Q4 2022 Acres Commercial Realty Corp Earnings Call

Good day, ladies and gentlemen, and welcome to the fourth quarter 2022 acres of commercial royalty 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 telephone keypad.

A reminder, this call is being recorded.

I would now like to introduce your host for today's conference Cal Brangle Vice President you may begin.

Good afternoon, and thank you for joining our call I would like to highlight that we have posted our fourth quarter earnings presentation to our website. This presentation contains summary, and detailed information about the quarterly and year end results of the company before we begin I want to remind everyone that certain statements made during this call are not based on historical information and may cause.

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.

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 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 Bryan acres.

CFO .

Also available for Q&A is Andrew if interests 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 our loan originations real estate investments and the health of the investment portfolio well, they Brian will discuss the financial statements liquidity condition book value and operating results for the fourth quarter of course, we look forward to your questions at the end of our prepared remarks.

The Akers team continues 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 originated $1 $18 million, new multifamily loan commitment in the fourth quarter.

Loan payoffs during the period were $114 $6 million and net funded commitments during the quarter with $22 million producing a net decrease to the portfolio of $74 $6 million.

The newly originated loan payoffs coupon interest at one month, so for plus a weighted average spread of four 8%.

The weighted average spread of the floating rate loans in our $2 1 billion dollar commercial real estate loan portfolio increased to $3 seven 8% over the one month benchmark rates.

We expect to maintain an investment portfolio of 2 billion to $2 $3 billion through 2023.

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.

During the quarter the company finalized terms with massmutual under its non mark to market agreement to upsize their commitment to provide for individual loan series, which will each have five year term for the date from the date of issuance.

The company is where health lines open with J P Morgan and Morgan Stanley with performing collateral on H <unk>.

In addition, we ever have the reinvestment window available on our two ACR securitizations through May 2023 in December 2023.

The bulk of the company's current portfolio was originated in 2021 and 2022 comprising 80% 4% of the current par balance and have initial maturities of 2024 or later and extended maturities of 2026 or later.

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

We ended the corner quarter with $2 $1 billion of commercial real estate loans across 82 individual investments.

As of December 31, 2022, there were five watchlist loans, including three delinquent loans, representing five 4% of the portfolio.

This represents a decrease from December 31, 2022 2021 at which they were 11 watchlist loans, representing eight 1% of the portfolio.

In January 2023, one watch list loan on a hotel portfolio in the southwest region with a par value of $56 $5 million was paid off in full which reduced the value of our watch list loans and half as compared to year end 2022.

We had one specific credit events during the quarter, we reserved 100% against the remaining mezzanine loan from our acquisition of the company in 2020.

The mezzanine loan has a par value of $4 $7 million and the underlining underlying collateral is an office property in the northeast region.

As acres does not originate mezzanine loans, you should not expect to see investments in this part of the capital structure again.

We continue to hold for investments in real estate that we expect to monetize our gains in the future.

These anticipated gains will be offset by the existing NOL carryforwards with equity retained and reinvested into the loan portfolio.

In February 2023, we sold one hotel asset located in Plymouth meeting, Pennsylvania, with a basis of approximately $14 million that we received through a deed in lieu of foreclosure in July 2022.

We expect to record a modest gain on the sale in the first quarter 2023.

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 now have Acr's CFO day, Brian discuss the financial statements and operating results during the fourth quarter 2022.

Thank you Mark and good afternoon.

Net loss allocable to common shares in the fourth quarter was $7 4 million or 87 cents per share.

Our guidance was for between 10, and 20 cents per share of GAAP net income for the year and we ended 2022 with a one dollar net loss, which was largely a result of the dollar one dollar and 28 cents per share of she saw reserves recorded in the fourth.

Quarter.

The company recorded a fourth quarter increase and she's still reserves of $11 million.

The increase includes $6 5 million attributable primarily to a decline in the macro economic outlook and a.

