Q4 2020 Acres Commercial Realty Corp Earnings Call
Thank you good day, ladies and gentlemen, and welcome to the fourth quarter 2020 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 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 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 forward looking statements.
These risks and uncertainties are discussed in the company's reports filed with the SEC, including its reports on form 8-K, 10-Q, 10-K and in particular, the risk factors sections of our form 10-K and form 10-Q.
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 will be discussed on this conference call. Our presentation of this information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with GAAP.
Reconciliations of these non-GAAP financial measures to the most comparable measures prepared in accordance with generally.
Kept it accounting principles are contained in our earnings presentation for the past quarter.
With me on the call today are Mark <unk>, President and CEO and Dave Bryant. Our CFO also available for Q&A is Andrew if interest chairman of acres.
I'll now turn the call over to Mark.
Good afternoon, everyone and thank you for joining our call today I will provide an overview of our strategic initiatives updates on our portfolio and a resumption of originating loans, while day, Brian will discuss our financial statements on operating results for the court for the fourth quarter and of course, we look forward to your questions at the end of our prepared remarks.
<unk>.
I want to begin by highlighting a significant post your event.
As of February 16th Exemptive Capital Corp became acres commercial Realty Corp, and is listed on the New York stock exchange under the symbol ACR.
This was the final step in the strategic transition of examples to the acres network by bringing the platforms together under the acres name.
Discussed previously acres and <unk> complementary platforms will help us to achieve our goal to be an end to end solution for the middle market commercial real estate bar.
Borrowers nationwide and accelerate our loan originations over time.
We marked a significant milestone during the fourth quarter. When we began originating loans again the first since March 2020.
During this time, we closed five commercial real estate whole loans for $83 $4 million significantly two of these loans are refinanced acres capital development loans. These loans were collateralized by a mix of multifamily and selective hospitality properties and were issued relatively inline with the portfolio L. T V.
At 71% and carry a weighted average coupon of one month LIBOR plus 6.19%.
The company ended the quarter with $1 $5 billion and loan assets across 98 individual investments as of January 2021, 98 per cent of the loans were performing well only 2% were delinquent.
Additionally, during the fourth quarter 12 borrowers paid down our fully repaid $160 million of their loans. We continue to believe that the ability of our borrowers to refinance in this uncertain environment speaks to the health and quality of the sponsors on assets underlying our loan portfolio.
Our portfolio is well diversified in terms of both geographic concentration and property type.
Outside of Texas, No state comprises more than 10% of our loans and approximately one third of our portfolio is in the high growth sudden southern region of the United States.
The family, which has been one of the most resilient asset classes during the challenges of the pandemic.
<unk> 56 per cent of the portfolio, while the remainder is split between office hotel self storage and other assets.
As discussed last quarter, we took a deep dive into the entire portfolio and created a specific plan for each asset on our watch list.
We sold our last remaining asset held for sale at a hotel asset in California.
We also received the deed in lieu of foreclosure on a select service hotel valued at approximately $40 million upon acquisition, which was in excess of the loans cost basis. As progress is made on the vaccine rollout we will determine the optimal plan forward with this asset and we will report accordingly.
We have made sequential progress progress regarding our balance sheet and liquidity position at.
At year end, our total leverage ratio was three nine times debt to total equity down from four six times at the end of the third quarter.
In terms of recourse debt leverage was <unk> eight times down from one one times.
As of the end of February acres had $150 million of net liquidity overall working capital reserve target of $40 million to deploy into additional commercial real estate loans and common stock repurchases.
At December 31, 2000, $21 billion of financing capacity comprising three different term warehousing financing facilities are senior secured financing facility and senior unsecured notes was available.
The acres network is now actively originating and underwriting new loan opportunities on <unk>.
Behalf of the company and we are focused on finding the ideal combination of location assets and sponsorship.
As mentioned previously we restarted loan originations in November 2020, closing $83 $4 million on commercial real estate loans.
Building on that momentum during the first quarter of 2021, our originations are already approaching $100 million to date.
As we continue to execute our strategy. We are confident that we will continue to see opportunities to increase originations.
In terms of the market dynamics, there was a fair amount of competition for high quality loans, particularly in sectors that have been more resilient to COVID-19 related challenges.
Such as multifamily and industrial to that point, we have seen moderate spread compression in these types of assets.
