ACRES Commercial Realty Corp.

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.

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.

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.