ACRES Commercial Realty's second quarter of 2026 was dominated by the near-completion of its internalization, with roughly 99% of votes cast approving the share issuance and management guiding to a close in short order (the merger subsequently closed August 6, 2026), after which employees and board members will own more than 40% of the company. The transition came with heavy one-time costs: $5.1 million of internalization transaction expenses and $4.0 million of accelerated-vesting compensation drove a GAAP net loss allocable to common of $12.5 million, or $1.87 per share, while $5.5 million of transaction costs and $984,000 of accelerated deferred debt costs pushed EAD to a loss of $0.74 per share - though underlying EAD excluding those items was a positive $0.14. GAAP book value per share fell to $26.76 from $29.98 on restricted-stock vesting and the transaction and debt charges. Operationally, the full-quarter benefit of the ACRES 2026-FL4 securitization lifted net interest income to $10.5 million, but the loan portfolio contracted a net $74.9 million as $92.7 million of payoffs outpaced just $17.8 million of new fundings amid a selective stance; the CECL allowance stood at $21.1 million (99 bps) after a $1.7 million reserve build, and leverage eased to 3.2x. Management said the loan pipeline is stronger than ever amid market capitulation, reaffirmed a target of about $500 million of net REIT growth for 2026, and framed the post-merger company around two revenue streams - the CRE loan balance sheet plus asset-management fees of roughly $48-73 million - supported by $94.1 million of gross NOL carryforwards (about $6.36 per share). Two REO properties remain to be sold, including a hotel on the market since 2022 that has been hard to exit without a labor-union contract.
Good morning, and thank you for joining our call. I would like to highlight that we have posted the Q2 2026 earnings presentation to our website. This presentation contains summary and detailed information about the quarterly results of the company. Before we begin, I want to remind everyone that certain statements made during this call are not based on historical information and may constitute forward-looking statements. When used in this conference call, the word believes, anticipates, expects, and similar expressions are intended to identify forward-looking statements. Although the company believes these forward-looking statements are based on reasonable assumptions, such statements are based on management's current expectations and beliefs and are subject to several trends, risks, and uncertainties that could cause actual results to differ materially from those contained in the forward-looking statements.
These risks and uncertainties are discussed in the company's reports filed with the SEC, including its reports on Forms 8-K, 10-Q, and 10-K, and in particular, the Risk Factors section of its Form 10-K. Listeners are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. The company undertakes no obligation to update any of these forward-looking statements. Furthermore, certain non-GAAP financial measures may be discussed on this conference call. Our presentation of this information is not intended to be considered in isolation or as a substitute to the financial information presented in accordance with GAAP. Reconciliations of non-GAAP financial measures to the most comparable measures prepared in accordance with generally accepted accounting principles are contained in the earnings presentation for the quarter.
With me on the call today are Mark Fogel, President and CEO, Andrew Fentress, Chairman of ACR, and Eldron Blackwell, ACR's CFO. I will now turn the call over to Mark.
Good morning, everyone, and thank you for joining our call. Today, I will provide an overview of our loan operations, real estate investments, and the health of the investment portfolio, while Eldron Blackwell, our CFO, will discuss the financial statements, liquidity condition, book value, and operating results for the Q2 2026. Of course, we look forward to your questions at the end of our prepared remarks. The ACRES team continues to actively manage the portfolio and has seen operations improving on underperforming assets. We are selective on the opportunities we pursue and the loans we originate. We still anticipate meeting our target $500 million of net growth in the REIT for 2026.
We spoke at our annual shareholders meeting last month, at which time we proposed a share issuance in accordance with a merger agreement we entered into with our external manager, the result of which will be the internalization function of our manager. We are very pleased that approximately 99% of the votes cast on the proposal to issue shares as part of the internalization transaction were cast in favor of the proposal. The ACRES team has been working hard on the internalization and anticipates that closing will take place in short order. We look forward to providing more updates as we complete the transaction. Loan payoffs and paydowns during the period were $92.7 million, and funded commitments during the quarter were $17.8 million, producing a net decrease to the loan portfolio of $74.9 million. The portfolio generally continues to perform, demonstrating sound and consistent underwriting and proactive asset management.
