ACRES Commercial Realty Corp.

Good day, ladies and gentlemen, and welcome to the Q4 and full year 2019 Exantus Capital Corp Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session, and instructions will follow at that time. If anyone should require assistance during the conference, please press star then zero on your touchtone telephone. As a reminder, this conference is being recorded. I would now like to introduce your host for today's conference, Steve Landgraber, Senior Vice President of Corporate Finance. Sir, you may begin.

Good morning, and thank you for joining the call. Before we begin, I would like to remind everyone that certain statements made in the course of this call are not based on historical information and may constitute forward-looking statements. When used in this conference call, the words believes, anticipates, expects, and similar expressions are intended to identify forward-looking statements. While the company believes that these forward-looking statements are based on reasonable assumptions, such statements are based on management's current expectations and beliefs and are subject to a number of 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 8K, 10Q, and 10K, and in particular, the risk factor section of our form 10K. Listeners are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. The company owner takes no obligation to upstate any of these forward-looking statements. Furthermore, certain non-GAF management measures will 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 these non-GAAP financial measures to the most comparable measures prepared in accordance with generally accepted accounting principles are contained in our earnings release for the past quarter. I will now turn it over to CEO of the Sanctus Capital Corp., Bob Lieber, for opening remarks.

Thanks, Dave, and good morning, everybody. Thanks for joining our call today. With me today are Matt Stern, our president, Dave Bryan, our chief financial officer, Paul Houston, who's the head of all the commercial real estate lending, and Steve Landgraber, from whom you've already heard. We also may be joined by Andrew Farkas, who's getting off an airplane imminently and may be joining into this call, but we didn't want to go any longer. So if Andrew joins, we'll welcome him as a part when he gets here. I'd like to start by reviewing the progress Exantus made in 2019. Our full-year dividend for 2019 was $0.95 versus $0.475 in 2018. an increase of 100%. We generated core earnings of $1.07, which was well in excess of our dividend. We originated or acquired nearly 1.1 billion of commercial real estate related debt investments. Economic book value began the year at 1354 and ended at 1361. Exansys continues to successfully execute the business plan articulated by our team. Needless to say, the commercial real estate finance markets are dynamic. As articulated in our calls through 2019, our traditional markets have seen a number of new entrants and risk-adjusted returns across products consistently evolve. To further differentiate Xantus from our competition and deliver value to our borrowers and our investors, we announced last week that Xantus will now offer a fixed-rate loan product, which expands our platform to provide a full suite of loan products to middle-market borrowers. We believe this differentiates Xantus from many of our competitors, and is expected to increase capital deployment as well as drive earnings. Full year 2019 core earnings were $1.07 versus $0.71 of adjusted core earnings in 2018. The growth in core earnings is attributable to $5.9 million or $0.19 improvement in net interest income and an improvement of $2.4 million or $0.08 per share in operating expenses. Deployment for the year was nearly $1.1 billion, with $730 million of loans originated and over $210 million of loans purchased from CM, including the 2011 loans purchased from C3 Commercial Mortgage, as well as $147 million of CMBS that was acquired. Excluding the portfolio purchased from C3, we deployed $878 million of capital, which falls within our original guidance of $850 to $1 billion, albeit at the lower end of the range. This compared to $862 million of loans