But we are also seeing opportunities that offer wider spreads in segments, such as hospitality and office, we will remain selective and focus on credit quality markets on sponsors and believe we will continue to source a mix of attractive opportunities.
As we move through 2021, we are confident about the market to deploy capital using the acres network and the enhanced capitalization.
Our priorities remain on actively managing the loans in our portfolio and continuing to pursue originations with focus on appropriate risk adjusted returns.
Haven't experienced underwriting team in a highly disciplined approach and I am encouraged by our pipeline on our progress closing loans year to date.
In addition, we are exploring the possibility of structuring a CLO in the coming months weighing the opportunity based upon market conditions, we will look forward to reporting to you on our on our activity going forward.
We will now have our CFO day, Brian to discuss our financial statements on operating results during the quarter.
Thank you Mark and good afternoon.
Our fourth quarter results reflect our continued positive progress before discussing the results for the quarter I would like to note that all per share numbers reflect the one for three reverse stock split that took effect on February 16th.
At that time every three issued and outstanding shares of company common stock were converted into one share of company common stock any fractional shares that were created because of the split for a return to shareholders in the form of cash.
Taking effect of the split acres commercial realities diluted weighted average common shares outstanding over the fourth quarter was approximately 11 million shares.
Our GAAP net income allocable to common shares for the three months ended December 31, 2020 was $21 5 million.
For $1 95 per share up from $3 8 million worth 36 cents per share in the prior year fourth quarter.
GAAP net income includes $18 6 million or $1 70, and seasonal reserve recovery.
Positive movement reflects a more constructive outlook on macroeconomic factors as we have seen broader improvements alongside the vaccine rollout.
In addition, it reflects the reversal of a specific reserve related to the hotel asset for which we received the deed in lieu of for closure that Mark discussed.
All other items in our results include a $1 6 million or <unk> 14 per share gain on conversion based on an appraisal related to the same hotel loan.
As well as a 700000 or <unk> <unk> per share loss related to the shale during the quarter of our last remaining asset held for sale a hotel property in Palm Springs, California.
Net interest income was 9 million or <unk> 82 per share for the fourth quarter compared to 11 6 million for a dollar six per share for the third quarter 2020.
The primary drivers of the $2 $6 million decline for the payoffs and Paydowns of commercial real estate loans in the third and fourth quarters as well as the full quarter impact of increased financing costs associated with our mashed mutual senior secured financing facility our senior unsecured.
Our notes and our new CLO issued in September, which we discussed last quarter.
The weighted average spread of the floating rate loans in our $1 5 billion loan portfolio expanded slightly from the third quarter to $3 five 6%.
Over the weighted average one month LIBOR for a 1.88% at quarter end for a gross rate of five for 4%.
These LIBOR floors are in the money on all of our floating rate loans with one month LIBOR at approximately 12 basis points at the end of February.
We expect to continue to see a meaningful benefit to net interest income.
The forward LIBOR curve projects rates to remain low in the near term.
All except two of the company's 98 commercial real estate loans were current on debt service payments through the end of January 2021, including two learned performing in accordance with forbearance agreements.
The implementation of Cecil on loan loss reserves, which applies to all mortgage reach and other financial institutions requires us to estimate expected credit losses over the life of our loans and.
In determining our expected credit losses, we evaluate by property and by loan type available relevant historical and current loan loss data as well as future macroeconomic expectations provided by independent economic experts.
The impact of seasonal resulted in a total allowance for credit losses at December 31 of $34 3 million or approximately two 2% on our $1 5 billion loan portfolio.
This represents an $18 6 million reduction from our allowance for credit losses at September 30th.
GAAP book value per share calculated over vested common shares outstanding including wants rose to $20 57 <unk>.
At December 31, 2020 from $18 <unk> at September 30th 2020.
The increase to book value per share was driven by $2. Two <unk> of net income during the quarter, along with 41 cents related to share repurchases that were completed in the quarter.
Note that the difference between the $2.02 of net income contribution to book value and the dollar 95 of GAAP GAAP net income in the fourth quarter relates to the share count.
And utilizing average shares for the income statement and shares outstanding at quarter end for book value purposes.
During the fourth quarter acres, we purchased 535000 shares for $5 4 million in.
In 2021 through the end of February we have purchased 565000 shares representing $6 $9 million.
These purchases in the aggregate were at an average price of approximately $11 per share.
The company has board authorization to repurchase up to $20 million of current outstanding shares through June 2021.