Specific provision to fully resolve the previously mentioned mezzanine loan with a par value of 4.7 million.

The total allowance for credit losses at December 31st was 18.8 million, which represents point.

Nine, 1% or 91 basis points of the $2 1 billion loan portfolio at par.

Earnings available for distribution or E D for the fourth quarter were 60 cents per share.

GAAP book value per share decreased to $24.54 on December 31st.

From $25 and <unk> one September 30th.

Available liquidity at December 31st 2022 was approximately $118 million.

Which comprised approximately 66 million of unrestricted cash.

$14 million of projected financing available on Unlevered assets.

$38 million of re investable cash available and CRE securitizations.

Our GAAP debt to equity leverage ratio decreased marginally to 4.2 times on December 31st from 4.3 times on September 30th.

Our recourse debt leverage ratio also decreased marginally to 1.4 times on December 31st from one five times on September 30th.

The decrease is due to the leverage and recourse debt leverage ratios were primarily due to decreased borrowings on our bank term facilities.

The result of net loan pay offs during the period.

Turning to results from the company's real estate investments net loss from real estate investments remained relatively flat at 369000 in the fourth quarter.

Included in the fourth quarter property operating loss was approximately 811000 of noncash depreciation and amortization.

Focusing on G&A to fall.

Quarter expanse of $2.6 million versus third quarter of $2 1 million reflects the seasonality for quarterly G&A, primarily due to the incurrence of the yearend audit expense.

Regarding share repurchases during the fourth quarter. The company used 934000 of the share repurchase plan to redeem 98000 shares at an approximate 61% discount to book value per share on December 31st.

There is approximately $7 2 million remaining on the board approved program at year end.

With net loan growth of $190 million in calendar year 'twenty 'twenty. Two we expect to have net income and four our earnings available for distribution to remain positive and steadily grow in 2023.

Of note, we expect to see a reduction in E. A D. During the first quarter of 2023, driven primarily by the seasonality in G&A expenses and hotel operations, along with anticipated net loan pay off activity.

We currently project that the company will produce GAAP income in a range of $1 25 to $1 75 per share.

N E a D and a range of $1 75 to $2.25 per share for the calendar year 2023.

Our projection remains subject to benchmark rate volatility loan payoff volume.

She saw rebar reserve adjustments and other nonrecurring or unexpected items that may arise during the year.

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

Thank you Dave as we closed the fourth quarter on a productive year at acres, we want to recognize the entire extended team and say thank you to everyone that works to deliver these results.

We also want to recognize our shareholders for trusting us to execute on our strategy, we remain committed and available at any time for questions and requests for information.

As I've said previously we are mindful that changes in the rate market and corresponding volatility in asset prices has created a heightened sense of anxiety.

As you've heard from our CEO , Mark <unk> and CFO , Dave The company is performing well.

<unk> 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.

We do this by investing in and managing high quality assets that will produce stable and growing book value for our shareholders.

This concludes our opening remarks, and I'll now turn the call back 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 telephone keypad, if you're using a speaker phone. Please pick up your handset before pressing the keys.

To withdraw your question. Please press Star then two.

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

And the first question will be from Stephen laws from Raymond James. Please go ahead.

Hi, Good afternoon, I guess first off congratulations on a nice quarter.

It was impacted by seasonal but but net interest income looks really solid on a smaller portfolio than I was looking forward to a solid distributable earnings number so nice nice close to the year.

Hmm.

Having said that can you talk about mark a little bit about your near term appetite no investments versus repayments repayments outstripped, our new originations are outpaced it a little bit in Q4, you know how do you thinking about that in the first half of the year. You know should we expect you know the portfolio size, you know kind of flatten that down.

But as we look out over the next couple of quarters.

Hey, Steve Thanks for the comments, yeah, we'd expect a through the at least the first half of this year probably throughout the year to remain relatively flat with respect to our net production.

When youre looking at it.

