Q1 2021 Acres Commercial Realty Corp Earnings Call

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Good day, ladies and gentlemen, and welcome to the first quarter 2021 acreage 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 will follow at that time.

Anyone requires assistance during the conference. Please press Star then zero on your Touchtone telephone.

As a reminder, this call is being recorded.

I'd now like to introduce your host for today's conference Kyle Greenwald 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 may constitute forward looking statements.

He 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 Companys reports filed with the SEC, including its reports on form 8-K, 10-Q, 10-K and in particular, the risk factors section 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.

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 to 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 accepted 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 as Andrew if interest chairman of acres I will now turn the call over to Marc Good afternoon, everyone and thank you for joining our call today I will provide an overview of our strategic initiatives and updates on our portfolio and loan originations while day, Brian will discuss our financial statements and operating results for the first quarter.

And of course, we look forward to your questions at the end of our prepared remarks.

We are pleased with the ongoing loan origination since we restarted lending late in 2020 as importantly, the portfolio has continued to perform demonstrated demonstrating sound and consistent underwriting and asset management. Our progress is evident in our results as we grew book value per share to $22 27.

As of the end of the first quarter up eight 2% from the end of 2020.

These results reflect our efforts over recent quarters to provide our borrowers with a one stop solution for their borrowing needs. We continue to work as a team to achieve our goal of being an end to end solution from middle market commercial real estate borrowers nationwide.

Additionally, we were active with the authorized share repurchase program during the quarter and repurchased an additional $9 5 million of common stock this quarter.

The company ended the quarter with $1 5 billion in loan assets across 92 individual investments.

As of the end of March all but three of these loans were performing and current on contractual payments.

We believe we have a well diversified portfolio with a presence across the country, but with a concentration in the high growth Southern region of the United States and.

In addition over half the loan book is backed by multifamily assets are particularly durable real estate segment.

We are pleased with our continued low new loan production after restarting lending towards the end of 2020 during.

During the quarter, we closed six commercial real estate whole loans for $144 3 billion.

From $83 million in the fourth quarter all six of these loans were originated with new borrowers.

Of the loans are collateralized by multifamily properties and one is collateralized by a hotel the.

The weighted average coupon on these loans is one month LIBOR with a LIBOR floor of four 4% plus 438% and the LTV is 67%.

Offsetting the new loan production were several paydowns and payoffs and two loan sales.

During the first quarter, we received proceeds of $197 million from the repayment of 16 loans. While these elevated levels of Paydowns resulted in a net negative production for the quarter. We believe the ability to refinance indicates the quality of the sponsors and assets underlying our loan portfolio.

Furthermore included in these Paydowns and payoffs were a few loans that were on our watch list and one preferred equity investment.

Our remaining preferred equity investment paid off in full in April.

As we look ahead, we anticipate that we would continue to see pay downs from the current portfolio offset by continued acceleration of new loan production.

Similar to what we discussed last quarter, there was a fair amount of competition for high quality loans at that point, we have seen moderate spread compression, particularly in our target segment of multifamily, 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 and sponsors to originate new loans for the portfolio.

Furthermore, we believe we offer a unique value proposition for our customers we place a priority on the service and convenience of our products. This includes providing an end to end lending solution from middle market sponsors from construction through stabilization and beyond we are further enhancing our operating platform by expanding the acres origination presence.

In Dallas, Miami, and Los Angeles, all of which are located in regions, where we see continued loan origination activity.

We are encouraged by our pipeline and the loans, we currently have going through our underwriting process.

We continue to maintain a solid balance sheet and liquidity position at the end of the first quarter total leverage ratio was three nine times debt to total equity consistent with the year end level and in terms of recourse debt leverage was one two times up from <unk> eight times due primarily to the increased utilization of term warehouse facilities.

Finance commercial real estate loan originations.

As of the end of April acres had $143 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 the end of the quarter more than $900 million of financing capacity comprising three different term warehousing financing facilities, a senior secured financing facility and our senior unsecured notes was available.

We will now have our CFO day, Brian discusses our financial statements and operating results during the first quarter.

Thank you and good afternoon, our first quarter results reflect our continued positive progress.

I would first like to remind you that we completed a one for three reverse stock split.

The effect on February <unk>.

And all of our results reflect this.

