Q4 2023 ACRES Commercial Realty Corp Earnings Call

Operator: Thank you. Good day, ladies and gentlemen, and welcome to the fourth quarter and full year 2023 Acres Commercial Realty Corporation earnings conference call. Currently, all participants are in a listen-only mode.

Thank you good day, ladies and gentlemen, and welcome to the fourth quarter and full year 'twenty 23 acres Commercial Realty Corporation earnings Conference call. Currently all participants are in a listen only mode.

Operator: 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 conference. Kyle Brengel, Vice President of Operations. You may begin.

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 conference Kyle Frankel Vice President operations you may begin.

Kyle Brengel: Good morning, and thank you for joining our call. I would like to highlight that we have posted the fourth quarter 2023 earnings presentation on our website. This presentation contains summary and detailed information about the quarterly and annual 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 company's Listeners are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof.

Good morning, and thank you for joining our call I would like to highlight that we have posted the fourth quarter 2023 earnings presentation to our website. This presentation contains summary, and detailed information about the quarterly and annual 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 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 lists.

Listeners 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.

Mark Steven Fogel: The company undertakes no obligation to update any of these forward-looking statements. Furthermore, certain non-GAAP financial measures may be discussed on the, 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. Reconciliations of non-GAAP financial measures for the most comparable measures prepared in accordance with generally accepted accounting principles are contained in the earnings presentation for the past. With me on the call today are Mark Fogel, President and CEO, and Eldron Blackwell, ACR's CFO. Also available for Q&A is Andrew Fentress, chairman of ACR. I will now turn the call over to Mark. Good morning, everyone, and thank you for joining us on our call.

Furthermore, certain non-GAAP financial measures may be discussed on this conference call a.

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 puzzle, President and CEO and elder Blackwell ACR CFO.

Also available for Q&A, Andrew Fentress, 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.

Mark Steven Fogel: Today, I will provide an overview of our loan originations, real estate investments, and the health of the investment portfolio, while Eldron Blackwell will discuss the financial statements, liquidity condition, book value, and operating results for the fourth quarter and full year 2023. Of course, we look forward to your questions at the end of our prepared remarks. The Acres 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. Loan payoffs during the period were $98.3 million.

Lastly, I will discuss the financial statements liquidity condition book value and operating results for the fourth quarter and full year 2023.

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

Loan payoffs during the period were $98 $3 million, we closed one new commitment of $29 $7 million and net funded commitments during the quarter were $3 $9 million producing a net decrease to the loan portfolio of $64 $7 million.

Mark Steven Fogel: We closed one new commitment of $29.7 million, and net funded commitments during the quarter were $3.9 million, producing a net decrease in the loan portfolio of $64.7 million. The weighted average spread of the floating rate loans in the $1.9 billion commercial real estate loan portfolio is now 3.77% over the one-month benchmark rate. The portfolio generally continues to perform, demonstrating sound and consistent underwriting and proactive asset management. The company ended the year with $1.9 billion of commercial real estate loans across 70 individual investors. At December 31st, there were 11 loans rated four or five, which represented 16% of the par value of our portfolio, an increase of three loans and 8% of par value, respectively, as compared to the end of the third quarter of 2023. Additionally, the weighted average risk rating increased from 2.6 at September 30th to 2.7 at December 31st.

The weighted average spread of the floating rate loans in the one 9 billion dollar commercial real estate loan portfolio is now 377% over the one month benchmark rates.

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

Company ended the year with $1 $9 billion of commercial real estate loans across 70 individual investments.

At December 31st there were 11 loans rated four or five which represented 16% of the par value of our portfolio, an increase of three loans and 8% of par value respectively as compared to the end of the third quarter of 2023.

Additionally, the weighted average risk rating increased from 2.6 at September 30th $2 seven at December 31st.

Mark Steven Fogel: This increase in weighted average risk grading is attributable to a combination of some properties falling slightly behind on implementing underwritten business plans or overall capital market conditions. We continue to manage several investments in real estate that we expect to monetize at gains in the future. These anticipated gains will be offset by NOL carry forwards, and we expect to retain the equity and reinvest potential gains into our loan portfolio. In summary, the Acres team continues to be focused on the overall quality of the investment portfolio, including investments in real estate with the goal of improving credit quality and recycling capital into performing categories. We will now have ACR's CFO, Eldron Blackwell, discuss the financial statements and operating results during the fourth quarter. Thank you, everyone.

This increase in weighted average risk rating is attributable to a combination of some properties falling slightly behind on implementing underwritten business plans and or overall capital market conditions.

We continue to manage several investments in real estate, we expect to monetize that games in the future.

These anticipated gains will be offset by NOL carry forwards and when do you expect to retain the equity and reinvest potential gains into our loan portfolio.

In summary, the acres team continues to be focused on the overall quality of the investment portfolio, including investments in real estate with the goal of improving credit quality and recycling capital into performing categories.

We'll now have Acr's, CFO elder and black well discuss the financial statements and operating results during the fourth quarter.

Thank you and good morning, everyone.

Eldron C. Blackwell: Gap net income allocable to common shares in the fourth quarter was $1.7 million, or 20 cents per share. Included in that income is an increase to current expected credit losses or CECL reserves of $1.1 million, or 13 cents per share, as compared to CECL reserves during the third quarter of $2 million. The four-quarter increase to general CECL reserves was primarily driven by model increases in general portfolio credit risk from sustained elevated benchmark interest rates offset by model improvement and expected macroeconomic conditions affecting the general commercial real estate market. The total allowance for credit losses at December 31st was $28.8 million, which represents 1.54 percent or 154 basis points of the $1.9 billion loan portfolio at par and comprised $4.7 million in specific reserves and $24.1 million in general credit. Turning to results from our real estate investments, net loss from real estate investments increased to approximately $800,000 in the fourth quarter from approximately $400,000 in the third quarter. This was primarily due to the seasonality of hotel operations.

Net income allocable to common shares in the fourth quarter was $1 $7 million or <unk> 20 per share.

Included in net income is an increase the current expected credit losses, or seasonal reserve $1 $1 billion or 13 cents per share as compared to seats of reserves during the third quarter up $2 million.

The fourth quarter increased the general seasonal reserves, it's primarily driven by modest increases in general portfolio credit risk from sustained elevated benchmark interest rates offset by model improvement unexpected macro economic conditions affecting the general commercial real estate market.

The total allowance for credit losses at December 31st was $28 8 million, which represents 154% or 154 basis points of the $1 9 billion loan portfolio at par and comprised $4 $7 million in specific reserves and $24 $1 billion in general credit reserves.

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Turning to results from our real estate investments that loss from real estate investments increased to approximately $800000 in the fourth quarter from approximately $400000 in the third quarter.

This was primarily due to the seasonality of hotel operations.

Eldron C. Blackwell: Included in the fourth quarter property operating loss was $1.2 million of non-cash depreciation and amortization. Earnings available for distribution or EAD for the fourth quarter were $0.55 per share as compared to $0.73 per share for the third quarter. The difference being a $0.15 decline in net interest income from net payoffs and the impact of two non-performing loans, an $0.08 increase in G&A expenses offset by a $0.05 reduction in management. Gap's book value per share was $26.65 on December 31st versus $25.07 on September 30.

<unk> in the fourth quarter property operating loss was $1 $2 million of noncash depreciation and amortization.

Earnings available for distribution or <unk> for.

For the fourth quarter. It was 55 per share as compared to 73 cents per share for the third quarter.

The difference being a 15% decline in net interest income from that pay offs and the impact of two nonperforming loans and 8% increase in G&A expenses offset by a 5% reduction in management fees.

GAAP book value per share was $26.65 on December 31st versus $25 seven on September 30th.

Eldron C. Blackwell: This increase was primarily due to our buyback program, which generated $1.32 of book value per share for the fourth quarter. We used $4.7 million of the share repurchase plan to redeem 601,000 common shares at an approximate 71% discount to book value on December 31st. At quarter end, there was approximately $9.8 million remaining on the board-approved program, which had been increased by $10 million by our board during the fourth quarter. Available liquidity at December 31 was $108 million, which comprised $83 million of unrestricted cash and $25 million of projected financing available on unlevered assets.

This increase was primarily due to our buyback program, which generated $1 32, a book value per share for the fourth quarter.

We used $4 $7 million of the share repurchase plan to between 601000 common shares at an approximate 71% discount to book value at <unk>.

31st.

At quarter end, there was approximately $9 $8 million remaining on our board approved program, which had been increased by $10 million by our board during the fourth quarter.

Available liquidity at December 31 was $108 million, which comprised $83 million of unrestricted cash and $25 million of projected financing available on unlevered assets, we completed the reinvestment window in both of our CRE securitization during 2024.

Andrew Fentress: We completed the reinvestment window in both of our CRE securitizations during 2024. As a result, any loan payoffs and securitizations will now pay down. Notes going forward. Our gap debt to equity leverage ratio slightly decreased to 3.8 times at December 31st from 3.9 times at September 30. Our recourse debt leverage ratio also slightly decreased to 1.1 times at December 31st from 1.2 times at September 30th, primarily due to a reduction in our CRE loan book offset by borrowings related to our development of a student housing project at Florida State University. With that, I will now turn the call over to Andrew Fentress for closing remarks. Thank you, Eldron.

Any loan payoffs in the Securitizations will now pay down notes going forward.

Our GAAP debt to equity leverage ratio slightly decreased to three eight times at December 31st from three nine times at September 30 of our recourse debt leverage ratio also slightly decreased 1.1 times at December 31st 112 times at September 30, primarily due to a reduction in our CRE loan book offset by borrowings relate.

To our development of a student housing project at Florida State University.

With that I will now turn the call to Andrew <unk> for closing remarks.

Thank you Eldon.

Andrew Fentress: I think, as we all know, 2023 was a challenging year for the mortgage markets broadly. But looking into 2024, we see improvements as capital markets are reopening, and asset-level transactions are beginning again. As a firm, we remain focused on the credit quality of the portfolio.

I think as we all know 2023 was a challenging year for the mortgage markets broadly.

But looking into 2024, we see improvements as capital markets are reopening and asset level transactions are beginning again.

As a firm we remain focused on the credit quality of the portfolio, we're maximizing the value of our investments made to offset the company's Nols.

Operator: We're maximizing the value of our investments made to offset the company's NOLs, and we're continuing to serve the needs of our borrower clients. This concludes our opening remarks, and I'll turn the call back over to the operator for questions. 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 are using a speakerphone, please pick up your handset before pressing the keys.

And we're continuing to serve the needs of our borrower clients.

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

We will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad.

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

Operator: If at any time your question has been addressed and you would like to withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster. The first question comes from Stephen Laws with Raymond James. Please go ahead. Hi, good morning.

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

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

The first question.

It comes from Stephen laws with Raymond James. Please go ahead.

Okay.

Hi, good morning.

Mark Steven Fogel: Appreciate the comments so far. Can you maybe talk a little bit more about what drove the increase in correlated loans? Is it discussions with borrowers? Is it at that level of performance, you know, or nearing maturity date? What drove that increase? And how should we think about loan migrations? Out. Good morning, Steve. Thank you. This is Mark.

I appreciate the comments so far can you maybe talk.

A little bit more about what drove the increase from four rated loans.

Is it discussions with borrowers at the asset level performance.

Bearing maturity date.

What drove that increase and how should we think about loan migration.

So.

Okay.

Good morning. Thank you Hi, this is mark.

Mark Steven Fogel: We had four loans migrate into the four and five territory this quarter. And that's using our standards, our watchlist standards. And I think it's more about some, you know, property-level cash flows, less about the credit quality of the asset in general. And we feel really good about those assets. It's really just sort of a short-term hiccup in property operations.

We have four loans migrate into the four and five territory this quarter and that's using our standards are our watchlist standards and I think it's more about some prop.

Property level.

Cash flows.

Yes about.

The credit quality of the asset in general we feel really good about those assets are it's really just sort of a short term hiccup on property operations and it just because deal flow into that four and five category does not mean that we expect a principal loss.

Mark Steven Fogel: And just because deals flow into that four and five category does not mean that we expect a principal loss on those assets. In fact, one of our five assets was resolved in Q1 of this year with the recovery of our entire full principal balance. I appreciate the comments on that.

Those assets are in fact, one of our five assets.

Resolved in Q1 of this year.

With the recovery of our entire full principal balance.

Mark Steven Fogel: And then Mark, I'm going to follow up on your comments from the prepared remarks around, you know, at some point, monetizing the real estate investments and recycling them into, you know, cash flow and theory loan investments. How do you think about the timing of that? You know, any assets queued up that maybe you could do that sooner rather than later?

Right I appreciate the comments on that one and then Mark I had a follow up on your comments in the prepared remarks around you know at some point monetizing the real estate investments in recycling and Oh.

Cash flow in your theory.

How do you think about the timing of that you know when you ask that.

Maybe you do that sooner rather than later.

Mark Steven Fogel: And we have some visibility on two of those assets. There's no certainty around those right now, but they're sort of getting to the point where we expect to monetize them. But at this juncture, we have no visibility on the timing.

Yeah, Stephen we you have some visibility on two of those assets.

There's no certainty around those right now, but they're they're sort of getting to the point that which we expect to monetize but at this juncture, we have no visibility on the timing of that.

Andrew Fentress: Okay, and then, you know, lastly, the stock repurchases were, you know, very accretive during the quarter. Can you talk about, you know, I know you gave the remaining authorization, but, you know, continued appetite for that versus possibly reinstating the dividend or possibly doing both? How do you think about returning capital to shareholders? Hey, Stephen, it's Andrew.

Okay and then.

Lastly, you know that the stock repurchases.

We did during the quarter can you just talk about you gave there mainly allow.

They shouldn't but well continued appetite for that versus possible reinstating the dividend or possibly them. How do you think about.

We're trying to accomplish here.

Hey, Steven it's Andrew So I think as we've said in the past, we're really always focus so as the stock continues to rally that gap gets narrowed and it'll be more favorable.

Andrew Fentress: So I think, as we've said in the past, we're really ROE focused. So as the stock continues to rally, that gap gets narrowed, and it'll be more favorable to deploy capital into the loan book and ultimately begin returning capital to shareholders through a dividend. You took advantage of some pretty meaningful discounts. There were some block volumes that were presented to us. In the late part of the fourth quarter, which we took advantage of because we felt the discount was just significantly attractive. I don't know if we're going to see those again at those levels. Hopefully, not.

To deploy capital into the loan book and ultimately begin returning capital to shareholders through dividends. So.

We took advantage of some pretty meaningful discounts there were some block volume that were presented to us.

In the late part of the fourth quarter that we took advantage of because we felt the discount was just significantly attractive I don't know if we're going to see those again at those levels hopefully not.

Operator: But that's our plan as we think about managing shareholder capital and returns of capital to shareholders. I appreciate the comments this morning and congratulations on a nice quarter. Thank you, Stephen. Again, if you have a question, please press star then 1. The next question comes from Chris Muller with Citizens J&P Securities. Please go ahead.

But that's our plan as we think about them.

Managing shareholder.

Capital and returns of capital to shareholders.

Great I appreciate the comments this morning, and congrats on a nice quarter.

Yeah.

That just didn't.

Again, if you have a question. Please press Star then one.

The next question comes from Chris Muller with citizens JMP Securities. Please go ahead.

Christopher Muller: Hey guys, thanks for taking the question. So I want to echo Stephen's comments there. It's great to see those buybacks and the nice book value accretion. So I just wanted to hit on the dividend a little bit here. Do you guys think that that's a 2024 event, or is that going to be more of a 2025 event?

Hey, guys. Thanks for taking the question so I want to Echo Steven's comments, there, it's great to see those buybacks and the nice book value accretion I'm, sorry, I just wanted to hit on the dividend a little bit here or do you guys think that that's a 'twenty 'twenty four of that or is that going to be more a 2025. After you get some of the Oreo off the books and <unk>.

Andrew Fentress: After you get some of the REO off the books and start getting some new loans coming in here, I guess what's the question: How are you guys viewing new loan originations versus dividends and just the whole capital deployment picture in this current environment? Yeah, so again, when we deploy new dollars in the loan book, our objectives are for roughly a 15% return on equity. So that's the calculus that goes through our deployment lens.

Targeting something a new.

New loans are coming in here I guess, what's.

How are you guys viewing new loan originations versus dividends and just the whole capital deployment picture in this current environment. Thanks.

