Q4 2021 Acres Commercial Realty Corp Earnings Call
Thank you good day, ladies and gentlemen, and welcome to the fourth quarter 2021 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 call.
Mr. 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 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 the forward looking statements.
These risks and uncertainties are discussed in the company's 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 its 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 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 Dave Bryant ACR CFO .
Also available for Q&A at Andrew Fentress, Chairman of ACR, 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 the companys loan originations real estate investments capitalization and the health of the investment portfolio, while they Brian will discuss the financial statements liquidity condition and operating results for the fourth quarter.
In addition, we have added two important disclosures for shareholders in our presentation, but first a presentation on the earnings potential of the company based on certain assumptions around leverage and returns and the second the list of the Oreos. The company currently has along with our strategy for each and of course, we look forward to your questions at the end of our prepared remarks.
In the fourth quarter, we continued to grow and manage the loan portfolio. We closed two equity investments in real estate, we closed the companys, 11th CLO, which would which will reduce its cost of capital and extend duration of the financing all while continuing to offer our sponsors outstanding service.
The acres origination team delivered $447 million of new loan commitments in the quarter.
This brings loan production volume for 2021 to approximately $1 5 billion a record year for the company. Additionally.
Additionally, the team completed $29 million of initial equity investments on two properties in the northeast region in the quarter.
Which we expect will deliver capital gains in future years.
These results reflect the efforts of the entire acres team in identifying processing and executing on opportunities nationwide with our unique financing solutions target asset classes.
From a capitalization standpoint, the company successfully executed its second managed CLO of 2021 , bringing its total loan financing capacity to over $1 $5 billion from the two clo's. Additionally.
Additionally, after December 31, 2021, the company repurchased a portion of its convertible senior notes and executed the optional redemption of the senior notes of the 2020 or so non CLO.
Portfolio quality remains high and is improving the watch list loans, comprising those risk rated a four or a five reflect 8% of the total commercial real estate loan portfolio as of December 31.
As compared to 10% as of September 30th and 23% when acres took over the REIT in July 2020.
We expect to continue expanding the commercial real estate loan portfolio in 2022 in order to continue delivering on our strategic initiatives to maximize earnings and build book value for the Companys shareholders shareholders.
Returning to loan production, we closed 15 commercial real estate whole loans for $447 million during the fourth quarter.
These loans pay coupon interest at one month benchmark rates, which comprised of LIBOR and sofa, plus a weighted average spread of 353%.
Each loan originated this quarter carries benchmark rate floor protection, which has a weighted average of 10 basis points.
Approximately $375 million or 84% of the originated loans in the fourth quarter are collateralized by multifamily properties, while the remainder are collateralized by office self storage and hotel properties.
These loans had a total weighted average LTV of 72% based on the underlying property valuations available at the time of each loans origination.
The company received self pay off and pay down proceeds of $363 million from the sale of one loan in full or partial repayment of 15 loans during the fourth quarter.
Total sale payoff and pay down proceeds in 2021 or $1 billion for.
For both the quarter and the year loan originations exceeded proceeds received producing net portfolio growth.
We believe that the borrower's ability to refinance or sell indicates the quality of the sponsors and assets underlying the portfolio along with improved market conditions for refinancing our sales activities.
During the quarter the company made initial investments totaling $29 million to acquire two commercial real estate properties.
The investments included a 99000 square foot class a office building, which is expected to be redeveloped into life science and lab space and a 12 acre parcel of land, which was preliminarily approved for development into a 300 unit multifamily building.
Each property is located in the northeast region of the United States.
We believe that these properties will generate on tax capital gains in the future through the use of the company's tax loss carryforwards and create returns that can be reinvested into the loan origination pipeline when realized.
Looking ahead, we expect to target asset classes nationwide consistent with the Companys origination history in the loan pipeline, including our primary focus on multifamily family properties, along with other segments, such as select opportunities in office hospitality and self storage.
The credit markets continue to be competitive, which as a result has accelerated spread compression, particularly in the multifamily sector. In addition, lower benchmark floor rates means lower all in rates for the company.
HCR is well positioned for growth.
We will remain selective and focus on credit quality target markets and strong sponsors to originate accretive new loans for the portfolio.
The company is in a strong liquidity position with a diverse array of financing sources.
We continue to manage the balance sheet to optimize for the lowest cost of capital structure, while extending duration.
In December the company executed executed its second managed CLO, a 2021 .