Our GAAP net income allocable to common shares from the three months ended March 31, 2021 was $10 5 million or $1 three per share compared to $21 5 million or $1 95 per share in the fourth quarter. These.

These results reflect the contributions from the new originations late in the fourth quarter and in the first quarter and exit fees from increased payoff activity offset by lower interest as a result of the net payoffs in.

Quarter to quarter change also includes a lower level of seasonal reserve recoveries compared to last quarter.

First quarter GAAP net income includes $5 6 million or <unk> 55 per share and seasonal reserve recoveries. This continued positive movement reflects improved property level operations and the loan portfolio and the pay off of certain loans that had been on our watch list.

Along with a more constructive outlook on macroeconomic factors as we have seen broader improvements alongside the vaccine rollout.

One item I would like to note in our core earnings is a $5 2 million or <unk> 51 per share charge.

Realized loss related to the sales of <unk> MBS.

These securities had been written down to their market values in prior quarters through our income statement and book value as we believed it was probable that day be sold prior to recovery of their bases.

However, since these were unrealized losses, they had been excluded from core earnings.

Now that the sales have occurred the impact is being recognized in core earnings.

There are no longer any see MBS assets with value in the portfolio.

Net interest income was $11 million or $1 eight per share up from $9 million were <unk> 82 per share for the fourth quarter driven by the increases just discussed in addition, first quarter results reflect a full quarter of contribution from the hotel where we receive.

The deed in lieu of foreclosure last quarter.

The hotel operator sourced a short term contract, which is having a positive impact, but we expect it will not have the same level of contribution into the back half of the year.

The weighted average spread of the floating rate loans, and a $1 5 billion loan portfolio expanded again to 367%.

Over the weighted average one month LIBOR floor of 172% at quarter end for a growth rate of five 4%.

These LIBOR floors are in the money.

On all of our floating rate loans with one month LIBOR at approximately 11 basis points at the end of April.

We expect to continue to see a meaningful benefit to net interest income as the forward LIBOR curve projects rates to remain low in the near term.

The implementation of <unk> on loan loss reserves, which applies to all mortgage Reits and other financial institutions.

Acquired us to estimate expected credit losses over the life of our loans.

In determining our expected credit losses, we evaluate by property and 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 March 31, $28 7 million, which now represents less than 2% of our $1 5 billion loan portfolio.

GAAP book value per share calculated over invested common shares outstanding including warrants rose to 20 to 20.

Two seven at March 31st 2021 free.

$20 57 at December 31, 2020, the increase to book value per share was driven by $1 <unk> of net income during the quarter, along with 59 related to share repurchases that were completed in the quarter. As a reminder, the difference between the dollar six from.

<unk> net income contribution to book value and the dollar three of GAAP net income in the first quarter relates to the share count and utilizing weighted average shares for the income statement and shares outstanding at quarter end from book value purposes.

During the first quarter acres repurchased 745000 shares for $9 5 million. These purchases in aggregate were at an average price of approximately $12 78 per share including commissions.

As of April 30, the company had remaining authorization to repurchase up to an additional $3 million of current outstanding shares.

Our GAAP debt to equity leverage ratio remained at three nine times at March 31, the company had over $900 million of availability on our CRE term warehouse in senior secured financing facilities and senior unsecured notes aggregated as of the end of March.

The company's available liquidity at the end of April was approximately $143 million, including $43 million of unrestricted cash and $65 million of projected financing available on unlevered assets and $75 million of availability on our senior unsecured notes. These.

<unk> were offset by our working capital reserve target of $40 million.

With an enhanced financial profile and including improved liquidity, along with the acceleration of originations and a robust pipeline.

We look forward to updating you on our ongoing growth.

Now I will turn the call to Andrew <unk> for closing remarks.

Thank you Dave in summary.

The company has a sound portfolio remains diversified and largely performing along with the origination engine that is actively sourcing and closing loans to grow the companys earnings power.

Through the use of approximately $60 million of operating tax loss carryforwards. The company can retain those earnings reinvest into new origination.

Repurchase shares as and when the price of those shares are compelling and of course, we continue to optimize the company's cost of capital and its leverage ratio.

This concludes our opening remarks, and I will turn the call back over to the operator for questions.

Operator.

Thank you and at this time, we will be conducting a question and answer session.

Like to ask a question. Please press star one on your telephone keypad a.

A confirmation tone will indicate your line is in the question queue. You may price start to 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.

