Q3 2022 Acres Commercial Realty Corp Earnings Call

Stated on our last call we plan to maintain a loan book balance of 2 billion to $2 3 billion through 2022.

During the quarter, we sold a former $19 9 million loan secured by an office property in Chicago that the company acquired by a deed in lieu and 2021.

At the time of the foreclosure the asset was valued at $17 $6 million, we sold the asset at $19 $2 5 million.

Prior to closing costs and other basis adjustments that resulted in a gain on the sale of real estate of $1 9 million included in GAAP net income.

Also during the quarter, we redeemed the remaining $48 2 million or four 5% convertible senior notes that the company issued in 2017.

Finally, a few comments on balance sheet items as we know this topic is top of mind for many investors given the recent market volatility and base rate increases.

The company has a healthy liquidity and financing profile. The company is warehouse lines open with J P. Morgan and Morgan Stanley with performing collateral on each the company also has agreed in principal to terms with mass mutual on an upsized and improved terms for its current facility, which is being documented this quarter.

Barclays line, which has zero collateral is being voluntarily close by the company in the current quarter.

The portfolio continues to perform demonstrating sound and consistent underwriting and proactive asset management.

The company ended the quarter with $2 $1 billion of commercial real estate loans across 88 individual investments of which only two comprising one 4% of the portfolio where delinquent.

As of September 30, there were six watch list loans inclusive of the two delinquent loans, representing five 6% of the portfolio.

As we have discussed previously the company holds for investments in real estate that we expect to monetize for a gain in the future. These gains will be offset by the existing NOL and corresponding cash retain and reinvested into the loan portfolio.

Lastly, there are two hotel assets currently classified as held for sale as a result of being in a formal sale process.

Early indications give us comfort that proceeds will be at or above par.

A testament to the work of the asset management team here at Akers, who work diligently to protect shareholder value during a challenging hospitality market over the last two and a half years.

In summary, the acres team is pleased with the 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 selectively originating high quality investments.

Actively managing the portfolio and continuing to focus on growing earnings and book value for our shareholders.

We will now have ACR CFO , Dave Brian discuss the financial statements and operating results during the third quarter of 2022.

Thank you and good afternoon.

GAAP net income allocable to common shares in the third quarter was approximately 700000.

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Earnings available for distribution for the third quarter were <unk> 40 per share and included the net charge off of the shale. They foreclosed office property of approximately 400000.

Or are <unk> per share as our.

Policy is to charge off losses upon realized transactions as opposed to loss estimates required by GAAP.

GAAP book value per share increased to $25 eight on September 30th.

24 hours and 48 <unk> on June 30th.

The increase to book value per share for the third quarter was primarily driven by 36.

<unk> per share accretion from common stock repurchases.

A lot of insurance related to the noncash equity expense.

And net income of <unk> <unk> per share.

Available liquidity at September 32022 was approximately $86 4 million.

Which comprised approximately $61 million of unrestricted cash.

$10 5 million of projected financing available on Unlevered assets, and $14 9 million of reinvestment cash available in CRE securitizations.

GAAP debt to equity leverage ratio increased marginally to four three times on September 30th from four two times on June 30th.

Our recourse debt leverage ratio also increased marginally to one five times on September 30th from one four times on June 30th the increase to the leverage and recourse leverage ratios is primarily due to increased borrowings on our bank term facilities.

Offset by the repayment of our four 5% convertible senior notes.

In the third quarter. The company recorded an increase in loan loss reserves under the Cecil calculations of approximately $2 6 million compared to a 500000.

Dollar provision in the second quarter.

The increase to general reserves reflects continuing changes in the macro economic outlook under the seasonal calculations.

The total allowance for credit losses on September 30 was $7 8 million, which represents 0.37%.

For our 37 basis points.

The $2 1 billion loan portfolio at par.

Turning to results from the company's real estate investments net loss from real estate investments remains relatively flat at 314000 in the third quarter.

Included in the third quarter property operating loss was $1 3 million of non cash depreciation and amortization.

Also as Mark mentioned in his opening remarks, the company had a $1 9 million realized gain on the sale of an office property in Chicago.

The gain included proceeds received over the property valuation basis as well as the recovery of accrued real estate taxes.

Focusing on G&A, the third quarter expense of $2 1 million versus second quarter $2 4 million reflects the seasonality for quarterly G&A. We typically see this time of year, we will see a slight increase during the fourth quarter as the year end audit procedures begin to win.

Car this seasonal expense.

Regarding share repurchases during the third quarter. The company used $1 8 million of the board approved share repurchase plan of $20 million to redeem approximately 198000 shares.

At approximately a 64% discount to book value per share on September 30th.

There is approximately $8 1 million remaining on the program at quarter end.

Looking forward. We currently project that the company will produce GAAP income between 10% and 20 per share.

