||
|
Professional services |
$ |
2,057 |
$ |
1,288 |
$ |
769 |
60 |
% |
||||||||
|
Wages and benefits |
172 |
325 |
(153 |
) |
(47 |
)% |
||||||||||
|
D&O insurance |
247 |
250 |
(3 |
) |
(1 |
)% |
||||||||||
|
Operating expenses |
838 |
234 |
604 |
258 |
% |
|||||||||||
|
Servicing expense |
414 |
- |
414 |
100 |
% |
|||||||||||
|
Dues and subscriptions |
211 |
174 |
37 |
21 |
% |
|||||||||||
|
Director fees |
215 |
204 |
11 |
5 |
% |
|||||||||||
|
Tax penalties, interest & franchise tax |
8 |
6 |
2 |
33 |
% |
|||||||||||
|
Travel |
27 |
9 |
18 |
200 |
% |
|||||||||||
|
Total |
$ |
4,189 |
$ |
2,490 |
$ |
1,699 |
68 |
% |
||||||||
|
For the Nine Months Ended September 30, |
||||||||||||||||
|
2026 |
2025 |
Dollar Change |
Percent Change |
|||||||||||||
|
General and administrative |
||||||||||||||||
|
Professional services |
$ |
4,894 |
$ |
4,396 |
$ |
498 |
11 |
% |
||||||||
|
Wages and benefits |
814 |
1,024 |
(210 |
) |
(21 |
)% |
||||||||||
|
D&O insurance |
733 |
736 |
(3 |
) |
(0 |
)% |
||||||||||
|
Operating expenses |
1,655 |
865 |
790 |
91 |
% |
|||||||||||
|
Servicing expense |
414 |
- |
414 |
100 |
% |
|||||||||||
|
Dues and subscriptions |
605 |
567 |
38 |
7 |
% |
|||||||||||
|
Director fees |
623 |
611 |
12 |
2 |
% |
|||||||||||
|
Tax penalties, interest & franchise tax |
140 |
118 |
22 |
19 |
% |
|||||||||||
|
Travel |
106 |
68 |
38 |
56 |
% |
|||||||||||
|
Total |
$ |
9,984 |
$ |
8,385 |
$ |
1,599 |
19 |
% |
||||||||
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(Back to Index)
The increase in general and administrative expense for the comparative three and nine months ended September 30, 2026 and 2025 was primarily attributable to additions from the Merger and Internalization. Office rent, IT expenses, insurance expenses and other operating expenses and professional service expenses that used to be included in allocated expenses from the Manager are now fully expensed post Merger and Internalization. Additionally, servicing expenses are now included in our general and administrative expenses when they were not included as an expense category prior to the Merger and Internalization.
Compensation and benefits. The increase of $2.4 million for both the comparative three and nine months ended September 30, 2026 and 2025, respectively, was due to the completion of the Merger and Internalization which resulted in us now accounting for payroll. In prior periods, compensation and costs related to the Company were reimbursed to the Manager pursuant to the Management Agreement and were included in wages and benefits in the general and administrative expense line item.
Real estate expenses - hospitality and rental. The increase of $3.3 million for the three months ended September 30, 2026 was primarily related to a catch-up adjustment of depreciation and amortization at two properties that were reclassified as held for investment in the third quarter and partially offset by a decrease in expenses related to a student housing property that was sold in September 2025. The decrease in aggregate of $3.2 million for the nine months ended September 30, 2026 was primarily related to (i) a decrease in expenses related to a student housing property that was sold in September 2025, (ii) a decrease in expenses at an office property that was sold in December 2025, and (iii) a decrease in expenses at a student housing property related to a decrease in marketing and other operating expenses in the comparative periods. This was partially offset by a pickup in depreciation and amortization at two properties that were reclassified as held for investment in the third quarter and an increase in overall operating expenses at a hotel property in both three and nine months ended September 30, 2026 and 2025.
Equity compensation. The decrease of $259,000 and increase of $3.8 million for the comparative three and nine months ended September 30, 2026 and 2025 was primarily related to the acceleration of amortization related to the Manager's shares in connection with the Merger, which was completed on August 6, 2026.
Management fees - related party. The decrease of $968,000 and $1.1 million for the comparative three and nine months ended September 30, 2026 and 2025 was primarily related to the termination of the Management Agreement as part of the Merger and Internalization of the Manager on August 6, 2026.
Merger and internalization costs. The increase of $38.3 million and $43.4 million for the comparative three and nine months ended September 30, 2026 and 2025, respectively, was due to the completion of the Merger and Internalization, and includes various professional fees and post-combination share-based compensation expenses pertaining to the transaction. No Merger and Internalization costs occurred prior to the second quarter of 2026.
Corporate interest expense. The increase of $5.2 million for the comparative three and nine months ended September 30, 2026 and 2025 was attributable to the assumption of the senior secured credit facility (the "Corporate Credit Facility") in connection with the Merger and the close of the 8.625% Senior Secured Notes due 2031 during the third quarter of 2026.
Provision for (reversal of) credit losses. The increase of $12.3 million and $15.5 million for the comparative three and nine months ended September 30, 2026 and 2025 was primarily due to a decline in macroeconomic factors both generally and locally as they relate to our CRE loans, including a qualitative adjustment for local macroeconomic factors on one loan, compounded by increased modeled credit risk in our loan portfolio.
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Other Income (Expense)
The following table sets forth information relating to our other income (expense) incurred for the periods presented (dollars in thousands):
|
For the Three Months Ended September 30, |
||||||||||||||||
|
2026 |
2025 |
Dollar Change |
Percent Change |
|||||||||||||
|
Other income (expense): |
||||||||||||||||
|
Equity in earnings (losses) of unconsolidated subsidiaries |
$ |
18 |
$ |
(827 |
) |
$ |
845 |
102 |
% |
|||||||
|
Gain on sale of investment in real estate |
- |
13,141 |
(13,141 |
) |
(100 |
)% |
||||||||||
|
Net realized and unrealized gains on investments in Consolidated Fund |
(480 |
) |
- |
(480 |
) |
(100 |
)% |
|||||||||
|
Interest income of Consolidated Fund |
20,942 |
- |
20,942 |
100 |
% |
|||||||||||
|
Interest expense of Consolidated Fund |
(13,923 |
) |
- |
(13,923 |
) |
(100 |
)% |
|||||||||
|
Expenses of the Consolidated Fund |
(601 |
) |
- |
(601 |
) |
(100 |
)% |
|||||||||
|
Other income |
(174 |
) |
655 |
(829 |
) |
(127 |
)% |
|||||||||
|
Total |
$ |
5,782 |
$ |
12,969 |
$ |
(7,187 |
) |
(55 |
)% |
|||||||
|
For the Nine Months Ended September 30, |
||||||||||||||||
|
2026 |
2025 |
Dollar Change |
Percent Change |
|||||||||||||
|
Other income (expense): |
||||||||||||||||
|
Equity in earnings (losses) of unconsolidated subsidiaries |
$ |
693 |
$ |
(1,988 |
) |
$ |
2,681 |
135 |
% |
|||||||
|
Gain on sale of investment in real estate |
3,336 |
13,141 |
(9,805 |
) |
(75 |
)% |
||||||||||
|
Net realized and unrealized gains on investments in Consolidated Fund |
(480 |
) |
- |
(480 |
) |
(100 |
)% |
|||||||||
|
Interest income of Consolidated Fund |
20,942 |
- |
20,942 |
100 |
% |
|||||||||||
|
Interest expense of Consolidated Fund |
(13,923 |
) |
- |
(13,923 |
) |
(100 |
)% |
|||||||||
|
Expenses of the Consolidated Fund |
(601 |
) |
- |
(601 |
) |
(100 |
)% |
|||||||||
|
Other income |
(69 |
) |
1,377 |
(1,446 |
) |
(105 |
)% |
|||||||||
|
Total |
$ |
9,898 |
$ |
12,530 |
$ |
(2,632 |
) |
(21 |
)% |
|||||||
Aggregate other income (expense) decreased $7.2 million and $2.6 million for the comparative three and nine months ended September 30, 2026 and 2025. We attribute the change to the following:
Equity in earnings (losses) of unconsolidated subsidiaries. The increase of $845,000 and $2.7 million for the comparative three and nine months ended September 30, 2026 and 2025, respectively, was primarily related to recognizing income at one unconsolidated entity. The two unconsolidated entities with losses are off-balance sheet and losses are only recognized when contributions are made. In 2025, more losses were recognized until the entity became off-balance sheet.
Gain on sale of investment in real estate. The decrease of $13.1 million and $9.8 million during the comparative three and nine months ended September 30, 2026 and 2025, was primarily attributed to the sale of a property generating a gain of $13.1 million in the third quarter of 2025 which was partially offset in the comparative nine months by a property sale generating a gain of $3.3 million in the first quarter of 2026.
Other income. The decrease of $829,000 during the comparative three months ended September 30, 2026 was primarily related to the loss of income on a related party loan that was settled as part of the Merger consideration. The decrease of $1.4 million during the comparative nine months ended September 30, 2026 was primarily attributed to the one-time settlements of reserves and escrows related to CRE loans that occurred in the second quarter of 2025 and the loss of revenues on the related party loan that was settled as part of the Merger consideration.
Results of operations for the Consolidated Fund. As a result of the Merger and Internalization, ACRES Capital LLC (the "Capital LLC") serves as investment manager of AMF, and we consolidate AMF in our condensed consolidated financial statements as
(Back to Index)
(Back to Index)
the "Consolidated Fund." The Consolidated Fund's results are included in our consolidated revenues, expenses, assets, liabilities and cash flows beginning August 6, 2026.
The consolidation of the Consolidated Fund significantly increases the reported amounts of consolidated assets, liabilities, revenues, expenses and cash flows; however, the economic ownership interests of third-party investors in the Consolidated Fund are reflected as non-controlling interests. Accordingly, the Consolidated Fund's gross revenues, expenses and cash flows should not be viewed as having the same economic effect on our common stockholders as revenues, expenses and cash flows generated by wholly-owned operations. For the period from August 6, 2026 through September 30, 2026, the Consolidated Fund contributed $601,000 of expenses, $480,000 of net realized and unrealized losses, $20.9 million of interest income and $13.9 million of interest expense.
The Consolidated Fund finances the acquisition of its investments through secured borrowings, and as of September 30, 2026, the Consolidated Fund was in compliance with all covenants under such borrowings. Changes in the Consolidated Fund's investment activity, financing costs, leverage and third-party ownership interests may affect our consolidated results and cash flows in future periods, although substantially all of the third-party investors' economics will continue to be reflected through non-controlling interests.
Financial Condition
Summary
Our total assets were $4.6 billion (which includes $2.0 billion from the acquired Consolidated Fund as described below) and $2.2 billion at September 30, 2026 and December 31, 2025, respectively.
Investment Portfolio
The tables below summarize the amortized cost and net carrying amount of our investment portfolio, classified by asset type, at September 30, 2026 and December 31, 2025 as follows (dollars in thousands, except amounts in footnotes):
|
At September 30, 2026 |
Amortized Cost |
Net Carrying Amount (1) |
Percent of Portfolio |
Weighted Average Coupon |
||||||||||
|
Loans held for investment: |
||||||||||||||
|
CRE whole loans |
$ |
2,129,218 |
$ |
2,100,057 |
93.91 |
% |
7.11% |
|||||||
|
CRE preferred equity investment |
10,194 |
9,946 |
0.44 |
% |
10.00% |
|||||||||
|
2,139,412 |
2,110,003 |
94.35 |
% |
|||||||||||
|
Other investments: |
||||||||||||||
|
Investments in unconsolidated entities |
30,271 |
30,271 |
1.35 |
% |
N/A(4) |
|||||||||
|
Investments in real estate(2) |
75,302 |
75,302 |
3.37 |
% |
N/A(4) |
|||||||||
|
Properties held for sale |
20,900 |
20,900 |
0.93 |
% |
N/A(4) |
|||||||||
|
126,473 |
126,473 |
5.65 |
% |
|||||||||||
|
Total investment portfolio |
$ |
2,265,885 |
$ |
2,236,476 |
100.00 |
% |
||||||||
|
At December 31, 2025 |
Amortized Cost |
Net Carrying Amount (1) |
Percent of Portfolio |
Weighted Average Coupon |
||||||||||
|
Loans held for investment: |
||||||||||||||
|
CRE whole loans |
$ |
1,820,942 |
$ |
1,800,784 |
91.74 |
% |
7.32% |
|||||||
|
CRE preferred equity investment |
9,425 |
9,185 |
0.47 |
% |
10.00% |
|||||||||
|
1,830,367 |
1,809,969 |
92.21 |
% |
|||||||||||
|
Other investments: |
||||||||||||||
|
Investments in unconsolidated entities |
29,237 |
29,237 |
1.49 |
% |
N/A(4) |
|||||||||
|
Investments in real estate(2) |
56,277 |
56,277 |
2.86 |
% |
N/A(4) |
|||||||||
|
Properties held for sale(3) |
67,509 |
67,509 |
3.44 |
% |
N/A(4) |
|||||||||
|
153,023 |
153,023 |
7.79 |
% |
|||||||||||
|
Total investment portfolio |
$ |
1,983,390 |
$ |
1,962,992 |
100.00 |
% |
||||||||
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(Back to Index)
(1)
Net carrying amount includes an allowance for credit losses of $29.4 million and $20.4 million at September 30, 2026 and December 31, 2025, respectively.
