Q2 2021 Acres Commercial Realty Corp Earnings Call
Good day, ladies and gentlemen, and welcome to the second quarter at 2021 acres of commercial Realty Corp Earnings Conference call.
Currently all participants are in a listen only mode of.
Later, we will conduct a question answer session with instructions to follow at that time.
If anyone requires assistance during the conference. Please press the 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 Jaclyn Jesper rigor General Counsel you may begin.
Good afternoon, and thank you for joining our call for.
Before we begin I want to remind everyone and that certain statements made during this call and 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 on.
And subject to.
Several trials risks and uncertainties that could cause actual results to differ materially from those contained in the forward looking statements.
These risks and uncertainties are discussed and the Companys reports filed with the SEC, including its reports on forms 8-K, 10-Q and 10-K.
And in particular, the risk factors section of our form 10-K and form 10-Q.
And ours are cautioned not to place undue reliance on these forward looking statements, which speak only as of the date hereof and.
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 and isolation or as a substitute for the financial information presented in accordance with GAAP.
Reconciliations of these non-GAAP financial measures for 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 is Andrew Fentress chairman of the acres I will 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 and updates on our portfolio and loan originations while day, Brian will discuss our financial statements and the operating results for the second quarter and.
And of course, we look forward for your questions at the end of our prepared remarks.
This week marks 1 year since acres capital acquired the management contract for what was then known as Exantus and is now acres of commercial Realty.
Since acquiring the management contract, we have start to stabilize the legacy loan portfolio grow loan originations and enhance our funding sources. During the second quarter, we were able to make market progress and all 3 areas.
Our aggressive asset management process has resulted in a healthy portfolio, including a net reduction of $133 million of loans risk rated a 4 of 5 during the second quarter of 2021.
There are $177.8 million of loans risk rated a 4 of 5 at the end of second quarter of 2021 from the peak of $410.8 million at the onset of the pandemic at the end of the second quarter of 2020.
From a capitalization standpoint, we successfully executed on the largest CLO and our history and completed the preferred stock offering during the quarter.
By doing so we have positioned the company to fund, our robust and attractive pipeline of opportunities.
The loan origination volume and the second quarter was up over 3 times the prior quarter and this is a direct result of the hard work by our entire team and creating and executing on unique financing solutions for the marketplace. We expect that of hard work to provide for our continued expansion of our portfolio for the remainder of this year.
The portfolio has continued to perform demonstrating sound and consistent underwriting and asset management, we ended the quarter with $1.6 billion and loan assets across 88 individual investments with all but 2 performing and current contractual payments.
Additionally, we realized incremental improvements and our loan portfolio of risk ratings of certain loans that were lower on our risk rating scale have paid off and we are issuing new loans in line with our core target ratings of <unk> 2.
We believe we have a well diversified nationwide portfolio, where the concentration and the high growth Southern region of the United States in.
In addition, nearly 60% of the loan book is backed by multifamily properties, particularly durable sector of real estate assets.
We continue to maintain a solid balance sheet and liquidity position and during the quarter. We took additional steps to further strengthen our funding sources.
And may we executed the company's 10th CLO.
This was the second acres sponsored transaction and the first managed CLO and the Companys history the.
The transaction was backed by $803 million of commercial real estate loans, and we issued $675.2 million of nonrecourse floating rate notes at an average cost of 149 basis points over LIBOR.
The CLO was structured with a 24 month reinvestment period during which we can use the principal proceeds to acquire additional mortgage loans.
Simultaneously, we liquidated the remaining $344 million of notes from our prior CLO.
In May we completed of preferred stock offering and fulfilled a follow on offering in June.
We issued $4.6 million New series D preferred shares and received net proceeds of approximately of $111 million.
At the end of the second quarter, our total leverage ratio was 3 point O times debt to total equity.
Down almost a full turn from the prior quarter and turns of recourse debt leverage was <unk> 7 times down from 1.2 times.
As of the end of July acres had $243 million of net liquidity AUM.
Overall, working capital reserve target of $40 million to deploy into additional commercial real estate loans.
At the end of the quarter, we had approximately $1 billion of financing capacity on our term warehousing financing facilities.
The senior secured financing facility and senior unsecured notes.
