Good day, welcome to the ACRES Commercial Realty Corp. Q1 2022...2023 C onference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press Star then one on a touch-tone phone. To withdraw your question, please press Star then two. Please note this event is being recorded. I would now like to turn the conference over to Kyle Brengel. Please go ahead. Good afternoon. Thank you for joining our call. I would like to highlight that we have posted the Q1 2023 earnings presentation to our website. This presentation contains summary and detailed information about the quarter, 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, and 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 the 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. 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 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 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 David Bryant will discuss the financial statements, liquidity condition, book value, and operating results for the Q1. 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. We originated a $116 million new self-storage loan commitment in the Q1. Loan payoffs during the period were $94.1 million, and net funded commitments during the quarter were $13.7 million, producing a net decrease to the portfolio of $64.4 million. The newly originated loan pays coupon interest at one month SOFR plus a spread of 5.5%. The weighted average spread of the floating rate loans in our $2 billion commercial real estate loan portfolio increased to 3.89% over the one-month benchmark rates. We expect to maintain a commercial real estate investment portfolio, including our loan book and real estate properties of $2 billion-$2.3 billion throughout 2023. During the quarter, we executed the sale of a hotel in the northeast region that we foreclosed on during July 2022. The loan had a basis of $14 million prior to foreclosure, and we were able to exit the property with a $745,000 gain during the period that benefited both GAAP and earnings available for distribution or EAD. This was an excellent job by our asset management team to work through the asset in a short window and maximize value in a challenging marketplace. The portfolio generally continues to perform, demonstrating sound and consistent underwriting and proactive asset management. We ended the quarter with $2 billion of commercial real estate loans across 79 individual investments. As of March 31st, 2023, there were five loans rated four or five, including four loans not current on contractual payments, representing 5% of the portfolio. This represents a slight decrease from December 31st, 2022, at which there were also five loans rated four or five but represented 5.4% of the portfolio. In January 2023, one watch list loan from December 31, 2022 on a hotel portfolio in the southwest region with a par value of $56.5 million was paid off in full. We continue to hold several investments in real estate that we expect to monetize at gains in the future. These anticipated gains will be offset by NOL carryforwards. We expect to retain the equity and reinvest potential gains into our loan 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 for new originations and capital appreciation going forward. We will now have ACR's CFO, David Bryant, discuss the financial statements and operating results during the Q1 of 2023. Thank you and good afternoon. GAAP net loss allocable to common shares in the Q1 was $2.4 million, or $0.28 per share. Included in that net loss is an increase to CECL reserves of $5.1 million, or $0.60 per share. The increase to CECL reserves is primarily attributable to modeled increases in expected general portfolio credit risk. To a lesser extent, the remaining increase in the CECL reserves resulted from the expected negative impact of macroeconomic factors on the general economy. The total allowance for credit losses at March 31st was $23.9 million, which represents 1.19% or 119 basis points of the $2.0 billion loan portfolio at par. Earnings available for distribution or EAD for the Q1 were $0.52 per share. GAAP book value per share decreased to $24.51 on March 31st from $24.54 on December 31st. Available liquidity at March 31st, 2023 was $130 million, which comprised $87 million of unrestricted cash, $10 million of projected financing available on unlevered assets, and $33 million of reinvestment cash available in our two CRE securitizations. GAAP debt to equity leverage ratio decreased marginally to 4.1 times on March 31st, 2023 from 4.2 times on December 31st, 2022. Our recourse debt leverage ratio also decreased to 1.3 times on March 31st from 1.4 times on December 31st. The decrease to the leverage and recourse debt leverage ratios were primarily due to decreased borrowings on our bank term facilities as a result of net loan payoffs during the period. Turning to results from our real estate investments. Net loss from real estate investments increased from $369,000 in the Q4 of 2022 to $1.8 million in the Q1 of 2023, due primarily to the seasonality of hotel operations. Currently, there are two hotels in the portfolio, both of which experience some natural seasonality in their revenue and earnings. Included in the Q1 property operating loss was approximately $946,000 of non-cash depreciation and amortization. Focusing on G&A, the Q1 2023 expense of $3 million versus fourth quarter expense of $2.6 million reflects some seasonality in quarterly G&A, primarily due to the incurrence of the year-end audit expense which amounted to approximately $600,000 in the Q1. Our annual G&A expense projection remains unchanged. Regarding share repurchases, during the Q1, we used $755,000 of the share repurchase plan to redeem 80,000 shares at an approximate 61% discount to book value per share on March 31st. There was approximately $6.5 million remaining on the board-approved program at quarter end. With respect to full year 2023 guidance, we still expect EAD of $1.75-$2.25, which, if paid as a cash dividend, would represent 7%-9% of book value, approximately in line with the peer group. Given the difficulty in projecting how the CECL model will adjust over the year, we are reducing GAAP EPS guidance by $0.50 per share to a new range of $0.75-$1.25 per share. I will turn the call to Andrew Fentress for closing remarks. Thank you, Dave. We appreciate the challenging environment our industry is facing here today. We're focused on the assets in our portfolio and helping our sponsors source the most efficient financing for their properties. As assets repay, we'll be making new loans into an attractive environment characterized by lower leverage and wider spreads. Our long-run mission remains unchanged, namely to deliver value to our shareholders through increasing earnings and book value over time. This concludes our opening remarks, and I'll turn the call back over to the operator and look forward to your questions. We will now begin the question and answer session. To ask a question, you may press star then one on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. At this time, we'll pause momentarily to assemble our roster. Our first question comes from Steve DeLaney from JMP Securities. Steve, please go ahead. Thanks. Good morning, everyone. Nice to be with you today. I'm looking at slide 17, the properties. I was wondering if you talked about the seasonality of the hotels. I'm looking at the description of the multifamily and the student housing, and I'm getting the sense. Well, I see that the student housing project just started construction here recently, and the multifamily indicated that it was land to be developed. Can you just comment on the multifamily and explain what level of development has been made there? I'm trying to get a sense of when those two, multifamily and student, will possibly start cash flowing for you. Thanks. Hey, Steve. It's Mark. Thanks for the question. Hi, Mark. Sure. That multifamily property has been sort of in the pre-development stage. We've been working with a general contractor to get the best possible price for construction. Right ... we're likely to start construction probably in the next 60 to 90 days. Okay. It's likely to be an 18-month construction process. Yeah. It'll take some time. Okay. The plan would be. Where is that set? By the way, the plan- Go ahead. ... by the way, Steve, is to sell the property upon completion. Got it. It's not really a, you wanna get it complete, sold. You're not looking for hold for several years and, you know, roll up the rents. I get it. You're looking at it as a development. A highest use for your land investment in the land, it sounds like. Yeah. Well, the other part of the equation was to take advantage of the NOLs that we had. Oh, correct. sell the property. Yeah Offset the gain with the NOLs. Got it. Of course, that makes sense. Same thing on the student. Same thing. ... sell it. That is. Yeah, we're looking to open that spring of next year and sell it at that same point in time. As you look here today, I mean, doesn't seem to be totally concerned with, like, the portfolio and if it runs off a little bit and be very selective on new loans. As you look at the balance of where you would allocate capital, do you see yourself, you know, putting more given the need to create capital gains going forward? Could we expect some additional investments in, you know, early-stage real estate with valuation appreciation? No, that's not the plan. Okay As we stand today, the plan is just regular way origination. Okay. Stick with the real estate you've got now and any additional capital would go into the loan portfolio. That's right. Can you talk about at the margin. Okay ... we're seeing, you know, after freezing for a while, people are starting to lend a little bit more. I don't know whether that has anything to do with expectation for lower rates, but there seems to be a little bit of a pickup in bridge lending. Can you characterize sort of the return profile of, you know, an incremental $20 million bridge loan, you know, today compared to where we were, I guess, what? 2021, first half of 2022, when money was cheap and there was a lot of competition for those loans. Is it a more lucrative business today than it was then? Yeah. This is Andrew. Hi, Andrew. Hey, thanks for the questions. short answer is yes. our first port of call on new loans in this environment is lower leverage and, quality and sponsorship. Mm-hmm. The third is return. We're able to adjust all three of those to a more favorable outcome. Lower leverage, higher quality sponsorship, and wider spreads... Yeah ... from where we were certainly 18 months ago and even 24 months ago. As you can appreciate, we've got some reinvestment left on our two CLOs. The first one closes this quarter, the reinvest period. The second one closes in the Q4, toward the very end of the Q4 of this year. With those liabilities, anything that we can replace from there with today's spread is highly accretive to our shareholders. Interesting. Okay, not the... do you have cash in there now, Andrew, that could be reinvested as well, or is it just anticipating payoffs and reinvesting payoffs? Anticipating new. Any cash that gets created through a payoff is redeployed pretty quickly. Pretty quickly. Okay. Well, there's that rollover- Yeah. Either Either from assets. Yeah. Either from assets that are recently put on a warehouse facility that we have open with two banks. Did you guys know? Sure. The, and or, transactions that are in our closing pipeline. Got it. Okay. Well, thank you both for the comments. Appreciate it. Thank you. Let me remind you, if you would like to pose a question, press star one. Our next question comes from Stephen Laws from Raymond James. Stephen, please go ahead. Thank you. Good morning. Soon to be good afternoon, and congrats on a solid quarter. You know, I enjoyed the commentary you provided on Steve DeLaney's questions that touched on a few things I wanted to ask about. You know, maybe a couple of specifics. You know, one of them, Dave, with regards to expenses in Q1, you know, I think there's some one-time expenses there, I'm not sure, in the G&A line, can you talk about the run rate going forward as we think about non-interest expense? Sure, Steve. I would tell you that, you know, we have that seasonality in G&A that I referred to. But also, in terms of your question, the run rate going forward is probably in the $2.4-$2.5 range when we remove that seasonality. That would lead you to about a $10-$10.5, somewhere in that range. I know that's kind of a 5% range there for the year. Great. That's, that's helpful and where I am, so that's good to hear. You know, bigger picture question. I was impressed with the LIBOR floor of 4.5% on the new loan. Certainly, if you look at the forward curve, that could be, you know, really attractive, to have in your loans. Unfortunately, with how quickly rates may turn, you know, not a lot of your capital is gonna turn over up here at a, at a five handle LIBOR. You know, would you consider buying your own floors? How do you think, you know, think about, you know, trying to take advantage of kinda where the market is today and do things to protect future earnings, since you probably aren't gonna have a lot of capital turnover here? It's a good thought. We have not considered that. Thanks for giving us something to think about. As you point out, as assets do turn, we are putting new loans on at today's prevailing SOFR rate as the base rate, and that rate is floored at the time of close. As assets do turn, that average floor does rise at today's levels. You know, I would also say that, and this is somewhat of an exception, but to the extent that there are any negotiations in the portfolio on any credit terms, mods, et cetera, increasing base rate is always one of the items that we try to focus on with the sponsors as part of an overall package. Great. One last question, just out of curiosity, kind of on the, you know, different uses of capital for investments. You know, outside of loans and, you know, or buying back your own stock, obviously, which you have limits around, you know, amount you can buy, liquidity, et cetera, leverage, and it's retiring the capital. You know, you look at anything else like, you know, buying stock and other mortgage REITs, you know, it's something where you probably have a, as good of an understanding of loan books with, you know, given you underwrote and competed for many of those loans. You know, it would not reduce your leverage. It's good REIT income. It's good REIT assets. You could sell it when you need it to fund new investments. I mean, is that something you guys would consider? You know, are there reasons that you look at that and just say that it really doesn't make sense? The short answer is it's not something we've done or plan on doing. Mm-hmm. I think what you're saying makes sense, and I think we do have a reasonable perspective on what's happening across the landscape. We just don't consider that to be part of our mission. Right. Yep. No, fair enough. Just curious to get your thoughts there. Okay, I think you covered my other stuff, with Steve Delaney's question. Thank you. Appreciate the comments, Andrew and Dave. Thank you. Again, if you would like to pose a question, press star one. If there are no further questions, we'll conclude the question and answer session. I would like to turn the conference back over to Andrew Fentress for any closing remarks. Thank you. Thank you, operator. Thank you everybody for joining the call. We appreciate everybody's time and interest in ACRES. Please follow up if you have any questions or comments that you'd like to speak to any one of the management team on in the coming days, weeks, and months. Much appreciated. Talk soon.