ACRES Commercial Realty Corp.

Good day, ladies and gentlemen, and welcome to the second quarter 2021 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 touch tone telephone. As a reminder, this call is being recorded. I would now like to introduce your host for today's conference, Jacqueline Jesberger, General Counsel. You may begin.

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 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 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 8K, 10Q, and 10K, and, in particular, the Risk Factors section of our Form 10K and Form 10Q. 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 Fogel, 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 and updates on our portfolio and loan originations, while Dave Bryant will discuss our financial statements and operating results for the second quarter. And of course, we look forward to your questions at the end of our prepared remarks. This week marks one year since Acres Capital acquired the management contract for what was then known as Exantis and is now Acres Commercial Realty. Since acquiring the management contract, we have sought to stabilize the legacy loan portfolio, grow loan originations, and enhance our funding sources. During the second quarter, we were able to make market progress in all three areas. Our aggressive asset management process has resulted in a healthy portfolio, including a net reduction of $133 million of loans risk rated a four or five during the second quarter of 2021. There are 177.8 million of loans risk rated a four or five at the end of the second quarter of 2021 from the peak of $410.8 million at the onset of the pandemic at the end of the second quarter of 2020. From a capitalization standpoint, we successfully executed on the largest CLO in our history and completed a preferred stock offering during the quarter. By doing so, we have positioned the company to fund a robust and attractive pipeline of opportunities. Loan origination volume in the second quarter was up over three times the prior quarter. This is a direct result of the hard work by our entire team in creating and executing on unique financing solutions for the marketplace. We expect that hard work to provide for continued expansion of our portfolio for the remainder of this year. The portfolio has continued to perform, demonstrating sound and consistent underwriting and asset management. We ended the quarter with $1.6 billion in loan assets across 88 individual investments, with all but two performing in current contractual payments. Additionally, we realized incremental improvements in our loan portfolio risk ratings as certain loans that were lower on our risk rating scale have paid off, and we are issuing new loans in line with our core target ratings of a two. We believe we have a well-diversified nationwide portfolio with a concentration in the high-growth southern region of the United States. In addition, nearly 60% of the loan book is backed by multifamily properties, a particularly durable sector of real estate assets. We continued to maintain a solid balance sheet and liquidity position, and during the quarter, we took additional steps to further strengthen our funding sources. In May, we executed the company's 10th CLO. This was the second ACRE-sponsored transaction and the first managed CLO in the company's history. The transaction was backed by $803 million of commercial real estate loans, and we issued $675.2 million of non-recourse floating rate notes at an average cost of 149 basis points over LIBOR. This CLO is structured with a 24-month reinvestment period during which we can use principal proceeds to acquire additional mortgage loans. Simultaneously, we liquidated the remaining $344 million of notes from a prior CLO. In May, we completed a preferred stock offering and fulfilled a follow-on offering in June. We issued 4.6 million new Series D preferred shares and received net proceeds of approximately $111 million. At the end of the second quarter, our total leverage ratio was 3.0 times debt to total equity, down almost a full turn from the prior quarter. In terms of recourse debt, leverage was 0.7 times, down from 1.2 times. As of the end of July, ACRES had $243 million of net liquidity over our working capital reserve target of $40 million to deploy into additional commercial real estate loans. At the end of the quarter, we had approximately $1 billion of financing capacity on our term warehousing financing facilities, a senior secured financing facility, and senior unsecured notes. We are pleased with the continued acceleration of our new loan production. During the quarter, we closed 18 commercial real estate whole loans for $470 million, more than three times the volume we produced in the first quarter. Fourteen of the loans are collateralized by multifamily properties, and the remainder are hotel, office, and self-storage. The weighted average coupon on these loans is one month LIBOR, 17 of which have floors with a weighted average of 0.22%, plus 3.81%. and the LTV is 70%. New commitments outpace loan paydowns and payoffs. During the second quarter, we received proceeds of $353 million from the repayment of 22 loans. We believe the ability of our borrowers to refinance indicates the equality of the sponsors and assets underlying our loan portfolio. Looking ahead, we anticipate continued paydowns from the current portfolio, offset by ongoing acceleration of new loan production. Our pipeline continues to include multifamily opportunities along with other segments, such as hospitality and office, where spreads are a bit wider, but we believe these spreads may begin to compress. We will remain selective and focus on credit quality, markets, and sponsors to originate accretive new loans for the portfolio. In additional news, I would like to publicly welcome two new members to the Acres Commercial Realty Board, Cameron Edwards and Dewana Williams. Karen brings 30 years of experience in the financial services industry, including 13 years serving on the board of a commercial mortgagery. Dawana has 20 years of real estate experience and provides valuable insights into current and future developments in the industry through her executive real estate development and strategic advisor experience. We appreciate the insights, experience, and diversity of thought these women bring to our board. We look forward to their contributions in years ahead. In summary, we are continuing to execute on our business plan, further diversify our funding sources, and originate high-quality investments as we continue our focus on growing earnings and book value for our shareholders. We will now have our CFO, Dave Bryant, discuss our financial statements and operating results during the quarter.