We are pleased with the continued acceleration of our new loan production during the quarter. We closed 18 commercial real estate whole loans for $470 million more than 3 times. The volume we produced and the first quarter 2014 of the loans are collateralized by multifamily properties and the remainder of our hotel office and self storage.
The weighted average coupon on these loans is 1 month, LIBOR 17 of which have floors with a weighted average of 2.2% plus 381% and the LTV of 70%.
New commitments outpaced loan Paydowns and payoffs during the second quarter, we received proceeds of $353 million from the repayment of 22 loans.
We believe the ability of our borrowers to refinance indicates the of quality of the sponsors and assets underlying our loan portfolio.
Looking ahead, we anticipate continued paydowns from the current portfolio offset by ongoing acceleration of new loan production.
Our pipeline continues to include multifamily opportunities along with other segments, such as hospitality and office, where spreads are a bit wider but we believe the spreads may begin to compress.
We will remain selective and focus on credit quality markets and sponsors to originate accretive new loans for the portfolio.
And additional news I would like to publicly welcome 2 new members to the acres of commercial Realty Board current Edwards and the 1 of Williams Carin and brings 30 years of experience and the financial services industry, including 13 years, serving on the board of of commercial mortgage REIT.
<unk> has 20 years of real estate experience and provides valuable insights into current and future developments and the industry through of her executive real estate development and strategic advisor experience.
We appreciate the insights experience and diversity of thought these women and bring to our board we look forward to their contributions and years ahead.
In summary, we are continuing to execute on our business plan further diversify our funding sources and originate high quality investments as we continue our focus on growing earnings and book value for our shareholders.
We will now have our CFO day, Brian and discuss our financial statements and operating results during the quarter.
Thank you and good afternoon, and our second quarter results reflect our continued positive progress.
Our GAAP net income allocable to common shares for the 3 months ended June 30th 2021 was $10.1 million or a dollar for per share compared to $10.5 million for $1.3 per share and the first quarter.
These results reflect the contributions from the new loan production and accelerated fees from increased pay off activity.
Offset by lower interest spreads due to loan payoffs as well as accelerations and amortization of deferred debt issuance costs from the 2019, CLO redemption and Paydown of CLO notes.
The quarter to quarter change also includes a higher level of seasonal reserve recoveries compared to last quarter.
Second quarter GAAP net income includes $10.3 million or of $1.6 per share and Cecil reserve recoveries, primarily due to ongoing improved macroeconomic factors a significant amount of loan payoffs of riskier loans and.
And the improved property level operations and the loan portfolio.
Net interest income was $7.1 million or <unk> 73 per share down from 11 million for $1.8 per share for the first quarter as higher interest income was offset by an acceleration of deferred debt issuance costs of $4.5 million.
The termination of of legacy CLO and the significant loan payoff volume that resulted and existing CLO debt pay downs.
The weighted average spread of the floating rate loans, and a $1.6 billion loan portfolio expanded to 3.7 and 8% over 1 month LIBOR.
All but 1 of which had a floor with a weighted average of 1.31% at quarter end.
These LIBOR floors are in the money for.
All of our floating rate loans with 1 month LIBOR at approximately 9 basis points at the end of July.
We expect to continue to see of benefit to net interest income as the forward LIBOR curve projects rates remain low and the near term.
The implementation of Cecil on loan loss reserves, which applies to all mortgage Reits and other financial institutions requires us to estimate expected credit losses over the life of our mines.
And the impact of seasonal reserve fleet and a total allowance.
Tri net losses at June 30th of $18.3 million.
Which now represents 1.1 and 7% of.
Of our $1.6 billion loan portfolio.
GAAP book value per share calculated over the vested common shares outstanding including watch rose to $23.56.
At June 30th from 'twenty to 'twenty 7 at March 31st.
The increase to book value per share was driven primarily by of our 5 of net income along with 18 cents related to accretive common share repurchases that were completed in the quarter.
We were active and the authorized share repurchase program during the quarter and we purchased an additional 274000 shares of common stock for $4.3 million this quarter.
In July we purchased an additional 73000 common shares and have now completed and fully utilized the 20 million of authorization under the buyback plan.
Our GAAP debt to equity leverage ratio declined to 3.0 times at June 30.
Primarily as a result of the.