originated and $252 million of CMBS purchased in 2018, totaling a little over $1.1 billion. Payoffs and paydowns were $740 million in 2019 versus $596 million for 2018 and So outsized payoffs did materially impact some of the things we did to increase our portfolio. It was in this context that Exantus announced that it's expanding its commercial real estate debt platform to include fixed-rate commercial real estate loans through the integration of C3 commercial mortgage platform. Matt will discuss later the benefits to our borrowers and our shareholders, but we feel this additional product will allow us to deploy more capital and at attractive yields and specifically capture some of the demand for permanent financing coming directly from our borrowers. XANTIS is now a one-stop solution for borrowers who borrow short-term on transitional assets and then can utilize the same lender to provide fixed-rate long-term loans once the business plan is completed. We feel this differentiates us from our competition at the loan size we most commonly originate. Turning to fourth quarter results, 2019 core earnings were $0.23 per share compared to $0.31 per share last quarter and $0.21 per share during the fourth quarter of 2018. This quarterly decline in core earnings from last quarter was driven primarily by the negative net production during the third quarter, which is consistent with our commentary provided on our third quarter earnings call. New commercial real estate originations of $203 million increased as expected in Q4 relative to the $105 million originating in Q3, but we continue to experience higher-than-usual paydown activity as our borrowers achieved their business plans and took advantage of the lower interest rate environment. Fourth quarter loan payoffs and paydowns were $204.8 million after $256.9 million in Q3. We do believe that the introduction of the fixed-rate business will allow us to capture some of this refinancing volume. Net deployment for the fourth quarter was $45.6 million, with gross real estate debt investments of $276 million, net of the $227.7 million of payoffs. As of December 31, 2019, our commercial real estate debt portfolio was $2.3 billion, which consists of $1.8 billion of commercial real estate loans and $556 million of CMBS at par. Net interest income during the fourth quarter was $14.4 million, or $0.45 per share, compared to $16.6 million, or $0.52 per share, during the third quarter of 2019. Gap net income for common share was $14, a $0.12 decrease from the third quarter, and economic book value decreased to $13.61 compared to $13.71 last quarter. Gap net income was $3.8 million, or $0.12 per share, compared to $10 million, or $0.31 per share, for the third quarter, Gap met income was negatively impacted by $0.07 of non-core activity, which Dave will highlight in his comments. Gap met income for the year was $0.81 versus $0.22 in 2018 prior to any one-time adjustments. In light of the integration of C3 commercial mortgage, we'd like to update our 2020 origination guidance. And I would characterize this under normalized market conditions. We now expect expenses to originate or acquire at least $1.1 billion of commercial real estate debt in 2020. Of this amount, we would expect about $200 million to come from fixed-rate originations. I want to emphasize, though, that this recent market activity has not been normal, and we may need to revisit this guidance later this year. Our current pipeline looks strong with over $350 million of term sheets returned and $87 million of loans closed this quarter to date. Some of the term sheets returned will close in the second quarter. We still have ample liquidity of $140 million to fund our pipeline and grow net interest income. This translates to roughly $300 to $350 million of incremental deployment capacity. Given most of our deployment will be at the end of the first quarter and then into the second quarter, we expect our net interest income in the first quarter to be relatively muted. However, the current pipeline and our competence in our deployment guidance gives us the comfort with our current dividend at 27.5 cents per share. With that, I'd like to turn it over to Matt.

