ACRES Commercial Realty Corp.

Ladies and gentlemen, and welcome to the third quarter 2023 Acres Commercial Realty Carp 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, Jacqueline Jesberger, Chief Legal Officer. You may begin.

Good morning, and thank you for joining our call. I would like to highlight that we have posted the third quarter 2023 earnings presentation to our website. This presentation contains summary and detailed information about the quarterly results of the company. 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 these 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, and 10-K, and, in particular, the Risk Factors section of its Form 10-K. 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 Fogel, 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 morning, everyone, and thank you for joining our call. Today I will provide an overview of our loan originations real estate investments and the health of the investment portfolio. While Dave Bryant will discuss the financial statements liquidity condition book value and operating results for the third quarter, of course, we look forward to your questions at the end of our prepared remarks. The acres team continues to execute on our business plan by selectively originating high quality investments. actively managing the portfolio, and continuing to focus on growing earnings and book value for our shareholders. And following this business plan, we chose not to originate any new investments in the current quarter. Loan payoffs during the period were $53.4 million, and net funded commitments during the quarter were $8.1 million, producing a net decrease to the portfolio of $45.3 million. The weighted average spread of the floating rate loans in the $1.9 billion commercial real estate loan portfolio is now 3.91% over the one month benchmark rates. We expect to maintain a commercial real estate investment portfolio, including our loan book and real estate properties of $2 billion to $2.3 billion through 2023. The portfolio generally continues to perform, demonstrating sound and consistent underwriting and proactive asset management. The company ended the quarter with $1.9 billion of commercial real estate loans across 75 individual investments. At September 30th, there were eight loans rated 4 or 5, which represented 8.4% of the par value of our portfolio. Five of these loans were also rated 4 or 5 at June 30th. Included in these eight loans were five loans not current on contractual payments, three of which were also not current on contractual payments at June 30th. Additionally, the weighted average risk rating increased from 2.4 at June 30th to 2.6 at September 30th. This increase in weighted average risk rating is attributable to a combination of some properties falling slightly behind on implementing underwritten business plans and or capital market conditions. We continue to manage several investments in real estate that we expect to monetize at gains in the future. These anticipated gains will be offset by NOL carry-forwards, and we expect to retain the equity and reinvest potential gains into our loan portfolio. In summary, the ACRES team is pleased with the 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. This quarter, we released an updated earnings presentation that includes a revamped design expanded financial highlights, along with increased disclosures on CECL and risk ratings. We feel that the new earnings presentation communicates our financial position in a more effective manner. We hope you appreciated this refreshed presentation. We will now have ACR's CFO, Dave Bryan, discuss the financial statements and operating results during the third quarter.

Thank you, and good morning. GAAP net income allocable to common shares in the third quarter was $2.9 million, or $0.33 per share. Included in net income is an increase to CECL reserves of $2 million, or $0.23 per share, as compared to CECL reserves during the second quarter of $2.7 million. CECL reserves this quarter are comprised of only general reserve increases. while the second quarter was comprised of $1.8 million in general reserve increases, plus a charge-off of $948,000 upon taking the deed in lieu of foreclosure on an office property in Chicago. The third quarter increase to general seasonal reserves is primarily driven by modeled increases in general portfolio credit risk. compounded by ongoing uncertainty around the commercial real estate market's current macroeconomic outlook, which has affected our borrower's business plan, execution, and general market liquidity. The total allowance for credit losses on September 30th was $27.6 million, which represents 1.43% or 143 basis points of the $1.9 billion loan portfolio at par and comprised $4.7 million in specific reserves and $22.9 million in general credit reserves. EAD for the third quarter was 73 cents per share, which compared favorably to 60 cents per share in the second quarter. Gap of value per share was $25.07 on September 30th versus $24.50 on June 30th. Available liquidity at September 30th was $104 million which comprised $64 million of unrestricted cash, $5 million of projected financing available on unlevered assets, and $35 million of reinvestment cash available in one CRE securitization. Our gap debt-to-equity leverage ratio remains steady at 3.9 times on September 30th. Our recourse debt leverage ratio also remains steady at 1.2 times on September 30th. Turning to results from real estate investments, Net loss from real estate investments decreased to $400,000 in the third quarter from $1.6 million in the second quarter. This decrease was primarily due to $1 million of property tax arrearages on an asset that we acquired via deed and legal foreclosure in the second quarter. Included in the third quarter property operating loss was approximately $930,000 of non-cash depreciation and amortization. Focusing on G&A, the third quarter expense of $2.2 million versus second quarter expense $2.3 million reflects the low point of seasonality in quarterly G&A. Our annual G&A expense projection remains unchanged. Regarding share repurchases, during the third quarter, we used $727,000 of the share repurchase plan to redeem 83,000 shares at an approximate 65% discount to book value per share on September 30th. There was approximately $4.5 million remaining on the board-approved program at quarter end. We now expect GAAP EPS for calendar year 2023 in a range of $0.25 to $0.55, which largely depends on the size of the CECL loan reserves at year end 2023. With respect to EAD, we expect a range of $0.50 to $0.60 per share in the fourth quarter 2023, which gets us to $2.35 to $2.45 per share for year-end 2023. If paid as a cash dividend, this would represent 9% to 10% of book value at September 30th, approximately in line with our peer group. Now I will turn the call to Andrew Fentress for closing remarks.

