ACRES Commercial Realty Corp. (ACR) Earnings Call Transcript & Summary

Good day, ladies and gentlemen, and welcome to the First Quarter 2024 ACRES Commercial Realty Corp. Earnings Conference Call. [Operator Instructions] As a reminder, this call is being recorded. I would now like to introduce your host for today's conference, Kyle Brengel, Vice President, Operations. You may begin.

Good morning, and thank you for joining our call. I would like to highlight that we have posted the first quarter 2024 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 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. 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. 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 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 our call. 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 first quarter 2024. 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 $80.8 million and net funded commitments during the quarter were $11.4 million, producing a net decrease to the loan portfolio of $69.4 million. The weighted average spread of the floating rate loans in our $1.8 billion commercial real estate loan portfolio is now 3.78% over the 1-month benchmark rates. The portfolio generally continues to perform, demonstrating sound and consistent underwriting and proactive asset management. The company ended the quarter with $1.8 billion of commercial real estate loans across 66 individual investments. At March 31, there were 11 loans rated 4 or 5, which represented 17% of the par value of our portfolio, an increase of 1%, respectively, as compared to the end of fourth quarter of 2023, and our weighted average risk rating decreased from 2.7 at December 31 to 2.6 at March 31. We acquired, via deed-in-lieu of foreclosure, an office property in Chicago with a basis of $14 million that was valued at $20.3 million upon acquisition. The loan was previously risk rated a 5 in our December 31 financials. We recognized a $5.8 million gain on conversion upon accepting the deed-in-lieu of foreclosure and immediately contributed the asset to a joint venture, seeking to maximize its value through a multifamily conversion. 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 carryforwards and we expect to retain the equity and reinvest potential gains in 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, to discuss the financial statements and operating results during the first quarter.

Thank you, and good morning, everyone. GAAP net income allocable to common shares in the first quarter was $556,000 or $0.07 per share. Included in net income is an increase to current expected credit losses, or CECL reserves, of $4.9 million or $0.61 per share as compared to CECL reserves during the fourth quarter of $1.1 million. The increase to the general CECL reserve is primarily driven by worsening macroeconomic factors due to higher interest rates lasting longer than expected, compounded by an increase in modeled credit risk. The total allowance for credit losses at March 31 was $33.7 million, which represents 1.89% or 189 basis points on our $1.8 billion loan portfolio at par and comprised $4.7 million in specific reserves and $29 million in general credit reserves. Earnings available for distribution, or EAD, for the first quarter was $0.16 per share as compared to $0.55 per share for the fourth quarter. The difference being a $0.25 run rate decline in net interest income resulting from net payoffs and, to a lesser extent, loan modifications that occurred during the quarter and late in the fourth quarter as well as a $0.16 decline in real estate operations due to seasonality. GAAP book value per share was $27.25 on March 31 versus $26.65 at December 31. This increase was primarily due to our buyback program, which generated $0.41 of book value per share for the first quarter. During the quarter, we used $2.1 million to repurchase 195,000 common shares at an approximate 61% discount to book value on March 31. In addition, we used $2.2 million to repurchase 100,000 shares of our preferred Series D securities at an approximate 14% discount to the stated redemption value of $25. There was approximately $5.6 million remaining on the Board-approved program at quarter end. Available liquidity at March 31 was $92.1 million, which comprised $84.6 million of unrestricted cash and $7.5 million of projected financing available on unlevered assets. Our GAAP debt-to-equity leverage ratio slightly decreased to 3.7x at March 31 from 3.8x at December 31. Our recourse debt leverage ratio remained consistent at 1.1x at both March 31 and December 31. And with that, I will now turn the call to Andrew Fentress for closing remarks.

