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spk01: Thank you. Good day, ladies and gentlemen, and welcome to the fourth 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 touchstone telephone. As a reminder, this call is being recorded. I would now like to introduce your host for today's conference, Mr. Kyle Brengel, Vice President, you may begin.
spk02: 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 the forward-looking statement. 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 its Forms 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 may 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 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 CFO. Also available for Q&A is Andrew Fentress, Chairman of ACR. I will now turn the call over to Mark.
spk07: Good afternoon, everyone, and thank you for joining our call. Today I will provide an overview of the company's loan originations, real estate investments, capitalization, and the health of the investment portfolio, while Dave Bryant will discuss the financial statements, liquidity condition, and operating results for the fourth quarter. In addition, we have added two important disclosures for shareholders in our presentation. The first, a presentation on the earnings potential of the company based on certain assumptions around leverage and returns, and the second, a list of the REOs the company currently has, along with our strategy for each. And, of course, we look forward to your questions at the end of our prepared remarks. In the fourth quarter, we continue to grow and manage the loan portfolio. We closed two equity investments in real estate. We closed the company's 11th CLO, which will reduce its cost of capital and extend duration of the financing, all while continuing to offer our sponsors outstanding service. The Acres Origination Team delivered $447 million of new loan commitments in the quarter. This brings loan production volume for 2021 to approximately $1.5 billion, a record year for the company. Additionally, the team completed $29 million of initial equity investments on two properties in the Northeast region in the quarter, which we expect will deliver capital gains in future years. These results reflect the efforts of the entire Acres team in identifying, processing, and executing on opportunities nationwide with our unique financing solutions and target asset classes. From a capitalization standpoint, the company successfully executed its second managed CLO of 2021, bringing its total loan financing capacity to over $1.5 billion from the two CLOs. Additionally, after December 31st, 2021, the company repurchased a portion of its convertible senior notes and executed the optional redemption of the senior notes of the 2020 RSO 9 CLO. Portfolio quality remains high and is improving. The watch list loans comprising those risk-rated A4 or A5 reflect 8% of the total commercial real estate loan portfolio as of December 31st as compared to 10% as of September 30th and 23% when Acres took over the REIT in July 2020. We expect to continue expanding the commercial real estate loan portfolio in 2022 in order to continue delivering on our strategic initiatives to maximize earnings and build book value for the company's shareholders. Returning to loan production, we closed 15 commercial real estate whole loans for $447 million during the fourth quarter. These loans pay coupon interest at the one month benchmark rates, which comprise LIBOR and SOFR, plus a weighted average spread of 3.53%. Each loan originated this quarter carries benchmark rate floor protection, which has a weighted average of 10 basis points. Approximately $375 million or 84% of the originated loans in the fourth quarter are collateralized by multifamily properties. while the remainder are collateralized by office, self-storage, and hotel properties. These loans had a total weighted average LTV of 72% based on the underlying property valuations available at the time of each loan's origination. The company received sale, payoff, and pay down proceeds of $363 million from the sale of one loan and full or partial repayment of 15 loans during the fourth quarter. Total sale, payoff, and pay down proceeds in 2021 or $1 billion. For both the quarter and the year, loan originations exceeded proceeds received, producing net portfolio growth. We believe that the borrower's ability to refinance or sell indicates the quality of the sponsors and assets underlying the portfolio, along with improved market conditions for refinancing or sales activities. During the quarter, the company made initial investments totaling $29 million to acquire two commercial real estate properties. The investments included a 99,000-square-foot Class A office building, which is expected to be redeveloped into life science and lab space, and a 12-acre parcel of land, which was preliminarily approved for development into a 300-unit multifamily building. Each property is located in the northeast region of the United States. We believe that these properties will generate untaxed capital gains in the future through the use of the company's tax-loss carry-forwards and create returns that can be reinvested into the loan origination pipeline when realized. Looking ahead, we expect to target asset classes nationwide consistent with the company's origination history in the loan pipeline, 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 benchmark 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. In