One moment, please while we poll for questions.

And our first question is from Steve Good loans with Raymond James. Please proceed with your question.

Hi, good afternoon.

I think you kind of.

One other question I had on my sheet here, but just kind of.

We'd like to get your thoughts as you think about the flexibility you have with earnings now the ability to retain them for future growth.

Look at dividend payouts.

How do you look at the toggle there.

As far as what level you want to see maybe.

To increase the buyback as far as accretion versus increase the dividend versus.

The return from our new.

New and vessels.

Sure. Stephen This is Andrew Thanks for the question. So as we think about optimizing capital within the company. We have a current return on equity of approximately 13% to 14% and so that's really the bogey that we're looking at with respect to allocation of new capital and so as we saw in the.

First.

Part of the ownership of the company are under our direction. When the shares presented a return opportunity that was greater than that we allocated capital to a share repurchase program and as you can see from the numbers. The accretion has really helped on our book value per share basis, and so that's one lever that the company can pull.

And then of course, what the company is really focused on is allocating capital out into new loan assets and what we're seeing today is an opportunity given the.

The leverage structure that we have to achieve that bogie and perhaps even generate higher roes and so that's.

That's really the area of focus where most of the capital is going to be directed on a go forward basis.

Okay.

That's.

Helpful. So I appreciate you framing that for us.

As we think about.

Our repayments versus new investments can you talk about the.

The net impact do you expect it to have say if you as you roll forward say 12 months on the yield or coupons as you think about tighter spread loans within the money force paying off and being replaced with wider spread new originations, what's the net impact going to be as weak as we both roll forward.

Yeah, well first off I think.

This is mark by the way.

The production levels, we expect to increase throughout the year. We just started as you know our origination engine back up again at the end of the fourth quarter.

First quarter, we saw a big increase from the last quarter and in the second quarter, we've already seen.

Closings and we have a pipeline that indicates that second quarter will grow even faster, but as far as the impact of.

Spreads compressing I think the goal is to offset that by various levers we can pull on the financing side.

Lowering our cost of capital, where we can to ensure that we continually get the ROE that Andrew mentioned, the 13% to 14%.

Great I appreciate you taking my questions today. Thank you.

And again as a reminder, if you have any questions. You May press Star then the number one on your telephone keypad doing so will ensure your spot in our question and answer queue.

Our next person queued up as Chris Muller with JMP Securities. Please proceed with your question.

Hey, guys. Thanks for taking the question.

Just wanted to ask about with multifamily being the bulk of first quarter activity can you talk about the competitive environment of multifamily just compared to other asset classes.

And then a follow up on that one.

Other asset classes do you like going forward and do you expect much of a change in composition of the portfolio say at the end of this year versus the current mix. Thanks.

Yeah. This is Marc.

We don't see much of a change with respect to the current composition, we still expect by end of year to be in that 55% to 60% range on multifamily.

There may be some changes within the other asset classes here and there, but I would expect that the mix would be.

Similar at year end as far as the competitive landscape. We believe that we have a bit of an edge with respect to what we do on the other side of our business in that we do a lot of construction lending on multifamily properties.

All across the country and what we keep referring to in our statements. This one stop solution what that allows us to do is.

To Shepherd sponsors who come to us for a construction loan on the other side of the business right into the REIT program once the properties get built.

Gets <unk> and need to stabilize through our bridge lending program. So it's organic.

Growth that we expect to.

Have through the generation of these construction loans that gives us I think a leg up on some of the groups that are out there right now.

Thank you very helpful. And then just one more quick one it looks like the coupon on loans from fourth quarter to the first quarter on new originations dropped pretty drastically or was that just.

Mix with multifamily been the big driver in <unk>.

Thank you.

Yes that was the big driver more multifamily, but at the same time there was some more dislocation in the fourth quarter. So there are better opportunities to get some higher spreads win.

Some of the other lenders were kind of sitting on the sidelines.

Thank you thanks for taking my questions.

Thank you.

And we have reached the end of the question and answer session and I'll now turn the call over to Andrew <unk> for closing remarks.

Thank you operator, and thank you everybody for joining our first quarter conference call. We appreciate the support the interest we're always available for any follow up questions that people may have and look forward to speaking to you again at the second quarter call later this year.

This concludes today's conference and you may disconnect. Your line at this time. Thank you for your participation.

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