At June 30th, our weighted average risk rating was 2.6, an increase from 2.5 at March 31st, and the number of loans rated four or five was 10, the same as the end of the Q1. The portion of our CRE loan portfolio rated four or five, based on the company's economic interest, was 14% at both June 30th and March 31st. We will now have ACR's CFO, Eldron Blackwell, discuss the financial statements and operating results during the Q2.
Thank you, and good morning, everyone. GAAP net loss allocable to common shares in the Q2 was $12.5 million or $1.87 per share. GAAP net loss for the quarter included $5.1 million of internalization transaction costs and $4 million of incremental compensation expense from the accelerated vesting in connection with the pending internalization transaction. Transaction costs for the pending internalization transaction are expensed as incurred in accordance with generally accepted accounting principles. As such, we expect additional transaction-related costs to be recognized in the Q3 as we diligently work to close the deal. GAAP net loss for the quarter also included $10.5 million in net interest income, which was an increase of $1.3 million over the prior quarter. This increase in net interest income was primarily driven by the full quarter's impact of our new CRE securitization.
GAAP net loss for the quarter also included $1.1 million of net increase in the performance of our net real estate operations. We saw an increase in current expected credit losses or CECL reserves of $1.7 million, or $0.25 per share, as compared to a decrease in CECL reserves during the Q1 of $1 million, which was primarily driven by a decline in projected macroeconomic factors. The total allowance for credit losses at June 30th was $21.1 million and represented 0.99% or 99 basis points on our $2.1 billion loan portfolio at par and was composed entirely of general credit reserves. EAD for the Q2 2026 was a loss of $0.74 per share as compared to an EAD gain of $0.02 per share for the Q1.
EAD loss was primarily driven by $5.5 million in internalization transaction costs recognized during the quarter, and the recognition of $984,000 of accelerated deferred debt costs on one of our debt facilities during the quarter. Without these costs, EAD would've been $0.14 for the quarter. GAAP book value per share was $26.76 on June 30th versus $29.98 on March 31st, driven by the vesting of restricted stock, transaction costs, and deferred debt costs this quarter. Available liquidity at June 30th was $83 million, which comprised $41 million of unrestricted cash and $42 million of projected financing available on unlevered assets. Our GAAP debt to equity and leverage ratio decreased to 3.2x at June 30th from 3.4x at March 31st, primarily from net repayments on our CRE loan portfolio.
At June 30th, 2026, the company had total gross net operating loss carryforwards of $94.1 million, or approximately $6.36 per share of book value that can be offset against the future net income generating activities of the company. With that, I will now turn the call to Andrew Fentress for closing remarks.
Thank you, Eldron and Mark. First, I want to thank all of our shareholders for voting in favor of the transaction this June. The entire team is highly motivated by your confidence, and we are committed to working to deliver on our mission of growing value for our shareholders over the long term. Pro forma for the closing of the transaction, ACRES employees will own 40%+ of ACR common stock. We are directly aligned with you. As you are aware, the combined company will have two primary sources of revenue that we will continue to focus on as we go forward, and we intend to provide you with as much transparency around the key metrics as possible so that you know what we are focused on, and that our efforts can be measured over time.
We ask for your patience as we transition the reporting from simply a REIT balance sheet to one that also includes additional fee-related revenues. Nothing about our business is changing. We will continue to originate, underwrite, and asset manage A-quality assets in A-quality markets with A-quality sponsors. We do this by staying focused on serving our borrowers and delivering them the service and capital that they need. We chose this time for the transaction because we see ample opportunity to grow. Stay tuned as we expect to share more with you in the coming weeks about the progress of the transaction. Thank you for your continued support, and I look forward to speaking with all of you. This concludes our opening remarks. I'll now turn the call back over to the operator for questions.