Good day Ladies and gentlemen, and welcome to the Q3 2020 Exantas Capital Corp Earnings Conference Call. At this time all participants are in a listen-only mode. Later we will conduct a question and answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference is being recorded.

I would now like to introduce your host for today's conference, Brian Brennan, Vice President. Thank you may begin..

Good afternoon, and thank you for joining our call. Before we begin, I would like to remind everyone that certain statements made in the course of this call are not based on historical information and may constitute forward-looking statements.

When using this conference call the word 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 a number of trends, risks and uncertainties that could cause actual results to differ materially from those contained in the forward-looking statements.

These risks and uncertainties are discussed in the company's reports filed with the SEC, including its reports on Form 8-K, 10-Q and 10-K. In particular, the risk factors section of our Form 10-K and Form 10-Q. 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 will 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 these non-GAAP financial measures to the most comparable measures prepared in accordance with the generally accepted accounting principles are contained in our earnings release for the past quarter. With me on the call today is Mark Fogel, President and CEO; and Dave Bryant, our CFO.

Also available for QA is Andrew Fentress, Chairman of Exantas. I'd now like to turn over the call to Mark..

Good afternoon, everyone and thank you for joining our call. Today I will provide an update on the transition of the Exantas management contract to ACRES Capital, and discuss our key accomplishments to date. Dave Bryant will then discuss our financial statements and operating results for the quarter.

I'm pleased to report that the integration associated with the July 31 acquisition of the Exantas management contract is complete. Since closing, our work is focused on enhancing the company's financial profile, stabilizing the existing loan portfolio, and positioning the company to restart originating loans.

I'd like to highlight a few key accomplishments. First, the integration has gone very smoothly. ACRES brought over 18 individuals from the prior management and the combined team is working together seamlessly. Second, the ACRES team has continued our work on the underlying loans in the portfolio during this challenging environment.

We have taken a deep dive into the entire portfolio and have created a specific plan for each loan asset on our watch list. We are working closely with every borrower where we have executed a forbearance agreement or provided an extension to ensure their payments remain on track.

Of the total portfolio of 105 commercial real estate loans, 18 have received some form of relief since the onset of COVID to reduce the credit risk, primarily due to pandemic related financial difficulties.

With the exception of two loans, representing approximately 4% of the total portfolio, all of our loans are current on debt service payments through October 2020.

While we believe we have proactively addressed the loans currently at risk, given the ongoing uncertainty, additional borrowers could face challenges in complying with the terms of their loans in the months and quarters ahead.

Additionally, several borrowers including many with multifamily and retail collateral pay down are fully repaid a total of $124 million of their loans during the quarter. We believe that the ability to refinance in this uncertain environment speaks to the health and quality of the assets underlying our loan portfolio.

Third, in September, the company closed a CLO backed by $297 million of floating-rate commercial real estate first mortgage loan commitments originated or acquired by Exantas.

With the proceeds from the CLO issuance and the liquidity from the senior secured facility, the company was able to pay off existing warehouse lines, which further reduced exposure to margin call risk.

As of the end of October, the company had a cash balance of approximately $150 million and access to approximately $1 billion of financing capacity with which to restart loan originations. Fourth, with improved liquidity, the company resumed payment of cash dividends on its Series C preferred stock, including all the accrued payments.

In terms of the common dividend, the company is taking all the steps necessary towards stabilizing the business and its capital position. The board evaluates dividend policy on a quarterly basis. ACRES is now actively originating and underwriting new loan opportunities on behalf of the company.

The quality of opportunities has improved over the course of the quarter and into the current fourth quarter. We believe this presents a compelling opportunity and we will remain highly disciplined in our approach. With our experienced underwriting team, we are focused on finding the ideal combination of location, assets and sponsorship.

We look forward to reporting to you on our activity going forward. The key driver for the ACRES acquisition of the Exantas management contract is the complementary nature of the platforms.

Over the past eight years, ACRES has been a successful and growing balance sheet lender focused on transitional loans to strong middle-market sponsors in all major asset classes within the top 25 MSAs across the country. The focus is on short term first mortgage loans in the $10 million to $80 million range.

We believe many of these loans are potential candidates for the Exantas platform, which focuses on longer term loans. The market and our borrowers have validated our thinking and are increasing the volume of business they seek to execute with ACRES.

We are confident that ACRES' network will provide access to additional originations for Exantas as we work towards our goal of being a full end to end solution for middle-market commercial real estate borrowers nationwide. We will now have our CFO, Dave Bryant discuss our financial statements and operating results during the third quarter..

Thank you and good afternoon. I would like to echo Mark's sentiments about the team coming together and working seamlessly. Our third quarter results reflect the ongoing impact of COVID-19 as well as the positive progress we continue to make.

Our GAAP net income allocatable to common shares for the three months ended September 30, 2020, was $5.6 million or $0.17 per share. Core earnings adjusted for $2.6 million in one-time costs related to the ACRES transaction were $5.7 million or $0.17 per share for the third quarter of 2020.

