Q1 2024 Acres Commercial Realty Corp Earnings Call

Participants

Kyle Brengel; Vice President-Operations; Acres Commercial Realty Corp

Mark Fogel; President, Chief Executive Officer, Director; Acres Commercial Realty Corp

Eldron Blackwell; Chief Financial Officer; Acres Commercial Realty Corp

Andrew Fentress; Chairman of the Board; Acres Commercial Realty Corp

Stephen Laws; Analyst; Raymond James & Associates, Inc.

Chris Muller; Analyst; Citizens JMP Securities, LLC

Presentation

Operator

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 call, Kyle Brengel, 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 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, and 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.

Mark Fogel

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 and our $1.8 billion commercial real estate loan portfolio, it's now 3.78% over the one-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 four or five, which represented 17% of the par value of our portfolio, an increase of 1% respectively, as compared to the end of fourth quarter 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 and office property in Chicago, the basis of $14 million that was valued at $20.3 million upon acquisition. The loan was previously risk rated a five in our December 31 financials. We recognized a $5.8 million gain on conversion on accepting the deed in lieu of foreclosure and immediately contributed the asset to a joint venture seeking to maximize its value stream through a multifamily conversion. We continue to manage several investments in real estate that we expect to monetize that 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 for the goal of improving correct credit quality and recycling capital into performing categories.
We will now have ACRs CFO, Eldron Blackwell, discuss the financial statements and operating results during the first quarter.

Eldron Blackwell

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 reserves is primarily driven by worsening macroeconomic factors due to higher interest rates lasting longer than expected, compounded by an increase in models 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 comprise $4.7 billion 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 25% run rate decline in net interest income resulting from net payoffs and to a lesser extent for loan modifications that occurred during the quarter and late in the fourth quarter as well as a 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 our available liquidity at March 31 was $92.1 million, which comprised $84.6 million of unrestricted cash and $7.5 million of project financing available on unlevered assets. Our GAAP debt to equity leverage ratio slightly decreased to 3.7 times at March 31 from 3.8 times at December 31. Our recourse debt leverage ratio remained consistent at 1.1 times at both March 31 and December 31.
And with that, I will now turn the call to Andrew Fentress for closing remarks.

Andrew Fentress

Thank you, Elden.
The first quarter of '24 was a mix, but net positive quarter for HCR shareholders. Our operating metrics at the two hotel properties were slightly below expectations. And we don't 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 of 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 the reinvestment period for there were some additional CECL reserves booked. They were largely in the macro economic category. Credit quality remains high, as you've heard from us in the past, wheat ACRES are focused on protecting book value. The book is in good shape. We had a nice win in the Q one, as Mark described, monetizing Chicago office for again, 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?

Question and Answer Session

Operator

(Operator instructions)
Stephen Laws, Raymond James.

Stephen Laws

Good morning. I appreciate the comments so far on the disclosure in the supplement. One thing I noticed with regards to interest rate caps have 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? You know after those expire, what type of traction you're seeing with existing sponsors and borrowers as far as buying new caps and supporting assets? And maybe any color on how you expect the CapEx breakdown maturity wall that play out over the next few quarters?

Mark Fogel

Stephen, this is Mark, and thank you for the question. It's a good question. We our asset management team stays very far ahead of lease 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 that and at least three to six months out we have a pretty good sense of where we are with respect to does the cap infusions and interest reserve deposits.

Stephen Laws

Great. We've spoken over the past quarters on the longer-term target. Once you recycle some of the gains you're able to realize off real estate into new investments, 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 at the EAD level.

That is our target. So our objective is to produce EAD, it 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 that, the pace with which we can sell the assets and return the equity back into the loan book and obviously then getting the company over 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 two CLOs run off and the repayments. So that's a deleveraging force. But certainly, the objective and we believe are there the our ability to do it is high that we're going to be able to deliver a data center, our book value.

Stephen Laws

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

Sure. We do obviously want to be in a place at the end point where we are reinstating the dividend is reinstated and then being distributed in the meantime, we're returning of 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 and the size 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, but processes are underway and that ultimately will drive the timing with which we can ramp back to full dividends. But in the meantime, we continue to return capital to shareholders and the share repurchase. And I'll just note that since the Q3 of 2021 ACRES took over as the manager for 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 out at an attractive annual rate.

Stephen Laws

Great. Appreciate the comments and appreciate you quantifying that the buybacks and other actions you've taken has certainly been quite beneficial to book value. So I'm going to keep up the good work on that and thanks for your comments this morning.

Thanks, Stephen.

Operator

(Operator instructions)
Chris Muller, Citizens.

Chris Muller

So looking at the real estate income line, it looks like there was a $1.7 million drop from the fourth quarter in that line is that all seasonality there probably with the hotels mostly? Or is there something else behind that decline quarter over quarter?

Eldron Blackwell

Hey, Chris. This is Eldron.
Yes, the majority of that has to do with seasonality of the hotels. We had a little bit of market softening at our HDI. a hotel in Philadelphia, but other than that is it seasonality.

Chris Muller

Got it. So we should expect that to pick back up in the second and third quarter.

Eldron Blackwell

We do.

Chris Muller

Perfect.
And then I guess with both of the CLOs, the reinvestment periods now expired? And do you think a CLO makes sense at some point, maybe in the back half of this year, or do you think that will be more a 2025 type of that you'll look at?

Mark Fogel

This is Mark. It's hard to say it's really a function of how much product you can contribute into the CLO. So it's a function of production and obviously where the markets are for CLO execution. So I wouldn't expect anything obviously in the first half of this year. I think we'll start to look at it and gauge the market and our book and determine whether or not end-of-year first quarter or second quarter of next year.

Chris Muller

Makes sense. Got it. And if I could just squeeze one more in a quick follow up on Stephen's last question. So the pace and timing of these real estate sales, would you guys be more inclined to maybe accelerate that process if you had the opportunity to quickly deploy capital into attractive investments? Or is that more of a independent process of selling those assets?

We're not waiting. I guess is the punch line. And we think that the assets are now at a place that they can be monetized. And so the processes are underway and we agree that the opportunity set in the marketplace is attractive, and that's driving it as well as our desire to just normalize the operations of the company.

Chris Muller

Great. Thanks for taking the questions.

Operator

There are no further questions at this time. I will now turn the call over to management for closing remarks.

Thank you, everyone, for attending the first quarter call. We are always available for any follow-up questions that people have. We look forward to speaking to you again with our results for the second quarter.

Operator

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating ask that you please disconnect your lines.