December, the company executed its second managed CLO of 2021. The transaction can finance up to $700 million of commercial real estate loans with the $567 million of non-request floating rate notes issued at an average cost of 180 basis points over one month LIBOR. Approximately $518 million of commercial real estate loans collateralized the CLO at closing. In accordance with the terms of the transaction, the company may ramp up the CLO with the $181 million of unused proceeds within 180 days of closing, subject to the acquired loan satisfying certain eligibility criteria. As of February 28th, approximately $181 million of the proceeds have been utilized to acquire additional collateral. In total, the two managed CLOs executed in 2021 give the company the ability to finance over $1.5 billion of commercial real estate loans using $1.2 billion of non-recourse floating rate notes at an average cost of 163 basis points over one month LIBOR. Additionally, each of the 2021 CLOs contain a 24-month reinvestment period commencing on respective closing date of each CLO. That is, the company may reinvest principal proceeds received on its collateral to acquire additional commercial real estate loans or participations in commercial real estate loans that satisfy certain eligibility criteria. Our intent is to use the reinvestment proceeds available to invest proceeds from the CLOs to finance the company's growing commercial real estate loan pipeline. In February, the company repurchased $39.8 million of principal of the 4.5% convertible senior notes and redeemed the remaining $69 million of principal of the senior notes of the 2020 RSO 9 CLO. 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 94 individual investments, of which only three comprising 2% of the portfolio were delinquent and one comprising less than 1% of the portfolio were performing in accordance with a forbearance agreement. At the time of our acquisition of the company, it had 23 watch list loans representing 23% of the portfolio. As of December 31st, the number of watch list loans has reduced to 10, representing 8% of the portfolio. In January, the company received payoff proceeds on two watch list loans which comprised 1% of the portfolio at December 31st and included the remaining legacy CRE loan. We believe that the company has a well-diversified nationwide portfolio with 66% of the loans concentrated 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 is particularly durable and represents 70% 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 at attractive returns. In summary, the ACRES team is pleased with the growth and quality of the investment portfolio, including investments in real estate, along with the improved balance sheet profile and the prospects for new originations and capital appreciation 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's shareholders. We will now have ACR's CFO, Dave Bryant, discuss the financial statements and the operating results during the fourth quarter.
spk03: Thank you, and good afternoon. Gap net income allocable to common shares in the fourth quarter was $7.3 million, or 76 cents per share. Compared to a gap net loss of $9.8 million, or $1.03 per share in the third quarter. In the fourth quarter, we recorded a reversal of the CECL provision for credit losses, 5.8 million, or 61 cents per share, compared to a 537,000 increase in the CECL provision in the third quarter. The fourth quarter CECL reserve reversal was primarily due to continued improvements in property-level operations of the underlying loan collateral, improvements in macroeconomic conditions, and decreases in reserves on individually-invaluated loans. Additionally, the company recorded $4.2 million of charge-offs against the CECL Reserve from three loans that settled during the quarter or after quarter end. The impact of the CECL estimate and the charge-offs resulted in a total allowance for credit losses at December 31st of $8.8 million, which now represents 0.46% of the $1.9 billion loan portfolio at par. Net interest income was $11.9 million, or $1.25 per share, in the fourth quarter, up from $9.5 million, or 99 cents per share, in the third quarter. The fourth quarter results included $2.2 million of loan minimum interest payments, an increase of $1.5 million over the third quarter. The fourth quarter results also reflect $1.1 million of deferred fee income accelerated due to the increased loan payoffs, an increase of $849,000 over the third quarter. These increases helped offset the impact of loan payoffs that carried higher coupons compared with rates on new loan originations. The weighted average spread of floating rate loans in the company's $1.9 billion commercial real estate loan portfolio compressed slightly to 3.67%, over the one-month benchmark rates, all but one of which had a floor with a weighted average of 75 basis points at December 31st. Since December 31st, 2020, the weighted average benchmark rate floor has declined from 1.88 percent to 0.75 percent or by 113 basis points as the loan portfolio mix has shifted to be predominantly made up of loans with lower floors, as recent loan originations with lower floors have replaced older loans with higher floors that have since paid off. However, with one-third of loans benchmarked to rates with floors in excess of 1%, the company continues to receive some asset yield protection in the current rate environment. If financing