Q4 2024 ACRES Commercial Realty Corp Earnings Call
Please, and by, your program is about to begin.
Cedric: Good day ladies and gentlemen and welcome to the 4th quarter 2024 Acres Commercial Realty Corp Earnings Conference call. Currently all participants are in a listen only mode.
Cedric: Later, we will conduct a question and answer session with instructions to follow at that time.
Cedric: If anyone requires assistance during the conference, please press star, then zero on your touch
As a reminder, the school is being recorded.
Speaker Change: I would now like to introduce your host for today's conference, Kyle Brengel, Vice President Operations. You may begin.
Speaker Change: Good morning and thank you for joining our call. I would like to highlight that we have posted the fourth quarter, 2024, earnings presentation to our website. This presentation contains summary and detailed information about the quarterly results of the company.
Speaker Change: 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.
Speaker Change: When used in this conference call the words Believes, anticipates expects and similar expressions are intended to identify forward-looking statements.
Speaker Change: 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 statement.
Speaker Change: These risks and uncertainties are discussed in the company's reports filed with the SEC, including its reports on forms 8K, 10Q and 10K, and in particular the risk factor section of its form 10K.
Speaker Change: Listeners are caution 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.
Speaker Change: Furthermore, certain non-GAAP financial measures may be discussed on this conference call. Our presentation of this information is not intended to be considered an isolation, or as a substitute to the financial information presented in accordance with GAAP.
Speaker Change: 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 past quarter.
Speaker Change: 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.
Mark Fogel: Good morning, everyone, and thank you for joining our call. Today I will provide an overview of our loan operations, 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 of 2024.
Mark Fogel: Of course, we look forward to your questions at the end of our prepared remarks.
Mark Fogel: The Acres team continues to execute on our business plan by developing a pipeline of 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 $107.5 million.
Mark Fogel: We closed one new commitment of $47.9 million with an unfunded commitment of $28.4 million and funded existing loan commitments during the quarter of $6.2 million, producing a net reduction of a lower value of $81.8 million.
Mark Fogel: The weighted average spread of the floating rate loans in our $1.5 billion commercial real estate loan portfolio is now 3.73% over one month term sofa rates.
Mark Fogel: The portfolio generally continues to perform demonstrating sound and consistent underwriting a proactive asset management. Stephen Laws, Mark Fogel,
Mark Fogel: The company ended the quarter with $1.5 billion of commercial real estate loans across 53 individual investments and one loan held for sale at $11.1 million.
Mark Fogel: At December 31st, our weighted average risk rating was 2.9 and increased from 2.7 at September 30th, and there were 12 loans rated 4 or 5 which represented 27% of the par value of our portfolio, an increase of 4% as compared to the end of the 3rd quarter of 2024.
Mark Fogel: Subsequent to December 31st, a for-rated loan with a principal balance of $30 million paid off at par, bringing off for-a-fiberated loans to approximately 25% of the par value of our portfolio and our weighted average risk rating to 2.8 on a pro-forma basis.
Mark Fogel: We continue to manage several investments in real estate that we expect to monetize at games in the future.
Mark Fogel: These anticipated gains will be offset by deferred tax assets and we expect to retain the equity and reinvest potential gained into our loan portfolio. One of those investments, an office property in Pennsylvania, was sold during the period for a gain of $7.5 million.
Mark Fogel: In January , we sold a loan on an underperforming hotel in Orlando that was risk-graded for at 94% of our bases.
Mark Fogel: We've already recorded the impact on book value at December 31st, and we will have a charge off to EAD of $700,000 in the first quarter.
Mark Fogel: The cell will allow us to redeploy the capital into new loans.
Mark Fogel: Our Student Housing Development at Florida State University opened in August 2024 and 95% occupancy.
Mark Fogel: Preleasing for the 2025-26 school year has been tracking well ahead of the current year in terms of both occupancy and rental rates.
Mark Fogel: One asset's pre-leasing is approximately 20% higher as compared to this time last year, while another asset is seeing near double-digit rent growth compared to 2024-25 school year.
Mark Fogel: We are working with our partner to sell the asset and will provide updates and future quarters on the monetization of this asset.
Mark Fogel: As we exit our real estate investments, we expect to redeploy the capital into our CRE loan book and look to increase our levered returns on the portfolio.
Mark Fogel: Along those lines, we are working on the liquidation of our two CRE securitization's structured in 2021. The leverage profile on an aggregate basis declined to 77% at December 31, and we will look to refinance the assets in the first quarter.