(2)
Includes real estate related right of use assets of $24.1 million and $19.0 million, intangible assets of $7.6 million and $6.2 million, and lease liabilities of $49.2 million and $45.3 million at September 30, 2026 and December 31, 2025, respectively.
(3)
Includes properties held for sale-related liabilities of $3.1 million and real estate related right of use assets of $5.4 million at December 31, 2025. Additionally, includes intangible assets of $2.7 million and mortgage payable of $20.2 million at December 31, 2025.
(4)
There are no stated rates associated with these investments.
CRE loans. During the nine months ended September 30, 2026, we originated ten new CRE floating-rate whole loans, purchased one new CRE floating-rate whole loan and purchased a participation in an existing CRE floating-rate whole loan, with total commitments of $530.9 million of floating-rate CRE whole loan commitments, and funded $42.1 million of loan commitments. These increases were offset by $239.1 million in proceeds from loan payoffs and sales and unfunded loan commitments of $25.2 million, producing a net increase of $308.7 million in the par balance of the portfolio.
The following is a summary of our loans (dollars in thousands, except amounts in footnotes):
|
Description |
Quantity |
Principal |
Unamortized (Discount) Premium, net (1) |
Amortized Cost |
Allowance for Credit Losses |
Carrying Value |
Contractual Interest Rates (2) |
Maturity Dates (3)(4) |
||||||||||||||||||
|
At September 30, 2026: |
||||||||||||||||||||||||||
|
Whole loans (5)(6)(7) |
$ |
2,137,041 |
$ |
(7,823 |
) |
$ |
2,129,218 |
$ |
(29,161 |
) |
$ |
2,100,057 |
1M Term SOFR to 1M Term SOFR + 7.00% |
October 2026 to May 2030 |
||||||||||||
|
Preferred equity investment (see Note 4) (8) |
10,257 |
(63 |
) |
10,194 |
(248 |
) |
9,946 |
10.00% |
October 2028 |
|||||||||||||||||
|
Total |
$ |
2,147,298 |
$ |
(7,886 |
) |
$ |
2,139,412 |
$ |
(29,409 |
) |
$ |
2,110,003 |
||||||||||||||
|
At December 31, 2025: |
||||||||||||||||||||||||||
|
Whole loans (5)(6)(7) |
$ |
1,828,299 |
$ |
(7,357 |
) |
$ |
1,820,942 |
$ |
(20,158 |
) |
$ |
1,800,784 |
1M Term SOFR + 2.50% to 1M Term SOFR + 7.00% |
January 2026 to May 2030 |
||||||||||||
|
Preferred equity investment (see Note 4) (8) |
9,511 |
(86 |
) |
9,425 |
(240 |
) |
9,185 |
10.00% |
October 2028 |
|||||||||||||||||
|
Total |
$ |
1,837,810 |
$ |
(7,443 |
) |
$ |
1,830,367 |
$ |
(20,398 |
) |
$ |
1,809,969 |
||||||||||||||
(1)
Amounts include unamortized loan origination fees of $7.6 million and $6.6 million and deferred amendment fees of $275,000 and $852,000 at September 30, 2026 and December 31, 2025, respectively.
(2)
References to ("1M Term SOFR") are one-month Term SOFR. The weighted-average one-month benchmark rates were 3.77% and 3.83% at September 30, 2026 and December 31, 2025, respectively. Additionally, the weighted-average benchmark rate floors were 2.33% and 1.78% at September 30, 2026 and December 31, 2025, respectively.
(3)
Maturity dates exclude contractual extension options, subject to the satisfaction of certain terms that may be available to the borrowers.
(4)
Maturity dates exclude two whole loans, with amortized costs of $43.9 million and $37.9 million, in maturity default at September 30, 2026 and December 31, 2025, respectively.
(5)
Substantially all loans are pledged as collateral under various borrowings at September 30, 2026 and December 31, 2025.
(6)
CRE whole loans had $78.2 million and $88.6 million in unfunded loan commitments at September 30, 2026 and December 31, 2025, respectively. These unfunded loan commitments are advanced as the borrowers formally request additional funding and meet certain benchmarks, as permitted under the loan agreement, and any necessary approvals have been obtained.
(7)
Includes five mezzanine loans, with total amortized costs of $22.8 million, with four having fixed interest rates of 15.0% and one having a fixed interest rate of 20.0% at September 30, 2026. Includes four mezzanine loans, with total amortized costs of $17.8 million, with three having fixed interest rates of 15.0% and one having a fixed interest rate of 20.0% at December 31, 2025. Because we are also the first mortgage lender on these loans, we consider the first mortgage and mezzanine loans together as one whole loan.
(8)
We had one preferred equity investment associated with a CRE whole loan at September 30, 2026 and December 31, 2025, respectively. Our preferred equity investment has a fixed interest rate of 10%, of which 4.0% interest is deferred until maturity.
At September 30, 2026, 18.2%, 16.2% and 15.0% of our CRE loan portfolio based on carrying value was concentrated in the Southeast, Southwest and Northeast regions, respectively, as defined by the NCREIF. At December 31, 2025, 24.2%, 20.6% and 14.0% of our CRE loan portfolio based on carrying value was concentrated in the Southwest, Southeast, and Pacific regions, respectively. At September 30, 2026 and December 31, 2025, no single loan or investment group represented more than 10% of our total assets and one investment group generated 11% and 14% of our revenue, respectively.
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(Back to Index)
Investments in unconsolidated entities.
The following table summarizes our investments in unconsolidated entities at September 30, 2026 and December 31, 2025 and equity in earnings (losses) of unconsolidated entities for the three and nine months ended September 30, 2026 and 2025 (dollars in thousands, except in the footnotes):
|
Earnings (Losses) of Unconsolidated Entities |
||||||||||||||||||||||||||||
|
Ownership % |
For the Three Months Ended September 30, |
For the Nine Months Ended September 30, |
||||||||||||||||||||||||||
|
at September 30, 2026 |
September 30, 2026 |
December 31, 2025 |
2026 |
2025 |
2026 |
2025 |
||||||||||||||||||||||
|
Unsecured Junior Subordinated Debentures(1) |
3% |
$ |
1,548 |
$ |
1,548 |
$ |
- |
$ |
- |
$ |
- |
$ |
- |
|||||||||||||||
|
65 E. Wacker Joint Venture, LLC |
90% |
28,723 |
27,689 |
18 |
(294 |
) |
1,034 |
(1,035 |
) |
|||||||||||||||||||
|
7720 McCallum JV, LLC |
50% |
- |
- |
- |
(187 |
) |
(129 |
) |
(339 |
) |
||||||||||||||||||
|
Pacmulti Affiliates JV, LLC |
50% |
- |
- |
- |
(346 |
) |
(212 |
) |
(614 |
) |
||||||||||||||||||
|
Total |
$ |
30,271 |
$ |
29,237 |
$ |
18 |
$ |
(827 |
) |
$ |
693 |
$ |
(1,988 |
) |
||||||||||||||
(1)
During the three and nine months ended September 30, 2026 and 2025, dividends from the investments in RCT I's and RCT II's common shares in the amounts of $31,000 and $34,000 and $93,000 and $100,000, respectively, are recorded in other revenue on our consolidated statements of operations.
We record our investments in RCT I's and RCT II's common shares as investments in unconsolidated entities using the cost method. We record our investment in the Wacker JV, the McCallum JV and the Pacmulti JV as equity method investments.
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(Back to Index)
Investments in real estate and properties held for sale. At September 30, 2026, we held investments in five real estate properties, four of which are included in investments in real estate and one of which is included in properties held for sale on the consolidated balance sheets. We reclassified two properties in the third quarter to real estate held for investment. We sold a property in March 2026 for $20.0 million, generating a gain on sale of $3.3 million, net of selling costs.
The following table summarizes the book value of our investments in real estate and related intangible assets at September 30, 2026 and December 31, 2025 (in thousands, except amounts in the footnotes):
|
September 30, 2026 |
December 31, 2025 |
|||||||||||||||||||||||
|
Cost Basis |
Accumulated Depreciation & Amortization |
Carrying Value |
Cost Basis |
Accumulated Depreciation & Amortization |
Carrying Value |
|||||||||||||||||||
|
Assets acquired: |
||||||||||||||||||||||||
|
Investments in real estate, equity: |
||||||||||||||||||||||||
|
Investments in real estate (1) |
$ |
86,735 |
$ |
(12,625 |
) |
$ |
74,110 |
$ |
74,468 |
$ |
(7,797 |
) |
$ |
66,671 |
||||||||||
|
Right of use assets (2)(3) |
19,664 |
(1,228 |
) |
18,436 |
19,665 |
(1,024 |
) |
18,641 |
||||||||||||||||
|
Intangible assets (4) |
9,748 |
(4,181 |
) |
5,567 |
9,469 |
(3,342 |
) |
6,127 |
||||||||||||||||
|
Subtotal |
116,147 |
(18,034 |
) |
98,113 |
103,602 |
(12,163 |
) |
91,439 |
||||||||||||||||
|
Investments in real estate from lending activities: |
||||||||||||||||||||||||
|
Investments in real estate (1) |
47,761 |
(8,023 |
) |
39,738 |
10,025 |
(281 |
) |
9,744 |
||||||||||||||||
|
Right of use assets (2)(3) |
5,914 |
(280 |
) |
5,634 |
399 |
(63 |
) |
336 |
||||||||||||||||
|
Intangible assets (4) |
3,700 |
(1,660 |
) |
2,040 |
364 |
(270 |
) |
94 |
||||||||||||||||
|
Subtotal |
57,375 |
(9,963 |
) |
47,412 |
10,788 |
(614 |
) |
10,174 |
||||||||||||||||
|
Properties held for sale (5) |
20,900 |
- |
20,900 |
90,825 |
- |
90,825 |
||||||||||||||||||
|
Total |
$ |
194,422 |
$ |
(27,997 |
) |
$ |
166,425 |
$ |
205,215 |
$ |
(12,777 |
) |
$ |
192,438 |
||||||||||
|
Liabilities assumed: |
||||||||||||||||||||||||
|
Investments in real estate, equity: |
||||||||||||||||||||||||
|
Mortgage payables |
$ |
20,306 |
$ |
726 |
$ |
21,032 |
$ |
19,565 |
$ |
620 |
$ |
20,185 |
||||||||||||
|
Lease liabilities (3)(6) |
45,520 |
- |
45,520 |
44,958 |
- |
44,958 |
||||||||||||||||||
|
Subtotal |
65,826 |
726 |
66,552 |
64,523 |
620 |
65,143 |
||||||||||||||||||
|
Investments in real estate from lending activities: |
||||||||||||||||||||||||
|
Other liabilities |
41 |
(41 |
) |
- |
41 |
(41 |
) |
- |
||||||||||||||||
|
Lease liabilities (3)(6) |
3,671 |
- |
3,671 |
378 |
- |
378 |
||||||||||||||||||
|
Subtotal |
3,712 |
(41 |
) |
3,671 |
419 |
(41 |
) |
378 |
||||||||||||||||
|
Liabilities held for sale (7) |
- |
- |
- |
3,131 |
- |
3,131 |
||||||||||||||||||
|
Total |
$ |
69,538 |
$ |
685 |
$ |
70,223 |
$ |
68,073 |
$ |
579 |
$ |
68,652 |
||||||||||||
|
Total net investments in real estate and properties held for sale (8) |
$ |
124,884 |
$ |
96,202 |
$ |
137,142 |
$ |
123,786 |
||||||||||||||||
(1)
Investments in real estate include $7.0 million and $15.2 million of land, which is not depreciable, at each of September 30, 2026 and December 31, 2025. Also includes $382,000 and $3.7 million of construction in progress, which is also not depreciable until placed in service, at September 30, 2026 and December 31, 2025, respectively.
