ACRES Commercial Realty Corp.

Thank you. Good day, ladies and gentlemen, and welcome to the fourth quarter 2020 Acres Commercial Realty Corp earnings conference call. Currently, all participants are in a listen-only mode. Later, we will conduct a question and answer session with instructions to follow at that time. If anyone requires assistance during the conference, please press star then zero on your touchtone telephone. As a reminder, this call is being recorded. I would now like to introduce your host for today's conference, Kyle Brengel, Vice President. You may begin.

Kyle Brengel Good afternoon, and thank you for joining our call. 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 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 several trends, risks, and uncertainties that could cause actual results to differ materially from those contained in forward-looking statements. These risks and uncertainties are discussed in the company's reports filed with the SEC, including its reports on Form 8-K, 10-Q, 10-K, and in particular, the risk factor sections of our Form 10-K and Form 10-Q. 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 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 presentation for the past quarter. With me on the call today are Mark Vogel, President and CEO, and Dave Bryant, our CFO. Also available for Q&A is Andrew Fentress, Chairman of Acres. I will now turn the call over to Mark.

Good afternoon, everyone, and thank you for joining our call. Today I will provide an overview of our strategic initiatives, updates on our portfolio, and our resumption of originating loans, while Dave Bryant will discuss our financial statements and operating results for the fourth quarter. And, of course, we look forward to your questions at the end of our prepared remarks. I want to begin by highlighting a significant post-year event. As of February 16th, Exantis Capital Corp became Acres Commercial Realty Corp and is listed on the New York Stock Exchange under the symbol ACR. This was the final step in the strategic transition of Exantis to the Acres network by bringing the platforms together under the Acres name. As discussed previously, Acres and Exantis' complementary platforms will help us to achieve our goal to be an end-to-end solution for the middle market commercial real estate borrowers nationwide and accelerate our loan originations over time. We marked a significant milestone during the fourth quarter when we began originating loans again, the first since March 2020. During this time, we closed five commercial real estate whole loans for $83.4 million. Significantly, two of these loans are refinanced acres capital development loans. These loans were collateralized by a mix of multifamily and selective hospitality properties and were issued relatively in line with the portfolio LTV at 71% and carry a weighted average coupon of one month LIBOR plus 6.19%. The company ended the quarter with $1.5 billion in loan assets across 98 individual investments. As of January 2021, 98% of the loans were performing, while only 2% were delinquent. Additionally, during the fourth quarter, 12 borrowers paid down or fully repaid $160 million of their loans. We continue to believe that the ability of our borrowers to refinance in this uncertain environment speaks to the health and quality of the sponsors and assets underlying our loan portfolio. Our portfolio is well diversified in terms of both geographic concentration and property type. Outside of Texas, no state comprises more than 10% of our loans. and approximately one-third of our portfolio is in the high-growth southern region of the United States. Multifamily, which has been one of the most resilient asset classes during the challenges of the pandemic, is 56% of the portfolio, while the remainder is split between office, hotel, self-storage, and other assets. As discussed last quarter, we took a deep dive into the entire portfolio and created a specific plan for each asset on our watch list. We sold our last remaining asset held for sale, a hotel asset in California. We also received the deed in lieu of foreclosure on a select service hotel valued at approximately $40 million upon acquisition, which was in excess of the loan's cost basis. As progress is made on the vaccine rollout, we will determine the optimal plan forward with this asset and will report accordingly. We have made sequential progress regarding our balance sheet and liquidity position. At year end, our total leverage ratio was 3.9 times debt to total equity, down from 4.6 times at the end of the third quarter. In terms of recourse debt, leverage was 0.8 times, down from 1.1 times. As of the end of February, Acres had $150 million of net liquidity over our working capital reserve target of $40 million to deploy into additional commercial real estate loans and common stock repurchases. At December 31st, 2020, $1 billion of financing capacity comprising three different term warehousing financing facilities, a senior secured financing facility, and senior unsecured notes was available. The Acres Network is now actively originating and underwriting new loan opportunities on behalf of the company, and we are focused on finding the ideal combination of location, assets, and sponsorship. As mentioned previously, we restarted loan originations in November 2020, closing $83.4 million of commercial real estate loans. Building on that momentum during the first quarter of 2021, our originations are already approaching $100 million to date. As we continue to execute our strategy, we are confident that we will continue to see opportunities to increase originations. In terms of the market dynamics, there is a fair amount of competition for high-quality loans, particularly in sectors that have been more resilient to COVID-related challenges. such as multifamily and industrial. To that point, we have seen moderate spread compression in these types of assets. But we are also seeing opportunities that offer wider spreads in segments such as hospitality and office. We will remain selective and focus on credit quality, markets and sponsors, and believe we will continue to source a mix of attractive opportunities. As we move through 2021, we are confident about the market to deploy capital using the ACRES network and the enhanced capitalization. Our priorities remain on actively managing the loans in our portfolio and continuing to pursue originations with focus on appropriate risk-adjusted returns. We have an experienced underwriting team and a highly disciplined approach, and I am encouraged by our pipeline and our progress closing loans year to date. In addition, we are exploring the possibility of structuring a CLO in the coming months, weighing the opportunity based upon market conditions. We will look forward to reporting to you on our on our activity going forward. We will now have our CFO, Dave Bryant, discuss our financial statements and operating results during the quarter. Thank you, Mark, and good afternoon.