Mark Fogel: We have 2.3 million dollars of unamortized debt issuance cost out of December 31st and will
Mark Fogel: In summary, the agers 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.
Mark Fogel: We will now have ACR's CFO , Eldron Blackwell discuss the financial statements and operating results during the fourth quarter.
Thank you and good morning everyone.
Mark Fogel: The app net income allocable to common shares in the fourth quarter was $4.1 million or 52 cents per share diluted.
Mark Fogel: Gapnet income for the quarter included $8.6 million in that interest income. A net loss on real estate operations of $2.3 million, which included depreciation of $1.4 million, and as Mark previously mentioned, again, a $7.5 million or $95 per share resulting from the sale of our interest in a real estate property.
Mark Fogel: We saw a decrease in current expected credit losses or Cecil reserves of $1.2 million or 15 cents per share as compared to a decrease in Cecil reserves during the third quarter of $291,000.
Mark Fogel: The $1.2 million fourth quarter reversal of Cecil Reserves was primarily driven by loan payoffs and improvements in expected macroeconomic factors offset by an increase in model credit risk resulting from worsening property level performance on certain loans and a direct charge off of $700,000 to the reserve related to the Orlando Hotel loan are previously discussed which was sold on the first quarter of 2025.
Mark Fogel: on our $1.5 billion loan portfolio at par and comprise $4.7 million in specific reserves and $28.1 million in general credit reserves.
Mark Fogel: Earnings available for distribution or EAD for the quarter, 2024 was 48 cents per share as compared to 24 cents per share for the third quarter.
Mark Fogel: The difference primarily resulted from a 67-cent increase to EAD from previously mentioned gang on sale of property and was offset by 24-cent decrease in that interest income, driven by loan payoffs and a decline in sofa, a 15-cent decrease in real estate operation, and a 3-cent increase in operating expenses.
Mark Fogel: Gap Look Value per share was $28.87 on December 31st versus $27.92 on September 30th.
Mark Fogel: During the fourth quarter, we purchased $2.3 million from our previous repurchase plan and our border proofs and additional $5 million on our buyback program.
Mark Fogel: In total, we used $2.5 million to repurchase $155,000 common shares at an approximate 43% discount to book value on December 31st.
Mark Fogel: There was approximately $4.8 million remaining on the Board of Proof Program at year end.
Mark Fogel: Available liquidity at December 31st was $76.9 million, which comprised $56.7 million of unrestricted cash and $20.2 million of projected financing available on unlevered assets.
Mark Fogel: primarily as a result of payoffs and our two remaining CRE securitization and our recourse debt leverage ratio remain consistent at 1.1 times at both December 31 and September 30.
Mark Fogel: At the end of Q4, the company's net operating loss carry forward was $32.1 million or approximately $4.31 per share.
Mark Fogel: As Mark indicated, we will have some one-time charge events in the first quarter of 2025.
Mark Fogel: As we transact on some of our assets, refinance our delivered CLOs and begin to reinvest the proceeds into our CRE loan book, we expect to see our EAD profile trend up from a low point in the early part of 2025.
Mark Fogel: With that, I will turn the call to Andrew Fentress for closing remarks.
Thank you, Eldron.
Speaker Change: We are at an important inflection point in the management strategy for the company.
Speaker Change: As discussed, we're actively monetizing the equity investments made to utilize the NOL inherited from when we took over management in August of 2020.
Speaker Change: We expect to redeploy that equity capital into the loan book through active origination activity.
Speaker Change: We also expect to re-leverage the portfolio through the CRE CLO market and take leverage back to historical levels of between three and a half and four turns.
Speaker Change: Our mission is to drive mid-teens ROEs that net down to a run rate 8-10% EAD range at
Speaker Change: As always, careful origination and active asset management are the cornerstones of our approach to creating sound book value.
Speaker Change: As the above transition unfolds over the next couple of quarters, there will be some noise associated with DDI and other charges, and it will take time to re-leverage the book.
Speaker Change: We are close and we are confident in the team. We will get to our state objectives.
Speaker Change: We respect all of your confidence in us and look forward to your questions. Operator, this concludes your opening remarks and I'll turn the call back over for questions. Thank you.
Speaker Change: Thank you and at this time if you would like to ask a question please press the star and one or your telephone keypad.
Speaker Change: You may withdraw your question at any time by pressing star two. Once again, to ask a question, please press the star and one or your telephone keypad.
Speaker Change: We'll dig our first question from Matthew Erdner with Jones Trading. Please go ahead, your line is open.