rates were increased compared to the conditions at December 31st, net interest margin would be negatively impacted. We expect that as the loan portfolio mix continues to shift toward lower floors, the direct relationship between rising rates and positive net interest margin sensitivity will return by late 2022 into early 2023. Gap book value per share, which is calculated over vested common shares outstanding, including warrants, increased to $23.87 at December 31st, 2021, from $22.68 at September 30th, 2021, a 5% increase, and from $20.57 at December 31st, 2020, a 16% increase. The increase to book value per share for the fourth quarter was driven primarily by 79 cents of GAAP net income per share and 27 cents of per share accretion from common stock repurchases. The company's board reauthorized a share repurchase program and approved repurchase of an additional $20 million. Combined with the previously utilized allotment, the company has been authorized to repurchase $40 million since its acquisition by Acres. In the fourth quarter, the company repurchased 275,000 shares for $3.7 million, which represented a 56% discount to book value at December 31. The gap debt-to-equity leverage ratio increased from 3.6 times at September 30 to 4.0 times at December 31st. The recourse debt leverage ratio decreased from 1.4 times at September 30th to .8 times at December 31st. The increase to the leverage ratio and the decrease to the recourse debt leverage ratio were primarily due to the close of the new CLO in December, which increased non-recourse debt through the issuance of notes while simultaneously decreasing recourse debt from the pay down of CRE warehouse financing. The company had approximately $929 million of combined availability on its CRE term warehouse facilities and senior secured financing facility and $75 million of availability on its 12% senior unsecured notes. Available liquidity at the end of February was approximately $178 million, including approximately $78 million of unrestricted cash, $65 million of projected financing available on unlevered assets, and $75 million of availability on the 12% senior unsecured notes. These components were offset by a working capital reserve target of $40 million. Looking ahead, we currently project that the company will incur gap losses of between 30 and 45 cents per share for the year ended December 31, 2022. This projected loss is primarily caused by depreciation and amortization related to the company's investments in commercial real estate properties. which came through debt converted to equity and through direct acquisitions. We expect the majority of the gap loss to be incurred in the first quarter of 2022, and that the company's earnings will begin to grow and stabilize in subsequent quarters. The first quarter projection includes non-recurring charges of approximately $500,000 related to the retirement of convertible note debt, and approximately $900,000 for charges related to the termination of CLOs and a recurring charge of $1.5 million for real estate depreciation. In addition, loans that are expected to pay off in the first quarter of 2022 had rate floors of 1.9%, contrasted with newly originated loans that had rate floors of 10 basis points. Because we do not expect meaningful net loan growth in the first quarter, this rate pressure is expected to reduce our net interest margin by approximately 500,000 in the first quarter of 2022. New loan production is expected to improve in the second quarter and in the back half of the year. This expected loan production, together with anticipated base rate growth, will mitigate this rate pressure and begin to result in positive earnings growth. The company continues to see growth in its loan origination pipeline, producing quality assets. Together with the continued improvement in the credit quality of the legacy portfolio, this has led to a reduction in the company's loan loss reserve. With the additional financing capacity provided by the close of the new CLO, we expect the company's net loan growth to continue for 2022. We will also selectively seek additional equity investments in real estate in order to maximize the utilization of the company's tax loss carry-forwards, thereby growing earnings and book value in future quarters and years. Now I will turn the call to Andrew Francis for closing remarks.
spk06: Thank you, David. As Mark discussed, we're proud to have achieved a record-setting year for the loan originations at ACR in our first full year as manager of the company. Equally as important, the asset management team has done exceptional work to address the credit issues, and the company has now a high-quality book. Additionally, the capital transactions that were closed during the year give the company the capacity to continue to build on the success and take advantage of the attractive financing rates in the years to come. Our mission is to deliver shareholders' value over the long term. We are focused on maximizing earnings, investing in high-quality assets, and strategically returning to capital through share purchases and dividends over time. This concludes our opening remarks. I'll now turn the call back over to the operator and look forward to everyone's questions. Thank you.
spk01: Thank you. At this time, we'll be conducting a question-and-answer session. If you would 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 Steve Delaney with JMP. Please proceed with your question.