(2)
Primarily comprised of an $18.3 million and $18.4 million right of use asset, at September 30, 2026 and December 31, 2025, respectively, associated with the ground lease disclosed in footnote (6) below accounted for as an operating lease. Amortization is booked to real estate expenses on the consolidated statements of operations. Additionally, we have an operating lease with a value of $289,000 and $322,000 at September 30, 2026 and December 31, 2025, respectively, associated with a parking lease.
(3)
Refer to Note 9 in the Notes to the Consolidated Financial Statements for additional information on our remaining operating leases.
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(Back to Index)
(4)
Primarily comprised of a franchise intangible of $5.1 million and $3.5 million, a management contract intangible of $2.4 million and $2.6 million, in-place lease intangible of $4,000 and $7,000 and a customer list intangible of $8,000 and $87,000, at September 30, 2026 and December 31, 2025, respectively.
(5)
At September 30, 2026 properties held for sale included an office property acquired via deed-in-lieu of foreclosure in June 2023 and at December 31, 2025, properties held for sale additionally included a hotel acquired via deed-in-lieu of foreclosure in November 2020 and a student housing property acquired in April 2022.
(6)
Primarily comprised of a $45.3 million and $44.7 million ground lease at September 30, 2026 and December 31, 2025, respectively. The ground lease has a remaining term of 90 years. Lease expense was $2.2 million and $2.1 million for the nine months ended September 30, 2026 and 2025, respectively, and $731,000 and $710,000 for the three months ended September 30, 2026 and 2025, respectively.
(7)
Comprised of an operating lease liability.
(8)
Excludes items of working capital, either acquired or assumed.
Assets of Consolidated Fund.
The following table summarizes the investments held in the Consolidated Fund as of September 30, 2026. (dollars in thousands):
|
Asset Type |
Asset Location |
Fair Value |
Percentage of Total Investments |
|||||||
|
First mortgage loans |
||||||||||
|
Various |
Various |
$ |
1,534,420 |
80.0 |
% |
|||||
|
Equity Investments |
||||||||||
|
Various |
Various |
383,691 |
20.0 |
% |
||||||
|
Total investments, at fair value |
$ |
1,918,111 |
100.0 |
% |
||||||
Financing Receivables
Current market conditions have resulted in, and may continue to result in, a dislocation in capital markets, declining real estate values of certain asset classes and increased delinquencies and defaults, resulting in increased loan modifications, increased allowances for credit losses and an increased risk to borrowers of foreclosure actions. We routinely employ rigorous risk management and underwriting practices to proactively evaluate and maintain the credit quality of our CRE loan portfolio and work closely with our borrowers to mitigate potential losses.
The following table shows the activity in the allowance for credit losses for the nine months ended September 30, 2026 and year ended December 31, 2025 (in thousands):
|
Nine Months Ended September 30, 2026 |
Year Ended December 31, 2025 |
|||||||
|
Allowance for credit losses at beginning of period |
$ |
20,398 |
$ |
32,847 |
||||
|
Provision for (reversal of) credit losses |
9,011 |
(7,749 |
) |
|||||
|
Charge-offs |
- |
(4,700 |
) |
|||||
|
Allowance for credit losses at end of period |
$ |
29,409 |
$ |
20,398 |
||||
During the three and nine months ended September 30, 2026, we recorded a provision for expected credit losses of $8.3 million and $9.0 million, respectively, primarily attributable to a decline in macroeconomic factors both generally and locally as they relate to our CRE loans, compounded by increased modeled credit risk in the our loan portfolio.
At both September 30, 2026 and December 31, 2025, we were not required to individually evaluate any CRE loans for credit loss.
Credit quality indicators
Commercial Real Estate Loans
CRE loans are collateralized by a diversified mix of real estate properties and are assessed for credit quality based on the collective evaluation of several factors, including but not limited to: collateral performance relative to underwritten plan, time since origination, current implied and/or re-underwritten loan-to-collateral value ("LTV") ratios, loan structure and exit plan. Depending on the loan's performance against these various factors, loans are rated on a scale from 1 to 5, with loans rated 1 representing loans with the highest credit quality and loans rated 5 representing the loans with the lowest credit quality. Loans are typically rated a 2 at origination. The factors evaluated provide general criteria to monitor credit migration in our loan portfolio; as such, a loan's rating may improve or worsen, depending on new information received.
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The criteria set forth below should be used as general guidelines and, therefore, not every loan will have all of the characteristics described in each category below.
|
Risk Rating |
Risk Characteristics |
|
|
Property performance has surpassed underwritten expectations. |
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|
Occupancy is stabilized, the property has had a history of consistently high occupancy, and the property has a diverse and high quality tenant mix. |
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|
Property performance is consistent with underwritten expectations and covenants and performance criteria are being met or exceeded. |
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|
Occupancy is stabilized, near stabilized or is on track with underwriting. |
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|
Property performance lags behind underwritten expectations. |
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|
Occupancy is not stabilized and the property has some tenancy rollover. |
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|
Property performance significantly lags behind underwritten expectations. Performance criteria and loan covenants have required occasional waivers. |
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Occupancy is not stabilized and the property has a large amount of tenancy rollover. |
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Property performance is significantly worse than underwritten expectations. The loan is not in compliance with loan covenants and performance criteria and may be in default. Expected sale proceeds would not be sufficient to pay off the loan at maturity. |
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The property has a material vacancy rate and significant rollover of remaining tenants. |
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An updated appraisal is required upon designation and updated on an as-needed basis. |
All CRE loans are evaluated for any credit deterioration by debt asset management and certain finance personnel on at least a quarterly basis. Mezzanine loans and preferred equity investments may experience greater credit risks due to their nature as subordinated investments.
For the purpose of calculating the quarterly provision for credit losses under CECL, we pool CRE loans based on the underlying collateral property type and utilize a probability of default and loss given default methodology for approximately one year after which we immediately revert to a historical mean loss ratio.
Credit risk profiles of CRE loans at amortized cost were as follows (in thousands, except amounts in the footnotes):
|
Rating 1 |
Rating 2 |
Rating 3 |
Rating 4 |
Rating 5 |
Total (1) |
|||||||||||||||||||
|
At September 30, 2026: |
||||||||||||||||||||||||
|
Whole loans |
$ |
- |
$ |
1,225,804 |
$ |
514,422 |
$ |
383,378 |
$ |
5,614 |
$ |
2,129,218 |
||||||||||||
|
Preferred equity investment |
- |
10,194 |
- |
- |
- |
10,194 |
||||||||||||||||||
|
Total |
$ |
- |
$ |
1,235,998 |
$ |
514,422 |
$ |
383,378 |
$ |
5,614 |
$ |
2,139,412 |
||||||||||||
|
At December 31, 2025: |
||||||||||||||||||||||||
|
Whole loans |
$ |
28,137 |
$ |
938,416 |
$ |
470,871 |
$ |
377,904 |
$ |
5,614 |
$ |
1,820,942 |
||||||||||||
|
Preferred equity investment |
- |
9,425 |
- |
- |
- |
9,425 |
||||||||||||||||||
|
Total |
$ |
28,137 |
$ |
947,841 |
$ |
470,871 |
$ |
377,904 |
$ |
5,614 |
$ |
1,830,367 |
||||||||||||
(1)
The total amortized cost of CRE loans excluded accrued interest receivable of $37.0 million and $27.2 million at September 30, 2026 and December 31, 2025, respectively.
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Credit risk profiles of CRE loans by origination year at amortized cost were as follows (in thousands, except amounts in footnotes):
|
2026(1) |
2025 (2) |
2024 (3) |
2023 |
2022 |
Prior |
Total (4) |
||||||||||||||||||||||
|
At September 30, 2026: |
||||||||||||||||||||||||||||
|
Whole loans: (5) |
||||||||||||||||||||||||||||
|
Rating 1 |
$ |
- |
$ |
- |
$ |
- |
$ |
- |
$ |
- |
$ |
- |
$ |
- |
||||||||||||||
|
Rating 2 |
449,061 |
638,324 |
- |
29,506 |
- |
108,913 |
1,225,804 |
|||||||||||||||||||||
|
Rating 3 |
16,605 |
- |
30,802 |
- |
215,385 |
251,630 |
514,422 |
|||||||||||||||||||||
|
Rating 4 |
32,928 |
141,516 |
88,266 |
15,996 |
59,471 |
45,201 |
383,378 |
|||||||||||||||||||||
|
Rating 5 |
- |
- |
- |
- |
- |
5,614 |
5,614 |
|||||||||||||||||||||
|
Total whole loans |
498,594 |
779,840 |
119,068 |
45,502 |
274,856 |
411,358 |
2,129,218 |
|||||||||||||||||||||
|
Preferred equity investment (rating 2) |
- |
10,194 |
- |
- |
- |
- |
10,194 |
|||||||||||||||||||||
|
Total loans |
$ |
498,594 |
$ |
790,034 |
$ |
119,068 |
$ |
45,502 |
$ |
274,856 |
$ |
411,358 |
$ |
2,139,412 |
||||||||||||||
|
Current Period Gross Write-Offs |
$ |
- |
$ |
- |
$ |
- |
$ |
- |
$ |
- |
$ |
- |
$ |
- |
||||||||||||||
|
2025 (2) |
2024 (3) |
2023 |
2022 |
2021 |
Prior |
Total (4) |
||||||||||||||||||||||
|
At December 31, 2025: |
||||||||||||||||||||||||||||
|
Whole loans: (5) |
||||||||||||||||||||||||||||
|
Rating 1 |
$ |
- |
$ |
- |
$ |
- |
$ |
- |
$ |
28,137 |
$ |
- |
$ |
28,137 |
||||||||||||||
|
Rating 2 |
649,712 |
22,249 |
49,376 |
- |
203,263 |
13,816 |
938,416 |
|||||||||||||||||||||
|
Rating 3 |
10,283 |
- |
- |
235,271 |
214,356 |
10,961 |
470,871 |
|||||||||||||||||||||
|
Rating 4 |
137,906 |
87,370 |
15,991 |
91,675 |
- |
44,962 |
377,904 |
|||||||||||||||||||||
|
Rating 5 |
- |
- |
- |
- |
- |
5,614 |
5,614 |
|||||||||||||||||||||
|
Total whole loans |
797,901 |
109,619 |
65,367 |
326,946 |
445,756 |
75,353 |
1,820,942 |
|||||||||||||||||||||
|
Preferred equity investment (rating 2) |
9,425 |
- |
- |
- |
- |
- |
9,425 |
|||||||||||||||||||||
|
Total loans |
$ |
807,326 |
$ |
109,619 |
$ |
65,367 |
$ |
326,946 |
$ |
445,756 |
$ |
75,353 |
$ |
1,830,367 |
||||||||||||||
|
Current Period Gross Write-Offs |
$ |
- |
$ |
- |
$ |
- |
$ |
- |
$ |
- |
$ |
(4,700 |
) |
$ |
(4,700 |
) |
||||||||||||
(1)
Includes one novated CRE whole loan that resulted from loan workouts.
(2)
Includes two novated CRE whole loans that resulted from loan workouts.
(3)
Includes two novated CRE whole loans that resulted from loan workouts.
(4)
The total amortized cost of CRE loans excluded accrued interest receivable of $37.0 million and $27.2 million at September 30, 2026 and December 31, 2025, respectively.
(5)
Acquired CRE whole loans are grouped within each loan's year of origination.
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Loan Portfolio Aging Analysis
The following table presents the CRE loan portfolio aging analysis as of the dates indicated for CRE loans at amortized cost (in thousands, except amounts in footnotes):
|
30-59 Days |
60-89 Days |
Greater than 90 |
Total Past Due |
Current (2) |
Total Loans Receivable (3) |
Total Loans > 90 Days and Accruing |
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|
At September 30, 2026: |
||||||||||||||||||||||||||||
|
Whole loans |
$ |
- |
$ |
29,833 |
$ |
65,084 |
$ |
94,917 |
$ |
2,034,301 |
$ |
2,129,218 |
$ |
38,250 |
||||||||||||||
|
Preferred equity investment |
- |
- |
- |
- |
10,194 |
10,194 |
- |
|||||||||||||||||||||
|
Total |
$ |
- |
$ |
29,833 |
$ |
65,084 |
$ |
94,917 |
$ |
2,044,495 |
$ |
2,139,412 |
$ |
38,250 |
||||||||||||||
|
At December 31, 2025: |
||||||||||||||||||||||||||||
|
Whole loans |
$ |
- |
$ |
- |
$ |
26,834 |
$ |
26,834 |
$ |
1,794,108 |
$ |
1,820,942 |
$ |
- |
||||||||||||||
|
Preferred equity investment |
- |
- |
- |
- |
9,425 |
9,425 |
- |
|||||||||||||||||||||
|
Total |
$ |
- |
$ |
- |
$ |
26,834 |
$ |
26,834 |
$ |
1,803,533 |
$ |
1,830,367 |
$ |
- |
||||||||||||||
(1)
During the three and nine months ended September 30, 2026, we recognized interest income of $1.0 million and $3.1 million, respectively, on one CRE loan with a principal payment past due greater than 90 days at September 30, 2026.
(2)
Includes one CRE loan with an amortized cost of $32.3 million in maturity default at December 31, 2025.
(3)
The total amortized cost of CRE whole loans excluded accrued interest receivable of $37.0 million and $27.2 million at September 30, 2026 and December 31, 2025, respectively.
At September 30, 2026 and December 31, 2025, we had four and three CRE whole loans, with total amortized costs of $94.9 million and $59.1 million, respectively, in payment default.
During the three and nine months ended September 30, 2026 and 2025, we did not recognize interest income on CRE whole loans that were placed on nonaccrual status.
Loan Modifications
We are required to disclose modifications where we determined the borrower is experiencing financial difficulty and modified the agreement to: (i) forgive principal, (ii) reduce the interest rate, (iii) cause an other-than-insignificant payment delay, (iv) extend the loan term, or (v) any combination thereof.
During the nine months ended September 30, 2026 and 2025, we did not enter into any loan modifications for borrowers that were experiencing financial difficulty.
Restricted Cash
At September 30, 2026, we had restricted cash of $2.1 million held in required account balance minimums in our various escrow and deposit accounts and our consolidated CRE debt securitization that has an expense reserve and reinvestment cash that is collateral to the senior notes, and the Consolidated Fund had $8.4 million. At December 31, 2025, we had restricted cash of $2.2 million held in required account balance minimums in our various escrow and deposit accounts.
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Accrued Interest Receivable
The following table summarizes our accrued interest receivable at September 30, 2026 and December 31, 2025 (in thousands):
|
September 30, 2026 |
December 31, 2025 |
Net Change |
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|
Accrued interest receivable from loans |
$ |
36,966 |
$ |
27,232 |
$ |
9,734 |
||||||
|
Accrued interest receivable from promissory note, escrow, sweep and reserve accounts |
40 |
27 |
13 |
|||||||||
|
Total |
$ |
37,006 |
$ |
27,259 |
$ |
9,747 |
||||||
The increase of $9.7 million in accrued interest receivable was primarily attributable to accrued deferred interest on modified loans offset by loan payoffs.
Other Assets
The following table summarizes our other assets at September 30, 2026 and December 31, 2025 (in thousands):
|
September 30, 2026 |
December 31, 2025 |
Net Change |
||||||||||
|
Tax receivables and prepaid taxes |
$ |
815 |
$ |
376 |
$ |
439 |
||||||
|
Other receivables |
4,110 |
2,987 |
1,123 |
|||||||||
|
Prepaid expenses |
4,291 |
1,890 |
2,401 |
|||||||||
|
Fixed assets - non real estate |
716 |
325 |
391 |
|||||||||
|
Other assets, miscellaneous |
1,140 |
982 |
158 |
|||||||||
|
Total |
$ |
11,072 |
$ |
6,560 |
$ |
4,512 |
||||||
The increase of $4.5 million in other assets was primarily attributable to increases in prepaid expenses and other receivables related to prepaid insurance and other receivables acquired in the Merger.
Goodwill
We accounted for the Merger and Internalization as a business combination using the acquisition method of accounting. Accordingly, the identifiable assets acquired and liabilities assumed of ACC were recognized at their estimated acquisition-date fair values, with the excess of consideration transferred over the estimated fair value of identifiable net assets acquired recognized as goodwill. Based on our preliminary purchase price allocation, we recognized preliminary goodwill of $175.1 million in connection with the Internalization and Merger.
Goodwill represents the future economic benefits arising from assets acquired that could not be individually identified and separately recognized, including expected synergies and other benefits from the Internalization, and goodwill is not amortized. The purchase price allocation is preliminary and may change as additional information becomes available, including information related to the valuation of acquired assets, assumed liabilities, intangible assets, non-controlling interests and related tax effects. Any adjustments to the preliminary purchase price allocation could affect the amount of goodwill, intangible assets, amortization expense, deferred tax amounts, segment reporting and future impairment analyses.
As of September 30, 2026, we had allocated preliminary goodwill of $78.3 million to our CRE Lending segment and $96.8 million to our Investment Management segment. This allocation may change as the purchase price allocation is finalized. We will continue to evaluate the preliminary purchase accounting during the measurement period and will record adjustments, if any, in the period in which the amounts are determined.
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Deferred Tax Assets
At both September 30, 2026 and December 31, 2025, our net deferred tax asset was zero, resulting from a full valuation allowance of $21.8 million and $20.3 million, respectively, on our gross deferred tax assets as we believed it was more likely than not that the deferred tax assets would not be realized. We will continue to evaluate our ability to realize the tax benefits associated with deferred tax assets by analyzing forecasted taxable income using both historical and projected future operating results, the reversal of existing temporary differences, taxable income in prior carry back years (if permitted) and the availability of tax planning strategies.
Derivative Instruments
Historically, we sought to mitigate the potential impact on net income (loss) of adverse fluctuations in interest rates incurred on our borrowings by entering into hedging agreements. We classified our interest rate hedges as cash flow hedges, which are hedges that eliminate the risk of changes in the cash flows of a financial asset or liability.
We terminated all of our interest rate swap positions associated with our prior financed CMBS portfolio in April 2020. At termination, we realized a loss of $11.8 million. At September 30, 2026 and December 31, 2025, we had losses of $717,000 and $1.6 million, respectively, recorded in accumulated other comprehensive loss, which will be amortized into earnings over the remaining life of the debt. During the three months ended September 30, 2026 and 2025, we recorded amortization expense of $248,000 and $425,000, respectively, reported in interest expense on the consolidated statements of operations. During the nine months ended September 30, 2026 and 2025, we recorded amortization expense of $886,000 and $1.3 million, respectively, reported in interest expense on the consolidated statements of operations.
For each of the three and nine months ended September 30, 2025 we recorded accretion income, reported in interest expense on the consolidated statements of operations, of $23,000 and $68,000, respectively, to accrete the accumulated other comprehensive income on the terminated swap agreements. At December 31, 2025, we fully accreted the unrealized balance from the gain attributable to two terminated interest rate swaps, and therefore no accretion income was recorded for the three and nine months ended September 30, 2026.
The following table presents the effect of derivative instruments on our consolidated statements of operations for the nine months ended September 30, 2026 and 2025 (in thousands):
|
Realized and Unrealized Gain (Loss) (1) |
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|
Consolidated Statements of Operations Location |
Nine Months Ended September 30, 2026 |
Nine Months Ended September 30, 2025 |
||||||||
|
Interest rate swap contracts, hedging |
Interest expense |
$ |
(886 |
) |
$ |
(1,191 |
) |
|||
(1)
Negative values indicate a decrease to the associated consolidated statement of operations line items.
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Financing Arrangements
Borrowings under our financing arrangements are guaranteed by us or one or more of our subsidiaries. The following table sets forth certain information with respect to our borrowings (dollars in thousands, except amounts in footnotes):
|
September 30, 2026 |
December 31, 2025 |
|||||||||||||||||||||||||||
|
Outstanding Borrowings |
Value of Collateral |
Number of Positions as Collateral |
Weighted Average Interest Rate |
Outstanding Borrowings |
Value of Collateral |
Number of Positions as Collateral |
Weighted Average Interest Rate |
|||||||||||||||||||||
|
CRE - Term Reinvestment Financing Facility |
||||||||||||||||||||||||||||
|
JPMorgan Chase Bank, N.A. (1) |
$ |
582,758 |
$ |
881,929 |
28 |
5.58% |
$ |
728,167 |
$ |
1,009,622 |
34 |
5.50% |
||||||||||||||||
|
Senior Secured Financing Facility |
||||||||||||||||||||||||||||
|
Massachusetts Mutual Life Insurance Company (2) |
- |
- |
- |
-% |
61,645 |
166,526 |
5 |
7.53% |
||||||||||||||||||||
|
CRE - Term Warehouse Financing Facilities |
||||||||||||||||||||||||||||
|
JPMorgan Chase Bank, N.A. (3) |
- |
- |
- |
-% |
116,488 |
149,000 |
3 |
5.50% |
||||||||||||||||||||
|
Morgan Stanley Mortgage Capital Holdings LLC (4)(5) |
68,818 |
99,100 |
2 |
5.67% |
417,374 |
544,937 |
12 |
5.55% |
||||||||||||||||||||
|
Mortgage Payable |
||||||||||||||||||||||||||||
|
HGM CRE LP (6) |
21,032 |
25,265 |
1 |
7.38% |
- |
- |
- |
-% |
||||||||||||||||||||
|
ReadyCap Commercial, LLC |
- |
- |
- |
-% |
20,185 |
26,964 |
1 |
7.57% |
||||||||||||||||||||
|
Total |
$ |
672,608 |
$ |
1,006,294 |
$ |
1,343,859 |
$ |
1,897,049 |
||||||||||||||||||||
(1)
Includes $2.3 million and $2.8 million of deferred debt issuance costs at September 30, 2026 and December 31, 2025, respectively.
(2)
Includes $1.5 million of deferred debt issuance costs at December 31, 2025.
(3)
Includes $352,000 of deferred debt issuance costs at December 31, 2025.
(4)
Includes $1.2 million and $546,000 of deferred debt issuance costs at September 30, 2026 and December 31, 2025, respectively, which includes $1.1 million of deferred debt issuance costs at September 30, 2026 from another term warehouse financing facility with no balance.
(5)
Collateral is also composed of seven future funding participations that are components of assets held by ACRES Commercial Realty 2026-FL4 Issuer, LLC ("ACR 2026-FL4") at September 30, 2026.
(6)
Includes $699,000 of deferred debt issuance costs at September 30, 2026.
We were in compliance with all covenants in the respective agreements at September 30, 2026 and December 31, 2025.
CRE - Term Reinvestment Financing Facility
In March 2025, an indirect wholly-owned subsidiary of ours entered into a master repurchase agreement (the "JPMorgan Chase 2025 Facility") with JPMorgan Chase Bank, N.A. ("JPMorgan Chase") to finance existing CRE loans and the origination of CRE loans. The JPMorgan Chase 2025 Facility had an initial maximum facility amount of $939.9 million, provides match term funding, charges interest of one-month benchmark plus a 1.75% spread and matures as of the latest maturity date of any purchased asset. The JPMorgan Chase 2025 Facility includes a two-year reinvestment period enabling the reinvestment of principal proceeds from asset repayments into qualifying replacement assets. The reinvestment period for the JPMorgan Chase 2025 Facility ends in March 2027.
In connection with the JPMorgan Chase 2025 Facility, we provided "bad act" guaranties pursuant to a Guarantee Agreement, dated March 14, 2025 between us and JPMorgan Chase (the "2025 JPMorgan Chase Guarantee") where we are liable for 100% of the repurchase price of the purchased assets and JPMorgan Chase's losses, costs and expenses only upon the occurrence of certain customary bad acts. The JPMorgan Chase 2025 Guarantee includes certain financial covenants required of us, including required liquidity, required capital, ratios of total indebtedness to equity and EBITDA requirements. The JPMorgan Chase 2025 Facility also includes minimum interest coverage requirements and maximum look through LTV requirements. Also, ACRES Realty Funding, Inc. ("ACRES RF"), the direct owner of the wholly-owned subsidiary borrower, executed a pledge agreement with JPMorgan Chase pursuant to which it pledged and granted to JPMorgan Chase a continuing security interest in any and all of its right, title and interest in and to the wholly-owned subsidiary, including all distributions, proceeds, payments, income and profits from its interests in the wholly-owned subsidiary. In November 2026, we entered into Amendment No. 1 to 2025 JPMorgan Chase Guarantee, by and between us and JPMorgan Chase, which makes certain amendments and modifications to the 2025 JPMorgan Chase Guarantee to amend certain financial covenants.
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The JPMorgan Chase 2025 Facility specifies events of default, subject to certain materiality thresholds and grace periods, customary for this type of financing arrangement, including but not limited to: payment defaults; bankruptcy or insolvency proceedings; a change of control of the ACRES SPE 2025-1, LLC, ("Seller SPE") or of us; breaches of covenants and/or certain representations and warranties; and a judgment in an amount greater than $250,000 against the Seller SPE or ACRES RF or $10.0 million against us. The remedies for such events of default are also customary for this type of financing arrangement and include the acceleration of the principal amount outstanding under the JPMorgan Chase 2025 Facility and the liquidation by JPMorgan Chase of purchased assets then subject to the JPMorgan Chase 2025 Facility. In October 2025, the JPMorgan Chase 2025 Facility was amended to allow ACRES Mortgage Fund Levered II, LLC ("AMF Levered II, LLC"), a wholly-owned subsidiary of ACRES Mortgage Fund, Ltd., to purchase a non-controlling interest in the Seller SPE. At September 30, 2026, AMF Levered II, LLC owned a $116.8 million non-controlling interest, or 43.2%, of the Seller SPE and assumed a proportionate share of risk in the portfolio.
Senior Secured Financing Facility
In July 2020, our indirect, wholly-owned subsidiary ("Holdings"), along with its direct wholly-owned subsidiary (the "Borrower"), entered into a $250.0 million Loan and Servicing Agreement (the "MassMutual Loan Agreement") with Massachusetts Mutual Life Insurance Company ("MassMutual") and the other lenders party thereto (the "Lenders"). The asset-based revolving loan facility (the "MassMutual Facility") provided under the MassMutual Loan Agreement had been used to finance our core CRE lending business.
In December 2022, Holdings, the Borrower and the Lenders entered into an Amended and Restated Loan and Servicing Agreement (the "Amended and Restated Loan and Servicing Agreement"), which amended and restated the MassMutual Loan Agreement, and reflected a senior secured term loan facility, not to exceed $500.0 million, composed of individual loan series issued upon mutual agreement of the Borrower and Lenders. Each loan series was available for three months after the closing date agreed upon by the Borrower and Lenders ("Commitment Period"), subject to the maximum dollar amount agreed upon for that series. The Commitment Period was subject to immediate termination upon the occurrence of an event of default. Each loan series had a final maturity of five years from the issuance date for the loan series unless an additional time was mutually agreed upon by the Lenders and Borrower. The advance rate on portfolio assets was mutually agreed upon by the Lenders and Borrower. Each loan series had its own mutually agreed upon interest rate equal to one-month Term SOFR plus the applicable spread. In August 2026, we paid off the MassMutual Facility and terminated the MassMutual Loan Agreement.
CRE - Term Warehouse Financing Facilities
In October 2018, an indirect, wholly-owned subsidiary of ours entered into a master repurchase agreement (the "JPMorgan Chase Facility") with JPMorgan Chase to finance the origination of CRE loans. As amended, the JPMorgan Chase Facility has a maximum facility amount of $250.0 million, charges interest of one-month Term SOFR plus market spreads and was set to mature in July 2026. In March 2025, we entered into Amendment No. 6 to Guarantee, by and between us and JPMorgan Chase, which makes certain amendments and modifications to the JPM Guarantee, dated October 26, 2018 between us and JPMorgan Chase, as amended (the "JPM Guarantee") including but not limited to amending (capitalized terms each as defined in the JPM Guarantee) (i) minimum unencumbered Liquidity requirement, (ii) the ratio of Total Indebtedness to Total Equity, (iii) ratio of Adjusted Total Indebtedness to Total Equity, and (iv) EBITDA to Interest Expense ratio. In August 2025, we entered into Amendment No. 7 to Guarantee, by and between us and JPMorgan Chase, which makes certain amendments and modifications to the JPM Guarantee, dated October 26, 2018 between us and JPMorgan Chase, as amended the JPM Guarantee to amend the terms of the debt service coverage period. In July 2026, we entered into Amendment No. 5 to the JPMorgan Chase Facility, extending its maturity to July 2028. We also have the right to request two one-year extensions. In November 2026, we entered into Amendment No. 8 to the JPM Guarantee, by and between us and JPMorgan Chase, which makes certain amendments and modifications to the JPM Guarantee to amend certain financial covenants.
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In November 2021, an indirect, wholly-owned subsidiary of ours entered into a Master Repurchase and Securities Contract Agreement (the "Morgan Stanley Facility") with Morgan Stanley Mortgage Capital Holdings LLC ("Morgan Stanley") to finance the origination of CRE loans. As amended, the Morgan Stanley Facility has a maximum facility amount of $250.0 million, charges interest of one-month Term SOFR plus market spreads and was scheduled to mature in November 2025. We also have the right to request an extension for an additional one-year period. In March 2025, we entered into Amendment No. 4 to Guaranty (the "Morgan Stanley Amendment") by and between us and Morgan Stanley, which makes certain amendments and modifications to the Guaranty between us and Morgan Stanley as amended (the "MS Guaranty"), including but not limited to (capitalized terms each as defined in the MS Guaranty) (i) minimum unencumbered Liquidity requirement, (ii) ratio of Total Indebtedness to Total Equity, (iii) ratio of Adjusted Total Indebtedness to Total Equity, and (iv) EBITDA to Interest Expense ratio. In November 2025, we entered into Amendment No. 3 to the Morgan Stanley Facility extending its maturity to November 2026 and entered into Amendment No. 4 to the Morgan Stanley Facility to increase the facility amount to $400.0 million, as increased from time to time, provided the amount shall be automatically reduced to $250.0 million on the earlier of May 2026 or when we send a request for a reduction in the facility amount. In December 2025, we entered into Amendment No. 5 to the Morgan Stanley Facility to increase the facility amount to $500.0 million. In March 2026, we entered into Amendment No. 6 to the Morgan Stanley Facility to decrease the facility amount to $250.0 million. In November 2026, we entered into Amendment No. 7 to the Morgan Stanley Facility and Amendment No. 5 to the MS Guaranty extending its maturity to November 2027 and to amend certain financial covenants.
Mortgage Payable
In April 2022, Chapel Drive West, LLC, a wholly-owned subsidiary of CS - ACRES FSU Student Venture, LLC (the "FSU Student Venture") entered into a Loan Agreement (the "Mortgage") with ReadyCap Commercial, LLC ("ReadyCap") to finance the acquisition of a student housing complex. The Mortgage was interest only and had a maximum principal balance of $20.4 million, of which, $18.7 million was advanced in the initial funding. The Mortgage charged interest of one-month Term SOFR plus a spread of 3.80%. The Mortgage was paid off in May 2026.
In May 2026, Chapel Drive West, LLC, entered into a Loan Agreement (the "HGM Mortgage") with HGM CRE LP ("HGM") to finance an existing student housing complex. The HGM Mortgage is interest only and has a maximum principal balance of $23.8 million, of which, $21.7 million was advanced in the initial funding. The HGM Mortgage charges interest of one-month Term SOFR plus a spread of 3.50%. The HGM Mortgage is scheduled to mature in June 2029, subject to two one-year extension options.
The HGM Mortgage contains events of default, subject to certain materiality thresholds and grace periods, customary for this type of financing arrangement. The remedies for such events of default are also customary for this type of transaction.
In January 2023, Chapel Drive East, LLC, a wholly-owned subsidiary of the FSU Student Venture, entered into a loan agreement (the "Construction Loan Agreement") with Oceanview Life and Annuity Company ("Oceanview") to finance the construction of a student housing complex (the "Construction Loan"). The Construction Loan was interest only and has a maximum principal balance of $48.0 million. The Construction Loan charged one-month Term SOFR plus a spread of 6.00%. In February 2025, the Construction Loan was amended to bifurcate the first one-year extension option into two separate extension options and periods: a seven month extension period ended September 2025 and a five month extension ended February 2026. The Construction Loan had a maturity of September 2025.
In addition to the Construction Loan, Chapel Drive East, LLC entered into a financing agreement with Florida Pace Funding Agency to fund energy efficient building improvements and had a maximum principal balance of $15.5 million. This agreement charged fixed interest of 7.26% and was scheduled to mature in July 2053.
In September 2025, the Construction Loan and the financing agreement with Florida Pace Funding Agency were paid off in connection with the sale of the student housing complex.
Securitizations
ACR 2026-FL4
In February 2026, we closed ACR 2026-FL4, a CRE debt securitization transaction that can finance up to $1.0 billion of CRE loans. ACR 2026-FL4 issued a total of $879.5 million of non-recourse, floating-rate notes to third parties at par. Additionally, we retained 100% of the Class F notes, Class G notes and Income notes. ACR 2026-FL4 includes a 180-day ramp up acquisition period that allows it to acquire CRE loans using unused proceeds from the issuance of the non-recourse floating-rate notes, which the Company fully utilized for new loan originations as of March 31, 2026. Additionally, ACR 2026-FL4 includes a reinvestment period, which ends in August 2028, that allows it to acquire CRE loans for reinvestment into the securitization using uninvested principal proceeds.
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At closing, the offered notes issued to investors consisted of the following classes: (i) $589.7 million of Class A notes bearing interest at one-month SOFR plus 1.45%, increasing to 1.70% in August 2031; (ii) $104.2 million of Class A-S notes bearing interest at one-month SOFR plus 1.70%, increasing to 1.95% in August 2031; (iii) $72.4 million of Class B notes bearing interest at one-month SOFR plus 1.95%, increasing to 2.45% in August 2031; (iv) $58.5 million of Class C notes bearing interest at one-month SOFR plus 2.25%, increasing to 2.75% in August 2031; (v) $36.9 million of Class D notes bearing interest at one-month SOFR plus 2.85%, increasing to 3.35% in August 2031 and (vi) $17.8 million of Class E notes bearing interest at one-month SOFR plus 3.60%, increasing to 4.10% in August 2031. All of the notes issued mature in August 2044, although we have the right to call the notes beginning on the payment date in August 2028 and thereafter.
ACR 2021-FL1
In May 2021, we closed ACR 2021-FL1, an $802.6 million CRE debt securitization transaction that provided financing for CRE loans. In March 2025, we exercised the optional redemption on ACR 2021-FL1 in conjunction with the closing of the JPMorgan Chase 2025 Facility.
ACR 2021-FL2
In December 2021, we closed ACR 2021-FL2, a $700.0 million CRE debt securitization transaction that provided financing for CRE loans. In March 2025, we exercised the optional redemption on ACR 2021-FL2 in conjunction with the closing of the JPMorgan Chase 2025 Facility.
Corporate Debt
Corporate Credit Facility
On August 6, 2026, immediately before the closing of the Merger, certain indirectly wholly-owned subsidiaries of the Company entered into a First Amendment and Joinder to Loan and Servicing Agreement with the administrative agent and Massachusetts Mutual Life Insurance Company and other lenders, pursuant to which ACRES Holdings, LLC, ACRES Capital, LLC and ACRES Insurance Agency, LLC became borrowers under the Corporate Credit Facility with an aggregate principal amount of $185.0 million. We accounted for the amendment and joinder as a new borrowing, resulting in no gain or loss recognized during the three months ended September 30, 2026.
The Corporate Credit Facility matures on July 25, 2033 and advances under the facility bear interest at a fixed rate of 8.749% per annum. Scheduled principal payments of $46.3 million are required in each of July 2030, July 2031, July 2032 and July 2033.
The obligations under the facility are unconditionally guaranteed, jointly and severally, by certain indirectly wholly-owned subsidiaries of the Company. The facility contains customary affirmative and negative covenants, including minimum asset value, maximum loan-to-value, interest coverage, minimum gross revenue and minimum fund share value requirements, and limitations on additional indebtedness, liens, investments, capital expenditures (including a limitation on capital expenditures of $1.0 million per calendar year) and dispositions, subject to specified exceptions. As of September 30, 2026, we were in compliance with all applicable covenants.
8.625% Senior Secured Notes Due 2031
On August 6, 2026, following the closing of the Merger, we completed a private placement of $200.0 million aggregate principal amount of 8.625% Senior Secured Notes pursuant to a Note Purchase Agreement, by and among us, the purchasers named therein and UMB Bank, N.A., as collateral agent. The 8.625% Senior Secured Notes mature on July 31, 2031 and bear interest at a fixed rate of 8.625% per annum, payable semi-annually. The 8.625% Senior Secured Notes are secured on a first lien basis by a pledge of certain capital stock of our subsidiaries, residual equity interests in certain of our securitization financing vehicles and other CRE assets, and are guaranteed by certain of our subsidiaries.
Prior to July 31, 2028, the 8.625% Senior Secured Notes will be redeemable at 100% of the principal amount plus a "make-whole" premium, plus any accrued and unpaid interest on the principal amount being redeemed, fees, expenses, indemnities and other amounts to, but excluding, the redemption date. On or after July 31, 2028, the 8.625% Senior Secured Notes will be redeemable at the following prepayment prices (expressed as a percentage of the principal amount of the Notes redeemed), plus any accrued and unpaid interest on the principal amount being redeemed, fees, expenses, indemnities and other amounts to, but excluding, the redemption date), if redeemed during the 12-month period beginning on July 31 of the year set forth below:
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|
Year |
Redemption Price |
|
2028 |
104.3125% |
|
2029 |
102.15625% |
|
2030 |
100.000% |
We used a portion of the net proceeds from the 8.625% Senior Secured Notes to repay in full our 5.75% Senior Unsecured Notes at their August 2026 maturity, with the remaining net proceeds used for general corporate purposes.
5.75% Senior Unsecured Notes Due 2026
On August 16, 2021, we issued $150.0 million of our 5.75% Senior Unsecured Notes pursuant to our Indenture, dated August 16, 2021 (the "Base Indenture"), between Wells Fargo, now Computershare Trust Company, N.A. ("CTC"), as trustee (the "Trustee"), and us as supplemented by the First Supplemental Indenture, dated August 16, 2021, between Wells Fargo, now CTC, and us (the "Supplemental Indenture" and, together with the Base Indenture, the "Indenture"). The 5.75% Senior Unsecured Notes were repaid in full at their scheduled maturity in August 2026.
Unsecured Junior Subordinated Debentures
During 2006, we formed RCT I and RCT II for the sole purpose of issuing and selling capital securities representing preferred beneficial interests. RCT I and RCT II are not consolidated into our consolidated financial statements because we are not deemed to be the primary beneficiary of these entities. In connection with the issuance and sale of the capital securities, we issued junior subordinated debentures to RCT I and RCT II of $25.8 million each, representing our maximum exposure to loss. The debt issuance costs associated with the junior subordinated debentures for RCT I and RCT II were included in borrowings and were amortized into interest expense on the consolidated statements of operations using the effective yield method over a ten-year period.
There were no unamortized debt issuance costs associated with the junior subordinated debentures for RCT I and RCT II outstanding at September 30, 2026 and December 31, 2025. The interest rates for RCT I and RCT II, at September 30, 2026, were 7.94% and 8.05%, respectively. The interest rates for RCT I and RCT II, at December 31, 2025, were 7.90% and 8.05%, respectively.
Equity
Total equity at September 30, 2026 was $1.2 billion compared to total equity at December 31, 2025 of $550.6 million. The increase in equity during the nine months ended September 30, 2026 was primarily attributable to the net issuance of 6.3 million shares of common stock as Merger consideration, issuance of 2.2 million shares of the Company's 8.625% Fixed-to-Floating Series C Cumulative Redeemable Preferred Stock, and non-controlling interests acquired as part of the Merger partially offset by net losses in the third quarter of 2026 and net redemptions of non-controlling interests.
Our preferred equity is composed of the following at September 30, 2026:
•
7.0 million shares of 8.625% fixed to floating rate Series C cumulative redeemable preferred stock with a $25.00 per share liquidation preference ("Series C Preferred Stock"). The Series C Preferred Stock has no maturity date and we are not required to redeem them at any time. However, we may redeem them at our election, in whole or in part, on or after July 30, 2024. Effective July 30, 2024, the Series C Preferred Stock converted from its fixed rate of 8.625% to a floating rate equal to three-month Term SOFR plus a spread of 5.927%, but at no time shall the floating rate be less than 8.625%. Dividends are payable quarterly in arrears.
•
4.5 million shares of fixed 7.875% Series D cumulative redeemable preferred stock with a $25.00 per share liquidation preference ("Series D Preferred Stock"). The Series D Preferred Stock has no maturity and we are not required to redeem them at any time. However, we may redeem them at our election, in whole or in part, on or after May 21, 2026. Dividends are payable quarterly in arrears.
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Balance Sheet - Book Value Reconciliation
The following table rolls forward our common stock book value for the three and nine months ended September 30, 2026 (in thousands, except per share data and amounts in footnotes):
|
Three Months Ended September 30, 2026 |
Nine Months Ended September 30, 2026 |
|||||||||||||||
|
Total Amount |
Per Share Amount |
Total Amount |
Per Share Amount |
|||||||||||||
|
Common stock book value at beginning of period (1) |
$ |
189,327 |
$ |
26.76 |
$ |
196,804 |
$ |
30.01 |
||||||||
|
Net loss allocable to common shares (2)(3) |
(56,326 |
) |
(4.21 |
) |
(69,868 |
) |
(5.22 |
) |
||||||||
|
Change in other comprehensive income on derivatives |
247 |
0.02 |
886 |
0.07 |
||||||||||||
|
Issuance of common shares in consideration for Merger(3) |
91,886 |
(5.77 |
) |
91,886 |
(7.59 |
) |
||||||||||
|
Impact to equity of share-based compensation |
115 |
0.01 |
5,541 |
(0.46 |
) |
|||||||||||
|
Total net decrease |
35,922 |
(9.95 |
) |
28,445 |
(13.20 |
) |
||||||||||
|
Common stock book value at end of period (1)(4) |
$ |
225,249 |
$ |
16.81 |
$ |
225,249 |
$ |
16.81 |
||||||||
(1)
Per share calculations exclude unvested restricted stock, as disclosed on our consolidated balance sheets, of 55,559 shares at each of September 30, 2026 and June 30, 2026 and 328,586 shares at December 31, 2025. The denominators for the calculations were 13,396,930, 7,075,542 and 6,558,865 shares at September 30, 2026, June 30, 2026 and December 31, 2025, respectively.
(2)
The per share amounts are calculated with the denominator referenced in footnote (1) at September 30, 2026. We calculated net income (loss) per common share-diluted of $(5.16) and $(8.65) using the weighted average diluted shares outstanding during the three and nine months ended September 30, 2026, respectively.
(3)
In total, the net impact of the Merger was a decrease of $8.62 to book value for the three months ended September 30, 2026, which includes the transactions costs included in net loss allocable to common shares as well as the impact of the issuance of common stock in consideration for the Merger.
(4)
We calculated common stock book value as total stockholders' equity of $499.5 million less preferred stock equity of $274.3 million at September 30, 2026.
Management Agreement Equity
Prior to the termination of our Management Agreement in connection with the Closing of the Merger and Internalization on August 6, 2026, our monthly base management fee, as defined in our Management Agreement, was equal to 1/12th of the amount of our equity multiplied by 1.50% and was calculated and paid monthly in arrears. Following the Closing, we no longer incur or pay a base management fee or incentive compensation to a third-party manager, as our Manager became our wholly-owned subsidiary and its personnel became our employees.
The following table summarizes the calculation of equity, as defined in the Management Agreement (in thousands):
|
Amount |
||||
|
At August 6, 2026: |
||||
|
Proceeds from capital stock issuances, net (1) |
$ |
1,330,472 |
||
|
Retained earnings, net (2) |
(641,971 |
) |
||
|
Payments for repurchases of capital stock |
(279,678 |
) |
||
|
Total |
$ |
408,823 |
||
(1)
Deducts underwriting discounts and commissions and other expenses and costs relating to such issuances.
(2)
Excludes non-cash equity compensation expense incurred to date.
Earnings Available for Distribution
Earnings Available for Distribution ("EAD") is a non-GAAP financial measure intended to supplement our financial results computed in accordance with accounting principles generally accepted in the United States of America ("GAAP"), and we believe EAD serves as a useful indicator for investors in evaluating our performance and ability to pay dividends.
EAD excludes the effects of certain transactions and adjustments in accordance with GAAP that we believe are not necessarily indicative of our current CRE loan portfolio and other CRE-related investments and operations. EAD excludes income (loss) from all non-core assets such as commercial finance, residential mortgage lending, certain legacy CRE loans and other non-CRE assets designated as assets held for sale at the initial measurement date of December 31, 2016.
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EAD, for reporting purposes, is defined as GAAP net income (loss) allocable to common shares, excluding (i) non-cash equity compensation expense, (ii) unrealized gains and losses, (iii) non-cash provisions for credit losses, (iv) non-cash impairments on securities, (v) non-cash amortization of discounts or premiums associated with borrowings, (vi) net income or loss from a limited partnership interest owned at the initial measurement date, (vii) net income or loss from non-core assets, (viii) real estate depreciation and amortization, (ix) foreign currency gains or losses and (x) income or loss from discontinued operations. EAD may also be adjusted periodically to exclude certain one-time events pursuant to changes in GAAP and certain non-cash items.
Although pursuant to the Management Agreement in place prior to the Closing of the Merger and Internalization we calculated incentive compensation using EAD that excluded incentive compensation payable to our Manager, we included incentive compensation payable to our Manager in calculating EAD for reporting purposes.
The following table provides a reconciliation from GAAP net (loss) income allocable to common shares to EAD allocable to common shares for the periods presented (in thousands, except per share data):
|
For the Three Months Ended September 30, |
For the Nine Months Ended September 30, |
|||||||||||||||||||||||||||||||
|
2026 |
Per Share |
2025 |
Per Share |
2026 |
Per Share |
2025 |
Per Share |
|||||||||||||||||||||||||
|
Net (loss) income allocable to common shares - GAAP |
$ |
(56,326 |
) |
$ |
(5.16 |
) |
$ |
9,782 |
$ |
1.34 |
$ |
(69,868 |
) |
$ |
(8.65 |
) |
$ |
3,191 |
$ |
0.42 |
||||||||||||
|
Adjustment for gain on sale of investment in real estate(1) |
- |
- |
(9,477 |
) |
(1.30 |
) |
(3,336 |
) |
(0.41 |
) |
(9,477 |
) |
(1.25 |
) |
||||||||||||||||||
|
Reconciling Items from Continuing Operations: |
||||||||||||||||||||||||||||||||
|
Non-cash equity compensation expense |
115 |
0.01 |
374 |
0.05 |
5,753 |
0.71 |
1,774 |
0.23 |
||||||||||||||||||||||||
|
Non-cash provision for (reversal of) CRE loan losses(2) |
5,070 |
0.47 |
(3,960 |
) |
(0.55 |
) |
5,766 |
0.71 |
(6,457 |
) |
(0.85 |
) |
||||||||||||||||||||
|
Realized net gain on core activities(1),(3) |
- |
- |
9,477 |
1.30 |
3,336 |
0.41 |
8,777 |
1.16 |
||||||||||||||||||||||||
|
Non-cash amortization of discount on borrowings |
156 |
0.01 |
- |
- |
156 |
0.02 |
- |
- |
||||||||||||||||||||||||
|
Fair value of ACC stock options attributable to post-combination costs |
13,720 |
1.26 |
- |
- |
13,720 |
1.70 |
- |
- |
||||||||||||||||||||||||
|
Real estate depreciation and amortization |
8,425 |
0.77 |
1,223 |
0.17 |
10,821 |
1.34 |
3,591 |
0.48 |
||||||||||||||||||||||||
|
Earnings (Loss) Available for Distribution allocable to common shares |
$ |
(28,840 |
) |
$ |
(2.64 |
) |
$ |
7,419 |
$ |
1.01 |
$ |
(33,652 |
) |
$ |
(4.17 |
) |
$ |
1,399 |
$ |
0.19 |
||||||||||||
|
Weighted average common shares - diluted on Earnings Available for Distribution allocable to common shares |
10,923 |
7,314 |
8,075 |
7,558 |
||||||||||||||||||||||||||||
|
Earnings (Loss) Available for Distribution per common share - diluted |
$ |
(2.64 |
) |
$ |
1.01 |
$ |
(4.17 |
) |
$ |
0.19 |
||||||||||||||||||||||
(1)
Non-core assets are investments and securities owned by us at the initial measurement date in (i) commercial finance, (ii) residential mortgage lending, (iii) legacy CRE loans designated as held for sale and (iv) other non-CRE assets included in assets held for sale.
(2)
Amount presented is net of the amount allocable to the non-controlling interest.
(3)
Realized net gain on core activities represents the gain, adjusted for any amounts allocable to non-controlling interests, recognized by the Company on dispositions of real estate or real estate related assets, including CRE loans.
For the three and nine months ended September 30, 2026, EAD in accordance with the Management Agreement in place prior to the Closing of the Merger and Internalization was a loss of $27.8 million and $32.6 million, respectively, or ($2.64) and ($4.17), respectively, per common share outstanding. There was no incentive compensation payable incurred by us for the three and nine months ended September 30, 2026.
Incentive Compensation Hurdle
Prior to the Closing of the Merger and Internalization, with respect to each fiscal quarter commencing with the quarter ended December 31, 2022, an incentive management fee was calculated and payable in arrears. This incentive management fee arrangement contained in the Management Agreement was terminated as part of the Merger and Internalization on August 6, 2026 and no further fees will be calculated.
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Liquidity and Capital Resources
Liquidity is a measurement of our ability to meet potential cash requirements, including ongoing commitments to pay dividends, fund investments, repay borrowings and provide for other general business needs. Our ability to meet our on-going liquidity needs is subject to our ability to generate cash from operating activities, which was a net use of $30.9 million for the nine months ended September 30, 2026, and our ability to maintain and/or obtain additional debt financing and equity capital together with the funds referred to below.
At September 30, 2026, our liquidity consisted of $53.3 million of unrestricted cash and cash equivalents and $43.0 million of potential proceeds from unlevered financeable CRE loans.
