Good day, ladies and gentlemen, and welcome to the Third Quarter 2021 ACRES Commercial Realty Corp Earnings Conference Call. Currently, all participants are in a listen-only mode. Later, we'll conduct a question-and-answer session. [Operator instructions] As a reminder, this call is being recorded.

I'd now like to introduce your host for today's conference. Kyle Brengel, Vice President. You may begin.

Kyle Brengel:.

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 Generally Accepted Accounting Principles are contained in the earning presentation for the past quarter. With me on the call today, our Mark Fogel, President and CEO and Dave Bryant, ACR's CFO.

Also available for Q&A is Andrew Fentress, Chairman of ACR. I will now turn the call over to Mark..

Good afternoon, everyone and thank you for joining our call.

Today, I will provide at an overview of the company's loan originations, capitalization, liquidity condition and the health of the investment portfolio while Dave Bryant will discuss the financial statements and the operating results for the third quarter and of course, we look forward to your questions at the end of our prepared remarks.

In the third quarter, we continue to grow and manage the loan portfolio, improve of the company's balance sheet profile by reducing cost of capital and extend duration while offering our sponsors outstanding service. The ACRES origination team delivered $468 million of new loan commitments in the quarter.

This brings total production volume in 2021 to approximately $1.1 billion. These results reflect the efforts of the entire ACRES team in identifying, processing and executing on opportunities nationwide with our unique financing solutions in our target asset classes.

From a capitalization standpoint, the company issued $150 million of new senior unsecured notes. This offering allowed the company to fully redeem its previously issued 12% senior unsecured notes, repurchase some of the 4.5% convertible senior notes that have a maturity date in August and supplement its liquidity profile.

Portfolio quality remains high and is improving. The watch list loans comprising those risk rated A4 or A5 reflect 10% of the total commercial real estate loan portfolio as of September 30th as compared to 23% when ACRES took over the REIT last summer.

We expect to continue expanding the portfolio for the remainder of this year and into 2022, in order to continue delivering on our strategic initiatives to maximize earnings and book value for the company's shareholders. Returning to loan production, we closed 17 commercial real estate whole loans for $468 million during the third quarter.

These loans pay coupon interest at a weighted average of one month LIBOR plus 3.46% and each carry LIBOR floor protection, which has a weighted average of 0.18%. Approximately $396 million or 85% of the originated loans are collateralized by multifamily properties, while the remainder are collateralized by self-storage and office properties.

These loans had a combined weighted average LTV of 73% based on the underlying property valuations available at the time of each loans origination. The company received payoff and paydown proceeds of $120 million from the full or partial repayment of 10 loans during the third quarter.

Payoffs and paydowns were outpaced by loan originations producing net portfolio growth. Borrower's ability to refinance indicates the quality of the sponsors and assets underlying the portfolio along with improving market conditions for refinancing our sales.

Looking ahead, we expect to target asset class as nationwide consistent with the company's origination history, including a primary focus on multifamily properties, along with other segments, such as select opportunities in office, hospitality and self-storage.

The credit markets continue to be competitive, which as a result has accelerated spread compression, particularly in the multifamily sector. In addition, lower LIBOR flow rates means lower all-in rates for the company.

While ACR is well positioned for growth, we will remain selective and focus on credit quality, target markets and strong sponsors to originate accretive new loans for the portfolio. The company is in a strong liquidity position with a diverse array of financing sources.

We continue to manage the balance sheet to optimize for the lowest cost of capital structure while extending duration. We took several steps forward on these initiatives in the quarter. In August, the company issued $150 million of new five year, 5.75% senior unsecured notes.

Using the proceeds, the company redeemed all $50 million of principle of the 12% senior unsecured notes. In August and September, the company repurchased a total of $55.7 million of principle of the 4.5% convertible senior notes, which mature in August 2022.

As of September 30, $88 million of principle remains outstanding on the 4.5% convertible senior notes and we retained the ability to utilize $75 million of principle available on the 12% senior unsecured notes until January 31, 2022. The net of these transactions provided the company with $44.3 million of additional capital.

