ACRES Commercial Realty Corp.

Good day, ladies and gentlemen, and welcome to the third 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. At that time, if you have a question, please press the 1 followed by the 4 on your telephone. If anyone requires assistance during the conference, please press star then 0 on your touchtone phone. 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 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 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, 10-Q, 10-K, and, in particular, the risk factor section of its 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 the earnings presentation for the past quarter. With me on the call today are Mark Vogel, President and CEO, and Dave Bryant, ACR's CFO. Also available for Q&A is Andrew Fentress, Chairman of ACR. 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 the company's loan originations, capitalization, liquidity condition, and the health of the investment portfolio, while Dave Bryant will discuss the financial statements and the operating results for the third quarter. And of course, we look forward to your questions at the end of our prepared remarks. In the third quarter, we continue to grow and manage the loan portfolio, improve the company's balance sheet profile by reducing cost of capital, and extend duration while offering our sponsors outstanding service. The Acres origination team delivered $468 million of new loan commitments in the quarter. This brings total production volume in 2021 to approximately $1.1 billion. These results reflect the efforts of the entire Acres team in identifying, processing, and executing on opportunities nationwide with our unique financing solutions in our target asset classes. From a capitalization standpoint, the company issued $150 million of new senior unsecured notes. This offering allowed the company to fully redeem its previously issued 12% senior unsecured notes, repurchase some of the 4.5% convertible senior notes that have a maturity date in August, and supplement its liquidity profile. Portfolio quality remains high and is improving. The watch list loans comprising those risk-rated a 4 or a 5 reflect 10% of the total commercial real estate loan portfolio as of September 30th, as compared to 23% when Acres took over the REIT last summer. We expect to continue expanding the portfolio for the remainder of this year and into 2022 in order to continue delivering on our strategic initiatives to maximize earnings and book value for the company's shareholders. Returning to loan production, we closed 17 commercial real estate whole loans for $468 million during the third quarter. These loans pay coupon interest at a weighted average of one month liable plus 3.46%, and each carry liable floor protection, which has a weighted average of 0.18%. Approximately $396 million, or 85%, of the originated loans are collateralized by multifamily properties, while the remainder are collateralized by self-storage and office properties. These loans had a combined weighted average LTV of 73%, based on the underlying property valuations available at the time of each loan's origination. The company received payoff and paydown proceeds of $120 million from the full or partial repayment of 10 loans during the third quarter. Payoffs and paydowns were outpaced by loan originations, producing net portfolio growth. Borrowers' ability to refinance indicates the quality of the sponsors and assets underlying the portfolio, along with improving market conditions for refinancing our sales. Looking ahead, we expect to target asset classes nationwide consistent with the company's origination history, including a primary focus on multifamily properties along with other segments such as select opportunities in office, hospitality, and self-storage. The credit markets continue to be competitive, which as a result has accelerated spread compression, particularly in the multifamily sector. In addition, lower LIBOR floor rates means lower all-in rates for the company. While ACR is well positioned for growth, we will remain selective and focus on credit quality, target markets, and strong sponsors to originate accretive new loans for the portfolio. The company is in a strong liquidity position with a diverse array of financing sources. We continue to manage the balance sheet to optimize for the lowest cost of capital structure while extending duration. We took several steps forward on these initiatives in the quarter. In August, the company issued $150 million of new five-year 5.75% senior unsecured notes. Using the proceeds, the company redeemed all $50 million of principal of the 12% senior unsecured notes. In August and September, the company repurchased a total of $55.7 million of principal of the 4.5% convertible senior notes, which mature in August 2022. As of September 30, $88 million of principal remains outstanding on the 4.5% convertible senior notes, and we retain the ability to utilize $75 million of principal available on the 12% senior unsecured notes until January 31, 2022. The net of these transactions provided the company with $44.3 million of additional capital. This activity reduced the weighted average cost of corporate debt by 88 basis points from June 30th to September 30th. Our intent is to use the remaining proceeds from the new senior unsecured notes to fund loan originations and for general corporate purposes. The portfolio has continued to perform, demonstrating sound and consistent underwriting and asset management. The company ended the quarter with $1.9 billion of commercial real estate loans across 95 individual investments, of which only four comprising 3% of the portfolio were delinquent. At the time of our acquisition of the company, it had 23 watch list loans representing 23% of the portfolio. As of September 30th, the number of watch list loans has reduced to 10, representing 10% of the portfolio. We believe that the company has a well-diversified nationwide portfolio with a concentration in the high-growth southeast, southwest, and mountain regions of the United States. Our target asset classes are projected to provide sustainable cash flow, including the multifamily class, which has been particularly durable and represents 66% of the loan portfolio. In addition, the Acres platform has over $250 million of loans in its development portfolio that will be eligible for the company's book in the coming quarters. This unique sourcing opportunity provides the company with curated sponsor relationships and Class A newly constructed assets as attractive returns. In summary, the ACRES team is pleased with the growth and quality of the investment portfolio, the improved balance sheet profile, and the prospects for new originations going forward. We will continue to execute on our business plan by originating high-quality investments, actively managing the portfolio, and continuing to focus on growing earnings and book value for the company shareholders. We will now have ACR's CFO, Dave Bryant, discuss the financial statements and the operating results during the quarter.