Our GAAP debt to equity leverage ratio decreased to three nine times at December 31.
From four six times at September 30.
As a result of the new financing commitments and debt refinance during the year. The company had $1 billion of availability on its CRE term warehouse and senior secured financing facilities and senior unsecured notes aggregated as of the end of December at the edge.
End of February the company's available liquidity was approximately $150 million, including 37 million of unrestricted cash.
$78 million of projected financing available on Unlevered assets.
$75 million of availability on our senior unsecured notes.
These components were offset by our working capital reserve target of $40 million.
With an enhanced financial profile, including improved liquidity and reduced recourse leverage and margin call risk along with the recommencement of originations and a robust pipeline. We look forward to updating you on originations over the course of 2021.
This concludes our opening remarks, and I will now turn the call back to the operator for questions.
Operator.
Thank you at this time, we'll be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May Press Star two if you would like to remove your question from the queue for participants using speaker equipment.
It may be necessary to pick up your handset before pressing the star keys, one moment, please while we poll for questions.
Yes.
Yes.
Our first question comes from the line of Stephen Laws with Raymond James. Please proceed with your question.
Hi, good afternoon.
Congratulations on a non eventful year and certainly the rebranding on that you guys are excited about continue to.
Put your put your fingerprints on it so but that said you know as we look at the loan pipeline our origination pace as he mentioned on this $100 million I think since year end, how does that compare to repayments and what type of.
Net portfolio growth should we expect to see this year.
Hi, Steve its Mark how are you.
Got it.
I would expect you know given you know where market conditions are today that our origination.
<unk> pipeline remains strong.
You know I think with regard to payoffs as we mentioned in the call we had about $160 million of payoffs on the quarter.
And dependent on market conditions, I would expect that payoffs would remain in that sort of range on a quarterly basis going forward.
As far as originations go.
We have about $1 billion plus.
Plus or minus on capacity and so long as market conditions are strong I would expect that.
We're going to be extremely active on the origination front and tried to sort of maximize our returns through the origination.
Great. Thanks for that color when you look at.
You know the the unsecured notes the 12%.
Notes can you talk about the options there around refinancing those are replacing those is that a 'twenty 'twenty two event or what are the prepayment terms around that.
Hi, Steve This is Andrew for interest we have.
A non call through the end of July of 2021.
And then there are some declining prepayment penalties after that day and so I think as we approach the back half of the year, we will begin to evaluate options and overall cost to capital analysis on that topic.
Great.
Hello, Darin and last question for now.
On the the deed in lieu assets of hotels can you talk about the timeline what the options are from here and kind of how you guys will go through that process of evaluating.
The best solution there.
Yeah. You know this is an asset that we really like it.
It was a strong performing hotel pre COVID-19.
And we didn't see any sense in trying to sell the property in the market today hotel assets are not trading very well as you probably would expect.
So we feel like given the fact that we have a good projection on strong net operating income in 2021 and going forward that we're going to hold the assets for at least the next six to 12 months evaluate options as the market changes and continually.
Seek out potential buyers of the properties.
Great I appreciate the comments this evening.
Thank you.
As a reminder, if you'd like to ask a question. Please press star one on your telephone keypad as a reminder, if you'd like to ask a question. Please press star one on your telephone keypad one moment. Please while we poll for more questions.
Your next question comes from the line of Steve Delaney with JMP Securities. Please proceed with your question. Thanks, Good evening, everyone and thank you for taking the question.
While you guys have been busy for sure.
And I Hope you also well doing well.
So.
The buybacks are.
So rational and and and obviously you know on.
I look at the 41 cent book value accretion.
And I applaud that when do you think about it relative to book value or anything else I mean, it for that.
Just the absolute amount of 41 cents far exceeds any dividend you may have elected to pay so I think shareholders should look at that you know kind of kind of as it is.
A large dividend in some ways.
That said I'm looking at the buybacks and it looks like you bought the shares back at about $10 average and <unk>, that's now up to 12.
Stocks close enough bits and spitting range of $14. So.
Getting towards sort of like a 70% price to book just curious.
You've got plenty of authorization, where is sort of a level, where you would look at that and say you know whether it's 80 per cent of book or 85 or is there some level, where you would simply say we will put this money into our loan portfolio, we will consider a cash dividend on an as an alternative to return capital.
Yep.