Our fourth quarter results reflect our continued positive progress. Before discussing the results for the quarter, I would like to note that all per share numbers reflect the one for three reverse stock split that took effect on February 16th. At that time, every three issued and outstanding shares of company common stock were converted into one share of company common stock. Any fractional shares that were created because of the split were returned to shareholders in the form of cash. Taking effect of the split, Acres Commercial Realty's diluted weighted average common shares outstanding over the fourth quarter was approximately 11 million shares. Our GAAP net income, allocable to common shares for the three months ended December 31, 2020, was $21.5 million, or $1.95 per share, up from $3.8 million, or $0.36 per share, in the prior year fourth quarter. GAAP net income includes $18.6 million, or $1.70, in CECL reserve recovery, This positive movement reflects a more constructive outlook on macroeconomic factors, as we have seen broader improvements alongside the vaccine rollout. In addition, it reflects the reversal of a specific reserve related to the hotel asset for which we received the deed in lieu of foreclosure that Mark discussed. Our other items in our results include a $1.6 million or $0.14 per share gain on conversion based on an appraisal related to the same hotel loan, as well as a $700,000 or $0.06 per share loss related to the sale during the quarter of our last remaining asset held for sale, a hotel property in Palm Springs, California. Net interest income was $9 million or $0.82 per share for the fourth quarter compared to $11.6 million or $1.06 per share for the third quarter 2020. The primary drivers of the $2.6 million decline were the payoffs and paydowns of commercial real estate loans in the third and fourth quarters, as well as the full quarter impact of increased financing costs associated with our MassMutual Senior Secured Financing Facility, our Senior Unsecured Notes, and our new CLO issued in September, which we discussed last quarter. The weighted average spread of the floating rate loans in our 1.5 billion loan portfolio expanded slightly from the third quarter to 3.56% over the weighted average one month LIBOR floor of 1.88% at quarter end for a gross rate of 5.44%. These LIBOR floors are in the money on all our floating rate loans with one month LIBOR at approximately 12 basis points at the end of February. We expect to continue to see a meaningful benefit to net interest income as the forward LIBOR curve projects rates to remain low in the near term. All except two of the company's 98 commercial real estate loans were current on debt service payments through the end of January 2021. including two loans performing in accordance with forbearance agreements. The implementation of CECL on loan loss reserves, which 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 and by loan type available, relevant, historical, and current loan loss data as well as future macroeconomic expectations provided by independent economic experts. The impact of CSOL resulted in a total allowance for credit losses at December 31, 34.3 million, or approximately 2.2% on our 1.5 billion loan portfolio. This represents an 18.6 million reduction from our allowance for credit losses at September 30th. Gap of value per share calculated over vested common shares outstanding, including warrants, rose to $20.57 at December 31, 2020, from $18.10 at September 30, 2020. The increase to book value per share was driven by $2.02 of net income during the quarter, along with 41 cents related to share repurchases that were completed in the quarter. Note that the difference between the $2.02 of net income contribution to book value and the $1.95 of GAAP net income in the fourth quarter relates to the share count and utilizing average shares for the income statement and shares outstanding at quarter end for book value purposes. During the fourth quarter, Acres repurchased 535,000 shares for $5.4 million. In 2021, through the end of February, we have purchased 565,000 shares representing $6.9 million. These purchases in the aggregate were at an average price of approximately $11 per share. The company has board authorization to repurchase up to $20 million of current outstanding shares through June 2021. Our gap debt to equity leverage ratio decreased to 3.9 times at December 31 from 4.6 times at September 30. As a result of the new financing commitments and debt refinance during the year, the company had $1 billion of availability on its CRE term warehouse and senior secured financing facilities and senior unsecured notes aggregated as of the end of December. At the end of February, the company's available liquidity was approximately $150 million, including $37 million of unrestricted cash, $78 million of projected financing available on unlevered assets, and $75 million of availability on our senior unsecured notes. These components were offset by our working capital reserve target of $40 million. With an enhanced financial profile, including improved liquidity and reduced recourse leverage and margin call risk, along with the recommencement of originations and a robust pipeline, we look forward to updating you on originations over the course of 2021. This concludes our opening remarks, and I will now turn the call back to the operator for questions. Operator?