The series D preferred stock issuance during the quarter.
The company had approximately 1 billion of combined availability 1 of its commercial real estate term warehouse and senior secured financing facilities.
And senior unsecured notes.
The company's available liquidity at the end of July was approximately $243 million, including $90 million of unrestricted cash.
$118 million of projected financing available on Unlevered assets and.
And $75 million of availability on our senior unsecured notes these.
And these components were offset by our working capital reserves target of $40 million.
With enhanced financing sources and improved the liquidity.
Along with acceleration of loan originations and a robust pipeline, we look forward to updating you on our ongoing growth.
Now I will turn the call to Andrew fan interest for closing remarks.
Thank you David.
And as Mark mentioned this week is the 1 year anniversary of acres managing this REIT.
We are proud of the progress we've made as we continue to secure new capital source underwrite close and asset managed loans and grow the Companys earnings power.
And I wanted to thank the entire team for their ongoing hard work and to our stakeholders for their continued support.
This concludes our opening remarks, and I will now turn the call back to the operator for questions.
Thank you we will now begin the question answer session.
And to join the question queue. You May Press Star then 1 on your telephone keypad, you'll hear of tone acknowledging your request.
If youre using a speakerphone please pick up your handset before pressing any keys.
To withdraw your question. Please press Star then 2.
We will pause for a moment of callers join the queue.
The first question comes from Stephen laws with Raymond James.
Please go ahead.
Hi, good afternoon.
I guess.
The everybody Mark Dave and congratulations on a first year that a heck of a time to step down, but you've accomplished a lot with the against the difficult backdrop.
1 of those things. So that you know you should be complimented for the $20 million repurchase of lot of companies have not repurchase stock to that level.
And would that get completed in July can you maybe give us an update on.
How you think about <unk>.
Use of capital either additional buybacks of common dividend or retained against some type of NOL to use to fund new investments.
Sure. Stephen This is Andrew I'd be happy to answer that.
And thanks for the support and the questions. So with respect to capital allocation as we mentioned we did complete the authorized the repurchase program of 20 million and the way the board and the management team are viewing share repurchases is it when we believe there's an opportunity to repurchase shares at a greater than 25%.
To book value and that's when we would be interested in and revisiting that conversation at the current levels. We're inside of that and so we believe the return on equity that we can generate for shareholders through new originations.
Is it more compelling use of capital and as you'll note, whereas we noted in the and the remarks and and the release of the company issued preferred shares to continue.
The loan book origination.
And so that's the first that's the first use of capital that we have as a priority at the moment is to continue to grow the loan book and get the company.
Back to being fully invested.
And using those proceeds to to invest and the areas that we believe are most compelling today.
We also as we've noted and as you just mentioned.
Do you have a tax asset.
And the amount of of about $60 million and enables the company to retain that capital on and hold it for the.
Fit of of shareholders and in doing and until we've gotten through that the.
You as at the moment that the we will continue to refrain from of common dividend, while we're retaining that capital and then turn the dividend back on once the capital has been fully earned.
Does that answer your question and it does.
That's helpful to prioritize it in the quantify the buyback levels. Thank you for that.
Mark thinking about originations.
Congratulations on the CLO.
Great Great enhancement for the liability side of the balance sheet.
You've now got non mark to market financing I think I read it 94 per set in your deck.
You know when we think about originations from here and you can kind of look at yields on multifamily and things that fit into the CLO versus some of the yields on maybe hotels or others that debt have some limits of restrictions around the CLO.
Where would you like to see that debt mix shake of the kind of maybe higher ROE year higher spread investment that has to be.
And it with with financing that has credit mark.
The exposure versus kind of more middle of the fairway CLO type of originations.
How do you how do you see that mix playing out in the coming quarters. As you put this reset recently raised capital to work.
And I see thank you.
Our basis will always be multifamily I think for the most part will always hover around that 60% level on the multifamily side. So we'll continue to originate.
Down the fairway of multifamily.
And that fits neatly into the Clo's and.
We also have capacity within the existing CLO for office product.
However, as you mentioned hospitality and other asset classes are not really welcome and those vehicles.
But we do see some really compelling opportunities and those asset classes. So we're looking at them on a on a 1 on 1 off basis to determine which ones. We liked the best we're not going to take any crazy risk I think the the.
The pandemic really hasnt played out with respect of some of those asset classes, yet and so we're being really careful.
We're not going to take a risk that team.
And on unnecessary and certainly the warehouse lenders.
And that we have are looking at it the same way so you know.
We're all on the same place, where where nobody's going to take the risk that makes no sense and we're just gonna have to be really careful about what we do with those other asset classes going forward, but we're certainly interested in them, but we're just going to be really picky and choosy.
Great and then and then lastly.
Could you touch on I think.
86 of your 88 loans are correct, but maybe could you provide us with an update on on the to the that aren't I don't I don't think the material would love to get an update there and I. Appreciate your time this afternoon.
Sure. Thanks, Steve.
So 1 is actually current now.
And was not current at the end of the quarter, but it is currently current that's the right way to say it.
And the other is in the REO asset on a on.
The hospitality property in Philadelphia.
Great I appreciate you identifying those force and updating us on the the 1 that's not current thanks for your time.
Thank you.
The next question comes from Steve Delaney with JMP Securities.
Please go ahead.
Hi, good evening everyone.
I guess I Echo Steve's comments, congratulations on the obvious lending momentum and also on the what I think I heard you say Mark is your first managed CLO I'm curious given the debt. It's actively manage do you have a.
Can you talk about the reinvestment period is at the standard 2 year reinvestment period on that facility debt structure.
That's correct 24 months.
Okay. Great. Thanks. Thank you and then looking at kind of the actual reported GAAP and core you know versus my number and Stephens number.
Just going through it all comes down to interest expense and we've sort of identified of.
A 5 million dollar difference and interest expense, both sequentially and <unk>, but also and our own model.
And now I think I know now that debt $4.5 million and accelerated.
Expenses from the 2019 Cielo is what's actually run through the interest expense line and is that correct day Brian.
That is correct Steve absolutely.
Okay, well it makes me feel a little better about my modeling ability because that was <unk> 46 cents a share it makes the business.
The big lumpy and lumpy item right.
But our net.
Yes.
The the MTV and <unk>.
The low swap I'm sure is very much net positive over the long term. So we'll make sure. The we highlight that in terms of the delta between estimates and the Tencent reported so no problem there and.
And then just just a little clean up on the you know the.
The facility I guess I'd call it that with the with the 7 year notes without premium mass mutual you took down 50, we know.
With that looks like on the balance sheet and the income statement and related warrants can you comment on the.
1.
How long do you have to call the the remaining 75 and more importantly your.
On your balance sheet and capital structure was pretty good now you got the press you're willing to comment on the possibility that you would draw that remaining $75 million and how much time do you have to make that decision.
Yes. This is Andrew I'll give you the answer on the we have a year.
Painting to be able to call. The remaining 75, if we so chose.
We we have no current plans to call it and we view it as very much of a a sort of of standby.
Piece of liquidity, which has no ongoing cost associated with it and theres no utilization fees or anything like that so it's really a and option at the company has and the in the event that it may need it but there is no current plans to use it.
Thanks, Okay. It makes sense.
As you continue to make your balance sheet more efficient and have other sources of capital the existing $50 million.
What would come into play just like we saw with the CLO.
What would you be facing with May call. You know makeup fees or a minimum interest payments are what is your flexibility to pay off the 12% 50 million and what kind of lumpy 1 time costs might you incur if if you ever decided to do that.
The there are some stipulated prepayment premiums.
Premiums that are due and the event that those notes were retired ahead of their scheduled maturity.
And to the extent that we go.
To explore repaying those and we expect we'd have a robust dialogue with those capital providers to understand whether or not we could and.
And I get to get to a mutual agreement on on what those might look like.
Okay.
Thank you for the comments everyone and.
Good luck for the second half of the year.
Thank you.
This concludes our question and answer session I would like to turn the conference back over to Andrew <unk> for any closing remarks.
Well I just want to say, thank you again to the to the acres team into all of our stakeholders for your support over this first the first year, we look forward to working with you on the coming quarters and years ahead, and if there's nothing else, we'll conclude the call operator, Thank you very much.
This concludes today's conference call you may disconnect. Your lines. Thank you for participating and have a pleasant day.
[music].
Yes.
[music].