Good afternoon, and welcome to ACRES Commercial Realty Corp. Second Quarter 2022 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Kyle Brengel. Please go ahead..

Good afternoon, and thank you for joining our call. I would like to highlight that we have posted the Q2 2022 shareholder presentation to our website. This presentation contains summary and detailed information about the quarterly and year-to-date 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 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 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 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 an overview of our loan originations, real estate investments and the health of the investment portfolio, while Dave Bryant will discuss the financial statements, liquidity condition, book value and operating results for the second quarter and provide an update on 2022 projected results.

Of course, we look forward to your questions at the end of our prepared remarks. The ACRES origination team delivered $311.7 million of new loan commitments in the second quarter, comprising eight multifamily loans and one office loan.

Loan payoffs during the period were $109.2 million and net unfunded commitments during the quarter were $23.2 million, producing a net increase of $179.3 million. The newly originated loans pay coupon interest at the one-month benchmark rates, which comprised SOFR plus a weighted average spread of 3.79%.

The weighted average spread of the floating rate loans and our $2.1 billion commercial real estate loan portfolio increased to 3.61% over the one-month benchmark rates. The weighted average benchmark rate is 2.32% as of July 26, 2022.

We observed spread widening in the period and are mindful of further potential widening as we deploy capital on our way to getting the company fully invested. We plan to maintain a loan book balance of $2 billion to $2.3 billion through 2022. As we have discussed previously, the company has five equity investments.

We do not plan on increasing this amount. The portfolio has continued to perform, demonstrating sound and consistent underwriting and proactive asset management. We ended the quarter with $2.1 billion of commercial real estate loans across 89 individual investments, of which only three, comprising 2% of the portfolio, were delinquent.

As of June 30, there were seven watchlist loans representing 6.4% of the portfolio. In summary, the ACRES team is pleased with the quality of the investment portfolio, including investments in real estate, along with the improved balance sheet profile and the prospects of new originations and capital appreciation 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 our shareholders. We will now have ACR’s CFO, Dave Bryant, discuss the financial statements and operating results during the second quarter of 2022..

Thank you and good afternoon. GAAP net income allocable to common shares in the second quarter was approximately $700,000 or $0.08 per share compared to GAAP net loss of $2.8 million or $0.30 per share in the first quarter.

In the second quarter, we recorded a provision for general loan reserves of approximately $500,000 compared to $1.8 million reversal in the CECL provision in the first quarter.

The second quarter increase to general reserves reflects a change in the macroeconomic outlook due to expected increases in inflation, interest rates and unemployment and growth in our loan portfolio, partially offset by continued improvement in property level operations on our collateral.

The impact of the CECL estimate and the charge-offs resulted in a total allowance for credit losses on June 30 of $5.2 million, which represents 0.25% or 25 basis points of the $2.1 billion loan portfolio at par.

Net interest income was $11.3 million or $1.26 per share in the second quarter as compared to $7.8 million or $0.85 per share in the first quarter. The second quarter results included minimum interest and origination fee accelerations of $1.5 million or $0.17 per share related to early payoffs of three loans during the period.

In addition, the second quarter net interest income reflects the net growth of $195 million year-to-date in our loan portfolio of which $179.3 million was attributable to the second quarter.

In addition, we had $1.1 million or $0.12 per share of non-recurring deferred debt issuance costs from our liquidated CLOs and $0.5 million or $0.05 per share savings from our 4.5% convertible note repurchase, both occurring in the first quarter.

These second quarter improvements to net interest income were offset by additional borrowings and interest expense under our bank term facilities. In the second quarter, our net loss from our real estate investments decreased to approximately $385,000 from $1.7 million in the first quarter.

This is due primarily to improved property operating performance. Included in the second quarter, property operating loss was $1.6 million of non-cash depreciation and amortization. Focusing on G&A. We had some seasonality in Q1 expenses covered on last quarter’s call that totaled approximately $1.1 million.

Second quarter expense of $2.4 million reflects what we anticipate will be our quarterly G&A run rate for the balance of 2022. GAAP book value per share increased to $24.48 on June 30, 2022 from $24.10 on March 31, 2022.

The increase to book value per share for the second quarter was primarily driven by $0.37 of per share accretion from common stock repurchases and net income of $0.08 per share offset by $0.23 related to the vesting of director and manager share grants.

During the second quarter, we used $2.5 million of our Board approved share repurchase plan of $20 million. These repurchases redeemed 238,000 shares and represented a 57% discount to book value per share on June 30. GAAP debt to equity leverage ratio increased from 3.7x on March 31 to 4.2x on June 30.