The Merger and Internalization affected our liquidity and capital resources through the assumption of additional indebtedness, the payment or accrual of transaction-related costs, and the transition from an externally managed to an internally managed operating model. In connection with the Closing, we assumed ACC's credit facility, with approximately $185.0 million outstanding at Closing.
During the nine months ended September 30, 2026, our principal sources of liquidity were: (i) gross financing proceeds of $879.5 million from the CRE securitization; (ii) net proceeds of $200.0 million from our Senior Secured Notes; (iii) $125.5 million from our CRE warehouse facilities; (iv) $50.4 million proceeds related to the issuance of Series C Preferred Stock; (v) net proceeds of $35.9 million from repayments on our CRE loan portfolio; (vi) proceeds of $29.1 million from a CRE loan sale, (vii) proceeds of $20.0 million from the sale of an investment in real estate; (viii) proceeds of $13.6 million from our senior secured financing facility; and (ix) $1.3 million contribution by our non-controlling interest.
These sources of liquidity were offset by the paydowns on our term warehouse facilities and senior secured financing facility, deployments in CRE loan portfolio and real estate investments, repayment of senior unsecured notes, distributions on our preferred stock and ongoing operating expenses and substantially resulted in the $53.3 million of unrestricted cash we held at September 30, 2026.
The outstanding balance of our loan to ACC was $10.4 million at December 31, 2025. The note accrued interest at 3.00% per annum, payable monthly, and was scheduled to mature in July 2026, subject to two one-year extensions, at ACC's option, and amortized at a rate of $25,000 per month. In July 2026, the loan was amended to extend the maturity date to August 2026. The loan to ACC was settled as part of the Merger consideration.
At September 30, 2026, $10.5 million of interest receivable is current and the remaining $26.5 million of interest receivable is deferred, which we deem fully collectible.
Cash Flows
For the nine months ended September 30, 2026, our restricted and unrestricted cash and cash equivalents balance decreased from $86.0 million to $55.4 million. The cash movements can be summarized by the following:
Cash flows from operating activities. For the nine months ended September 30, 2026, operating activities decreased our cash balances by $30.9 million, primarily driven by net cash flow impact from the Merger. Cash inflows from operating activities are down as we work with our borrowers to structure loan repayment terms that allow our borrowers to successfully complete their underwritten plans and that allow us to ultimately maximize our investment. Some of these structures have deferred loan components that impact our current cash position. We expect to be repaid these deferred amounts as our borrowers create value in the underlying collateral through the execution and completion of their project plans and exit our loans through sales or refinance transactions.
Cash flows from investing activities. For the nine months ended September 30, 2026, investing activities decreased our cash balances by $279.9 million, primarily driven by deployments in CRE whole loans, funding of existing commitments on CRE whole loans, deployments in our investment in real estate and investments in unconsolidated entities with underlying real estate collateral, partially offset by repayments of CRE loans, proceeds from sales of CRE loans and proceeds from the sales of investments in real estate.
Cash flows from financing activities. For the nine months ended September 30, 2026, financing activities increased our cash balances by $280.3 million, primarily driven by proceeds received on our CRE securitization notes, 8.625% Senior Secured Notes, term warehouse financing facilities, term reinvestment financing facility and senior secured financing facility offset by repayments on our term warehouse financing facilities, term reinvestment financing facility, 5.75% Senior Unsecured Notes, senior secured financing facility and distributions on our preferred stock.
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Financing Availability
We utilize a variety of financing arrangements to finance certain assets. We generally utilize the following types of financing arrangements:
1.
CRE - Term Reinvestment Financing Facility: Our term reinvestment financing facility allows us to borrow effectively against loans that we own. Under this agreement, we transfer loans to a counterparty and agree to repurchase the same loans from the counterparty at a price equal to the transfer price plus interest. The counterparty retains the sole discretion over whether to purchase the loan from us. The facility includes a two-year reinvestment period enabling the reinvestment of principal proceeds from asset repayments into qualifying assets, provided that the proceeds are reinvested within 90 days of the payoff. We can also acquire and finance the future funding participations of the portfolio collateral, subject to the discretion of the counterparty.
2.
Senior Secured Financing Facility: Our senior secured financing facility allows us to borrow against loans and real estate investments that we own. This facility has an individual floating rate loan series structure that has a three month commitment period after the financing is approved by the lender, subject to the maximum dollar amount agreed upon for the series. Each floating rate loan series will have mutually agreed upon terms including (i) total commitment, including the capacity to fund future funding commitments, where applicable; (ii) advance rate on portfolio assets; (iii) interest rate composed of one-month Term SOFR plus a market rate spread; and (iv) maturity date of five years from the issuance date for the loan series unless an additional time is mutually agreed upon by the parties. The facility has a maximum portfolio LTV of 85% and contains customary events of default, subject to certain materiality thresholds and grace periods, customary for this type of financing arrangement. This facility was repaid in full at the closing of the Internalization.
3.
CRE - Term Warehouse Financing Facilities: Term warehouse financing facilities effectively allow us to borrow against loans that we own. Under these agreements, we transfer loans to a counterparty and agree to purchase the same loans from the counterparty at a price equal to the transfer price plus interest. The counterparty retains the sole discretion over both whether to purchase the loan from us and, subject to certain conditions, the collateral value of such loan for purposes of determining whether we are required to pay margin to the counterparty. Generally, if the lender determines (subject to certain conditions) that the value of the collateral in a repurchase transaction has decreased by more than a defined minimum amount, we would be required to repay any amounts borrowed in excess of the product of (i) the revised collateral or market value multiplied by (ii) the applicable advance rate. During the term of these agreements, we receive the principal and interest on the related loans and pay interest to the counterparty.
4.
Securitizations: We seek non-recourse long-term financing from securitizations of our investments in CRE loans. The securitizations generally involve a senior portion of our loan but may involve the entire loan. Securitization generally involves transferring notes to a special purpose vehicle (or the issuing entity), which then issues one or more classes of non-recourse notes pursuant to the terms of an indenture. The notes are secured by the pool of assets. In exchange for the transfer of assets to the issuing entity, we receive cash proceeds from the sale of non-recourse notes. Securitizations of our portfolio investments might magnify our exposure to losses on those portfolio investments because the retained subordinate interest in any particular overall loan would be subordinate to the loan components sold and we would, therefore, absorb all losses sustained with respect to the overall loan before the owners of the senior notes experience any losses with respect to the loan in question.
5.
Mortgage payable: We have entered into a loan agreement to finance the acquisition of a student housing complex. This loan is interest only and has a maximum principal balance, most of which was advanced in the initial funding. The loan agreement contains events of default, subject to certain materiality thresholds and grace periods, customary for this type of financing arrangement. The remedies for such events of default are also customary for this type of transaction.
The issuance of ACR 2026-FL4 includes a reinvestment period, which ends in August 2028, that allows it to acquire CRE loans for reinvestment into the securitization using uninvested principal proceeds. The reinvestment feature of the securitization will allow us to extend the useful life of the securitization financing by extending the life of the senior notes and return liquidity to fund our forward loan pipeline that would otherwise pay down the senior notes of the securitization. The securitization also provides for the acquisition of future funding participations.
We were in compliance with all of our covenants at September 30, 2026 in accordance with the terms provided in agreements with our lenders.
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At September 30, 2026, we had financing arrangements as summarized below (in thousands, except amounts in footnotes):
|
Execution Date |
Maturity Date |
Maximum Capacity |
Facility Principal |
Availability |
||||||||||||
|
CRE - term reinvestment financing facility (1) |
||||||||||||||||
|
JPMorgan Chase Bank, N.A. |
March 2025 |
November 2030 |
$ |
605,794 |
$ |
585,089 |
$ |
20,705 |
||||||||
|
CRE - term warehouse financing facilities (2) |
||||||||||||||||
|
JPMorgan Chase Bank, N.A. |
October 2018 |
July 2028 |
250,000 |
- |
250,000 |
|||||||||||
|
Morgan Stanley Mortgage Capital Holdings LLC |
November 2021 |
November 2026 |
250,000 |
70,032 |
179,968 |
|||||||||||
|
Mortgage payable (3) |
||||||||||||||||
|
HGM CRE, LP |
May 2026 |
June 2029 |
23,750 |
21,731 |
2,019 |
|||||||||||
|
Total |
$ |
676,852 |
||||||||||||||
(1)
Excludes deferred debt issuance costs of $2.3 million.
(2)
Excludes deferred debt issuance costs of $1.2 million.
(3)
Excludes deferred debt issuance costs of $699,000.
The following table summarizes the average principal outstanding during the three months ended September 30, 2026 and December 31, 2025 and the principal outstanding on our financing arrangements at September 30, 2026 and December 31, 2025 (in thousands, except amounts in footnotes):
|
Three Months |
September 30, 2026 |
Three Months |
December 31, 2025 |
|||||||||||||
|
Average Principal Outstanding |
Principal Outstanding |
Average Principal Outstanding |
Principal Outstanding |
|||||||||||||
|
Financing Arrangement |
||||||||||||||||
|
CRE - term reinvestment financing facility (1) |
$ |
588,593 |
$ |
585,089 |
$ |
784,225 |
$ |
731,002 |
||||||||
|
Senior secured financing facility (2) |
22,110 |
- |
63,099 |
63,099 |
||||||||||||
|
CRE - term warehouse financing facilities (3) |
37,197 |
70,032 |
361,988 |
534,760 |
||||||||||||
|
Total |
$ |
647,900 |
$ |
655,121 |
$ |
1,209,312 |
$ |
1,328,861 |
||||||||
(1)
Principal outstanding excludes deferred debt issuance costs of $2.3 million and $2.8 million at September 30, 2026 and December 31, 2025, respectively.
(2)
Principal outstanding excludes deferred debt issuance costs of $1.5 million at December 31, 2025.
(3)
Principal outstanding excludes deferred debt issuance costs of $1.2 million and $898,000 at September 30, 2026 and December 31, 2025, respectively.
The following table summarizes the maximum month-end principal outstanding on our financing arrangements during the periods presented (in thousands):
|
Maximum Month-End Principal Outstanding During the |
|||||||
|
Nine Months Ended September 30, 2026 |
Year-Ended-December 31, 2025 |
||||||
|
Financing Arrangement |
|||||||
|
CRE - term reinvestment financing facility |
$ |
711,875 |
$ |
891,098 |
|||
|
Senior secured financing facility |
63,099 |
63,099 |
|||||
|
CRE - term warehouse financing facilities |
534,760 |
534,760 |
|||||
Historically, we have financed the acquisition of our investments through collateralized loan obligations ("CLO") and securitizations that essentially match the maturity and repricing dates of these financing vehicles with the maturities and repricing dates of our investments. In the past, we have derived substantial operating cash from our equity investments in our CLOs and securitizations, which will cease if the CLOs and securitizations fail to meet certain tests. Through September 30, 2026, we did not experience difficulty in maintaining our CLO and securitization financing and passed all of the critical tests required by these financings. Our securitization had a principal balance of $879.5 million at September 30, 2026.
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The following table sets forth the distributions received by us and coverage test summaries for our active securitization and financing facility for the periods presented (in thousands):
|
Cash Distributions |
Overcollateralization Cushion(1) |
Look Through LTV Cushion (2) |
Annualized Interest Coverage Cushion (3)(4) |
|||||||||||||||||||
|
Name |
For the Nine Months Ended September 30, 2026 |
At September 30, 2026 |
Initial Measurement Date |
At September 30, 2026 |
At September 30, 2026 |
Reinvestment Period End |
||||||||||||||||
|
ACR 2026-FL4 |
$ |
9,487 |
$ |
20,378 |
$ |
20,378 |
n/a |
$ |
11,674 |
August 2028 |
||||||||||||
|
CRE - term reinvestment financing facility |
n/a |
n/a |
n/a |
$ |
58,638 |
$ |
19,705 |
n/a |
||||||||||||||
(1)
Overcollateralization cushion represents the amount by which the collateral held by the securitization issuer exceeds the minimum amount required.
(2)
Look through LTV cushion represents the amount by which the collateral held by the counterparty exceeds the minimum amount required.
(3)
Interest coverage includes annualized amounts based on the most recent distribution period.
(4)
Interest coverage cushion represents the amount by which annualized interest income expected exceeds the annualized amount payable on the CRE term reinvestment financing facility.
Our leverage ratio, defined as the ratio of borrowings to total equity, may vary as a result of the various funding strategies we use. At September 30, 2026 and December 31, 2025, our leverage ratio under GAAP was 2.7 times and 2.8 times, respectively. The leverage ratio decreased during the period primarily due to the net increase in borrowings offset by the net increase to total equity.
