ACRES Commercial Realty Corp.

Thank you. Good day, ladies and gentlemen, and welcome to the first quarter 2025 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 touchtone phone. As a reminder, this call is being recorded. I would now like to introduce your host for today's conference, Kyle Brinjal, Vice President, Operations. You may go ahead.

Good morning, and thank you for joining our call. I would like to highlight that we have posted the first quarter 2025 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 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. 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 Eldren Blackwell, ACR 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 operations, real estate investments, and the health of the investment portfolio, while Elder and Blackwell will discuss the financial statements, liquidity condition, book value, and operating results for the first quarter of 2025. 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 developing a pipeline of high-quality investments, actively managing the portfolio, and focusing on growing earnings and book value for our shareholders. Loan payoffs during the period were $115.9 million. We closed one new commitment of $15 million and funded existing loan commitments during the quarter of $12 million, producing a net reduction of the loan portfolio of $109.6 million. In addition, we sold two loans during the period, including a loan reported as held for sale at December 31, 2024, for $31.7 million in proceeds. The weighted average spread of the floating rate loans in our $1.4 billion commercial real estate loan portfolio is now 3.67% over one-month term SOFR rates. The portfolio generally continues to perform, demonstrating sound and consistent underwriting and proactive asset management. Company ended the quarter with $1.4 billion of commercial real estate loans across 48 individual investments. Our weighted average risk rating was 2.9 at the end of both Q1 2025 and Q4 2024, and the number of loans rated four or five decreased by one from 12 at the end of last year to 11 at the end of this quarter. In March, we sold a $20.6 million loan at par on an underperforming self-storage facility in Miami that had a poor risk rating. This quarter, we also had a charge-off to EAD of $700,000, or 10 cents per share, related to a loan we sold on an underperforming hotel in Orlando that was reported as held for sale at December 31st. 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 deferred tax assets. We will provide updates in future quarters on the monetization of these assets. As we exit our real estate investments and the loan portfolio continues to amortize, we expect to read up the capital into attractive CRE loans. As always, we will seek to optimize our portfolio leverage in order to drive equity returns. During the quarter, we closed a new $940 million financing facility with J.P. Morgan. The facility includes a two-year reinvestment period that will provide for reinvestment of principal proceeds from asset repayments into qualifying replacement assets. The facility allowed us to refinance collateral from our two 2021 CRE securitizations to pay off a majority of the balances on our warehouse lines. As a result of the financing, we incurred a non-recurring charge of $1.5 million, or 20 cents per share, related to unamortized debt issuance costs at the two CRE securitizations. In summary, the ACRES 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 new investments to enhance shareholder value. We will now have ACR CFO, Eldren Blackwell, discuss the financial statements and operating results during the quarter.

Thank you, and good morning, everyone. Gap net loss allocable to common shares in the first quarter was $5.9 million or 80 cents per share diluted. Gap net loss for the quarter included $5.6 million in net interest income and net loss on real estate operations of $2 million which included depreciation of $1 million. We saw a decrease in current expected credit losses or seasonal reserves of $1.7 million or 23 cents per share as compared to a decrease in CECL reserves during the fourth quarter of $1.2 million. The first quarter 2025 reversal in CECL of $1.7 million was primarily driven by loan payoffs. The total allowance for credit losses at March 31st was $31.1 million and represented 2.26% or 226 basis points on our $1.4 billion loan portfolio at par and comprised $4.7 million in specific reserves, and $26.4 million in general reserves. Earnings available for distribution, or EAD for the quarter, 2020 for the first quarter of 2025 was a loss of $0.86 per share as compared to earnings of $0.48 per share for the fourth quarter. Quarter over quarter, EAD saw a $0.41 decrease in net interest income, a $0.10 decrease from the realized loss on a loan held for sale, and a $0.09 decrease from real estate operations. The decreases in net interest income were driven by loan payoffs, SOFR declines, and the aforementioned DDI accelerations related to the refinancing of our two CRE securitizations. The decreases in real estate operations are primarily due to seasonality in operation. Gap book value per share was $28.50 on March 31st versus $28.87 on December 31st. Additionally, during the quarter, we used $4.4 million to repurchase 220,000 common shares at an approximate 30% discounted book value on March 31st. There were approximately $426,000 remaining on the board-approved program at quarter end. Available liquidity at March 31st was $87 million, which comprised $66 million of unrestricted cash and $21 million of projected financing available on unlevered assets. Our gap debt to equity leverage ratio slightly decreased to 2.9 times at March 31st from three times at December 31st, primarily resulting from loan payoffs. And our recourse debt leverage ratio increased to 2.9 times at March 31st from 1.1 times at December 31st, primarily as a result of the liquidation of our two CRE securitizations and the closing of our new financing facility. At the end of Q1, the company's net operating loss carry forwards worth $32.1 million or approximately $4.44 per share. And with that, I will now turn the call to Andrew Fentress for closing remarks.