And E D.

One dollar and $1 10 per share for calendar year 2022.

Our projection remains subject to volatility from rate increases loan payoff volume seasonal reserve adjustments and other nonrecurring or unexpected items that may arise in the remaining three months of the year.

With the loan growth of $264 6 million in the first nine months of 2022, we expect our net income and earnings available for distribution to remain positive and steadily grow for the balance of 2022 and into 2023.

Retained earnings and any capital gains generated from real estate equity investments will allow the company to grow its loan portfolio in future periods.

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

Thank you David.

Michael that the changes in the rate market and a corresponding volatility in asset prices.

A heightened sense of anxiety over the unknowns.

Management wants to remove many of these unknowns as possible with regard to a company that you own.

As you've heard from our CEO Mark <unk> CFO , David The company is performing well has a strong portfolio ample liquidity and is managed by a team of professionals, who have been through several cycles during their careers.

We remain vigilant in our mission to deliver shareholders value over the long term, we do this by investing in and managing high quality assets that will produce a stable and growing book value for our shareholders.

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

We will now begin the question and answer session.

To ask a question you May Press Star then one on your Touchtone phone.

If youre using a speakerphone please pick up your handset before pressing the team.

If at any time. Your question has been addressed and you would like to draw. Your question. Please press Star then two.

At this time, we will pause momentarily to assemble our roster.

Our first question today comes from Chris <unk> with JMP Securities. Please go ahead.

Hey, guys. Thanks for taking the question I'm on for Steve today.

Sorry, if I missed this at the beginning I jumped on a few minutes late but.

We've seen a lot of headwinds in the office space with a couple of other peers.

<unk> a bunch of loans.

So you guys did two office loans in the quarter. So I guess, what do you guys look for in an office loan in this environment and do you expect to do more office loans in the near term. Thanks.

Yes.

This is mark thanks for the question.

It's not our strategy to go after office loans.

And make it a focus of the company, but we've always been a lender that identifies good opportunities in the marketplace.

Where our borrowers our sponsors are buying properties that are really good basis.

These two particular loans were purchased at prices that made a lot of sense to us.

When it went in at a really good structure low LTC.

And.

The deals work very well in the markets in which they exist.

Looking for high quality assets always in.

As you might imagine in the office sector, there's a lot of availability for lenders and we're trying to pick the best of the best with the best sponsors.

Got it that's helpful. And then just the other one I have big.

Big jump in spreads from quarter to quarter or is that just that heavier construction component on loans or is there anything else behind that.

No I think that's really just a function of the market.

There is.

Certainly a widening of spreads out there.

Amongst our peer group and that.

What we're seeing is a lot of lenders sitting on the sideline giving.

Groups that have capital the opportunity too.

Really dictate terms as compared to 12 months ago or even nine months ago.

And none of that is construction lending, we don't do construction lending in the region.

Okay, and then what are the unfunded commitments for or is that just like milestones they have to hit on the projects.

Its hold backs for lease up in <unk>.

Capital improvements, but it's not for ground up construction.

Got it I appreciate the questions today. Thanks.

Thank you.

As a reminder, if you would like to ask a question. Please press Star then one to enter the question queue.

Your next question comes from Stephen Laws with Raymond James. Please go ahead.

Hi, good afternoon.

Mark can you talk a little bit about use.

Use of capital relative attractiveness between.

<unk> senior stock New investments, obviously, you mentioned that the originations at 600 or Moreover.

Or simply building some liquidity for may.

Maybe more attractive opportunities that you may think present themselves in the quarters ahead, and finally additional real estate investments if thats something youre looking at.

Please see the theater on the first part of the question with respect to capital allocation. So as you know we have an open repurchase program ongoing in the marketplace.

We're able to.

Really repurchase the maximum amount that is available to the company under the share repurchase rules, which are is really governed by the average daily volume that shares trade on the exchange each day. So we're limited in that regard in terms of share repurchases and we're doing the best and the most of the comps.

He can so with regard to liquidity after that there is.

First up is to originate high quality assets that will go into loan portfolio.

Spreads as we identify did widen to levels, where we're 600 over now.

And we're certainly mindful of liquidity, we think the company has a healthy amount of liquidity on balance sheet today with.

Over $85 million of cash and then.

More available to us as assets, obviously repay will redeploy.

So we think we're in a good place on those on those three fronts.

Great. Thanks for that Dave can touch based on seasonal I think youre due to adopt early next year.

Be similar to the initial adoption.

Three years ago, where there was an overnight right down to book and then you.

Take provisioning or releases through the income statement or will it all run through the income statement can you give us any color on how that's going to work.

Yes, it would actually run through the income statement.

How're Ya participation input and look forward to any follow up questions over coming days and weeks.

Have a good evening everyone. Thank you.

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