ACRES Commercial Realty Corp. Q3 FY2024 earnings call

• Loan operations: Loan payoffs of $118.1M, foreclosures of $23.7M, funded commitments of $7.4M, net decrease in loan portfolio of $134.4M. Weighted average spread of floating rate loans is 3.73% over SOFR. Portfolio generally performs well with sound underwriting and asset management.
• Real estate investments: Student housing development near FSU opened at 95% occupancy and marketing initiated for sale. Two loan assets foreclosed, one with $2.8M unrealized gain, the other being stabilized. Plan to monetize investments for gains and reinvest potential gains into loan portfolio.
• Financials: GAAP net income allocable to common shares in Q3 was $2.8M or $0.36 per share diluted. Earnings available for distribution (EAD) was $0.24 per share vs $0.51 in Q2. GAAP book value per share was $27.92 on Sep 30 vs $27.20 on Jun 30. $1.7M used to repurchase 114,000 common shares at ~46% discount to book value. Available liquidity at Sep 30 was $79M.

The company's loan portfolio was $1.6 billion in commercial real estate loans across 56 individual investments. Loan payoffs during the period were $118.1 million, foreclosures were $23.7 million, and funded commitments were $7.4 million, resulting in a net decrease to the loan portfolio of $134.4 million. The weighted average spread of the floating rate loans in the portfolio is 3.73% over one-month term SOFR rates. The student housing development near Florida State University opened in August at 95% occupancy, and two loan assets were foreclosed: an office property in Austin, Texas with a $2.8 million unrealized gain upon conversion, and a multifamily property in Memphis, Tennessee which is being worked on for stabilization. Revenue contribution details aren't explicitly given for segments, but the loan operations and real estate investments are the key segments discussed.

• Expect to monetize assets over next two quarters, with directionally flat to better book value per share. Plan to redeploy capital from asset monetization into loan book and focus on growing earnings and market-based dividend. - Liquidity of ~$80M available, planning to redeploy capital into loan pipeline once appropriate liquidity profile is maintained. - Thinking about collapsing existing CLOs and doing new deals to drive mid to high teens ROE based on collateral and pipeline if CRE CLO market stays current.

Certain statements are forward-looking and subject to risks and uncertainties discussed in the company's SEC filings, including Forms 8-K, 10-Q, 10-K, particularly the Risk Factors section of Form 10-K. These risks could cause actual results to differ from forward-looking statements.

Q: When it comes to monetizing these equity assets and REO, are you guys looking to fully clear this stuff off of your books before turning to originations? Or are you guys open to kind of doing it hand-in-hand together while you're disposing of assets and originating at the same time?

A: It will be the latter. As we monetize, we'll redeploy gradually. We're not going to wait until they're all completed to begin that process.

Q: What are you guys looking for there to kind of get the dividend back up and going? Is it full monetization of the assets and getting ex amount of capital deployed? What are you guys looking for there as targets?

A: We haven't set a specific target, but we'll continue to monetize the assets, drive EAD and then pay out of EAD a dividend that we believe will be growing as we relever the balance sheet and get back to focusing on driving earnings. The liquidity from monetization first goes to pay down AAA tranches, and we're thinking about issuing a new one which will impact our ability to drive earnings.

Q: Can you remind me how much you guys used for share repurchases this quarter and then what's left?

A: We used $1.7 million, and we have about $2.3 million left on the program.

Q: I think student housing with the FSU asset likely is the first domino to fall or first REO sale. Can you talk about what other assets do you think are near-term liquidations, and how we should think about the sales playing out over the next six months?

A: Without getting too specific, there are three others in process now that we have a high degree of certainty on being executed over the next couple of quarters.

Q: As you think about turning the loan pipeline back on, how is that going? Are you reengaged there where you do loans on any of these assets to the buyer, as a way to put some money to work on assets you already know? Kind of how do we think about ramping up the pipeline, and when we'll start to see new originations close?

A: It's about liquidity. We have ~$80 million of liquidity available. We want to be mindful of appropriate liquidity, and once dollars are available, we expect to allocate some origination to the REIT as we're engaged with the marketplace daily and originate new loans weekly.

Q: When it comes to the REO assets, have you guys had any type of appraisal since acquiring them? Or just any general thoughts of directionally, I guess, where valuations could be today given you've held some of those properties for a little while now?

A: We hold these at cost or depreciated value if on a depreciation schedule. We're not going to mark them until they're monetized. When we sell them, we'll record the gains then. They'll be positive gains.

Q: Once the unrealized gain with the REO conversion is realized, will that flow through EAD?

A: That's correct. When we monetize that asset, you'll see that as an adjustment to EAD.

Q: What drove the loan rated four to convert to REO?

A: It was a borrower with other issues in his portfolio, couldn't keep the loan current, so we went ahead with foreclosure as the remedy in the quarter.