Our recourse debt leverage ratio increased from 0.9x on March 31 to 1.4x on June 30. The increase to the leverage and recourse debt leverage ratios were primarily due to increased borrowings on our bank term facilities.

Available liquidity at July 22, 2022 was approximately $78 million, including approximately $47 million of unrestricted cash, $71 million of projected financing available on unlevered assets. These components were offset by a working capital reserve target of $40 million.

We intend to redeem the outstanding $48.2 million of 4.5% convertible notes that mature on August 15, 2022 with available cash. Looking forward, we currently project that we will report GAAP income between zero and $0.10 per share for calendar year 2022.

This represents an improvement over the previous estimate provided on the Q1 call and is primarily the result of minimum interest received on loan payoffs and projected increases in benchmark rates.

This projected result of nominal GAAP income is impacted by estimated non-cash depreciation and amortization related to our investments in commercial real estate properties of $5.4 million or $0.61 per share for the calendar year.

Our income projection remains subject to volatility from rate increases, loan payoff volume and other non-recurring or unexpected items that may arise. Earnings available for distribution for the second quarter was $0.45 per share.

With the loan growth of $195 million in the first half 2022, we expect our net income and earnings available for distribution to remain positive and steadily grow for the balance of 2022. Retaining our earnings and any capital gains generated from our real estate equity investments will allow us to grow our loan portfolio in future periods.

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

Thank you, Dave. We approached the quarter with caution in anticipation of some spread widening in the period. And while not dramatic, we have seen spreads widen across the landscape. The portfolio remains sound with nearly all the watchlist names fully resolved and the company has ample liquidity.

The ACRES platform continues to present interesting opportunities to evaluate, and our sponsor clients continue to want to do more transactions with us. Our mission is to deliver shareholder value over the long term.

We’re focused on maximizing earnings, investing in high-quality assets and strategically returning capital through share repurchase and dividends over time. This concludes our opening remarks. And I’ll turn the call back over to the operator for everyone’s questions.

Operator?.

Thank you. [Operator Instructions] Our first question comes from Steve Delaney with JMP Securities. Please go ahead..

Hi. Good evening, everyone and thanks for taking my question. I want to apologize, I was 5 minutes late hopping on, so I missed Mark’s opening remarks. Delighted with the $0.45 EAD number, I think your estimate was $0.15. And I’m on Page 24. The way Page 24 is laid out, I don’t have, unfortunately, March, the first quarter of this year.

Would you guys indulge me in just maybe try to point me to the two or three key drivers that caused earnings to – EAD to increase so strongly in this quarter. Thank you..

Yes. Steve, this is Dave. I would say that the key drivers are a couple of pieces. Primary one being net income the starting point per EAD was income actually this quarter, about $700,000 versus loss last quarter of about $2 million..

Got it..

And if you recall, Steve, and I mentioned this, I think, in my remarks, we had some onetime adjustments last quarter when we retired those CLOs. So our interest expense was accelerated, those debt issuance costs were accelerated, that’s recorded in interest expense and related to that termination.

And then the other thing I would say is that in spite of the fact that we had the loss last quarter, when we adjust EAD, we’re removing any of the CECL adjustments – cash. And last quarter, it was a reversal, right? So, the loss would have been even greater if you follow my logic when you take that out..

Yes. Got it. And this quarter, you got a positive $500,000..

Yes. That’s correct. That’s correct. So those would be the primary drivers..

Okay. And the real estate depreciation and amortization, that was relatively flat at $1.5 million - $1.6 million, so relatively flat....

It was probably up about $100,000 or $200,000, but relatively flat..

Okay. Great. Yes, well, it can certainly – it’s been quite a day with calls. I think there’s 17 mortgage REIT earnings calls today, so forgive us if we’re scrambling a little bit. But, yes, Dave, I will call you back in the next couple of days. We’ll obviously line it up with March. But let me just say I’m very pleased to see $0.45, and that’s fantastic.

So, everybody stay well, enjoy the rest of your summer..

Thank you, Steve..

[Operator Instructions] This concludes our question-and-answer session. I would like to turn the conference back over to Andrew Fentress for any closing remarks. Please go ahead..

Thank you, everyone, for joining the call. Enjoy the rest of your summer, and we look forward to connecting over the coming days, weeks. If anybody has any specific questions, please reach out. And we look forward to connecting with everybody. Thank you again..

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect..