ACRES Commercial Realty Corp.

Good day ladies and gentlemen and welcome to the first quarter 2024 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, Cal Brangle. Vice president operations you may begin.

Good morning and thank you for joining our call. I would like to highlight that we have posted the first quarter 2024 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 a forward-looking statement. 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 8K, 10Q and 10K and in particular the risk factor section of its form 10K. 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. Reconciliation of non-GAAP financial measures, 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 Eldren Blackwell, ACR CFO. Also available for Q&A is Andrew Fentris, 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 Eldren Blackwell will discuss the financial statements, liquidity condition, book value and operating results for the first quarter 2024. Of course, we look forward to your questions at the end of our prepared remarks. The ACRS 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. Loan payoffs during the period were $80.8 million and net funded commitments during the quarter were $11.4 million, producing a net decrease to the loan portfolio of $69.4 million. The weighted average spread of the floating rate loans in our $1.8 billion commercial real estate loan portfolio is now .78% over the one month benchmark rates. The portfolio generally continues to perform, demonstrating sound and consistent underwriting and proactive asset management. The company ended the quarter with $1.8 billion of commercial real estate loans across 66 individual investments. At March 31st, there were 11 loans rated 4 or 5, which represented 17% of the par value of our portfolio, an increase of 1% respectively as compared to the end of fourth quarter 2023 and our weighted average risk rating decreased from 2.7 at December 31st to 2.6 at March 31st. We acquired the Deidin-Lua Foreclosure and Office property in Chicago with a basis of $14 million that was valued at $20.3 million upon acquisition. The loan was previously risk rated a 5 in our December 31st financials. We recognized a $5.8 million gain on conversion upon accepting the Deidin-Lua Foreclosure and immediately contributed the asset to a joint venture seeking to maximize its value through a multifamily conversion. 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 in our loan portfolio. In summary, the ACERS team continues to be focused on the overall quality of the investment portfolio including investments in real estate with the goal of improving credit quality and recycling capital into performing categories. We will now have ACERS CFO Eldren Blackwell discuss the financial statements and operating results during the first quarter.

Thank you and good morning everyone. Gap net income allocable to common

shares in the first quarter was $556,000 or $0.07 per share. Included in net income is an increase to current expected credit losses or CESL reserves of $4.9 million or $0.61 per share as compared to CESL reserves during the fourth quarter of $1.1 million. The increase to the general CESL reserves is primarily driven by worsening macroeconomic factors due to higher interest rates lasting longer than expected compounded by an increase in modeled credit risk. The total allowance for credit losses at March 31st was $33.7 million which represents .89% or 189 basis points on our $1.8 million loan portfolio at PAR and comprised $4.7 million in specific reserves and $29 million in general credit reserves. Earnings available for distribution or EAD for the first quarter was $0.16 per share as compared to $0.55 per share for the fourth quarter. The difference being a $0.25 run rate decline in net interest income resulting from net payoffs and to a lesser extent loan modifications that occurred during the quarter and late in the fourth quarter as well as a 16-cent decline in real estate operations due to seasonality. Gap book value per share was $27.25 on March 31st versus $26.65 at December 31st. This increase was primarily due to our buyback program which generated $0.41 of book value per share for the first quarter. During the quarter we used $2.1 million to repurchase 195,000 common shares at an approximate 61% discount to book value on March 31st. In addition, we used $2.2 million to repurchase 100,000 shares of our preferred series D securities at an approximate 14% discount to the state of redemption value of $25. There was approximately $5.6 million remaining on the border proof program at quarter end. Available liquidity at March 31st was $92.1 million which comprised $84.6 million of unrestricted cash and $7.5 million of projective financing available on unlevered assets. Our gap debt to equity leverage ratio slightly decreased to 3.7 times at March 31st from 3.8 times at December 31st. Our recourse debt leverage ratio remained consistent at 1.1 times at both March 31st and December 31st. And with that,

I will now turn the call to Andrew Finchus for closing remarks. Thank you, Eldren.

The first quarter of 24 was a mixed but net positive quarter for ACR shareholders. Our operating metrics at the two hotel properties were slightly below expectations and we don't like to use the word seasonality because we also know that Q1 can typically be a slower part of the calendar but that does in fact drive some of the results. There's been some deleveraging at the portfolio as loans have repaid, driving lower portfolio return on equity. We expect this will continue throughout the balance of the year as both of our CLOs are outside their reinvestment period. While there were some additional CESA reserves booked, they were largely in the macroeconomic category. Credit quality remains high. As you've heard from us in the past, we at ACRs are focused on protecting book value. The book is in good shape. We had a nice win in the Q1 as Mark described, monetizing a Chicago office for a gain. We'll continue to focus on our portfolio in 2024 and monetizing the assets that were required to utilize our NOL. We look forward to the Q&A, discussion, and answering your questions. Operator.

Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press star followed by the one on your touchtone phone. You will hear a three-tone prompt acknowledging your request and your questions will be pulled in the order they are received. Should you wish to decline from the polling process, please press star followed by the two. If you are using a speakerphone, please lift the handset before pressing any keys. Your first question comes from Stephen Laws with Raymond James. Your line is now open.

