ACRES Commercial Realty Corp.

Good day, ladies and gentlemen, and welcome to the second quarter 2025 Acres Commercial Reality 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 telephone. As a reminder, this call is being recorded. I would now like to introduce your host for today's conference, Kyle Brangle, Vice President, Operations. You may begin.

Kyle Brangle Good morning and thank you for joining our call. I would like to highlight that we have posted the second quarter 2025 earnings presentation to our website. The 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 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. A 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 Algern Blackwell, ACR CFO. 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 Eldrin Blackwell, our CFO, will discuss the financial statements, liquidity condition, book value, and operating results for the second quarter 2025. Of course, we look forward to your questions at the end of our prepared remarks. The Acres team remains focused on executing on our business strategy by building a pipeline of high-quality investments, actively managing the portfolio, and focusing on growth in both earnings and book value for our shareholders. We closed one new commitment of $72 million with an unfunded commitment of $1.2 million, funded existing loan commitments during the quarter of $7.3 million, offset by loan payoffs and paydowns of $17.6 million, and producing a net increase to the loan portfolio of $60.5 million. The weighted average spread of the floating rate loans in our $1.4 billion commercial real estate loan portfolio is now 3.65% over one-month term SOFR rates. The portfolio generally continues to perform, demonstrating sound and consistent underwriting and proactive asset management. The 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 Q2 2025 and Q1 2025, and the number of loans rated 4 or 5 increased by 2 from 11 at the end of last quarter to 13 at the end of this quarter. 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 redeploy capital into attractive CRE loans. As always, we will seek to optimize our portfolio leverage in order to drive equity returns. 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's CFO, Eldren Blackwell, discuss the financial statements and operating results during the second quarter.

Thank you, and good morning, everyone. Gap net loss allocable to common shares in the second quarter was $732,000, or a loss of 10 cents per share diluted. Gap net loss for the quarter included $8.6 million in net interest income, which was an increase of $3 million over the prior quarter. The increase in net interest income was driven by the lower cost of financing of our new financing facility, which produced savings of approximately $1 million, and the non-recurrence of accelerated deferred financing charges of $1.5 million recognized in the prior quarter related to the liquidation of our prior two securitization vehicles. Met real estate operations improved by $1.9 million over the prior quarter or to a loss of $77,000, which included depreciation of $1.2 million and was largely due to improved operating performance of our owned hotels. We saw a decrease in current expected credit losses or CECL reserves of $780,000 or 11 cents per share as compared to a decrease in CECL reserves during the first quarter of $1.7 million, which was primarily driven by improvements in the model credit risk of our loan portfolio offset by a general worsening in macroeconomic factors during the quarter. The total allowance for credit losses at June 30th was $30.3 million and represented 2.18% or 218 basis points on our $1.4 billion loan portfolio at par. and comprised $4.7 million in specific reserves and $25.6 million in general credit reserves. Earnings available for distribution, or EAD, for the second quarter 2025 was $0.04 per share as compared to a loss of $0.86 per share for the first quarter. Quarter over quarter, EAD saw a $0.40 increase in net interest income, as previously discussed, a $0.26 increase from real estate operations, and a 9 cent increase from the non-recurrence of realized losses recorded in Q1 2025. Gap book value per share was $27.93 on June 30th versus $28.50 on March 31st. Additionally, during the quarter, we used $5.1 million to repurchase 272,000 common shares at an approximate 33% discount to book value on June 30th. There were approximately $5.4 million remaining on the board-approved program at quarter end. Available liquidity at June 30th was $65 million and comprised $43 million of unrestricted cash and $22 million of projected financing available on unlevered assets. Our gap debt-to-equity leverage ratio slightly increased to three times at June 30th from 2.9 times at March 31st. And our recourse debt leverage ratio increased to three times at June 30th from 2.9 times at March 31st, primarily resulting from the financing of our new loan origination. At the end of the second quarter, 2025, the company's net operating loss carry forward was $32.1 million, or approximately $4.45 per share. And with that, I will now turn the call to Andrew Fentress for closing remarks.