Thank you. At this time, we'll be conducting a question and answer session. If you'd like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Our first question comes from the line of Steven Laws with Raymond James. Please proceed with your question.

Hi, good afternoon. Congratulations on an eventful year and certainly the rebranding. I know you guys are excited to continue to put your fingerprints on it. So with that said, as we look at the loan pipeline, origination pace, as you mentioned, almost 100 million, I think, since year end. How does that compare to repayments and what type of net portfolio growth should we expect to see this year?

Hi, Steve. It's Mark. How are you? Good. I would expect, given where market conditions are today, that our origination pipeline will remain strong. I think with regard to payoffs, as we mentioned in the call, We had about $160 million of payoffs in the quarter, and dependent on market conditions, I would expect that payoffs would remain in that sort of range on a quarterly basis going forward. As far as originations go, we have about a billion dollars plus or minus in capacity, and so long as market conditions are strong, I would expect that we're going to be extremely active on the origination front. and try to sort of maximize our returns through the origination.

Great. Thanks for that, Keller. When you look at the unsecured notes, the 12% notes, can you talk about the options there around refinancing those or replacing those? Is that a 2022 event, or what are the prepayment terms around that?

Hi, Steve. This is Andrew Fentress. a non-call through the end of July of 2021, and then there are some declining prepayment penalties after that date. And so I think as we approach the back half of the year, we'll begin to evaluate options and overall cost of capital analysis on that topic. Great.

Appreciate the color there. And last question for now. Um, the, the deed in lieu assets, the hotel, can you talk about the timeline, what the options are from here and kind of how you guys will go through that process evaluating, uh, you know, the best solution there.

Yeah. You know, this is an asset that we really like. It's a, it's a, was a strong performing hotel pre COVID. And, uh, we didn't see any sense in trying to sell the property in, in the market today. Hotel assets are not trading very well, as you probably would expect. And so we feel like, given the fact that we have a good projection on strong net operating income in 2021 and going forward, that we're going to hold the asset for at least the next six to 12 months, evaluate options as the market changes, and continually seek out potential buyers of the property. Great. Appreciate the comments this evening. Thank you.

As a reminder, if you'd like to ask a question, please press star 1 on your telephone keypad. As a reminder, if you'd like to ask a question, please press star 1 on your telephone keypad. One moment, please, while we poll for more questions. Your next question comes from the line of Steve Delaney with JMP Securities. Please proceed with your question.

Thanks. Good evening, everyone, and thank you for taking the question. Wow, you guys have been busy for sure. And I hope you're also doing well. So the buybacks are so rational. And obviously, you know, I look at the 41 cent book value accretion and, you know, applaud that when you think about it, you know, relative to book value or anything else. I mean, just the absolute amount of 41 cents far exceeds that. you know, any dividend you may have, uh, elected to pay. So I think shareholders should look at that, you know, kind of, kind of as a, as a, a, a large dividend in some ways. Um, you know, that said, I'm looking at the buybacks and it looks like you bought the shares back at about $10 average in 4Q. That's now up to 12 stocks close enough. It's in spitting range of $14. So, um, you know, I guess getting towards sort of like a 70% price to book. Just curious, like you've got plenty of authorization. Where is sort of a level where you would look at that and say, you know, whether it's 80% of book or 85, is there some level where you would simply say, we will put this money into our loan portfolio. We will consider a cash dividend and as an alternative to return capital, you know, great run. And I guess the question is, how much longer should we expect if the stock continues to move that buybacks will be a big part of the capital allocation each quarter? Thanks.

