ACRES Commercial Realty Corp.

Good day, ladies and gentlemen, and welcome to the Q1 2020 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 touch-tone telephone. As a reminder, this conference is being recorded. I would now like to introduce your host for today's conference, Steve Landgraver, Senior Vice President of Corporate Finance. Sir, you may begin.

Thank you, Operator. Good morning, and thank you for joining our 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. Although 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 8-K, 10Q and 10K, and in particular, the risk factors section of our form 10K. Listeners are cautioned not to place undue reliance on these forward-looking statements. We speak only at the date hereof. The company undertakes no obligation to update any of these forward-looking statements. Furthermore, certain non-GAAP financial measures will be discussed on this conference call. Our presentation of this information is not intended to be considered in isolation or or as a substitute to the financial information presented in accordance with GAAP. Reconciliations of these non-GAAP financial measures to the most applicable 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 the Chairman of Exantus Capital Corp., Andrew Farkas, for opening remarks.

Thanks, Steve. Good morning, everybody. Thank you for calling in. With me today are Bob Lieber, our CEO, Matt Stern, president of Exantus, Dave Bryant, our CFO, Paul Hewson, who's head of commercial real estate lending, and as you heard from Steve Landgraver, who's our senior vice president. Let me begin, please, by expressing our hope that all of you and your families are healthy and safe. All of us at Exantus Capital Corp. and C3 Capital Partners, which is Exantus' manager, salute our healthcare and other essential workers who are doing and risking so much at this remarkable time. As an organization, C3 Capital Partners made a concerted effort to provide charitable financial support to both healthcare workers on the front lines and assistance to those in need. The unprecedented fallout from the COVID-19 virus in broad financial markets around the world has had an acute impact on commercial real estate. Like many of our peers, these events have had a material impact on our company. We transitioned our entire operations to a remote setting in the second week of March, There has and continues to be no disruption in our ability to operate, and all of our employees are safe. It's been approximately 12 years since our industry experienced a shock of this magnitude, and we are rigorously monitoring what is a fluctuating environment to ensure that we remain responsive and adaptable. While this period has been and will continue to be difficult, this particular management team has been through several real estate cycles, I'm confident we will find opportunities when the economy and financial markets stabilize. With the uncertainty in our financial markets and our economy today, our first and foremost goal is to protect the franchise and retain sufficient excess liquidity. We therefore did not pay a first quarter dividend on our common and preferred shares. We wanted to do this to maximize the liquidity for the company. We understand this is uncomfortable for shareholders, but the length and depth of this crisis is not yet known. The actions of the Federal Reserve and U.S. government have certainly stopped the freefall we were experiencing in the second half of March, but there's still uncertainty that's originated not from an economic event, but from a medical event, one we really haven't seen in this country in 100 years. We're confident the U.S. will recover when its medical issue is resolved, and we're positioning Xantus to recover as well. There's a lot that's transpired over the course of the last 8 to 10 weeks. Actually, an extraordinary amount has transpired over the course of the last 8 to 10 weeks, all of which have had a material impact on the company. Because there is so much that has transpired, we wanted to ensure that our shareholders had a detailed explanation from the company with regards to exactly what happened, how we responded to what happened, and how it has helped to mitigate further harm to the company. The objective, of course, is to make sure that the company emerges strong and solid as we go forward into the market and make certain that we have a future for all of our shareholders and for the organization. We've done a good job of making sure that that's going to happen. This call will be a little more detailed than usual so you have all the information. With that, let me turn this over to our CEO, Bob Lieber.