This activity reduced the weighted average cost of corporate debt by 88 basis points from June 30 September to September 30. Our intent is to use the remaining proceeds from the new senior unsecured notes to fund loan originations and for all corporate purposes.

The portfolio has continued to perform demonstrating sound and consistent underwriting and asset management. The company ended the quarter with $1.9 billion of commercial real estate loans across 95 individual investments of which only four comprising 3% of the portfolio were delinquent.

At the time of our acquisition of the company, it had 23 wash list loans representing 23% of the portfolio. As of September 30, the number of wash list loans has reduced to 10 representing 10% of the portfolio.

We believe that the company has a well-diversified nationwide portfolio with a concentration in the high growth Southeast Southwest and mountain regions of the United States.

Our target asset classes are projected to provide sustainable cash flow, including the multifamily class, which has been particularly durable and represent 66% of the loan portfolio. In addition, the ACRES platform has over $250 million of loans in its development portfolio that will be eligible for the company's book in the coming quarters.

This unique sourcing opportunity provides the company with curated sponsor relationships and Class A newly constructed assets as attractive returns. In summary, the ACRES team is pleased with the growth and quality of the investment portfolio, the improved balance sheet profile and prospects for new originations going forward.

We will continue to execute on our business plan by originating high quality investments, actively managing the portfolio and continuing to focus on growing earnings and book value for the company shareholders. We will now have ACR's CFO, Dave Bryant discuss the financial statements and the operating results during the quarter..

Thank you and good afternoon. The company's third quarter were a $1.04 per share in the second quarter. The third quarter results reflect one time charges to earnings totalling $9.5 million or $1 per share on the full redemption of the 12% senior unsecured notes and the partial repurchase of the 4.5% convertible senior notes.

The total charges to earnings comprise $9 million of losses on the extinguishment of debt due to a $5 million make whole payment on the senior unsecured notes and $4 million acceleration of non-cash discounts along with $522,000 of interest expense due to the acceleration of deferred debt issuance costs.

The quarter to quarter change also reflects the accrual of a full quarter of dividends payable on the company's Series D preferred stock, which were issued in the second quarter.

In the third quarter, we also increased the provision for credit losses by 537,000 or $0.06 per share, related to Cecil compared to a $10.3 million Cecil reserve recovery in the second quarter.

The third quarter Cecil reserve provision was primarily due to the increase in size of the commercial real estate loan portfolio offset by improvements in macroeconomic conditions. The impact of Cecil resulted in a total allowance for credit losses at September 30 of $18.9 million, which now represents 1.02% of the $1.9 billion loan portfolio at par.

Net interest income was $9.5 million or $0.99 per share in the third quarter up from $7.1 million or $0.73 per share in the second quarter. As loan payoff volume declined, which resulted in less acceleration of deferred debt issuance costs in the third quarter.

The weighted average spread of the floating rate loans in the company's $1.9 billion commercial real estate loan portfolio compressed slightly to 3.71% over one month LIBOR, all but one of which had a floor with a weighted average of 1.03% at September 30.

Over the trailing four quarters, the weighted average LIBOR floor has declined from 1.88% to 1.03% or by 85 basis points due to a shift in the loan portfolio mix as recent loan originations with lower floors have replaced older loans that have paid off with higher floors.

At September 30, 47% of the floating rate loans had LIBOR floors in excess of 1% down from 92% of the portfolio at December 31, 2020. As we previously disclosed, we anticipated ordinary tax loss carry forwards upon completion of the 2020 tax return filing.

Beginning with the tax year 2021, the net operating loss carry forwards are approximately $66 million or $6.71 of book value per share and have an infinite life. The company also has available net capital loss carry forwards of $137 million or approximately $13.85 of book value per share that have a five year life.

The operating loss carry forwards can be utilized by simply retaining earnings from operations, while the capital loss carry forwards can only be used to offset a capital gain.

The ACRES team is exploring a range of assets and options to invest in with the objective of creating capital gains to take advantage of a portion or all this asset before it expires. GAAP book value per share, which is calculated over vested common shares outstanding, including warrants, declined to $22.68 at September 30 from $23.56 at June 30.