Transaction can finance up to $700 million of commercial real estate loans with the 560.
$7 million of nonrecourse floating rate notes issued at an average cost of 180 basis points over one month LIBOR.
Approximately $518 million of commercial real estate loans collateralized the CLO at closing.
In accordance with the terms of the transaction the company may ramp up the CLO with the $181 million of unused proceeds within 180 days of closing subject to the acquired loan satisfying certain eligibility criteria.
As of February 28, approximately $181 million of the proceeds have been utilized to acquire additional collateral.
In total the two managed CLO is executed in 2021 give the company the ability to finance over $1.5 billion of commercial real estate loans using $1 $2 billion of nonrecourse floating rate notes at an average cost of 163 basis points over one month LIBOR.
Additionally, each of the 2021 CLO contain a 24 month reinvestment period commencing on respective closing date of each CLO.
That is the company may reinvest principal proceeds received on its collateral to acquire additional commercial real estate loans are participations in commercial real estate loans that satisfy certain eligibility criteria.
Our intent is to use the reinvestment proceeds periods available to invest proceeds from the CLO to finance the company's growing commercial real estate loan pipeline.
In February the company repurchased $39 8 million of principal of four 5% convertible senior notes and redeemed.
The remaining $69 million of principal of our senior notes of the 2020, our ISO nine CLO.
The portfolio continued to perform Devon, demonstrating sound and consistent underwriting and asset management. The company ended the quarter with $1 $9 billion of commercial real estate loans across 94 individual investments.
It's only three comprising 2% of the portfolio, where delinquent and one comprising less than 1% of the portfolio. We're performing in accordance with a forbearance agreement.
At the time of our acquisition of the company. It had twenty-three watch list loans, representing 23% of the portfolio as of December 31st the number of watch list loans has reduced the 10, representing 8% of the portfolio.
In January the company received payoff proceeds on to watch list loans, which comprised 1% of the portfolio at December 31, and included the remaining legacy CRE alone.
We believe that the company has a well diversified nationwide portfolio with 66% of the loans concentrated in the high growth southeast southwest and mountain regions of the United States.
Our target asset classes are projected to provide sustainable cash flow, including the multifamily callout class, which has been particularly durable and represent 70% of the loan portfolio.
In addition, the acres platform has over $250 million of loans in its development portfolio that will be eligible for the company's book in the coming quarters. This unique sourcing opportunity provides the company with curated sponsor relationships and class a newly constructed assets at attractive returns.
In summary, the acres team is pleased with the growth and quality of the investment portfolio, including investments in real estate, along with the improved balance sheet profile.
And the prospects for new originations and capital appreciation going forward.
We will continue to execute on our business plan by originating high quality investments actively managing the portfolio and continuing to focus on growing earnings and book value for the Companys shareholders.
We will now have Acr's CFO , Dave Brian to discuss the financial statements and the operating results during the fourth quarter.
Thank you and good afternoon.
GAAP net income allocable to common shares in the fourth quarter was $7 3 million.
We're 76 cents per share compared to a GAAP net loss of $9 8 million or $1 three per share.
In the third quarter.
In the fourth quarter, we recorded a reversal of the seasonal provision for credit losses of $5 8 million or <unk> 61 per share compared to a 537000 increase in the seasonal provision in the third quarter.
The fourth quarter seasonal reserve reversal was primarily due to continued improvements in property level operations.
The underlying loan collateral.
Improvement in macroeconomic conditions.
And decreases in reserves on individually evaluated loans.
Additionally, the company recorded $4 2 million of charge offs against the seasonal reserve.
Three loans that settled during the quarter after quarter end.
The impact of the <unk> estimate and the charge offs resulted in a total allowance for credit losses at December 31st of $8 8 million.
Which now represents.
Four 6%.
The $1 9 billion loan portfolio at par.
Net interest income was $11 9 million or $1 25 per share in the fourth quarter up from $9 5 million.
<unk> 99 per share in the third quarter.
Our fourth quarter results included $2 2 million of loan minimum interest payments, an increase of $1 5 million over the third quarter.
The fourth quarter results also reflect $1 1 million of deferred fee income <unk>.
Salaries due to the increased loan payoffs and increase of 849000 over the third quarter.
These increases helped offset the impact of loan payoffs that carried higher coupons compared with rates on new loan originations.
The weighted average spread.
Floating rate loans, and the company's $1 9 billion.