Thank you, Andrew, and good morning, everybody. as Andrew mentioned, that we were going to talk through some of the timeline and the significant events that have occurred since March 4th. And starting on March 4th, on our last earnings call, we provided guidance about deployment for 2020. And at the time, we noted that such guidance presumed, quote, normalized market conditions, but the recent market activity had not been normal. We clearly weren't aware of how unfortunately prescient that caveat turned out to be. The week after the earnings call, members of senior management and the board were very excited about the addition of the fixed rate loan origination capabilities to our product offerings at Exantus, and we demonstrated this confidence in our business plan through the purchase of equity securities in the company. The threat of COVID-19 was not fully known at this time, and even while we shut down our New York City office, we were confident in our loan and CMBS portfolios, as well as the direction of the company. ON THE LOAN SIDE, AS YOU KNOW, WE FOCUS ON BORROWERS WITH LIGHT TRANSITIONAL BUSINESS PLANS, SUBSTANTIALLY ALL OF WHICH GENERATES SUFFICIENT CASH FLOW DURING THE TRANSITION. WE HAVE NO CONSTRUCTION LOANS IN OUR PORTFOLIO. WE HAVE MINIMAL EXPOSURE TO NEW YORK CITY. OVER 98% OF OUR PORTFOLIO IS IN SENIOR SECURED LOANS. OUR PORTFOLIO IS GEOGRAPHICALLY DIVERSE WITH ALMOST 60% OF OUR LOANS IN MULTIFAMILY ASSETS. OUR CMBS PORTFOLIO WAS A MIX OF AGENCY, SASB, AND CONDUIT CMBS POSITIONS SELECTED based on their strong credit profile as a result of their sponsorship, the asset class, and subordination levels. For example, at February 29, 2020, about one-third of our portfolio was comprised of the Class B bonds from Freddie Mac's floating rate K-Series securitizations. These are pools of loans originated by Freddie Mac from their approved borrower list, and each bond had a 7.5% subordination level within the pool to absorb any realized losses. Our feeling was that even if the COVID-19 virus spread, our portfolio was relatively insulated, and despite the potential for short-term disturbances, we felt the long-term value diminution was much less likely. It was in this context that we initially funded CMBS margin calls to protect our bond portfolio. Just 12 days after our earnings call, starting the week of March 16th, the capital markets almost entirely seized up. The weekend of March 21st saw several distressed trades due to the certain parties needing immediate liquidity with limited bidders in the market. This gave rise to us receiving sizable margin calls the following Monday morning. And these margin calls differed materially in prices that we would see in a liquid market, never mind what fair value was. Despite our attempts to communicate and resolve these discrepancies, we received a notice of a default, which resulted in one of our bond portfolios being repriced and effectively sold by the lender into a shockingly illiquid market. I'd like to point out that the cost of the settlement for this default was actually less than the margin call, which led to the default and the loss of our bonds. But in order to protect our balance sheet, we decided to exit the remainder of our CMBS portfolio with the exception of our BP's investment. We felt that an orderly unwinding of these positions, given the current market conditions, was the best path to protect the company's liquidity and book value. and the final sales price took place shortly after the quarter ended. This is why we show a bond balance on our March 31st financials. Matt will discuss in more detail the impact of these CMBS transactions in his comments. On the loan side, we completed $208.9 million of originations in the first quarter, but today have temporarily curtailed our loan origination as it's currently very difficult to accurately underwrite loans. Given this backdrop, we are rescinding our previous guidance of at least $1.1 billion of deployment in 2020 and will revisit providing our expectations for the remainder of the year on future calls. As of March 31st, GAAP book value per common share is $7.13 compared to $14 per share as of December 31st, 2019. Economic book value per share As of March 31st, 2020, it's $6.77. At May 7th, we have $36.7 million of cash. As you would expect, management is heavily focused on asset management and a plan to continue to enhance our liquidity cushion. There will be opportunities arrive from this location, and we want to maintain the optionality to seize them. In our existing investor presentation, we have indicated that we generally target a $40 million minimum cash balance in an environment where we are originating loans. Given that we have curtailed our originations, we feel comfortable with our current cash balance and have suspended our common and preferred stock dividends to preserve and build our liquidity. Additionally, we are evaluating potential asset sales and have $91.5 million of unencumbered assets, which are potential sources of additional liquidity. Further, the company is actively exploring financing, capital raising, and strategic options and has engaged JMP Securities to assist us in that process. To reiterate, we believe the current market does create long-term opportunities, but our focus for the short term is generating and preserving liquidity through asset sales and financing opportunities until the longer-term effects of this global virus on the U.S. economy stabilizes and shows signs of renewed economic activity. With that, I'd like to turn the call over to Matt. Matt?