Yeah, So again, where when we deploy new dollars in the loan book our objectives are for a roughly a 15% return on equity. So that's the calculus that goes through our deployment.

Yes.

Andrew Fentress: And we think about that in the context of repurchasing shares as well. So at the levels that we were repurchasing in the fourth quarter, you can do the math that we're significantly above that 15% ROE number. So that's why we were happy to return capital to shareholders through the purchases that we did in the Q4. As it relates to the timing of a dividend, we have not given guidance as to specifically when that will occur.

And we think about that in the context of repurchasing shares as well so at the levels that we were repurchasing in the fourth quarter. You can do the math there were significantly above that 50% of our OE number. So that's why we were happy to return capital to shareholders through repurchases that we did in Q4.

As it relates to the timing of a dividend we have not given guidance as to specifically when that will occur I would tell you that as mark indicated our objectives are to monetize some of the investments that the company made.

Andrew Fentress: I would tell you that, as Mark indicated, our objectives are to monetize some of the investments that the company made to offset the NOL this year. And as those monetizations occur, the capital will be able to be redeployed back into the loan book and drive additional EAD or earnings available for distribution. Another one of our stated objectives is to have an EAD that roughly equates to a 10% dividend at book value. We think that dividend is roughly competitive with the market and our peers. And so those are the metrics that we're using internally to think about monetizing assets, returning capital to the loan book, and then ultimately having EAD capacity to pay a common dividend.

To offset the NOL this year and as those monetization occur.

The capital will be able to be redeployed back into the loan book and drive additional E D. Our earnings available for distribution.

Another one of our stated objective is to have an EAA D that roughly equates to a 10% dividend at book value are.

We think that dividend is roughly competitive.

With the market and our peers.

And so those are the metrics that we're using internally to think about monetizing assets returning capital under the loan book and then ultimately having E D capacity to pay a common dividend.

Mark Steven Fogel: I guess so, in the deck, you guys put a slide in there with interest rate cap maturities, and I think that's very helpful. So it looks like you have a big chunk of maturities coming in the next interest rate cap maturity, to be clear, in the next couple quarters. I guess, how are conversations going with those borrowers, and do you expect, broadly, most of the borrowers to be able to replace those caps at this current rate and interest? Yeah, we're getting way ahead of it. Obviously, we're having conversations early on, you know, six months in advance of those interest rate cap maturities. For the most part, I think, you know, our borrowers are replacing the caps with no issues. Obviously, there's conversations around, you know, structure; some wish to potentially create some interest reserves in lieu of caps. But generally speaking, our borrowers have a lot of equity invested in these assets, and there's a lot of upsides related to the majority of our assets, so they're sticking by their assets, they're investing in the caps, and I would say that the majority of the conversations have been very positive.

Got it that that context is helpful. And then I guess, so and in the deck you guys put a slide in there with our interest rate cap maturities and I think that's very helpful. So it looks like you have a big chunk of maturities come in in the next interest rate cut maturities to be clear in the next couple of quarters I guess, how are conversations going with those borrowers and do you expect.

Probably most of the borrowers to be able to replace those caps in this current rate environment.

Yeah.

We're getting way ahead of it obviously, we're having conversations early on you know six months in advance of those interest rate cap maturities for.

For the most part I think you know our borrowers are.

Or are replacing the cats no issues, obviously theres conversations around.

You know structure, some some worst to potentially create some interest reserves in lieu of caps, but generally speaking our borrowers have a lot of equity invested in these assets and that there's a lot of upsides related to the majority of our assets so they're sticking by their assets or investing in the caps and.

Yeah, I would say that the majority of the conversations have been very positive.

Christopher Muller: Thanks for taking the questions and congratulations on a strong finish to the year. Thank you. This concludes our question and answer session and the fourth quarter and full year 2023 Acres Commercial Realty Corp earnings conference call. Thank you for attending today's presentation. You may now disconnect. The Ultimate Parody Site! https://www.youtube.com.au,...

Got it thanks for taking my questions and congrats on a strong finish to the year.

Thank you.

This concludes our question and answer session and the fourth quarter and full year 2023 acres of commercial Realty Corp Earnings Conference call. Thank you for attending today's presentation you may now disconnect.

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Yeah.

Yeah.

Mhm.