<unk> real estate loan portfolio compressed slightly to 3.67% over.
Over the one month benchmark range, all but one of which had a floor with a weighted average of 75 basis points at December 31st.
Since December 31st 2020.
The weighted average benchmark rate floor has declined from 1.88%.
2.75%.
Or by 113 basis points as the loan portfolio mix has shifted to be predominantly made up of loans with lower floors. As recent loan originations with lower floors have replaced older loans with higher floors that have since paid off.
However, with one third of loans benchmark to gauge with floors in excess of 1%.
The company continues to receive some asset yield protection in the current rate environment.
Financing rates were increased compared to the conditions at December 31st net interest margin would be negatively impacted.
We expect that as the loan portfolio mix continues to shift toward lower floors.
Direct relationship between rising wage and positive net interest margin sensitivity will return by late.
2022 into early 2023.
GAAP book value per share, which is calculated at our common shares outstanding including warrants increased to $23 87 at December 31, 2021 from $22 68 at September 30th 2021, a five <unk>.
<unk> increase.
And from $20 57 chance at December 31, 2020, a 16% increase.
The increase to book value per share for the fourth quarter was driven primarily by 79 of GAAP net income per share and 27.
<unk> per share accretion from common stock repurchases.
The company's board, we authorized a share repurchase program and approved repurchase of an additional $20 million.
Combined with the previously utilized a lot and then the company has been authorized to repurchase 40 million shares.
Its acquisition by acres.
In the fourth quarter, the company repurchased 275000 shares for $3 7 million, which represented a 56% discount to book value at December 31.
The GAAP debt to equity leverage ratio increased from three six times at September 32, 4.0 times.
At December 31st.
The recourse debt leverage ratio decreased from one four times at September 32.
Eight times at December 31st.
<unk> increased to the leverage ratio and a decrease to the recourse debt leverage ratio were primarily due to the close of the new CLO in December .
Which increased nonrecourse debt.
Through the issuance of notes, while simultaneously decreasing recourse debt from the pay down of CRE warehouse financing.
The company had approximately $929 million of combined availability when age CRE term warehouse facilities, and senior secured financing facility and $75 million of availability on its 12% senior unsecured notes.
They all boil liquidity at the end of February was approximately $178 million.
Including approximately 78 million of unrestricted cash.
$65 million of projected financing available.
On unlevered assets and $75 million of availability on the 12% senior unsecured notes.
These components were offset by a working capital reserve target of $40 million.
Looking ahead, we currently project that the company long car GAAP losses of between 30 and 45 cents per share for the year ended December 31st 2022.
This projected losses, primarily caused by depreciation and amortization related to the company's investments in commercial real estate properties.
Which came through debt converted to equity and through direct acquisitions.
We expect the majority of the GAAP loss to be incurred in the first quarter of 2022 and that the company's earnings will begin to grow and stabilize in subsequent quarters.
Our first quarter projection includes nonrecurring charges of approximately 500000 related to the retirement of convertible note debt and approximately 900000 per charges related to the termination of Clo's and a recurring charge of $1 5 million for real estate depreciation.
In addition loans that are expected to pay off in the first quarter of 2022.
Rate floors of one 9% <unk>.
Contrast, it with newly originated loans that had been floors of 10 basis points.
Because we do not expect.
Meaningful net loan growth in the first quarter.
This rate pressure is expected to reduce our net interest margin by approximately 500000 in the first quarter of 2022.
New loan production is expected to improve in the second quarter and then the back half of the year.
This expected loan production together with anticipated base rate growth will mitigate this rate pressure and begin to result in positive earnings growth.
The company continues to see growth in its loan origination pipeline producing quality assets.
Together with the continued improvement in the credit quality of the legacy portfolio.
This has led to a reduction in the company's loan loss reserve.
With the additional financing capacity provided by the close of the new CLO.
We expect the company's net loan growth to continue for 2022.
We will also selectively seek additional equity investments in real estate in order to maximize the utilization of the company's tax loss carryforwards, thereby growing earnings and book value in future quarters and years.
Now I will turn the call to Andrew <unk> for closing remarks.
Thank you David.
As Mark discussed we're proud to have achieved a record setting year for the loan originations at ACR.
First full year as manager of the company.
Equally as important the asset management team has done exceptional work to address the credit issues.
The company has now a high quality book.
Additionally, the capital transactions that were closed during the year give the company the capacity to continue to build on the success and take advantage of the attractive financing rates in the years to come.