Thank you, Bob, and good morning, everyone. I'll first provide some additional information on the integration of C3 Commercial Mortgage's loan platform, after which I'll review the fourth quarter performance of our CRE and CMBS portfolios. We are encouraged by the opportunities created for Exantus through the integration of C3 Commercial Mortgage's fixed-rate lending business. Since its inception in 2010, C3 Commercial Mortgage has originated $3.2 billion of fixed-rate loans and $2.1 billion of floating-rate loans. This business has a track record of profitably deploying capital with an excellent credit history. As you will recall, in May 2019, C3 Commercial Mortgage sold a $211 million portfolio of floating-rate CRE mortgage loans to Exantus, which was immediately accretive to Exantus' earnings. We believe the addition of the fixed-rate business will be a valuable differentiator for Exantis as the competition for transactions has increased. We tend to target borrowers with light transitional assets who are often looking for more permanent financing as their business plan gains traction. Exanus' borrowers will now be able to benefit from a full suite of real estate capital market offerings, from short-term floating rate loans to longer-term fixed rate loans, as well as preferred equity and mezzanine debt in appropriate situations. We will also be able to capture a share of the maturities in our floating rate book. by offering flexible, longer-term fixed-rate capital products to our existing floating-rate customer base, as well as reaching a new universe of borrowers who primarily seek fixed-rate loans. Additionally, Exanus will become one of the few public REITs operating a fixed-rate securitization business, which will enhance shareholder returns. Our fixed-rate loans will be originated at a taxable REIT subsidiary, or a TRS, as these loans will be targeted for CMBS securitization. Gains on securitization are deemed to be non-qualified income for a REIT, which is why we will be doing this business at a TRS. One item of note is that Exantus has $60 million of gross net operating losses, or NOLs, at our TRS from legacy business activities, which were disposed of as part of the strategic plan. Exantus has a full valuation allowance against these NOLs, so there is no book value currently associated with them. This new business endeavor will allow us to utilize this valuable asset. In conclusion, the integration meaningfully expands Xanis' presence in the commercial real estate space and helps to accelerate the deployment of our capital base accretively, despite the competitive marketplace. I'll now address fourth quarter activity in both our commercial real estate and CVS portfolios. At December 31, 2019, our commercial real estate loan portfolio balance was $1.8 billion and consisted of 98% floating rate assets. the composition of the portfolio remained consistent by both property type and region relative to last quarter. During the fourth quarter, we originated 12 commercial real estate floating rate loans, totaling $203 million with an average commitment of $16.9 million and a weighted average spread of 289 basis points over 30-day LIBOR. The weighted average unlevered yield on new loan originations decreased by 68 basis points to 5.04% during the fourth quarter, compared to 5.72% during the fourth quarter of 2018. Total CRE loan asset financing was $1.3 billion at quarter end, with a weighted average spread of 1.59%, compared to a spread of 1.68% during the fourth quarter of 2018. Our CRE loan portfolio remained flat during the fourth quarter as payoffs and paydowns of $204.8 million offset new loan originations of $203 million. We had 15 loan payoffs in the fourth quarter, 11 of which, totaling $163 million, were paid off within 25 months of origination. Of the 11, five were paid off with fixed-rate financing and four assets were sold, demonstrating that these properties had sufficiently achieved their business plan to exit the transitional loan market. It is exactly these types of situations where we feel we can capture some of the refinancings with our own fixed-rate loan product. Turning now to our CMBS portfolio, during the third quarter, we acquired $73 million in face amount of CMBS bonds, including $59 million of floating rate bonds at a spread of LIBOR plus 2.46%. This was partially offset by $22.9 million of paydowns, resulting in net acquisitions of $50.1 million at a weighted average coupon rate of 3.99%. At December 31, 2019, our $556 million CMBS portfolio at par, which had a carrying value of $520.7 million, was comprised of $382.7 million of floating rate bonds and $138 million of fixed rate bonds. we recognized a net increase from last quarter of $0.02 per common share of book value from our CMBS portfolio, including the impact of mark-to-market on our interest rates funds. With that, I'd like to turn it over to Dave Bryant to discuss our financials.