Thank you, Bob, and good morning, everyone. As disclosed in our earnings release last night, we sold our entire CNBS portfolio. other than the BP's tranches we held unlevered, which resulted in a $180.3 million loss on sale, or $5.69 per common share. Volatility in the CMBS markets starting in mid-March led to the company funding $59.7 million of CMBS margin calls, and following additional sizable CMBS margin call requests, we eventually received notices of default on repurchase facilities as disclosed in our two 8K filings in late March. While we certainly felt comfortable with the CMBS portfolio we had acquired, the lack of liquidity in the CMBS market during this time led to pricing that was not reflective of underlying value and led to margin calls inconsistent with the fair value of our assets. Despite this dynamic, as Bob discussed, we concluded it was necessary to divest our bond portfolio and protect our balance sheet. The company's CMBS repo liabilities were not fully settled until April 2020. So you will note that we have liabilities that remain on the March 31st balance sheet of $175.9 million, which are offset by the fair value of CMBS, margin cash posted, and retained ceiling notes. As of April 20th, we no longer have any liabilities associated with our CMBS portfolio, and all losses associated with the disposition of the CMBS portfolio have been recognized as of March 31st. As disclosed in our April 22nd 8K, all notices of default have been rescinded or withdrawn. The $180.3 million loss on disposition of the CMBS portfolio has the following components. The size of our CMBS portfolio and retained investment grade CLO notes prior to the disposition was $548.8 million at cost, financed with $436 million of short-term repurchase agreements. yielding a net investment of $112.8 million before any margin calls and other deposits. We had $4.8 million of restricted cash deposited prior to the crisis, and we funded this amount and additional margin calls and repo rolls, totaling $59.7 million from mid-March through April that was utilized to pay down our CMBS borrowings as a result of lender-based mark-to-market adjustments. We also recognized an additional $3 million of charges related to net settlements with our CMBS lenders and other adjustments to reflect the sale of our CMBS book. As of April 21st, we terminated all of our interest rate swaps associated with our Disposed CMBS portfolio and realized an $11.8 million charge to equity as a result of our swap terminations, of which $11.3 million was recognized at March 31st. The remaining $475,000 will impact equity in the second quarter. The loss on termination of the swaps will amortize into interest expense on the income statement over approximately seven years, but will have no further impact on GAAP book value, as the loss is already completely reflected in our book value of equity. It is important to note that our interest expense on the income statement will therefore include this non-cash expense going forward. Our only remaining CMBS securities are the BP tranches that we acquired in 2017, which remain unlevered. We now carry these positions at $3.2 million after recording a $5 million unrealized mark-to-market loss this quarter. At March 31, 2020, our commercial real estate loan portfolio balance increased to $1.9 billion. At the beginning of April, the company had 124 loan assets outstanding. Only two of these loans did not make a payment in April, and one other paid debt service but did not fund escrows and reserves. It's important to note that the vast majority of our loans are in areas of the country less severely impacted by COVID-19 than is the New York tri-state area where many of us live. As Bob mentioned, 60% of our portfolio is multifamily, which we have found historically hold up better in environments such as this. The balance of our portfolio composition has not moved materially from last quarter, and a breakdown is provided on Schedule 5 of our press release issued last night. we are acutely focused on the asset management of our existing CRE loan portfolio. Like every commercial lender today, we are having active discussions with our borrowers. These discussions are very fluid due to varying durations of lockdowns or shelter in place orders around the country. The right path for each of our assets will depend on the asset type and region, as well as our real estate underwriting. On March 12th, 2020, We are very pleased to have closed Exantus 2020-8, a CLO financing $522.6 million of CRE loans, and we placed $435.7 million of non-recourse floating rate notes. At May 7th, $1.45 billion of our entire $1.9 billion CRE loan portfolio is financed by CLOs with $1.1 billion of debt that is non-recourse and is not subject to margin call. 352.6 million of our loans are pledged to our three warehouse lenders, with 237.8 million of debt currently outstanding. The balance of 91.5 million of assets are comprised of unencumbered assets and future fundings available for purchase in our CLOs or financing on our loan facilities. We also have 297.5 million at face value of equity investments in our CLOs. We have been in continuous dialogue with our CRE loan warehouse lenders since the pandemic began, and we are pleased to announce that we have negotiated covenant amendments under our facilities associated with the impact of our CMBS portfolio sale activity. Additionally, just this week, we have entered into agreements with our two largest warehouse lenders, representing over 90% of our $237.8 million of outstanding borrowings. which provide a framework to avoid credit-based markdowns for approximately four months. As of today, we have reduced our leverage under our three warehouse lines to 67%, which we believe provides our lenders sufficient comfort, and they have been working productively with us so that we are able to provide our borrowers, where appropriate, with adjustments to their loan terms. We are appreciative of the time, effort, and productive engagement of our warehouse line lenders through this process. We feel these arrangements give us the appropriate runway to navigate the current economic environment and pursue additional liquidity for the company going forward. As a management team, we recognize both the importance and challenge of delivering real-time information in these circumstances. We have made a concerted effort during our management of Exantis to build the trust and confidence of our shareholders, financing partners, and borrowers, and we will continue to do so as we navigate this environment. With that, I'd like to turn the call over today.