Yeah. Hey, it's Andrew Fentress. Thanks for the question, Steve. Hi, Andrew. I think we obviously, I think like a lot of people when we saw it at 30% to 40% of book value thought that it was very clear. I think as we approach 75% or 80%, if we get to that level, it will begin to to evaluate it from that point forward and understand whether or not it makes sense, like you say, to allocate those dollars to new origination and drive an ROE that would be in excess of what we expect to return on a buyback there.

Okay, thank you. I appreciate that. And, Mark, the great that lending is kicking up, I think that's your natural business and where you want to be. Help us understand the, you know, we've looked at your historical pipeline, Stephen, who was just on the line. And, you know, we've been on earnings calls for the last two or three weeks. And we see L plus, you know, 300. We see L plus 350. Maybe we see an L plus 400. What would you say, I guess, the relationship with the borrower, the level of transitional? You mentioned loans coming off development. So I assume they're just early in lease up. And so the real question is, getting a 600 spread and a 75 basis point floor, what are the factors that allow you to obtain that type of pricing vis-a-vis what we would normally see in middle market bridge loans? Thanks.

That's a good question, Steve. And I would say that you'll still see several of those types of loans that you see in everyday bridge lending, the L-plus 300s to 350s to 400s. But what we have, and when I talk about it coming out of development, and we've talked about this often, is the acres capital side of the business where we focus quite heavily on ground-up construction of multifamily properties and other asset classes. And it helps us develop a relationship with the borrowers that eventually leads to providing them a stabilizing bridge loan once construction is complete. And I think it allows us to capture a little bit better interest rate because of the fact that it's this one-stop shop solution without any sort of friction cost associated with going back to market for a new loan. So I think that that helps on driving some growth sizable size interest rates that you might not otherwise see on these types of assets. And it also allows our portfolio to grow with what I'll deem class A assets. I mean, everything coming out of the development pipeline is a class A asset. So it really improves our portfolio from a property standard perspective.

No, great point. Well, strategically located, I'm sure, for new construction and you know, full amenities, et cetera, et cetera. It makes a lot of sense. And I guess from your borrower's perspective, since this is a relationship business, while he or she or whoever is paying 7%, I suspect that's a roll down from what the development and construction loan coupons were. Am I correct?

That's right. You know, coupons in construction are certainly in excess of that, depending on, you know, how you leverage the deals. But, you know, the construction market for middle market properties is still not really bounced back all that much. So we have a lot of opportunity there, and certainly we're getting good yield. And, you know, certainly our borrowers like to see that drop down in rate on the REIT side as we bring it in.

Sure, makes sense. One final quick thing, if I may, for Dave Bryant. Dave, you reported your book value on a GAAP basis at 2057. In the past, Exantus, in the past, before the management change, had also used an economic book value figure, which was not that materially different. But are we now, the fact that you didn't mention economic, should we assume that going forward it will be a GAAP book value figure?

Simply put, yes, Steve. Okay. We believe in the GATT number, and that's what we'll use.

All right. And on the initial Oak Tree Mass Mutual warrants, we were getting dilution on the penny warrants. We were getting dilution of about 4% from reported book value as of September 30. If I applied that same 4% discount, you know, I'd get a current, like a warrant diluted book value figure of about 1975. I don't know whether you all, internally, whether you run that calculation or you have that figure in your mind, but does my logic in going, you know, applying the warrant... It doesn't, Steve.

I'll tell you why. The warrants are in our denominator for GAAP.

So they've already been... Oh, I see. Thank you. Okay, because we have not seen that before.

But, of course, they were affected by the one-for-three split as well.

Okay, great. So when you calculated the 2057, you had the $1.4 million pre-split warrants in there. Thank you, Dave, for clarifying that. And I appreciate everybody's comments. Thanks.

Thanks, Dave.

Ladies and gentlemen, we have reached the end of the question-and-answer session. And I would like to turn the call back to Mr. Andrew Fentress for closing remarks.

Thank you, everyone, for joining the call. We appreciate your interest and time and look forward to speaking to you again after our first quarter results in May of this year. Have a good evening, everyone. This does conclude today's conference.

You may disconnect your lines at this time. Thank you for your participation.