Q2 2023 ACRES Commercial Realty Corp Earnings Call

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After todays presentation, there will be an opportunity to ask questions.

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I would now like to turn the conference over to Kyle Burn Joe. Please go ahead.

Good morning, and thank you for joining our call.

I would like to highlight that we have posted the second quarter 2023 earnings presentation to our website. This presentation contains summary, and detailed information about the quarterly 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 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 forward looking statements.

These risks and uncertainties are discussed in 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 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.

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.

A 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.

Reconciliation 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 quarter.

With me on the call today are Mark <unk>, President and CEO and Dave Brian ACR CFO .

Also available for Q&A is Andrew <unk> Chairman of ACR, I will now turn the call over to Mark.

Good morning, 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, while Brian will discuss the financial statements liquidity condition book value and operating results for the second 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.

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

We originated $122 $5 million mixed use loan commitments in the second quarter, which pays coupon interest at one month sofa, plus a spread of 6.25%.

Loan payoffs during the period were $47 3 million and net funded commitments during the quarter were $14 8 million.

Producing a net decrease to the portfolio of $10 million.

The weighted average spread of the floating rate loans and the $2 billion of commercial real estate loan portfolio increased to 394% over the one month benchmark rates.

During the quarter, we acquired an office property in Chicago via deed in lieu.

At the time of the foreclosure the asset was valued at $29 million.

This property is classified as held for sale at June 32023.

We expect to maintain a commercial real estate investment portfolio, including our loan book and real estate properties of $2 billion to $2 3 billion throughout 2023.

The portfolio generally continues to perform demonstrating sound and consistent underwriting and proactive asset management. The company ended the quarter with $2 billion of commercial real estate loans across 78 individual investments as.

As of June 32023, there were five loans rated four or five including three loans not current on contractual payments, representing four 9% of the portfolio.

This represents a slight decrease from March 31 2023 at.

At which there was also five loans rated four or five but represented 5% of the portfolio.

We continue to manage several investments in real estate that we expect to monetize our gains in the future. These.

These anticipated gains will be offset by NOL carryforwards, and we expect to retain the equity and reinvest potential gains into our loan portfolio.

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 , Dave Brian discuss the financial statements and operating results during the second quarter of 2023.

Thank you.

And good morning.

GAAP net income allocable to common shares in the second quarter was $817000.

Or <unk> 10 per share <unk>.

Included in that net income is an increased <unk> reserves of $2 7 million or <unk> 31 per share as compared to seasonal reserves during the first quarter of $5 1 million.

Seasonal reserves. This quarter are made up of $1 8 million in general reserve increases plus a charge off of 948000.

Taking the deed in lieu of foreclosure on the office property in Chicago.

The second quarter increased to general reserves was primarily attributable to the expected negative impact of macroeconomic factors on the general economy.

Those factors are partially offset by improvements in general portfolio credit risk.

The total allowance for credit losses at June 30 was $25 7 million.

Which represents one 3%.

130 basis points of the $2 billion loan portfolio at par.

And comprised $4 7 million in specific reserves and $21 million in general credit reserves.

Our earnings available for distribution for the second quarter was <unk> 60 per share, which compared favorably to 52 per share in the first quarter.

GAAP book value per share was $24.50 on June 30th versus $24 51.

On March 31.

Available liquidity at June 32023 was 91 million, which comprised $57 million of unrestricted cash $20 million of projected financing available on an unlevered assets and $14 million of reinvestment cash available and CRE.

Securitization.

GAAP debt to equity leverage ratio decreased to three nine times on June 32023.

Four one times on March 31, 2023.

Our recourse debt leverage ratio also decreased one point.

212 times on June 30th from one three times on March 31.

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

Turning to results from our real estate investments.

Net loss from real estate investments decreased to $1 6 million in the second quarter of 2023 from $1 8 million in the first quarter 2023.

During the second quarter, we incurred $1 million of property tax arrearages on the asset that we acquired via deed in lieu of foreclosure.

Included in the second quarter property operating loss was approximately 946000 of non cash depreciation and amortization.

Focusing on G&A.

Second quarter, 2023 expense of $2 $3 million versus first quarter.

2023 expense of $3 million.

Flex seasonality and quarterly G&A, primarily due to the incurrence of the year end audited expense, which amounted to approximately 600000 in the first quarter.

Our annual G&A expense projection remains unchanged.

Regarding share repurchases during the second quarter, we used $1 2 million of the share repurchase plan to redeem a 135000 shares at.

At an approximate 64% discount to book value on June 30th.

There was approximately $5 3 million remaining on the board approved program at quarter end.

With respect to full year 2023 guidance, we still expect EA D and a range of $1 75 and $2 25.

If paid as a cash dividend, which represents 7% to 9% of book value approximately in line with the peer group.

In addition, we still expect GAAP EPS of <unk> 75 to $1 25 per share.

Now I will turn the call to Andrew franchise for closing remarks.

Thank you David.

As you're all aware of the environment for the mortgage REIT sector remains challenging.

Acre team is focused on managing our high quality portfolio that is primarily invested in multifamily assets throughout the United States.

Fundamentals remained strong in this segment as low levels of unemployment strong demographic trends continue to drive low vacancy and positive rent growth.

We're mindful of the margin pressures are our sponsors are facing given higher cost of capital and other inputs.

Credit quality of our portfolio remains stable and we are actively monitoring for any early signs of weakness.

Our long run mission remains unchanged, namely to deliver value to our shareholders through increasing earnings and book value overtime.

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

Thank you.

We will now begin the question and answer session.

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Our first question comes from Chris Mueller with JMP Securities. Please go ahead.

Hey, guys. Thanks for taking the question. So I wanted to talk about spreads on your new originations.

The last couple of quarters, there has been a nice steady trend of improvements there. So I guess the question is this.

Is this something that you guys are seeing more broadly or are the loans that you guys are originating more of the outliers and the group. Thanks.

Okay.

Mark.

Sure Good morning, Chris how are you.

Yes, there are opportunities to invest in loans with some higher spreads in the market today frankly.

Frankly, we're really focused more on high credit quality good sponsorship in markets in which we believe so a couple of those deals were sort of outliers.

They're good assets, where we were able to gain good spread but for the most part our real focus on originations going forward is to ensure that.

We have high credit quality.

Assets coming into the portfolio good sponsorship.

Strong ltvs and in markets that are highly liquid.

Got it and being able to check all those boxes. There is obviously the best case scenario.

So the other question I have is on the share repurchases. So nice to see some some repurchases in the quarter.

Especially with where you guys are trading at book to book, but can you talk about how you guys think about or how the board thinks about.

Further buybacks versus originating new loans, even if youre, a cherry picking some of those better opportunities.

Yes. This is Andrew so the way, we think about the share repurchases as long as we're.

Wider than a 15% return on equity.

So we're going to allocate we're going to continue to allocate a portion of our liquidity too.

Share repurchases and given the discount that's available today.

Over that 15% ROE target. So we're going to we have an authorized $20 million share repurchase that has about $5 million left on it.

And as long as we're trading at the ranges that.

The stock is today I think we will continue to utilize the remaining $5 million and then reevaluate.

Got it that's very helpful. Thanks for taking the questions.

Ladies and gentlemen, this concludes our question and answer session for today.

I would like to turn the conference back over to Pedro <unk> for any closing remarks.

Thanks, everyone for joining and we appreciate the <unk>.

Tenants in the questions and we look forward to speaking with you again next quarter. Thank you very much.

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