Net interest income declined by $3.1 million for the third quarter, compared to the second quarter of 2020. The primary drivers of $2 million of the decline were the payoffs and pay downs of commercial real estate loans, a loan sale and the temporary pause in loan originations during the second and third quarters of 2020.

Additionally, an increase in corporate interest expense on our 12% Senior unsecured notes issued in the third quarter contributed $1 million to the decline.

The weighted average spread on the floating rate loans in our $1.7 billion loan portfolio remained stable for the second quarter at 3.41% over the weighted average of one month LIBOR floor of 1.92% at quarter end, for a gross rate of 5.33%. These LIBOR floors are in the money on all of our floating-rate loans.

With one month LIBOR at approximately 15 basis points at the end of September. We expect to continue to see a meaningful benefit to net interest income as the forward LIBOR curve projects rates to remain low for the balance of 2020.

All except two of our company's 105 commercial real estate loans were current on debt service payments through the end of October, including eight loans performing in accordance with forbearance agreements. We have provided relief in the form of short term forbearance agreements and other modifications on 18 loans this year.

The implementation of CECL on loan loss reserves which applies to all mortgage rates and other financial institutions requires us to estimate expected credit losses over the life of our loans.

In determining our expected credit losses we evaluate by property and loan site available relevant historical and current loan loss data as well as future macroeconomic expectations provided by third-party economic experts.

The impact of CECL resulted in a total allowance for credit losses at September 30, of $52.9 million, or 3.2% on our $1.7 billion loan portfolio.

This represents an $8.1 million reduction from our estimated loss at June 30, resulting from $124 million of loan payoffs, together with the anticipated improvement in macroeconomic conditions, and the related potential impact on our estimated credit losses.

During the third quarter of 2020, we incurred $3.4 million of charges on a non-core legacy asset held for sale, primarily driven by $2.9 million valuation adjustment based on an offer received to purchase the property, the balances from protective operating advances and amortization of certain prepaid property expenses.

GAAP book value per share rose slightly to $6.03 at September 30, 2020, as compared to $6.01 at June 30. The increase to book value per share, driven by our net income during the quarter was largely offset by the net impact of the issuances of senior unsecured notes and related warrants to purchase common shares, which we had announced in August.

Our GAAP debt to equity ratio decreased to 4.6x at September 30, from 5x at June 30, but increased from year-end 2019 due to the decline in retained earnings year-to-date.

In September, we paid our commercial real estate term warehouse financing facilities down to zero and liquidated a 2018 CLO by refinancing the assets with our MassMutual Senior secured financing facility and a new CLO Exantas Capital Corp 2020-RS09.

The new CLO financed $297 million of commercial real estate loan commitment by issuing $275 million of notes, including $246 million issued to third parties, at a weighted average cost of one month LIBOR plus 3.13%.

As a result of the new financing commitments and debt refinanced during the quarter, the company had $947 million of availability on its commercial real estate term warehouse and senior secured financing facilities and senior unsecured notes aggregated as of the end of September.

At October 31, the company's available liquidity was approximately $225 million, including $150 million of unrestricted cash and $75 million of availability on the senior unsecured notes.

With an enhanced financial profile, including improved liquidity and reduced margin risk, we are encouraged by the progress we have made in a short amount of time and look forward to continuing to build on this progress as we move forward. With that, I'd like to open the call up for questions.

Operator?.

[Operator Instructions] Our first question comes from the line of Steven Laws with Raymond James. Proceed with your question..

Hi, good afternoon and congratulations. You guys have accomplished a lot. It seems like in three months from reading through the release and the updates. Mark, I guess first start with the comments around originations. You've got roughly $225 million in liquidity.

Can you talk about what type of loans you're looking to do? Are there certain property types? Also as we think about the impact on the model, will these loans have any upfront origination fees or how do we think about how the new loans are going to impact the interest income line, any one-time fees there?.

Sure. It's Dave. How are you? I don't think the new loans will look dramatically different in nature compared to what's existing in the portfolio today. In other words, the lion's share of new loan origination will be residential related type assets. Right now our portfolio is about 55% to 60%, geared towards those types of assets.

Then in the other asset classes, office, industrial, retail, hospitality, we're taking a hard look at a lot of the opportunities that are out there right now being very careful, taking our time and understanding what's going on in a lot of these markets and that will dictate the types of loans that we do.

Will certainly stick to our knitting, which is to really focus on the credit quality of the assets versus pricing. As far as the origination fees go, it won't be that much different in nature than what exists in the book today. Meaning that the bulk of our loans have 1% origination fees..

Great, that's helpful. Can you talk a little Mark, towards the portfolio performance? I may have these numbers slightly off, but I think it's at all but 2 of the 105 loans are current. So you can really talk to the two that aren't and I believe in the release it said maybe 18 loans have experienced some type of modification.

Correct my number there if I'm off.

Can you talk about what the typical modifications look like? Are you seeing borrowers contribute more capital into the deals? Is the interest partial interest deferral? Can you give us some color on the type of actions taking place there?.

Sure. As far as the two loans that haven't paid one actually did pay subsequent to the end of the quarter. So the only loan that has not paid is a deal that's being taken back through a deed in lieu of foreclosure. That is one in which we project some good value so we view that as a positive situation.