Hi. Good morning. Appreciate the comments so far and the disclosure and the supplement. One thing I noticed with regards to interest rate caps, they've been providing a lot of protection so far but seems like a lot of them hit maturity or expiration in the next few quarters. Can you talk about your expectations on portfolio performance after those expire? What type of traction you're seeing with the existing sponsors and borrowers as far as new caps and supporting assets and maybe any color on how you expect the cap expiration maturity to play out over the next few quarters?

Stephen, this is Mark. Thank you for the question. Good question. Our asset management team stays very far ahead of these expiring caps. In most cases, those loans that have expiring caps, if they want to extend, they're required to buy a new cap. And many, many months before those extension options can essentially be executed on, our asset management team is working with the sponsors on acquiring new caps and or creating interest reserve deposits in lieu of the caps. So we're very far ahead of it. We haven't had any issues to date and we don't expect to. In that, at least three to six months out, we have a pretty good sense of where we are with respect to those cap executions and interest reserve deposits. Great.

We've spoken over the past quarters. I know the longer-term target once you recycle some of the gains you're able to realize off real estate and to new investments, likely senior loans. Can you talk about the outlook for maybe a return on book or EAD return on book? Do you think 10 percent is achievable? When you think about the long-term earnings power of the company, how do you guys think about quantifying that EAD level?

That is our target. So our objective is to produce EAD that would pay an equivalent 10 percent yield at book value. The timing of the achievement of that outcome will be, as you pointed out, driven by the pace with which we can sell the assets and return the equity back into the loan book and obviously then getting the company or the portfolio levered at the appropriate level as well. So we're addressing both of those real time, some of which, as I pointed out, with respect to the deleveraging is happening as the two CLOs run off and the repayment. That's a deleveraging force. But certainly the objective, and we believe our ability to do it is high, that we're going to be able to deliver EAD at a 10 percent

of book value. Great. And then my last question, the NOLs, some have no expiration, others I think had a five-year life. Can you talk about how you expect the pace of asset sales to play out? What your thoughts are as far as the right time to reinstate the dividend and how you think about returning capital to shareholders between burning off the NOLs or repurchasing stock and then at some point reinstating a dividend?

Sure. We obviously want to be in a place at the end point where the dividend is reinstated and being distributed. In the meantime, we're returning capital to shareholders through stock buybacks that continues to be in place. And we're in the market with that program daily. As it relates to the pace and timing of the sales and then ultimately the amount of NOLs, we're moving forward as we speak on all of the assets. We don't have exact visibility on the timing. The processes are underway. And that ultimately will drive the timing with which we can ramp back to a full dividend. But in the meantime, we continue to return capital to shareholders with the share we purchased. I'll just note that since the Q3 of 2020, when Acres took over as the manager, the book value per share increase has been .4% annualized. So that we think reflects that statement that we are in fact delivering value to shareholders at an attractive annual rate.

Great. Appreciate the comments and appreciate you quantifying that. The buybacks and other actions you've taken have certainly been quite beneficial to book value. So keep up the good work on that. Thanks for your comments this morning.

Thanks, Steve.

Ladies and gentlemen, as a reminder, should you have a question, please press star one. Your next question comes from Chris Mueller with Citizens.

Please go ahead.

So

looking at the

real estate income line, it looks like there was a $1.7 million drop from the fourth quarter in that line. Is that all seasonality there, probably with the hotels mostly, or is there something else behind that decline quarter over quarter?

Hey Chris, this is Eldren. Yes, the majority of that has to do with seasonality of the hotels. We had a little bit of market softening at our HGI hotel in Philadelphia, but other than that, it's seasonality.

Got it. So we should expect that to pick back up in the second and third quarter?

We do. Perfect.

And then I guess with both of the CLOs, the reinvestment period's now expired. Do you think a CLO makes sense at some point, maybe in the back half of this year, or do you think that'll be more a 2025 type of that you'll look at?

Chris, it's Mark. It's hard to say. It's really a function of how much product you can contribute into the CLO. So it's a function of production and obviously where the markets are for CLO execution. So I wouldn't expect anything, obviously, in the first half of this year. I think we'll start to look at it and gauge the market and our book and determine whether or not end of year, first quarter, second quarter of next year makes sense.

Got it. And if I could just squeeze one more in, a quick follow up on Stephen Law's question. So on the pace of timing of these real estate sales, would you guys be more inclined to maybe accelerate that process if you had the opportunity to quickly deploy capital into attractive investments? Or is that more of an independent process of selling those assets?

Yeah, we're not waiting, I guess, is the punchline. We think that the assets are now in a place that they can be monetized and so the processes are underway. And we agree that the opportunity set of the marketplace is attractive and that's driving it as well as our desire to just normalize the operations of the company.

Great. Thanks for taking the question.

There are no further questions at this time. I will now turn the call over to management for closing remarks.

Thank you everyone for attending the first quarter call. We're always available for any follow up questions that people have. We look forward to speaking to you again with our results for the second quarter.

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.