Thank you, Eldren. As previously discussed, the small portfolio size, seasonal expenses, one-time DDI charges related to the recent refinancing of FL1, FL2 securitizations, and seasonally slow hospitality drove negative performance in the quarter. We expect Q1 to represent a trough on the portfolio side. Our plan is to utilize capital from recent low repayments, proceeds from asset sales, and available liquidity from our lending partners to ramp up securitization in the second half of the year. The investment landscape is attractive. We're actively closing new loans across the Acres platform. As has been the foundation of our philosophy, credit quality of the current portfolio remains strong, and we continue to monitor each of the names for any changes to our underwriting. We look forward to your questions and speaking with you over the coming weeks. This concludes our opening remarks. I'll now turn the call back over to the operator for questions.

Thank you. At this time, if you would like to ask a question, please press star 1 on your telephone keypad. You may remove yourself from the queue at any time by pressing star 2. Once again, that is star one to ask a question. We'll pause for just a moment to allow questions to queue. Thank you. Our first question will come from Matthew Erdner with Jones Trading. Your line is open.

Hey, good morning, guys. Thanks for taking the question. Could you talk a little bit about more of the portfolio and the payoffs that occurred during the quarter? You know, were those expected to come through or were some of them early?

Hey, Matt, this is Mark. No, those were expected to come through. We had five loan payoffs, four through refinancing into permanent vehicles. One of them was an asset that was sold. And then, as we indicated, we had one note that we sold, actually two notes that we sold during the quarter, and that really represents the entire amount of the payoffs. But none were not expected.

Got it. And then as kind of a follow-up to that, fully extended, it looks like there's 101 million for the remainder of the year. Should we expect a little more kind of maybe towards the back half, some early payments, I guess, so to speak? And then as that occurs, what should we expect in terms of portfolio growth? Because spreads kind of tighten there in terms of you know, I guess multifamily lending, you know, so I guess what are the opportunities you guys are seeing now and just kind of talk about where you'd like to see the portfolio to get that securitization off?

Yeah, great question. Look, I think payoffs are good. It shows that we have a healthy portfolio and we do expect that there will be more payoffs throughout the year through refinancings or sales of assets. You know, the multifamily market is very healthy. And I think because of that, you're going to see sales and refinancings across the board with all lenders. We expect to grow the portfolio, though, despite the payoffs. As I indicated last quarter, our expectation is that through the end of the year, we'll have net growth in the portfolio somewhere between 300 million and 500 million. There's certainly opportunity in multifamily, but we don't limit ourselves to just that asset class. We are looking across the board at assets like student housing, and self-storage and retail, but multifamily will continue to be the bulk of what we do on a go-forward basis.

Got it.

That's helpful.

Thank you, guys.

Thank you. Our next question will come from Chris Muller with Citizens Capital Markets. Your line is open.

Hey, guys. Thanks for taking the questions. So I wanted to start on the loan sales. And I think I heard Mark, I think he said that one of the loans was sold at par. but I didn't catch the other loan. So was that sold below par? And just any details you could give us would be helpful.

Yes. Yes. The one was sold at par during the quarter. The other one was on a non-performing hotel property where we were offered 94 cents on the dollar. We took a $700,000 loss on that asset. And it was, it was, in my view, the right thing to do as opposed to letting the asset continue to not perform within our portfolio.

Got it. It's helpful. And then I guess looking at the income statement, you guys touched on this a little bit in your prepared remarks, but it looks like the real estate expenses jumped and REO was kind of a drag on first quarter earnings. Can you talk us through that dynamic? Is it mostly seasonality or And then just a second part of that question, should we expect to see any REO sales in 2025, or is that looking too far ahead?

Yeah, the drag is in Q1, I think if you went back to last year, you'd see the same dynamic. It's a seasonality issue with respect to the hotels that we own. You'll see, I think, as we go forward in Q2, 3, and 4, that that will flip over to sort of a flat or positive number versus a loss on REO operations. As far as sales of assets go, we are actively in the market with several of our real estate investments. I don't have anything to report right now, but my expectation is that in the next quarter or maybe the following quarter, we will have something more to report.

Got it. Very helpful. If I could just squeeze one more just on your comments for the last question. So I guess with the expectations of $300 million to $500 million of growth in 2025. How's the pipeline looking, and have you seen any impacts on the pipeline given some of the recent market volatility?

No. In fact, the pipeline has been stronger than ever. I think there's a lot of opportunities out there. We are quoting deals more so than ever at this point. I think, in fact, the volatility has caused some of the lenders to move to the sidelines and wait which is pushing a lot more deals our way in the ways of those that are continuing to be active. So we see a lot of really good opportunities, and we are absolutely quoting three to four deals a day, and I expect that growth will not be a problem along the lines of what I mentioned earlier.

That's great to hear. I look forward to seeing the story play out this year, and thanks for taking the question. Thank you.

And once again, as a final reminder, that is star one if you would like to join the queue. We will pause for just a moment. And it appears we have no further questions at this time. I'll now turn the program back over to our presenters for any additional or closing remarks.

Thank you, everyone, for joining our call. We look forward to gathering again in queue two.

Thank you, ladies and gentlemen. This concludes today's event. You may now disconnect.