Thank you, Aldrin. The second quarter marked a turn as the portfolio increased in size once again. We expect to continue redeploying equity capital from the sale of our investments into new loans. The Acres platform is active in the marketplace and working closely with our sponsors to provide them the value-add capital they need for success. We remain vigilant managing the portfolio and see a stable credit picture. We look forward to your questions and speaking with you over the coming weeks. This concludes our opening remarks, and I'll now turn the call back to the operator for questions.

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 1 to ask a question. We'll take our first question from Matthew Erdner with Jones Trading. Your line is open. Please go ahead.

Hey, good morning, guys. Thanks for taking the question. So could you give a little more context around timing of, you know, what you guys are expecting for payoffs, maybe asset sales the remainder of the year to kind of get that capital redeployed or maybe look to hit the CLO market with, you know, net new originations as you guys, you know, kind of turn that machine on over the next couple of quarters?

Hey, Matt. This is Mark. As I've said in the past couple of quarters, our goal is to grow the portfolio by $300 million to $500 million through the end of the year. So that'll include the payoff. The capital for that will come from the payoffs of loans as well as the sale of some of the REO properties. But we're on target for exactly what we've said for the past couple of quarters, which is the growth of $300 to $500 million.

That's helpful.

Thanks for that. And then, you know, could you talk a little bit about the opportunities that you guys are seeing in the marketplace? We've seen spreads kind of come in on multifamily, you know, over the past quarter or so pretty tightly. You know, so I guess what are you guys seeing out there? And then, you know, any guidance for spreads that you guys are achieving would be great. Thanks.

The market is seeing compressed spreads in certain sectors, particularly Class A multifamily. We are active in that market as well as other markets. We feel like there's enough opportunity for us to create an overall spread that works well for the ROE that we're targeting. We do believe that if we continue to target certain assets that are outside of where all the money is going sporadically, that the target ROE is definitely achievable.

Great. Thank you, guys. And as a reminder, it is star one if you'd like to ask a question.

We'll go next to Chris Muller with Citizens Capital Markets. Your line is open. Please go ahead.

Hey guys, thanks for taking the questions. So I like the slide you guys have in the deck on the potential earnings profile. I guess on the leverage piece of that, how are you guys thinking about leverage in the near term? And can you remind me if the REO has financing against it or if it's unlevered? And I guess what I'm trying to get at is can leverage move higher before that REO gets sold?

Yeah.

Hey, this is Andrew. Appreciate the question. I'll give you a little, little thinking on the leverage point. So we think we can get leverage up to the kind of three and a half, perhaps four turns comfortably using mostly obviously non-recourse series CLO financing. And in doing so, you know, get the book to where it's generating the earnings necessary to hit the numbers that are on the slide that you referenced. So that's the objective, and as Mark talked about adding to the loan book, that's how we get there. With respect to the properties that are being sold, yes, they are currently levered, not inside of the facilities that we have, but at the asset level. So upon the sale, you'll see on our balance sheet they're referenced here. the mortgages, and then as the asset gets sold, obviously the mortgages leave the balance sheet as well.

Got it. So there would be a slight pickup on leverage there, but nothing too dramatic. Are you guys thinking about a CLO in the back half of the year? Is that something you're looking at?

We're definitely going to execute on another one. I don't think we can give you a specific timing if it's Q4, Q1, but that's the zip code.

Got it. And I guess the other question I have, are there any updated thoughts you guys can give on reinstating the dividend? And I know you can't give any specifics on timing and it's a board decision there, but I guess is there anything that we can keep an eye on like REO sales or EAD growth that you would like to accomplish prior to reinstating that dividend?

Yeah, it's really driven by what we just talked about. So first step is monetizing the assets. Second step is getting the portfolio ramps to the target number that Mark described, and then the result of those two exercises will drive EAD to a place where we'll begin to pay it out.

Got it. Thanks for taking my questions.

Thank you. This does conclude today's question and answer session. I will now turn the program back over to Andrew Fentress for any additional or closing remarks.

Thank you, everyone, for joining the call. We greatly appreciate your time. And again, please reach out directly to us if you have any questions. We look forward to speaking with each of you. Have a great rest of the day and a good weekend.

This does conclude today's program. Thank you for your participation. You may disconnect at any time.