ACRES Commercial Realty Corp. (NYSE:ACR) Q1 2024 Earnings Call Transcript

ACRES Commercial Realty Corp. (NYSE:ACR) Q1 2024 Earnings Call Transcript May 2, 2024

ACRES Commercial Realty Corp. isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day, ladies and gentlemen, and welcome to the First Quarter 2024 ACRES Commercial Realty Corp Earnings Conference Call. Currently, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session with instructions to follow at that time. [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.

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 a forward-looking statement. 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 factor 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. Reconciliation of non-GAAP financial measures, 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 in our $1.8 billion commercial real estate loan portfolio is 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 31st, 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 2023, and our weighted average risk rating decreased from 2.7 at December 31st to 2.6 at March 31st. 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 at 5 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 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 carry forwards 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, 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 macro-economic factors due to higher interest rates lasting longer than expected compounded by an increase in model credit risk. The total allowance for credit losses at March 31st was $33.7 million, which represents 1.89% or 189 basis points on our $1.8 million 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 31st versus $26.65 at December 31st. 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 state of redemption value of $25. There was approximately $5.6 million remaining on the Board approved program at quarter end. Available liquidity at March 31st 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 3.7 times at March 31st from 3.8 times at December 31st. Our recourse debt leverage ratio remained consistent at 1.1 times at both March 31st and December 31st. And with that, I will now turn the call to Andrew Fentress for closing remarks.

Andrew Fentress: Thank you, Eldron. The first quarter of 2024 was a mixed but net positive quarter for ACR 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 at 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 our Chicago office for a gain. We'll continue to focus on our portfolio in 2024 in monetizing the assets that were acquired to utilize our NOL. We look forward to the Q&A, discussion, and answering your questions. Operator.

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