Thank you, Matt, and good morning. Our gap net loss allocable to common shares for the three months ended March 31st, 2020, was $199.1 million, or $6.30 per share. The core earnings loss was $172.9 million, or $5.40 per share, for Q1 2020. and adjusted core earnings after adjusting for the $180.3 million loss on CMBS dispositions was $7.4 million or $0.23 per share. In terms of significant items impacting Q1 GAAP earnings, we incurred $185.4 million or $5.86 per share of losses on the combined impact from the sale of our CMBS portfolio that was financed by repurchase agreements and mark-to-market changes on our remaining VPS investment, which, of course, was not financed. We saw our CECL reserve increase by $16.1 million, or $0.51 per share, at March 31, 2020, due to the macroeconomic shocks caused by the COVID-19 pandemic's effect on business conditions. This adjustment is over and above the $4.5 million of CECL reserves already on the company's books at the time of CECL implementation on January 1, 2020. And we recorded $3.8 million, or $0.12 per share, of fair value adjustments to our held-for-sale strategic plan asset. The net negative impact from these items in Q1 2020 was approximately $205.3 million or $6.49 per share. When our year-end 2019 call held in early March, we reported available liquidity of $139 million as of February 29th. Given that we are now reporting $102 million less at May 7th, I wanted to provide a high-level summary of the items that impacted liquidity. we had three major uses of liquidity. First, we had significant market-to-market margin calls of 59.7 million. Second, we reduced the balance of our CRE loan warehouse financing facilities by 46.9 million, which breaks down as 23.7 million from loan payoffs and 23.2 million from available cash. And third, we closed new loans using another 14.8 million. These uses were offset by net CLO proceeds of $15.3 million and operating cash flow of $4.1 million. The implementation of CECL, which is new accounting guidance on our loan loss reserves that applies to all mortgage REITs and other financial institutions, requires us to estimate expected credit losses over the life of our loans. In determining our expected credit losses, we evaluate by property type and loan type, available, relevant, historical, and current loan loss data, as well as future macroeconomic expectations. The impact of CECL resulted in a total allowance for credit losses at March 31 of $20.6 million, or 1.09% on our $1.9 billion CRV loan portfolio. To reconcile the impact, as of December 31st, we had recorded approximately $1.5 million of allowances against the loan portfolio. We had also previously disclosed a $3 million or 10 cents per share adjustment related to the initial CECL implementation in retained earnings as of January 1st, 2020. And we recorded an additional $16.1 million or 51 cents per share through income as of March 31st, 2020. This March 31st addition to our announced loan losses resulted primarily from the expected impact of COVID-19 on the forward macroeconomic forecast that is used for CECL modeling. It is important to note that these adjustments are non-cash reserves. Gap book value. Gap book value was $7.13 per share at March 31, 2020, as compared to $14 per share at December 31, 2020. Economic book value, a non-gap measure, was $6.77 per share at March 31, as compared to $13.61 per share at December 31, 2019. Gap book value declined by $6.87 per share which consists of $5.69 per share of loss from the CMDS portfolio disposition, mark-to-market adjustments from CMDS-related interest rate hedges of $0.21 per share, the implementation of CISO allowance for losses, which are non-cash reserves, of $0.61 per share, a $0.16 per share loss on the unrealized mark-to-market adjustments on our remaining CMDS BP's position, and $0.12 per share from the valuation adjustment and carrying costs on our held for sale asset and other adjustments that net to a negative $0.08 per share. Economic book value is further impacted by the non-cash discount on our convertible senior notes of $0.23 per share and the redemption value of our preferred stock in excess of carrying value of $0.13 per share to arrive at the $6.70 per share of economic value. Our gap debt to equity ratio was four and a half times when we adjust for the net impact of the payoffs of the CMBS repurchase agreements and paydowns on our CRE warehouse lines that happened after quarter end. Our CLOs provide us financing by allowing for the purchase of additional loan fundings from our balance sheet. what we refer to as future fundings. Our CLOs were able to purchase $5 million of these future fundings since year end, 2019, and we currently have $8.8 million of balances available to purchase as loans pay off within our CLOs. At March 31st, our $1.9 billion floating rate CRE loan portfolio, at par, had a weighted average LIBOR floor of 1.91%. and a weighted average spread over LIBOR of 3.41%. At the end of March, we had 1.8 billion or 96% of our loan book with LIBOR floors that are in the money with 30-day LIBOR at approximately 1% at the end of the period. We expect to continue to see a benefit to net interest income during 2020 as the LIBOR forward, LIBOR curve project rates to remain low for the balance of the year. With that, I'll turn the call back to Bob for some final comments.

And I will turn it to Andrew. Andrew?

Thank you, Bob. Thanks, everybody. So basically, about two and a half months ago or so, this company was on a trajectory that was entirely consistent with our stated objectives. Over the course of the last five years, we took Exantus from an organization that was in a series of disparate businesses, and we converted it into a pure mortgage REIT, which was the original intention. And earnings from that mortgage REIT continued to increase, as did dividends, over the course of the last five years or so. And even as recently as 10 weeks ago, we had no reason to believe that that would not continue. What took place 10 weeks ago as the lockdown commenced and the economic crisis commenced in this country was, at least in the history of my tenure and my career in the industry, which spans about three decades, unprecedented. And the impact on our company has been profound. Our primary objective has been to ensure that the company has the ability to continue as a going operation. and that we are able to continue to aggregate liquidity and to get loans paid off such that the company can return to a normal standard of operation. Everything that's occurred has impacted everybody in the industries in which we operate. Not that that is any consolation to any of us, but the management of this particular organization has been through crises like these over and over again, and we do have the skill set to help to navigate through this as best as is humanly possible. We continue to appreciate your support. We obviously wish that these things had not come to pass, and we have worked tirelessly to try to manage through them. With that, I welcome your questions.

As a reminder, if you would like to ask a question, please press star followed by the number one. At this time, there are no questions. I would like to turn the call back to management.

All right. Well, there are no further questions at this point. We thank you for calling in. Obviously, we're available to you with any questions you may have privately on the phone. And we hope that everybody continues to stay healthy and safe. Thank you.

Thank you, ladies and gentlemen, for participating in today's conference call. We appreciate you now. Connect your lines.