Contractual Obligations and Commitments
|
Contractual Commitments |
||||||||||||||||||||
|
(dollars in thousands, except amounts in footnotes) |
||||||||||||||||||||
|
Payments due by Period |
||||||||||||||||||||
|
Total |
Less than 1 year |
1 - 3 years |
3 - 5 years |
More than 5 years |
||||||||||||||||
|
At September 30, 2026: |
||||||||||||||||||||
|
CRE securitization |
$ |
879,499 |
$ |
- |
$ |
- |
$ |
- |
$ |
879,499 |
||||||||||
|
CRE - term reinvestment financing facility (1) |
585,089 |
- |
- |
585,089 |
- |
|||||||||||||||
|
CRE - term warehouse financing facilities (2) |
70,032 |
70,032 |
- |
- |
- |
|||||||||||||||
|
Mortgage payable (3) |
21,731 |
- |
21,731 |
- |
- |
|||||||||||||||
|
Corporate credit facility |
185,000 |
- |
- |
- |
185,000 |
|||||||||||||||
|
8.625% Senior secured notes (4) |
200,000 |
- |
- |
200,000 |
- |
|||||||||||||||
|
Unsecured junior subordinated debentures (5) |
51,548 |
- |
- |
- |
51,548 |
|||||||||||||||
|
Lease liabilities (6) |
890,274 |
2,074 |
4,730 |
5,016 |
878,454 |
|||||||||||||||
|
Unfunded commitments on CRE loans (7) |
78,233 |
24,070 |
37,406 |
16,757 |
- |
|||||||||||||||
|
Total |
$ |
2,961,406 |
$ |
96,176 |
$ |
63,867 |
$ |
806,862 |
$ |
1,994,501 |
||||||||||
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(1)
Excludes $1.4 million of accrued interest payable.
(2)
Excludes $132,000 of accrued interest payable.
(3)
Excludes $134,000 of accrued interest payable.
(4)
Excludes $86.0 million of accrued interest payable through maturity in July 2031.
(5)
Excludes $22.3 million and $22.8 million of estimated interest expense payable through maturity, in June 2036 and October 2036, respectively.
(6)
Lease liabilities include a ground rent lease for a hotel property with a remaining term of 90 years and an annual growth rate of 3%, a parking lease for an asset acquired with a remaining term of 97 years and an annual growth rate of 2% and a ground lease for a hotel property with a remaining term of 60 years.
(7)
These unfunded loan commitments are advanced as the borrowers formally request additional funding and meet certain benchmarks, as permitted under the loan agreements, and any necessary approvals have been obtained. At September 30, 2026, we had unfunded commitments on 33 CRE whole loans.
Net Operating Losses and Loss Carryforwards
The following table sets forth the net operating losses and loss carryforwards for the periods presented (in millions):
|
Tax Year Recognized |
REIT (QRS) Tax Loss Carryforwards |
TRS Tax Loss Carryforwards |
||||||||||||||||
|
Tax Asset Item |
Operating |
Capital |
Operating |
Capital |
||||||||||||||
|
Net Operating Loss Carryforwards: |
||||||||||||||||||
|
Cumulative as of 2025 |
2025 Return |
$ |
36.9 |
$ |
- |
$ |
65.0 |
$ |
- |
|||||||||
|
Net Capital Loss Carryforwards: |
||||||||||||||||||
|
Cumulative as of 2025 |
2025 Return |
- |
- |
- |
20.8 |
|||||||||||||
|
Total tax asset estimates |
$ |
36.9 |
$ |
- |
$ |
65.0 |
$ |
20.8 |
||||||||||
|
Useful life |
Unlimited |
5 years |
Various |
5 years |
||||||||||||||
At September 30, 2026, we had $36.9 million of cumulative net operating losses ("NOL") to carry forward to future years. NOL can generally be carried forward to offset both ordinary taxable income and capital gains in future years. The Tax Cuts and Jobs Act ("TCJA"), along with revisions made by the Coronavirus Aid, Relief, and Economic Security ("CARES") Act reduced the deduction for NOLs generated post 2017 to 80% of taxable income and granted an indefinite carryforward period.
We also have tax assets in our taxable REIT subsidiaries ("TRS"). These tax assets are analyzed and disclosed quarterly in our financial statements. At September 30, 2026, our TRS had $65.0 million of NOLs comprising: $39.8 million of pre-TCJA NOLs, some of which are set to expire beginning in 2044 and $25.2 million of NOLs with an indefinite carryforward period. Additionally, our TRS had cumulative total net capital losses of $20.8 million, which are set to expire at December 31, 2029.
Distributions
We did not pay distributions on our common shares during the nine months ended September 30, 2026 as we were able to utilize NOL carryforwards and net capital loss carryforwards to offset our REIT taxable income. This enabled us to grow our investable equity base. Our Board is responsible for the establishment and evaluation of a plan for the prudent resumption of the payment of common share distributions. No assurance, however, can be given as to the amounts or timing of future distributions as such distributions are subject to our earnings, financial condition, capital requirements and such other factors as our Board deems relevant.
We intend to continue to make regular quarterly distributions to holders of our preferred stock.
U.S. federal income tax law generally requires that a REIT distribute at least 90% of its REIT taxable income annually, determined without regard to the deduction for dividends paid and excluding net capital gains, and that it pay tax at regular corporate rates to the extent that it annually distributes less than 100% of its taxable income. Before we pay any dividend, whether for U.S. federal income tax purposes or otherwise, we must first meet both our operating and debt service requirements on our repurchase agreements and other debt payable. If our cash available for distribution is less than our taxable income, we could be required to sell assets or borrow funds to make cash distributions, or we may make a portion of the required distribution in the form of a taxable stock distribution or distribution of debt securities.
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Off-Balance Sheet Arrangements
General
At September 30, 2026, we did not maintain any relationships with unconsolidated entities or financial partnerships that were established for the purpose of facilitating off-balance sheet arrangements or contractually narrow or limited purposes, although we do have interests in unconsolidated entities that were not established for those purposes. At September 30, 2026, we had not guaranteed obligations of any unconsolidated entities or entered into any commitment or letter of intent to provide additional funding to any such entities, other than those discussed in the "Guarantees and Indemnifications" section below.
Unfunded Commitments
In the ordinary course of business, we make commitments to borrowers whose loans are in our CRE loan portfolio to provide additional loan funding in the future. Disbursement of funds pursuant to these commitments is subject to the borrower meeting pre-specified criteria. These commitments are subject to the same underwriting requirements and ongoing portfolio maintenance as are the on-balance sheet financial investments that we hold. Since these commitments may expire without being drawn upon, the total commitment amount does not necessarily represent future cash requirements. Whole loans had $78.2 million and $88.6 million in unfunded loan commitments at September 30, 2026 and December 31, 2025, respectively. Unfunded commitments are not considered in the CECL reserve if they are unconditionally cancellable.
Guarantees and Indemnifications
In the ordinary course of business, we may provide guarantees and indemnifications that contingently obligate us to make payments to the guaranteed or indemnified party based on changes in the value of an asset, liability or equity security of the guaranteed or indemnified party. As such, we may be obligated to make payments to a guaranteed party based on another entity's failure to perform or achieve specified performance criteria, or we may have an indirect guarantee of the indebtedness of others.
In September 2025, we entered into guaranties related to a $62.4 million construction loan and a $10.9 million bridge loan made to a borrower that is held by a joint venture in which we have a 90% membership interest (the "Borrower"). Pursuant to the Guaranty of Completion, executed September 2025, by the individual principals of the partnership and us (collectively, the "Guarantors") for the benefit of DL RCF I Loan Holdings, LLC and DL RCF I Loan Holdings (Evergreen), LLC (collectively, the "Lender"), the Guarantors guarantee to the Lender, the Borrower's obligation to commence, construct, develop and complete the construction project in a good and workmanlike manner in accordance with the terms and conditions of the Loan Agreement, dated September 12, 2025 by and among the Borrower, DL RCF I Loan Holdings, LLC (the "Agent") and the Lender (the "Loan Agreement") and to perform all other work contemplated or required to be completed pursuant to the loan documentation through final completion.
In September 2025, the Guarantors also entered into a Guaranty of Retail Space to guarantee the payment and performance of all of the obligations for the payment of debt and the performance of the obligations under the Loan Agreement and a Guaranty of Recourse Obligations to guarantee the payment and performance of certain liabilities ("bad boy") and payment obligations set forth in the Loan Agreement and agree to be liable for the guaranteed obligations as a primary obligor. Also in September 2025, the Guarantors entered into the Guaranty of Interest and Carry Costs to guarantee the payment and performance of the Borrower's obligation to timely pay all Carry Costs and Debt Service and its obligation to make deposits into the Carry Cost Account (each as defined in the agreement) in accordance with the Loan Agreement, and all interest due to the Bridge Lender (defined below) and/or preferred return due pursuant to the Master Tenant Operating Agreement. The Guarantors also unconditionally covenant and agree to be liable for these guaranteed obligations as a primary obligor. Additionally, the Guarantors with the Borrower also entered into an Environmental Indemnity Agreement jointly and severally in favor of the Lender and Agent whereby the Guarantors serving as Indemnitors provided environmental representations and warranties, covenants and indemnification.
In connection with the $10.9 million bridge loan from Hoyne Savings Bank ("Bridge Lender") to Borrower, we entered into the Repayment and Completion Guaranty in September 2025, in favor of Bridge Lender subject to the Bridge Loan Agreement between Borrower and Bridge Lender (the "Bridge Loan Agreement") to guarantee the prompt payment of all indebtedness under the Bridge Loan Agreement and the prompt performance of all other covenants, obligations and agreements of Borrower under the Bridge Loan Agreement, including but not limited to, construction of the improvements and completion before the completion date and material compliance with all environmental covenants and indemnities set forth in the Bridge Loan Agreement.
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Critical Accounting Policies and Estimates
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 allowance for credit losses, investments in real estate, revenue recognition and variable interest entities ("VIEs"). We have reviewed these accounting policies with our Board and believe that all of the decisions and assessments upon which our financial statements are based were reasonable at the time made based upon information available to us at the time.
Allowance for Credit Losses
We maintain an allowance for credit losses 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.
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.
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.
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.
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.
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.
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.
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Investments in Real Estate
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 U.S. 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.
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.
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.
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.
Revenue Recognition
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.
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.
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.
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:
•
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.
•
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.
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Income Earned from Fee-Based Services
Income from fee-based services includes asset management fees, development fees, servicing fees, and incentive fees. Such fees are included in fee and other income on the consolidated statements of operations. Incentive fees are earned when specified financial hurdles are met for certain separately managed accounts. Revenues from fee-based services that we provide are recognized as earned over time in accordance with contractual agreements. The services we provide represent performance obligations that are satisfied over time.
Goodwill
Goodwill represents the costs of business acquisitions in excess of the fair value of identifiable net assets acquired. We evaluate the recoverability of goodwill annually on the first day of our fiscal fourth quarter of each fiscal year, or more frequently, if events or changes in circumstances indicate that goodwill might be impaired. If our review indicates that the carrying amount of goodwill exceeds its fair value, we will reduce the carrying amount of goodwill to fair value. The annual impairment test will be performed as of October 1st each year. While we have not yet completed this analysis for 2026, we do not anticipate that goodwill will be impaired, nor were there events or changes in circumstances indicating impairment at September 30, 2026.
Variable Interest Entities
We consolidate entities that are VIEs where we have determined that we are the primary beneficiary of such entities. Once it is determined that we hold a variable interest in a VIE, management performs a qualitative analysis to determine (i) if we have the power to direct the matters that most significantly impact the VIE's financial performance; and (ii) if we have the obligation to absorb the losses of the VIE that could potentially be significant to the VIE or the right to receive the benefits of the VIE that could potentially be significant to the VIE. If our variable interest possesses both of these characteristics, we are deemed to be the primary beneficiary and would be required to consolidate the VIE. This assessment must be done on an ongoing basis.
At September 30, 2026, we determined that there were two VIEs to be consolidated.
Recent Accounting Standards
Accounting Standards to be Adopted in Future Periods
In November 2024, the Financial Accounting Standards Board issued guidance to improve transparency on certain costs and expenses. This guidance is effective for fiscal years beginning after December 15, 2026 and is to be adopted on a prospective basis with the option to apply retrospectively. We are in the process of evaluating the impact of this guidance, however, we do not expect a material impact to our consolidated financial statements.
Inflation
Virtually all of our assets and liabilities are interest rate sensitive in nature. As a result, interest rates and other factors influence our performance far more than inflation. Changes in interest rates do not necessarily correlate with inflation rates or changes in inflation rates. Our consolidated financial statements are prepared in accordance with GAAP and our distributions are determined by our Board based primarily on our maintaining our REIT qualification; in each case, our activities and balance sheet are measured with reference to historical cost and/or fair market value without considering inflation.
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