spk05: Thanks. Good evening, everyone, and thank you for taking my questions. I'd like to probably also, the deck is great, and especially the new pages, 26 and 27. My first question is on 26, and Mark, the maximum portfolio size, you ended the year at $1.9 billion. So if we take the midpoint there at 2.3, we'll call it $400,000. Can you achieve that growth with your existing capital structure? I realize you'll need financing, you know, but do you have the capital base to achieve, say, that midpoint 400,000 of loan growth to push the portfolio up to 2.3 by the end of this year, 2022? Thanks. Yes, Steve.
spk07: Thanks for the question. Yes, we do have the capital base to grow the portfolio to that level. between cash on hand and our financing sources.
spk05: Okay, good. Okay, got it. So the other question I had would be the CLO market. Your timing of your executions was excellent, and I'm sure you've noticed a little weakness there. If CLOs, let's just say worst case with everything going on in the world, let's just say the CLOs you looked at where it just kind of locks up a little bit, would you return to commercial bank financing? And I guess if you do, is there non-mark-to-market, other than for credit, true credit, available from the banks for financing lines? And if not that, I mean, is there even the thought of at some point you're back to the old school A-note concept where you don't really worry about borrowing money?
spk07: Yeah, a couple of points on that. As we alluded to in our remarks, we have 24-month reinvestment periods in our two CLOs. Sure. There's great opportunity to, as loans pay off, to reinvest those proceeds back into new loans. We do have, obviously, a lot of capacity available on our lines, but outside of that, at this juncture, I can't point to any other non-market-to-market situations which we could access, but we do have the line capacity and the revolvers. Right.
spk05: And as you look at the CLO market today, if you had ample collateral and you just called an old CLO, do you feel the CLO market is viable for new issuance? It would just be maybe at a compressed rate? return on equity compared to the deals you did in 2021?
spk07: I think it's viable. I mean, the spreads have widened overall a little bit, but it's certainly viable. And, you know, as you know, over the course of time, the CLO market changes and you can't really time the market. And if you're a serial issuer, sometimes it's good, sometimes it's bad. And You just have to use that market while it's available to finance your business.
spk04: I hope it will average out over time. Thank you very much for your comments. Thank you.
spk01: 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 hold for more questions. The next question comes from the line of Fred Betts with Private Investor. Please proceed with your question.
spk00: Yes. I was just wondering, does the company have a plan for the reinstatement of the common dividend?
spk06: Thank you, Fred. This is Andrew Fentress answering your question. Currently, the company does not have a plan to reinstate the common dividend. As we stated in our remarks, and hopefully as you'll be able to see from the shareholder presentation, which was posted to the website this evening, that the capital that the company would otherwise pay a dividend with is being retained inside of the business and being used to grow book value. So as a shareholder, you're receiving the benefit of that capital. You're just receiving it in stock appreciation versus the receipt of a cash dividend. Does that answer your question?
spk00: Yes. And I have a second question. The book value, like you said, was like $23. And yet the share price is so low. Now, I'm not an accountant or anything. But is there a reason for that? You know, the company sounds like it's doing well. but yet the share price seems to have been going down the past few months. Can you give me an answer for why that's probably happening?
spk06: Fred, I'm not going to speculate on why the market has a disconnect between the share price and the book value, but what I will say is that the company's actions of repurchasing shares, the company has an authorized repurchase program and has been actively in that plan to repurchase shares should tell you hopefully what you need to know about what the company thinks about the share price at these levels.
spk00: Oh, I think it's great that you're buying it back, that's for sure. But I don't know. Like I said, I'm not an accountant or an expert in this, but I was just always wondering why if the common book is $23, that the price was so low, the daily price. But I know people have their reasons, I'm sure. Okay, thank you very much. I appreciate it.
spk01: You're welcome. 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.
spk06: Thank you, everyone, for joining our call. As always, we look forward to any follow-up questions you have and to speaking with you again at the end of the next quarter. Thanks, everyone.
spk01: This concludes today's conference. You may disconnect your lines at this time. Thank you all for your participation.
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