Thank you, Matt. Good morning. Our gap net income allocable to common shares for the three months and year-ended December 31, 2019, was $3.8 million, or $0.12 per share. and $25.6 million, or $0.81 per share, respectively. Core earnings were $7.3 million, or $0.23 per share, for the fourth quarter of 2019, and that was relatively flat over the adjusted amount for the same period in 2018. For the calendar year of 2019, core earnings were $34 million, or $1,007 per share, for an increase of $11.6 million, or $0.36 per share, over adjusted core earnings in calendar 2018. The growth in our core earnings is being driven primarily by our positive net investment production over the last year. Accordingly, we saw net interest income increase by $5.9 million, or 11% for 2019 compared to 2018. In terms of significant items impacting the fourth quarter gap earnings, we incurred $3.3 million or $0.10 per share of charges on a non-core legacy asset held for sale, comprised of $2.2 million, or $0.07 per share that Bob mentioned, from a valuation adjustment based on an updated property appraisal. And the balance of $0.03 per share is from protective operating advances, both reflected in other incomes. As we stated during last quarter's call, we expected a decline in net interest income during the fourth quarter as a result of outsized loan payoffs in the second half of 2019. We had substantial loan payoffs at the end of the third quarter and beginning of the fourth quarter, which was only partially offset by our net positive fourth quarter production. This combines to cause a six cent decline to earnings per share. We accelerated deferred costs related to our 2018 securitization of approximately $700,000, worth two cents per share, reflected in interest expense that resulted from loan payoffs of $125 million within our 2018 CLO. These items were offset by a non-repairing adjustment from a former investment that was exited as part of the strategic plan, in which we recovered 600,000 or 2 cents per share resulting from a revaluation of an indemnification obligation recorded from the 2017 disposal of a JV investment. The net negative impact from these items combined in 2019 was approximately 5.3 million or 16 cents per share. With the net positive investment production in fourth quarter and a strong start to production toward the first quarter of 2020, we expect our run rate earnings profile to increase as we see the full impact of our production from the current pipeline to begin in the second quarter. For 2019, our gap net income is $0.81 compared to $1.07 of core earnings per share. Net income includes a net $0.10 of charges, which I outlined, related to the asset in our strategic plan. The other significant difference of $0.16 in core adjustments for the year are predominantly from the combination of non-cash amortization on our equity compensation expense and the non-cash amortization of the value of the convertible option on our 4.5% note. Gap book value declines to $14 per common share at December 31st, from $14.12 at September 30th, and represents a two-cent decrease from our December 31st, 2018 book value of $14.02 per common share. Economic book value, the non-gap metric, was $13.61 per share at December 31st, a decline from $13.71 at September 30th. However, The economic book value per share of $13.61 at year-end represents an increase of $0.07 from $13.54 at December 31st of 2018. Gap book value per common share of $14 less the adjustment for unannotized discounts on our convertible notes and redemption value of our preferred stock, which totaled $0.39 per share, reconciles the calculation of economic book value per share. As a further point of comparison, our economic book value at December 31, 2017, was $1,363 per calendar year and reflects our relative book value stability. Impacting our financials starting January 1, 2020, will be the implementation of CECL, which is New Accounting Guidance on Loan Loss Reserves that require us to estimate expected credit losses over the life of our loans. In determining our credit losses, expected credit losses, we evaluated by property type and loan type, available relevant historical and current loan loss data, as well as future macroeconomic information. We have evaluated the impact of CECL on our going forward reserve policy with our advisors, and it results in a 25 basis point reserve or $4.5 million on our $1.8 billion lending portfolio. Since we had reserved $1.5 million at year-end 2019, the charge to retained earnings will be $3 million, or $0.10 per share, upon adoption in the first quarter of 2020. Our GAAP debt-to-equity ratio remained flat from last quarter at 3.4 times at December 31st. We saw our securitizations experience Fed paydowns of $138 million, which was offset by a net increase in our recourse bonds of $120 million as we ramped up our loan book for our new CLO and acquired additional CMBS during the period. Stockholders' equity decreased by $3.6 million. The GAAP earnings were below our dividend this quarter, partially offset by a net increase in our marks and markets, which Matt had discussed. As an experienced issuer in CRE CLO markets, we find the CLO market an attractive source of non-market-to-market cost-efficient financing. During 2019, we issued the largest CLO in our history of advanced capital, 2019 RSO 7 deal at $687.2 million. In addition, we were able to liquidate and recycle capital in our 2017 CLO with only $63 million of the original loan collateral of $377 million that remained on our balance sheet as of today. After the quarter, we announced the pricing of our newest real estate CLO, Xanus Capital 2020-RSO8. The transaction finances $522.6 million of CRE loans with $435.7 million of investment-grade non-recourse floating rate notes. We price the deal at a weighted average spread of 1.43% on the investment-grade notes, and we'll close with a leverage factor of 83.4%. However, at closing, we plan to purchase 42.4 million of the BBB notes, and after financing those notes, we expect our leverage to be 81.9%, at a weighted average spread of 1.28%. This is our 10th real estate CLO, and we have sponsored 4.3 billion of CLO transactions over our 15-year history. At December 31st, our 1.8 billion floating rate GRE loan portfolio at Quar has a weighted average LIBOR floor of 1.89%, and weighted average spread over over LIBOR of 3.49%. To mitigate the impact of the decline in LIBOR, we have historically included LIBOR floors on our loans, along with minimum interest period protections, typically ranging from 12 to 18 months at the time of origination. At the end of December, we had $1.3 billion, where 71% of our loan bulk was LIBOR floors that are in the money. That is with 30-day LIBOR at 1.76% at the end of 2019. We expect to continue to see a benefit to net interest income during 2020 as we have seen LIBOR decline over the past week and the forward LIBOR curve projects a further decrease in rates. Lastly, we redeemed the remaining 21 million of our 8% convertible notes in January 2020 and have sufficient liquidity at the end of February to fund a robust real estate floating and fixed rate debt investment pipeline. With that, I'll turn the call back to Bob for some final comments.

