ACRES Commercial Realty Corp.
Q1 2021 Earnings Call Transcript

Published: 5 May 2021

[Operator:]

[Operator:]

Good day, ladies and gentlemen, and welcome to the First Quarter 2021 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. As a reminder, this call is being recorded. I would now like to introduce your host for today's conference, Kyle Brengel, Vice President. You may begin.

[Kyle Brengel:]

Good afternoon and thank you for joining our call. 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 forward-looking statements.

[Mark Fogel:]

Good afternoon, everyone and thank you for joining our call. Today I will provide an overview of our strategic initiatives and updates on our portfolio and loan originations. Dave Bryant will discuss our financial statements and operating results for the first quarter. And of course, we look forward to your questions at the end of our prepared remarks. We are pleased with the ongoing loan origination since we restarted lending late in 2020. As importantly, the portfolio has continued to perform, demonstrating sound and consistent underwriting and asset management. Our progress is evident in our results as we grew book value per share to $22.27 as of the end of the first quarter of 8.2% from the end of 2020. These results reflect our efforts over recent quarters to provide our borrowers with a one-stop solution for their borrowing needs. We continue to work as a team to achieve our goal of being an end-to-end solution for middle market commercial real estate borrowers nationwide. Additionally, we were active with the authorized share repurchase program during the quarter and repurchased and additional $9.5 million of common stock this quarter.

[Dave Bryant:]

Thank you, and good afternoon. Our first quarter results reflect our continued positive progress. I would first like to remind you that we completed a 1-for-3 reverse stock split that took effect on February 16. And all of our results reflect this. Our GAAP net income allocable to common shares for the three months ended March 31, 2021 was $10.5 million or $1.03 per share, compared to $21.5 million or $1.95 per share in the fourth quarter. These results reflect the contributions from the new originations late in the fourth quarter and in the first quarter, and exit fees from increased pay-off activity offset by lower interest as a result of the net payoffs. The quarter to quarter change also includes a lower level of CECIL reserve recoveries compared to last quarter. First quarter GAAP net income includes $5.6 million or $0.55 per share in CECIL reserve recoveries. This continued positive movement reflects improved property level operations in the loan portfolio and the payoff of certain loans that had been on our watch list, along with a more constructive outlook on macroeconomic factors as we have seen broader improvements alongside the vaccine rollout. One item, I would like to note in our core earnings is a $5.2 million or $0.51 per share of charge, realized loss related to the sales of CMBS. These securities had been written down to their market values in prior quarters through our income statement and book value as we believe; it was probable that they be sold prior to recovery other bases. However, since these were unrealized losses, they had been excluded from core earnings. Now that the sales have occurred, the impact is being recognized in core earnings. There are no longer any CMBS assets with value in the portfolio.

[Andrew Fentress:]

Thank you, Dave. In summary, the company has a sound portfolio that remains diversified and largely performing, along with an origination engine that is actively sourcing and closing loans to grow the company's earnings power. Through the use of approximately $60 million of operating tax loss carryforwards, the company can retain those earnings, reinvest into new origination, repurchase shares as and when the price of those shares are compelling. And of course, we continue to optimize company's cost of capital and its leverage ratio. This concludes our opening remarks, and I'll turn the call back over to the operator for questions. Operator?

[Operator:]

Thank you. And at this time, we will be conducting a question-and-answer session. Our first question is from Steven Laws with Raymond James. Please proceed with your question.

[Steven Laws:]

Hi. Good afternoon. I think you kind of knew one of the question's I had on my sheet here. But just kind of, we'd like to get your thoughts as you think about the flexibility you have with earnings now, the ability to retain them for future growth, look at dividend payouts. How do you look at the toggle there? As far as what level you want to see maybe to increase the buyback as far as accretion versus increase the dividend versus the return from new investments?

[Andrew Fentress:]

Sure, Steven. This is Andrew. Thanks for the question. So as we think about optimizing capital within the company. We have a current return on equity of approximately 13% to 14%. And so that's really the bogey that we're looking at with respect to allocation of new capital. And so, you know, as we saw on the first part of the ownership of a company, or under our direction, when the shares presented a return opportunity that was greater than that, and we allocated capital to the share repurchase program, and as you can see from the numbers, the accretion has really helped on a book value per share basis. And so that's one lever that the company can pull.

[Steven Laws:]

That's helpful. So I appreciate you framing that for us. As we think about, repayments versus new investments, can you talk about the net impact, do you expect it to have say, as you roll forward, say 12 months on the yield or coupon, as you think about, you know, tighter spread loans within the money floor is paying off and being replaced with wider spreads, new originations. Now, what's the net impact going to be as we will roll forward?

[Mark Fogel:]

Well, first off, I think the -- this is Mark, by the way. The production levels we expect to increase throughout the year. We just started, as you know, our origination engine back up again, at the end of the fourth quarter. First quarter, we saw a big increase from the last quarter. And in the second quarter, we've already seen closings, and we have a pipeline that indicates that second quarter will grow even faster. But as far as the impact of spreads, compressing, you know, I think the goal is to offset that by various levers we can pull on the financing side, lowering our cost of capital where we can to ensure that we continually get the ROE that Andrew mentioned with 13% to 14%.

[Steven Laws:]

Great. Appreciate for taking my questions. Thank you.

[Operator:]

Our next person queued up is Chris Muller with JMP Securities. Please proceed with your question.

[Chris Muller:]

Hey, guys, thanks for taking the question. I just wanted to ask about with multi-family being the bulk of first quarter activity, can you talk about the competitive environment of multi-family just compared to other asset classes. And then a follow up on that. What other asset classes do you like going forward and do you expect much of a change in composition of the portfolio, say at the end of this year versus the current mix? Thanks.

[Mark Fogel:]

This is Mark. We don't see much of a change with respect to the current composition, we still expect by end of year to be in that 55% to 60% range on multi-family. There may be some changes within the other asset classes here and there. But I would expect that the mix would be very similar at year end. As far as the competitive landscape, we believe that we have a bit of an edge with respect to what we do on the other side of our business in that we do a lot of construction lending on multi-family properties, all across the country. And what we keep referring to in our statements is this one stop solution. What that allows us to do is to shepherd sponsors who come to us for a construction loan on the other side of the business, right into the reprogram once the property is good build and get fill of those and need to stabilize to a bridge lending programs. So it's this organic growth that we expect to have through the generation of these construction loans, that gives us I think, a leg up on some of the groups that are out there right now.

[Chris Muller:]

Thank you, very helpful. And then just one more, quick one, it looks like the coupon on loans from fourth quarter the first quarter on new originations dropped pretty drastically. Was that just type of mix with multi-family being the big driver in 1Q? Thank you.

[Mark Fogel:]

Yes. That was the big driver more multi-family. But at the same time, there was more dislocation in the fourth quarter. So there were better opportunities to get some higher spreads, when some of the other lenders were kind of sitting on the sidelines.

[Chris Muller:]

Thank you. Thanks for taking the questions.

[Mark Fogel:]

Thank you.

[Operator:]

And we have reached the end of the question-and-answer session. And I'll now turn the call over to Andrew Fentress for closing remarks.

[Andrew Fentress:]

Thank you, Operator. And thank you everybody for joining our first quarter conference call. We appreciate the support, the interest. We're always available for any follow-up questions that people may have. And look forward to speaking to you again at the second quarter call, later this year.

[Operator:]

This concludes today's conference. And you may disconnect your line at this time. Thank you for your participation.