But as far as the forbearance agreements go, the bulk of the forbearance agreements were put in place in August and September, and essentially gave borrowers a three-month reprieve. In a lot of cases on interest, in which cases the interest was tacked on to the principal balance of the loan.

The majority of the situations -- a lot of the situations have been resolved through a lot of hard work and effort on our asset management team. In that many of the loans were modified to include, as you suggested, equity infusion by the borrower. We're finding that the majority of our borrowers are standing by their loans.

They believe in their properties and feel like they just need some time to turn the corner. So they are infusing equity in the majority of cases. All of the deals that were in forbearance are performing in accordance with those forbearance agreements and all the loans that were modified are performing in accordance with those modifications..

Great.

Lastly, any comments around the common dividend either timing or what metrics we should look at to think about when and where that may be reinstated? I know you're current on the preferred, current there but any general comments around thoughts on the dividend?.

Steven, it's Andrew Fentress. I'll take that one. As you highlighted, we did reinstate and pay the preferred dividends and the board went through the exercise of discussing the common dividend elected to pay in the period ending September 30.

But as we said in our prepared remarks, we're going to evaluate where the company is from an origination standpoint, a liquidity standpoint and have a conversation again with the board at the next meeting, which will be really into January, early Feb for the Q4 period, and then have a conversation to make a decision on that point..

Great, thanks, Andrew. I know clearly with the buyback announced you're looking at returning capital to shareholders that way and discounted books should be highly accretive there. So Andrew, Mark, Dave, thank you for your time there, appreciate it..

Thanks..

[Operator Instructions] Our next question comes from the line of Steve Delaney with JMP securities. Please proceed with your question..

Hi, good evening everyone. Stephen took a couple of my good ones but I'm glad they got out on the table. Repayments, I agree with your comment Mark there that kind of assigned is good loans in the portfolio.

Can you just share with us any visibility that you have for modeling purposes on repayments looking out over the next couple of quarters?.

It's hard to say. The majority of the loans that repaid the past quarter were multifamily related assets. As you know, that's a very active market right now with Fannie, Freddie and just about anybody that's looking for good quality real estate.

It's really hard to say at this juncture what that might look like on a go-forward basis, given what's going on in the world. People are still a little bit wary, even on multifamily about the potential for tenants to not pay rent.

I would think that it makes it difficult to analyze how a takeout lender might look at those types of situations and when these loans might get paid off..

Sure.

Tying that uncertainty with your positioning to start looking at new opportunities, the portfolio is at $1.7 billion, to the extent that say between now and March, the year is almost over, to the extent that you have repayments, would it be reasonable for us to assume that you will look to find attractive loans to redeploy that capital so that the portfolio doesn't fall too much below the current $1.7 billion? Maybe another way to look at it is, How far would you let your portfolio contract before you would get serious about adding some new loans?.

No. Steve, we're actively looking at new loans right now. We have liquidity as Dave mentioned so we're not waiting for pay off to start the origination process. We're out in the market looking at deals but we're being very careful.

We want to make sure that we bring in good quality assets into the portfolio at the right pricing to ensure that we don't have any problems down the road, but we are active in the market right now..

Well, thanks for clarifying that. We might even see the portfolio take up a touch over the next couple of quarters. Okay, great. Then this is just a cleanup housekeeping for Dave.

The loan sale that you had in the quarter, Dave, should we assume that is the same loan held for sale loan that you took the $3.4 million write-down on?.

No, Steve. Let me clarify. The loan sale that I referred to actually happened at the end of the second quarter.

So what I was saying is, with the combination of the loan payoffs that you've heard about the loan sales at the tail end of the second quarter, and the temporary pause that Mark referred to in loan originations, they all combined to explain our net interest income decline.

So that loan was a $18 million loan and generated probably $250,000 of net interest income that we didn't have in the third quarter because it was the gone by the end of the second quarter..

Got it.

Now the loan you did take the write-down on it sounds like that is a final write down in that the property was you got to bid for the property and it was sold so you're done with that asset?.

It's not yet sold. We're not done until we're done as we all know, but we're close and we would hope to get there by the end of the year..

Okay.

Any further remaining legacy assets from the original Exantas strategic plan left on the books other than this one?.

There is one other fee that we had talked about last quarter, which was a discounted payoff to the borrower, where we took a specific reserve against it. We're still working our way through that asset. It's hard to say exactly when it will be disposed of but we are actively working on it..

Okay, so those two cleanup items, and you'll be done with all that..

Correct..

Okay. Well, thanks. Appreciate your comments and good job. We'll look forward to hopefully the buyback will help with the stock price a little bit here over the next couple of quarters and keep up the good work..

Thanks, Steve..

Since there no further questions left in the queue, I would like to turn the call back over to Andrew Fentress for any closing remarks..

Thank you very much for everybody joining the conference call and we look forward to updating you again for our fourth quarter results sometimes at the end of January, February. Thank you..

This concludes today's teleconference. You may now disconnect your lines at this time. Thank you for your participation and have a wonderful day..