The turnover there I know you talked about you know there's not a lot of turnover a boat with the replenishment you know kind of where are you, putting new assets spreads today versus things youre seeing paying off.

So for the most part you're seeing loans paying off better probably spreads of three and a half to four and a half.

Today, we're putting spreads on the books that are between four and a half and five and a half.

Okay, so a little bit of a pick up there on the on the turnover.

Some of it.

And I wanted to touch base, a clarification first I think on the real estate page in the deck. A footnote mentioned is an asset that was sold subsequent to year end is that the same one you referenced in your prepared remarks that the.

That's probably the small I guess gain in Q1.

That's correct. It's a it was a small limited service hotel in Pennsylvania.

Great and just wanted to make sure. They wanted the same asset great. Appreciate the comments this afternoon and thank you.

Thanks, Steve.

And once again, if you would like to ask a question. Please press Star then one.

The next question is from Steve Delaney from JMP Securities. Please go ahead.

Hello, Mark, Dave and Andrew Nice to be with you. This evening.

You mentioned these see some reserve at 18.8 million at year end and I jotted down a figure of $6 5 million was that intended to be the specific reserve within the 18.8.

No.

Okay.

Yeah, sorry, Mark.

So Steve the 11 million, which the period expense, yeah, and return to 606 and a half of that was general reserve.

Primarily caused.

Cause by a worsening macro economic outlook.

The other of about 45 was general right, Okay right the other four and a half.

Got the mezzanine loan to a full reserve of 4.7. So it previously had a couple of hundred thousand.

Done through the Cecil model, but now that we are evaluating value aiding that one specifically, we added 4.5 to it and.

Got it to the full reserve of $4 seven.

Got it so as of now but that is gone are there any more specific reserves on your books.

As we sit here today.

None as we sit here today excellent. Okay. Your guidance I think that was the only the only mezzanine loan we had on our on our understood understood. You've got that so everything is first seats now got that so.

Thank you for the guidance for the full year in.

N B E T, which is actually higher than your gap.

GAAP I guess, you know, there's certainly going to reflect any additional cecil reserves that you have to put up within your E. D are you trying to build in any expectation for realized losses that might occur in the year, which would then reduce E D.

There may be a small amount of that Steve it's not a particularly meaningful number.

I would say that the biggest assumption in that guidance is that we expect we're keeping the Cecil reserve at that 91 basis point level that we ended the year at of course back to change.

In 2023, but we don't know enough now to you know meaningfully or accurately predict what that might be I understand so the the the consensus you've got is with the the 91 basis point see some reserve would be sort of a constant within that what I'm hearing you say.

Okay great.

Okay, and just stepping back one kind of big picture thing we are in a different market today than we were maybe six months ago in terms of commercial real estate, certainly 12 months ago. The.

The capital loss carry forwards you have just.

Speaking with several of you over the last year or so is the thought is that it probably is hard real estate bed as the asset class that will you know will generate potential capital gains I'm curious in this less certain market how proactive you may be in <unk>.

What you're seeing in.

[laughter] attractively valued our commercial real estate properties that you might decide to invest in in order to hopefully utilize your capital loss carryforward.

Yeah, Steve Thanks for the question.

I wouldn't expect us to be too active in going after additional equity investments I think what we have for now as what we'll stick with the remainder of the year at least.

Our business is making commercial mortgage loans and not really making equity investments. So.

I think that if there's distressed opportunities out there are it's probably not something that we're going to be going after.

Got it well thank you for the comments.

Thank you.

Yeah.

Ladies and gentlemen, this concludes our question and answer session I would like to turn the conference back over to Mark Stoeckle for any closing remarks.

Well. Thank you everybody for joining us today, we appreciate everybody's support and we look forward to speaking again in the first quarter of 2023 and.

Hopefully, having some robust earnings to discuss talk soon.

Thank you Sir the conference has now concluded. Thank you for attending today's presentation you may now disconnect.

Yeah.

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