Thanks, Dave. Good morning, everybody. Instead of my normal commentary summarizing the quarter, what I'd like to do is just to take a few minutes to focus on the announcement that we made last night as part of our reporting in the AK that David Bryant, who's been the CFO of Acres and its predecessor names, has announced his retirement. He is going to be moving on to take on some more personal initiatives, but we're not going to let him go too easily. We're going to keep him around Acres as best we can. I also want to make sure that we introduce Eldren Blackwell, who's going to be assuming the role of Chief Financial Officer, as was made in the announcement. Eldren, you want to say hi to everybody?

Hello, everyone.

Eldren has worked with Dave for many years, and this will be a very smooth transition, and we're excited about welcoming Eldren to the calls and to the investor group. So I'm going to turn it over to Dave. I know he wanted to say a few things, but Personally, it's been a pleasure working with Dave. All of us here at Acres are going to wish him well in his new initiatives. And I know all the stakeholders, the shareholders, the bondholders, and everybody else along the Acres system appreciate your time and energy as well. Thank you.

Thank you, Andrew. As I near the end of my career here at Acres as a CFO, I wanted to thank the Acres Board and the Acres Capital Partners for Mark and Andrew and Marty for the opportunity to help them implement the strategy to grow book value and provide a good, strong return to the shareholders. I also want to congratulate Eldrin. It's a very deserved promotion for him. He's well-positioned to work as a CFO and to protect the shareholders' interests. And I would also say that the entire Acres team is very knowledgeable and talented in the real estate space, and I truly believe the Acres shareholders' interest will benefit from that knowledge. Thank you, Andrew. And I guess now we will gladly take any questions that you may have regarding our results. Operator?

Thank you. We will now begin the question and answer session. To ask a question, you may press star then 1 on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster.

Our first question comes from Chris Miller with JMP.

Please go ahead.

Hey, guys. I'm on first use today. Thanks for taking the question. So congrats on a nice quarter and a challenging commercial real estate environment. And congrats to Dave on your retirement and welcome to Eldrin. So I wanted to start on some CLOs. So we saw a CLO get done by one of the CM REITs recently. I guess from where you guys sit, how does the CLO market look to you guys? Is a CLO possibility in 2024? And can you just remind me what the remaining reinvestment period is on your current CLOs?

Yeah, hi, it's Andrew. The reinvestment period for FL1 has closed. That occurred in the second quarter. The reinvestment period for FL2 closes at the end of this current quarter. With respect to our plans for an additional CLO, I would say we're ramping our warehouse lines as assets naturally amortize. And we put new names onto the different warehouse lines that we have. And at some point through the natural amortization, as you do the math and the deleveraging process, there becomes a point where you want to call that CLO and print another one. We obviously want to do it to the extent we can so that we're ROE neutral. And we think that to the extent from a timing perspective, that probably puts us at the end of 2024 or earlier if collateral begins to pay faster than what the stated maturity dates are. So I think that's the timeline that we have in our head. We're certainly encouraged by the fact that the market seems to be opening. As you point out, there was a transaction recently completed by one of our peers. And, you know, we're in close touch with the various banks on the street who are, you know, on the front lines of aggregating and issuing. So we're paying close attention to it. But that's our plan in terms of time and how we think about it from an ROE standpoint. Does that answer your question?

Very helpful. Thank you. Then just the other one I have here. So you guys have bought properties in the past to help utilize some of those tax loss carry forwards. Given some of the distress we're seeing in commercial real estate out there, are there opportunities that you guys are either seeing or would be interested in acquiring additional properties? I guess just how are you guys thinking about that?

The short answer is no. We acquired the properties that are in the portfolio very specifically to take advantage of the NOLs that you highlighted. We're now in a place where we believe those assets are going to begin to get monetized and the gains will be utilized through those NOLs to increase book value. And then we'll be deploying additional capital to the extent we get it created through amortization or gains back into the loan book where we are again targeting You know, mid-teens return on equity, I think in the current quarter, we were a little bit better than a 14% ROE. We think if we can deliver those types of returns to our shareholders, we think we're doing a pretty good job.

Yeah, I don't think anyone's going to complain about mid-teens ROEs. I appreciate you guys taking the questions today, and congrats again on our next quarter.

Thank you.

Again, if you have a question, please press star, then one to be joined into the queue. Our next question comes from Donald J. Polliet with Retail. Please go ahead.

Thank you for taking the call. As an investor, I'd like to see some dividends. Could you give some color as to when you might be able to start seeing dividends?

Thank you, Donald, for the question. It's... Our timing on paying dividends is tied to utilizing the net operating loss that we have in the portfolio. You as a shareholder and all the shareholders should recognize that in lieu of actually receiving a cash dividend, the same amount of cash is accruing to increasing book value per share. So you as a shareholder are receiving the same rate of return. You're You're just receiving it in a slightly different form through the increase in book value. But we are mindful that there will come a time when we believe we've gotten book value to the appropriate level, and then that return will be shifted and delivered to the shareholders in the form of a dividend.

Thank you.

As we have no further questions, the conference is now concluded. And thank you for attending today's presentation. You may all now disconnect.