Our mission is to deliver shareholder value over the long term, we are focused on maximizing earnings investing in high quality assets and strategically returning to capital through share repurchases and dividends overtime.
This concludes our opening remarks, I'll now turn the call back over to the operator and look forward to everyone's questions. Thank you.
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'd 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.
Our first question comes from the line of Steve Delaney with JMP. Please proceed with your question.
Thanks, Good evening, everyone and thank you for taking my questions.
I would like to probably also the deck is great and especially the new pages 26 and 27. My first question is on 26 and Mark the maximum portfolio size.
You ended the year at 1.9 billion. So if we take the mid point there are 2.3.
Call It 400000.
Can you achieve that growth with your existing capital structure I realize you'll need financing.
But do you have the capital base to achieve say that midpoint of 400000 of loan growth to push the portfolio up to 2.3 by the end of this year 2022 banks.
Yes, Steve Thanks for the question, Yes, we do have the capital base.
Grow the portfolio to that level.
Between cash on hand, and our financing sources.
Okay, good so and.
Ah Okay got it so.
The other question I had would be the CLO market. Your your timing of your your execution was excellent and I'm sure you've noticed.
A little weakness there if clo's, let's just say worst case with all everything going on in the World, Let's just say the Clo's you looked at.
Or is this kind of walks up a little bit can you.
Would you return to commercial bank financing and I guess, if you do is there non mark to market.
Other than for credit true credit available from from the banks for financing lines.
And if it's not that I mean is there even the thought of at some point you back to the old School a note concept, where you don't really worry about borrowing money.
Yes, a couple of points on that.
As we alluded to in our remarks, we have.
24 month reinvestment periods in our two CLO sure there is great opportunity to add loans pay off to reinvest.
Those those proceeds back into new loans.
We do have obviously a lot of capacity available on our lines.
But outside of that at this juncture I can't point to any other non mark to market.
Situations, which we could access.
But we do have to align capacity and the revolvers.
Right and as you look at the market if the CLO market today.
You had ample collateral.
You just called it an old CLO do you feel the market is the CLO market is viable for new issuance. It would just be maybe at a compressed.
Return on equity compared to what your deals you did in 2021.
I think its viable in the spreads have widened a little bit, but it's certainly viable and.
No.
As you know over the course of time, the CLO market changes and you cant really time, the market and if you're a serial issuer, sometimes it's good sometimes it's bad.
And you just have to.
Use that market, while it's available to finance your business.
And I hope it will average out over time. So thank you very much for your comments.
Thank you.
Okay.
Yeah.
As a reminder.
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 Fred <unk> with private Investor. Please proceed with your question.
Yes.
I was just wondering does the company have a plan for the reinstatement of the common dividend.
Thank you Pat this is Andrew <unk> answering your question.
Currently the company does not have a plan to reinstate the common dividend as we stated in our remarks and hopefully as you'll be able to see from the shareholder presentation, which was posted to the website. This evening.
At.
The capital of the company would otherwise pay a dividend with us being retained inside of the business and being used to grow book value. So as a shareholder you're receiving the benefit of that capital you are just receiving it in stock appreciation versus the receipt of a cash dividend.
Does that answer your question.
Yes, and I have a second question.
The.
Yeah.
The book value like you said it was like $23.
Get the share price is so low.
Now I'm not an accountant alrighty. Thanks.
Is there a reason for that.
The company sounds like it's doing well, but yet the share price seems to have been gone down the past few months.
Can you give me the answer for why that that's probably happening.
But I'm not going to speculate on why the market is.
It has a disconnect between those.
When the share price and the book value, but what I will say is that the company's actions of repurchasing shares. The company has an authorized repurchase program has been active in that plan to repurchase shares should tell you hopefully what you need to know about what the company thinks about the share price at these levels.
Oh, I think it's great that you're buying it back that's for sure.
No.
But I don't know.
Okay.
And that's part in this.
But I was just wondering why it's the common book is $23.
The price was so low.
Yes.
The daily price.
Yeah.
I know people got their if they have their reasons I'm sure.
Okay.
Okay. Thank you very much I appreciate it.
Youre welcome.
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 <unk> for closing remarks.
Thank you everyone for joining our call as always we look forward to any follow up questions you have and to speaking with you again at the end of the next quarter. Thanks, everyone.
This concludes today's conference you may disconnect your lines at this time. Thank you all for your participation.
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