The decrease to book value per share was driven primarily by the one-time charges resulting in the $1.03 of GAAP net loss in the third quarter. GAAP debt to equity leverage ratio and recourse debt leverage ratio increased from June 30 to 3.6 times and 1.4 times respectively at September 30.

The increases were primarily due to commercial real estate warehouse advances, a net increase in corporate borrowings and a reduction of equity. The company had approximately $714 million of combined availability on its commercial real estate term warehouse facilities, senior secured financing facility and 12% senior unsecured notes.

Available liquidity at the end of October was approximately $201 million, including $118 million of unrestricted cash, $48 million of projected financing available on unlevered assets and $75 million of availability on the 12% senior unsecured notes. These components were offset by a working capital reserve target of $40 million.

While the refinancing of the senior unsecured secured notes and partial repurchase of the convertible senior notes created one-time charges that reduced our earnings in the quarter, we believe that the addition of available liquidity at a lower cost of capital provides the company with flexibility and funding strength to continue to grow the investment portfolio, grow earnings and utilize the company's tax assets, thereby growing book value in the coming quarters and years.

Now I will turn the call to Andrew Fentress for closing remarks..

Thank you, Dave. Thank you, Mark. As you heard from Mark and David, we continue to make progress towards our stated objectives, carefully manage the portfolio, grow the portfolio through new originations with quality sponsors and manage the balance sheet of the company so that we can drive earnings and create value for our shareholders.

The ACRES team is focused on these objectives and is grateful for your continued confidence and support. This concludes our opening remarks. We'll now turn the call back to the operator and look forward to your questions..

Thank you, sir. [Operator instructions] Our first question is from the line of Stephen Laws with Raymond James. Please go ahead..

Hi, good afternoon. I guess first it looks like the -- comparing the last two decks, looks like pretty big focus with new originations on the Southeast and Southwest with how you break out those geographies.

Can you talk about what you like there obviously seems like multifamily is heavy, but how -- is your pipeline consistent with that? Or is that really just a one quarter coincidence?.

Yeah, hi Stephen, this is Mark. Yeah, so our pipeline going forward is consistent with those markets. We are really bullish on the Southwest Texas in particular and the Southeast we see a lot of population growth in those markets. Fundamentals are strong for multifamily in those markets.

And, in fact there hasn't been a lot of construction going on to keep up with the population growth and the multifamily arena in those markets. So, that combined with all the job growth and economic drivers, you're seeing in some of those Southwestern and Southeastern markets is why we're heading in that direction..

Great. And then, can you talk about the stock buyback, where you stand with that, how you think, I know you've had a little bit of accretion during the quarter from repurchase activity. Just outlook for buyback, how you think about use of capital there versus new investments given the pipeline you have in place..

Sure. This is Andrew. So we completed the repurchase program in July and we do not have any additional shares authorized for repurchase at this time.

The capital that we have allocated from the issue that we spoke about and that you can see from the five and three quarters is going to be invested into new loans and into some of the investments we've identified to address the tax asset..

Great.

Yeah, that will be my next and last question was, any additional color, equity investments in commercial real estate properties is covers a lot, but can you give us any additional details kind of what you're looking at, how much -- how big of a mix of the portfolio that could become over the next year or so?.

Yeah, I think as a quantum, you should think about the capital representing about 5% of the total of the total book and so, you're talking about a $100 million roughly that would probably be spread across four to five different investments. It would be with sponsors that we know and assets that we already know.

We're not going out in a blanket market effort here. These are things that are close to home. We've got a good understanding handle on. And I think in the coming quarters, we'll be able to give you a little bit more detail around what they are, what the timeline looks like for executing and what our expectations are for the returns on those..

Great, look forward to hearing more about that. Thanks for your time this afternoon. .

And speakers. It appears we have no further questions at this time. I'll return the call back to you. You may continue with your presentation or closing remarks..

Great. Well, thank you again for everybody to participate in the call. We look forward to continuing to update everybody over the coming quarters and please reach out to us, if there's any additional questions that you need answered offline. Thank you everyone..

And that does conclude the conference call for today. We thank you all for your participation and kindly ask that you please disconnect your lines. Have a great day, everyone..