Matthew Erdner: and Foley Extended Loans. Do you guys expect any additional payoffs to come through from some of those two rated loans? And then if you could, could you kind of give a little guidance in terms of portfolio growth and what you're targeting there on kind of a
Matthew Erdner: Yeah, we do expect more payoffs on some of the higher rated loans in fact we've already had during Q1 a few more payoffs than we're expected.
Speaker Change: So I would anticipate that, you know, given the fact that many of our properties are starting to stabilize, the fact that there is some...
Speaker Change: A lot of availability in the bridge loan market to refinance loans. There's suddenly we have a higher level of payoffs, but we expect to roll those back into.
Speaker Change: Our loan book, very quickly, ultimately we expect that by the end of the year our portfolio will be somewhere in the range of $1.8 billion to $2 billion up from where it is today $1.5 billion.
Speaker Change: Great, that's helpful. And then, you know, I guess in terms of opportunities, what are you guys seeing out there? You know, I know you just mentioned bridge, but as a target still kind of do increase multi-family, you know, I guess just what are you guys seeing out in the market right now?
Speaker Change: We're seeing a lot more activity in the market for sure. I think it was obviously pretty quiet over the last couple of years.
Speaker Change: We're seeing a lot of multi-family refinancing for loans coming out of construction.
Speaker Change: and at the same time, there's other asset classes which are attracted to us.
Speaker Change: We're seeing certainly improved fundamentals whether that hospitality or self-storage, there's just a lot coming in the door more so than expected, so we'll be able to pick and choose some pretty good assets along the way.
Speaker Change: Yeah, that's helpful. And then last one for me, as you guys kind of de-lever and refinance these CLOs, are you guys expecting to kind of have a reinvestment there to believe it open for future loan originations that you guys do make?
Speaker Change: Yeah, absolutely, so the new structures will include a revolving period of at least 24 months, so that will give the company some flexibility to add names in the future while tying up liabilities of pre-attractive levels here.
Great, thank you guys.
Thank you.
Speaker Change: Thank you and as a reminder, it is StarN1 on your telephone keypad if you would like to join the queue. We will move next with Chris Muller with Citizen Spank. Please go ahead. Your line is open.
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Chris Mueller: Hey guys, thanks for being a question and congrats on a nice finish to a challenging year. So I guess you guys are in a really good position to grow your book value as you continue to harvest these gains from the REO in addition to share buybacks and both those were really nicely creative in the fourth quarter.
Chris Mueller: and that's really not something we're seeing in the rest of the group.
Chris Mueller: So I guess this has been a long strategy you guys have been working on and it's nice to see it.
Chris Mueller: So I guess my question would be is on the rest of the REO are you guys expecting gained anywhere near what you saw on the office sale because that could really lead to some nice book value gains over the next year or two so just any thoughts on the magnitude of those potential gains going forward would be really helpful.
Speaker Change: Yes, so we've been purposely careful and not guiding too specifically in terms of where we think those sales are going to land.
Speaker Change: but I would echo what you've said, which is we believe and we've said it in the comments that there's going to be some future gain.
Speaker Change: and most importantly, when those gains to realize that that capital gets recycled back into the book using the facilities that we are now creating.
Speaker Change: I think that the strategy is the same as what we've discussed.
Speaker Change: and you'll see it play out over the next couple of quarters. And then we'll be out of that part of our strategy and history around making those investments and be squarely back into the full-time loan making business.
Speaker Change: God, and do you expect that to be mostly wrapped up in 25 or could some of those properties flip to 26?
So I would say it would be largely completed in 25.
Speaker Change: Got it. And then just the last line I have here, it's a little house keeping one. So the increase in real estate expenses quarter over quarter, does that include some selling costs or is there something else going on in that line item?
Speaker Change: You know, this is old and speaking. For the most part, there are a bunch of cleanup items. We call them one-time items and we don't expect to see them in 2025, but mostly cleanup got some new managers in there and we've been hitting hard the properties to better understand the stabilized cost structures.
So for the most part I would just say nothing.
Thanks for listening to CityFive.
Speaker Change: Guy, so 4Q is probably not a good run, right to use, going forward though, that's very helpful from that moment.
below.
Thanks for taking the questions.
Sure thing.
Speaker Change: Thank you. I need up here so we have no further questions at this time. I will turn the call back to Andrew for closing remarks.
Speaker Change: Thank you, Operator, and thank you everyone for joining. We look forward to following up with you if not before at our next quarterly call.
Speaker Change: and the Stascon Collegiate Program. Thank you for your participation. You may disconnect at any time.