Encore Properties: Preferred Equity, the Accounting, and What Actually Rolls Into Cash
Encore’s residential Preferred layer can look, at first glance, like a shortcut to a higher stabilized NOI. The annual report shows a more complex picture: purchased accrued preferred return, Promote rights, and sponsor-side rights transfers all sit between property economics and the cash that actually reaches the public-company layer.
Where The Gap Actually Opens
The main article already made the broader point: Encore’s 2025 is no longer just a story about whether NOI moved up. It is about how much of the improvement at the asset level actually makes its way into the public-company layer. This follow-up isolates the residential Preferred layer because that is where the gap between reported property economics and accessible cash is the easiest to misread.
In the deck, the residential story looks almost clean. The portfolio ends 2025 with $21.7 million of NOI on a 100% basis, and the stabilized annual run-rate is expected to exceed $28 million. Lower Broadway, Narcoossee, and Chandler are already part of that story, and the company says the Preferred investments are expected to add about $8 million of NOI.
But the footnote matters more than the headline. On those three assets, the deck explicitly says the NOI is calculated on the basis of the Preferred investment. That is not the same math as ordinary common-equity ownership in the project company. This is a preferred-return layer with priority in distributions, and in some cases Promote rights on top. Before getting to FFO, the first correction is simply to recognize that Encore’s residential NOI now includes economics that sit ahead of the common equity.
That improves downside protection relative to ordinary equity. The preferred layer sits ahead of the other investors in the distribution waterfall, and the deck itself frames it as a source of more stable cash flow and better downside protection. But that same structure also requires a more disciplined reading. NOI, ownership percentage, Promote, and cash at the public-company layer are not interchangeable.
Montana also shows why the structure should not be read too mechanically. In the presentation it is compressed into an 11% line and a defined IRR structure. In the annual report the mechanics are more specific: the company is entitled to 8.3% of distributable net cash from operations, while the 11% IRR applies to cash distributed from capital transactions. Even inside the Preferred bucket, not every dollar comes through the same channel.
What The Company Actually Bought
The key accounting point is that Encore did not simply buy a clean stake in three new residential assets. It bought out the existing Preferred investor, received distribution priority, and also received additional rights transferred from the controlling shareholder. The controlling shareholder remained the managing partner in the assets. This is a layered transaction, not a shortcut to plain ownership.
| Asset | 2025 purchase price | Preferred principal acquired | Accrued preferred return acquired with the deal | Sponsor-side rights transferred to Encore | Ownership after the deal | Ownership including Promote |
|---|---|---|---|---|---|---|
| Lower Broadway | $22.5 million | $15.8 million | $6.7 million | $5.8 million | 39.6% | 64.4% |
| Narcoossee | $21.6 million | $16.4 million | $5.2 million | $4.5 million | 50.7% | 70.7% |
| Chandler | $19.6 million | $15.0 million | $4.6 million | $1.4 million | 44.6% | 57.8% |
What stands out is that the gap between the purchase price and the Preferred principal is not trivial. In all three assets, Encore also acquired preferred return that had already accrued: $6.7 million at Lower Broadway, $5.2 million at Narcoossee, and $4.6 million at Chandler. Part of what can look like a jump in economic value is therefore not newly created NOI from scratch. It is the purchase of a return layer that had already been building before Encore stepped into the transaction.
At the same time, the company received sponsor-side rights, mostly accrued management fees and other receivables, totaling about $11.6 million across the three assets. That matters for two reasons. First, the transaction is broader than a pure Preferred capital injection. Second, even after the transfer, the controlling shareholder remains the managing partner, so the path from property economics to public-company cash still runs through a more complex partner-and-management structure than direct ownership would.
This is another place where a surface read can go wrong. Lower Broadway moves from 39.6% to 64.4% when Promote is included, Narcoossee from 50.7% to 70.7%, and Chandler from 44.6% to 57.8%. That is real economic upside. But it already depends on future distribution tiers. It is not cash already sitting at the company. It is an economic right that still has to travel through time, partners, and the waterfall.
Where The Accounting Is Still Ahead Of The Cash
If the Preferred layer had already translated fully into the public-company layer, the first place to expect it would be FFO attributable to shareholders. That did not happen in 2025.
Under the Fourth Schedule framework, FFO attributable to shareholders fell to negative $23.8 million. Even under management’s friendlier presentation, which neutralizes $15.1 million of FX differences, $0.472 million of notional financing expense that was not paid in cash, and $4.3 million of hotel depreciation, FFO attributable to shareholders was still negative $3.9 million.
That is the sharpest read-through in the file set. One can fully accept the economics of the Preferred strategy and still recognize that the translation into public-company cash is incomplete. In 2025 Encore did improve residential NOI, buy a stronger place in the waterfall at several assets, and widen its economic upside through Promote. But the last station, what reaches shareholders after minorities, FX, financing, and the management layer, still did not turn positive.
And even management’s FFO is not the same thing as “cash left over.” The company explicitly notes that the metric still includes another $6.3 million of debt issuance-cost amortization and amortization expense, plus a $1.2 million one-time asset-management-fee write-off linked to prior periods. So even the cleaner-looking number is still better read as a signpost showing the distance between property economics and public cash, not proof that the gap has already closed.
That is why it is too aggressive to take stabilized residential NOI and carry it straight into the public-company layer. The proper bridge has three stops: first the preferred return at the asset level, then Promote and partner rights, and only then FFO attributable to shareholders. In 2025, that last stop still does not look like clean public cash.
Conclusions
There is no criticism here of the strategy itself. If anything, the Preferred layer looks rational and, in several ways, smart. It buys distribution priority, improves downside protection, and gives Encore upside through Promote without always forcing it to sit in the ordinary equity position. That is the credit side of the story.
The mistake would be analytical. If the residential presentation is read as though all of that stabilized NOI already equals accessible cash at the public-company layer, the key point is missed. Part of that NOI sits on a preferred return layer, part of the value sits in Promote, and part of the purchase price bought accrued return and sponsor-side rights. At the public-company layer, 2025 still ended with negative shareholder FFO even after management adjustments.
In practical terms, the next read should be governed by three simpler signals rather than by the NOI headline itself: actual distributions from the new assets, improvement in FFO attributable to shareholders, and less dependence on the gap between “economic ownership” and cash that has actually landed. Until those three points start to show up together, the Preferred layer is better understood as a promising value layer with stronger downside protection, not as full proof that the cash has already arrived.
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