Thanks, Dave. These are certainly interesting times, particularly in the capital markets. The current market dislocations create uncertainty, but for us, we believe this creates new opportunities, and we think 2020 will be a great year for Xantus. particularly with the addition of the fixed-grade business, and remain optimistic about our long-term operating strategy and its ability to produce results. With that, I would like to ask the operator to open it up for any potential questions.

Thank you. At this time, I would like to inform everyone, if you would like to ask a question, please press star, then the number 1 on your telephone keypad. Our first question comes from the line of Steve Delaney of JMP Securities.

Good morning, everyone. Thank you for taking the questions. I appreciate the color on the C3 commercial mortgage. You know, we saw the initial announcement, and because we, you know, obviously a couple other commercial mortgage REITs have this activity, and it's been very positive to return on common equity. But just to clarify a couple things, it strikes me that what I'm hearing now, and it wasn't clear initially from the press release, is that any gain on sale revenue net, and we certainly hope there will be positive, that that stays in the TRS. And the manager is not receiving any share in that. Can you just kind of clarify? What I'm trying to get at is if you record the sale of the loans in the TRS, somehow or another, is there any expenses paid or or fees paid to the manager other than the existing management agreement with the REIT. Thanks.

Yes, so I guess there are two parts to that. One was an income question as it pertains to the REIT, Steve. I'll touch on that first, and then I'll hit your second. So the answer is the income would occur at the TRS level, and then if the income or the money and income is distributed up to the QRS, that would produce income at the REIT level. So that's the first piece. It's really the upstreaming of the cash. I got that. Right from the securitization game. As part of the broader arrangements, there's a significant cost profile to bringing over the team in order to execute this business at Exanus. And as you might have seen in our press release, 1%, of loans that are made, fixed-rate loans only, that are made on behalf of Exantus, there will be an expense reimbursement associated with that to the manager. Got it. I missed that, Matt. Thank you. Sure. And if you look at our AK in our press release, it's explained there. And that really is just an effort to partially mitigate the the cost profile of bringing over the entirety of the fixed and floating rate team from commercial mortgage.

Got it. And I guess the other benefit, as you said, is to the extent you don't need that cash in the REIT to cover dividends, et cetera, you want to utilize your NOL, you could hold that there and just grow gap of value for the consolidated company, I assume, if you don't need to upstream it.

I think that that is right, but I would clarify one thing. It would still be a taxable event at the TRS level, and so you could utilize the NOL, but you're right about the decision, which is we could choose to upstream that money to the QRS, or the capital could be left in the TRS, which would obviously be a positive from a book value perspective.