Thank you, Eldron. The first quarter of '24 was a mix but net positive quarter for ACR shareholders. Our operating metrics at 2 hotel properties were slightly below expectations. And we know you like to use the word seasonality because we also know that Q1 can typically be a slower part of the calendar, but that does, in fact, drive some of the results. There's been some deleveraging in the portfolio as loans have repaid, driving lower portfolio return on equity. We expect this will continue throughout the balance of the year as both of our CLOs are outside their reinvestment period. While there were some additional CECL reserves booked, they were largely in the macroeconomic category. Credit quality remains high. As you've heard from us in the past, we at ACRES are focused on protecting book value. The book is in good shape. We had a nice win in the Q1, as Mark described, monetizing a Chicago office for a gain. We'll continue to focus on our portfolio in 2024 and monetizing the assets that were acquired to utilize our NOL. We look forward to the Q&A discussion and answering your questions. Operator?

[Operator Instructions] Your first question comes from Stephen Laws with Raymond James.

I appreciate the comments so far in the disclosure and the supplement. One thing I noticed with regards to interest rate caps, they've been providing a lot of protection so far, but it seems like a lot of them hit maturity or expiration in the next few quarters. Can you talk about your expectations on portfolio performance after those expire, what type of traction you're seeing with the existing sponsors and borrowers as far as buying new caps and supporting assets? And maybe any color on how you expect the cap expiration or maturity wall to play out over the next few quarters?

Stephen, this is Mark. Thank you for the question. It's a good question. Our asset management team stays very far ahead of these expiring caps. In most cases, those loans that have expiring caps, if they want to extend, they're required to buy a new cap. And many, many months before those extension options can essentially be executed on, our asset management team is working with the sponsors on acquiring new caps and/or creating interest reserve deposits in lieu of the caps. So we're very far ahead of it. We haven't had any issues to date, and we don't expect to, in that at least 3 to 6 months out, we have a pretty good sense of where we are with respect to those cap executions and interest reserve deposits.

Great. We've spoken over the past quarters. I know that the longer-term target, once you recycle some of the gains you're able to realize off the real estate into new investments, is likely senior loans. Can you talk about the outlook for maybe a return on book or EAD return on book? Do you think 10% is achievable? When you think about the long-term earnings power of the company, how do you guys think about quantifying that EAD level?

That is our target. So our objective is to produce EAD that would pay an equivalent 10% yield at book value. The timing of the achievement of that outcome will be, as you pointed out, driven by the pace with which we can sell the assets and return the equity back into the loan book and obviously, then getting the company or the portfolio levered at the appropriate level as well. So we're addressing both of those real time, some of which, as I pointed out, with respect to the deleveraging, is happening as the 2 CLOs run off in their repayments. So that's a deleveraging force. But certainly, the objective, and we believe our ability to do it is high, that we're going to be able to deliver EAD at 10% of book value.

Great. And then my last question. The NOLs, some have no expiration. Others, I think, have a 5-year life. Can you talk about how you expect the pace of asset sales to play out, what your thoughts are as far as the right time to reinstate the dividend and how you think about returning capital to shareholders between burning off NOLs or repurchasing stock and then, at some point, reinstating the dividend?

Sure. We obviously want to be in a place at the end point where we are -- the dividend is reinstated and being distributed. In the meantime, we're returning capital to shareholders through stock buybacks. That continues to be in place, and we're in the market with that program daily. As it relates to the pace and timing of the sales and then ultimately, the amount of NOLs, we're moving forward as we speak on all of the assets. We don't have exact visibility on the timing. The processes are underway. And that ultimately will drive the timing with which we can ramp back to a full dividend. But in the meantime, we continue to return capital to shareholders through the share repurchase. I'll just note that since the Q3 of 2020, when ACRES took over as the manager, the book value per share increase has been 14.4% annualized. So the -- that we think reflects that statement that we are, in fact, delivering value to shareholders at an attractive annual rate.

Appreciate the comments and appreciate you quantifying that. The buybacks and other actions you've taken have certainly been quite beneficial to book value. So -- and keep up the good work on that.