Great run and I guess the question is how much longer should we expect if the stock continues to move debt buybacks would be a big part of the capital allocation each quarter. Thanks.
Yeah, Hey, it's Andrew if interest thanks for the question, Steve Hi, Andrew.
We.
We obviously I think like a lot of people when we saw it at 30% to 40% of book value.
Very clear I think as we approached 75 or 80, if we get to that level. It will begin to to evaluated from that point forward and understand whether or not it makes sense like you say to allocate those dollars to new origination and drive an ROE that would be in excess of what we expect to return on a buyback there.
Great. Thank you I appreciate that.
And Mark the.
Great debt lending is kicking up I think that's your your natural business and where you want to be.
Help us understand the.
We looked at Europe, we've looked at your historical pipeline, Stephen who was just stay on the line and I know we've been on earnings calls for two or three.
Three weeks.
And we see L plus.
300, we see L. Plus 350, maybe we see an L plus 400.
What would you say I guess the relationship with the borrower the level of transitional you mentioned coming.
Loans coming off development. So I assume there just early in lease up and so the real question is getting.
Getting a 600 spread.
In a 75 basis point for you know what.
Are the factors that allow you to obtain.
Obtain that type of pricing visa would be what we would normally see in middle market bridge loans. Thanks.
Yes, that's a good question Steve.
Yeah, I would say that youll still see several of those types of loans that you see in every day bridge lending the L plus 300 for $3 $50 for hundreds right.
But what we have on when I talked about it coming out of development and we've talked about this often is the acres capital side of the business, where we focus.
Quite heavily on ground up construction of multifamily properties in other asset classes and it helps us develop a relationship with the borrowers.
That eventually leads to providing them a stabilizing bridge loan once construction is complete and I think it allows us to.
Capture a little bit better interest rate because of the fact that it's this one stop shop solution without any sort of friction costs associated with going back to market for new loans. So I think that that helps.
On on driving some.
Some.
A sizable size interest rates that you might not otherwise see on these types of assets and it also allows our portfolio to grow with you now.
But all of the class a assets I mean, everything coming out of the development pipeline is a class a asset so it really improves our portfolio from.
Our property standard perspective.
Great point.
Well strategically located I'm sure for new construction and you know full amenities etcetera etcetera. It makes a lot of sense and I guess from your borrowers for perspective. Since this is a relationship business, while while he he or she or whoever's paying seven per cent.
I suspect that's a roll down from what the construction development and construction loan coupons work am I correct.
That's right.
Coupons in construction.
Certainly in excess of that.
Depending on you know how you leverage that the deals, but you know the construction market for middle market.
<unk> is still not really bounce back all that much. So we have a lot of opportunity there and certainly we're getting good yield.
You know certainly our borrowers like to see that dropdown in rate on the on the REIT side as we bring it in share.
Sure. It makes sense one final quick thing if I made for day, Brian Dave You reported your book value on a GAAP basis in 2057 in the past.
Exantus in the past before the management change it also used in economic book value figure.
Which was not that are materially.
Different but are we now the fact that you didn't mention economics should we assume that going forward. It will be a GAAP book value figure.
Simply put yes, Steve.
People, who believe in the GAAP number and that's what we'll use.
Alright, and then on the initial.
The initial born.
Got you a pre massmutual warrants, we were getting dilution warrant on the Penny warrants, we were getting dilution of about 4% from reported book value at a sub seven third.
September 30, if I applied that same 4% discount yeah, I'd get a car like a warrant diluted book value figure of about 1975 on.
On know whether you all internally, whether you run that calculation or you have that figure in your mind, but this is my logic and going applying the warrant.
It doesn't Steve I'll say I'll tell you why the warrants are anr denominator for GAAP shallow.
They've already been Oh I see.
Thank you okay. Because we have of course seen were affected by the one for three split as well.
Okay, great. So when you calculated the 2057, you had the $1 4 million a pre split.
That's our warrants in there. Thank you day for clarifying that and I appreciate everybody's comments snacks.
Thanks, Dave.
Yeah.
Ladies and gentlemen, we have reached the end of the question and answer session and I would like to turn the call back to Mr. Andrew Fentress for closing remarks.
Thank you everyone for joining the call. We appreciate your interest and time and look forward to speaking to you again after our first quarter results in may of this year.
Have a good evening everyone.
This does conclude today's conference you may disconnect. Your lines at this time. Thank you for your participation.
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