Correct, correct. Okay, thanks. That's very helpful, especially the 1%, which, as I said, I missed. You had a good fourth quarter in credit in terms of CMBS spreads and a positive fair value mark. I know it's still early, you know, in this latest disruption. You know, as recently as two weeks ago, we were seeing new issue, you know, A4 tenure bonds being sold at, you know, near all-time tights. But I suspect things have widened out a little bit. Can you just comment generally on how much – spread widening you're generally seeing in the CMBS market in the last couple weeks?

So, Paul, you want to take that? Sure. So I would say, you know, the DNK deal priced yesterday, AAA 10 years priced at 95 over. Okay. Say, you know, two weeks ago, three weeks ago, that's probably, you know, like versus like 76.

Yeah.

So I think at the top, you know, we priced our CLO on Monday. And I'd say, you know, at the top of the stack, things are kind of 15, 20 wider. And at the bottom of the stack, things are probably 35 to 50 wider.

That's very helpful. Thank you, Paul. So, you know, it's hard to expect that, you know, as low as absolute rates are going. In some ways, that may be an economic requirement, but if I'm a light company and I see the 10-year go down 50 basis points, I've got to get some carry somewhere. Spreads almost widen just because base rates are so much lower. We'll have to wait and see on the credit. That call is very helpful. One final thing for me. You guys have done a good job of cleaning up the right side of your balance sheet with some high-cost debt, et cetera, that you've paid off. You still have your Series C, $116 million at eight and five-eighths. Can you remind us when that would be callable?

Yeah, so that's the last piece of it. I think it's on our balance sheet at 116, and it is callable, and I believe it is July of 2024. So you've got to live with that for a while. Yeah, I think based on existing terms, that's something that we'll need to have for a while. Okay. Thank you very much for the time and the questions.

Yeah, thank you, Stephen.

Once again, if you would like to ask a question, please press star, then the number one on your telephone keypad. Your next question comes from the line of Stephen Laws of Raymond James.

Hi, good morning. Good morning. Good morning. Bob, I appreciate some of the details you went through with projections on originations, especially the $200 million of fixed rate, but can you give us a little more details on that product, what the typical yield is, how it differs, if any, in structure from terms of the floating outside of just the rate and financing strategy around those loans to mitigate interest rate risk?

Sure. Thanks, Steve. I'm going to turn that over to Paul to talk about what he sees in that part of the business.

So the majority of those loans are 10-year fixed rate loans that are fully call protected with the intention that they be contributed to securitized transactions. C3 contributed to 35 or 40 different pooled securitized transactions. The loans are hedged and there's a component of our lines that will allow us to finance them. So given the We have roughly $900 million of warehouse line capacity, so we'll have the ability to finance most of the fixed and the floating rate loans.

Great. You know, to follow up on the last bit of remaining legacy assets, I think it's $30 or $40 million left. Can you give us an update there, timing to resolution, or are those assets largely just need to run off to maturity? But any update there would be appreciated.

Paul, you want to? I would say it's a good question, and the, I mean, I think we, I would like to think that the substantial majority of those assets will be gone over the course of the next two quarters, but some of that is subject to the sales market and how the current environment affects the overall realistic capital markets. But all things equal, I would hope that the vast majority of that would be resolved over the course of the next couple of quarters.

Great. Finally, Dave, can you appreciate the numbers on CECL? Any expected material changes to that reserve either way in anticipation of a you know, any shift in asset mix or anything else that we need to think about as we build in a CECL reserve line going forward?

Not at this present time, Stephen. It obviously just went into effect on January 1st, and we've looked at our history of losses, and we've looked forward using a service, and, you know, we just don't see any change to that in the near-term future. Great. Thanks very much.

At this time, there are no further questions. I want to return the call to management for any additional or closing remarks.

Well, I want to thank everybody for joining us this morning. We look forward to updating you on our progress on our next earnings call. Thank you very much.

Thank you. That does conclude the Q4 and full year 2019 Exantis Capital Corp earnings conference call. You may now disconnect.