Good day, ladies and gentlemen, and welcome to the Third Quarter 2022 ACRES Commercial Realty Corporation 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.

Good afternoon, and thank you for joining our call. I would like to highlight that we have posted the Q3 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 words 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 for 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 third 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 $181.3 million of new loan commitments in the third quarter, comprising three hotel loans, two office loans, and one multifamily loan. Loan payoffs during the period were $83.5 million and net unfunded commitments during the quarter were $27.9 million, producing a net increase of the portfolio of $69.9 million. The newly originated loans pay coupon interest at the one-month benchmark rates, which comprised SOFR, plus a weighted average spread of 6.04%. The weighted average spread of the floating rate loans and our $2.1 billion commercial real estate loan portfolio increased to 3.76% over the one-month benchmark rates. The weighted average benchmark rate is 3.65% as of 10/25/22. 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. As stated on our last call, we plan to maintain a loan book balance of $2 billion to $2.3 billion through 2022. During the quarter, we sold a former $19.9 million loan secured by an office property in Chicago that the company acquired by a foreclosure in 2021. At the time of the foreclosure, the asset was valued at $17.6 million. We sold the asset at $19.25 million prior to closing costs and other basis adjustments that resulted in a gain on the sale of real estate of $1.9 million included in GAAP net income. Also during the quarter, we redeemed the remaining $48.2 million of 4.5% convertible senior notes that the company issued in 2017. Finally, a few comments on balance sheet items, as we know this topic is top of mind for many investors, given the recent market volatility and base rate increases. The company has a healthy liquidity and financing profile. The company has warehouse lines opened with JPMorgan and Morgan Stanley, with performing collateral on each. The company also has agreed in principle to terms with MassMutual on an upsize and improved terms for its current facility, which is being documented this quarter. The Barclays line, which has zero collateral, is being voluntarily closed by the company in the current quarter. The portfolio continues to perform, demonstrating sound and consistent underwriting and proactive asset management. The company ended the quarter with $2.1 billion of commercial real estate loans across 88 individual investments, of which only two comprising 1.4% of the portfolio were delinquent. As of September 30, there were six watch list loans, inclusive of the two delinquent loans, representing 5.6% of the portfolio. As we have discussed previously, the company holds four investments in real estate that we expect to monetize for a gain in the future. These gains will be offset by the existing NOL and corresponding cash retained and reinvested into the loan portfolio. Lastly, there are two hotel assets currently classified as held for sale as a result of being in a formal sale process. Early indications give us comfort that proceeds will be at or above par, a testament to the work of the asset management team here at ACRES who work diligently to protect shareholder value during a challenging hospitality market over the last 2.5 years. 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 continue 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 will now have ACR's CFO, Dave Bryant, discuss the financial statements and operating results during the third quarter of 2022.

Thank you, and good afternoon. GAAP net income allocable to common shares in the third quarter was approximately $700,000 or $0.08 per share. Earnings available for distribution for the third quarter were $0.40 per share and included the net charge-off of the sale of a foreclosed office property of approximately $400,000 or $0.04 per share, as our EAD policy is to charge off losses upon realized transactions as opposed to loss estimates required by GAAP. GAAP book value per share increased to $25.08 on September 30 from $24.48 on June 30. The increase to book value per share for the third quarter was primarily driven by $0.36 of per share accretion from common stock repurchases, $0.11 related to the non-cash equity expense, and net income of $0.08 per share. Available liquidity at September 30, 2022 was approximately $86.4 million, which comprised approximately $61 million of unrestricted cash, $10.5 million of projected financing available on unlevered assets, and $14.9 million of reinvestment cash available in CRE securitizations. GAAP debt-to-equity leverage ratio increased marginally to 4.3 times on September 30 from 4.2 times on June 30. Our recourse debt leverage ratio also increased marginally to 1.5 times on September 30 from 1.4 times on June 30. The increase to the leverage and recourse leverage ratios was primarily due to increased borrowings on our bank term facilities, offset by the repayment of our 4.5% convertible senior notes. In the third quarter, the company recorded an increase in loan loss reserves under the CECL calculations of approximately $2.6 million compared to a $500,000 provision in the second quarter. The increase to general reserves reflects continuing changes in the macroeconomic outlook under the CECL calculations. The total allowance for credit losses on September 30 was $7.8 million which represents 0.37% or 37 basis points of the $2.1 billion loan portfolio at par. Turning to results from the company's real estate investments, the net loss from real estate investments remains relatively flat at $314,000 in the third quarter. Included in the third quarter property operating loss was $1.3 million of non-cash depreciation and amortization. Also, as Mark mentioned in his opening remarks, the company had a $1.9 million realized gain on the sale of an office property in Chicago. The gain included proceeds received over the property valuation basis, as well as the recovery of accrued real estate taxes. Focusing on G&A, the third quarter expense of $2.1 million versus second quarter reflects the seasonality for quarterly G&A we typically see this time of year. We'll see a slight increase during the fourth quarter as the year-end audit procedures begin to incur this seasonal expense. Regarding share repurchases during the third quarter, the company used $1.8 million of the board approved share repurchase plan of $20 million to redeem approximately 198,000 shares at approximately a 64% discount to book value per share on September 30. There is approximately $8.1 million remaining on the program at quarter-end. Looking forward, we currently project that the company will produce GAAP income between $0.10 and $0.20 per share and EAD of $1.10 per share for calendar year 2022. Our projection remains subject to volatility from rate increases, loan payoff volume, CECL reserve adjustments, and other non-recurring or unexpected items that may arise in the remaining three months of the year. With the loan growth of $264.6 million in the first nine months of 2022, we expect our net income and earnings available for distribution to remain positive and steadily grow for the balance of 2022 and into 2023. Retained earnings and any capital gains generated from real estate equity investments will allow the company to grow its loan portfolio in future periods.

Thank you, David. We are mindful of the changes in the rate market and corresponding volatility in asset prices creates a heightened sense of anxiety over the fear of the unknowns. Management wants to remove many of these unknowns as possible with regard to the company that you own. As you've heard from our CEO, Mark and CFO David, the company is performing well, has a strong portfolio, ample liquidity, and is managed by a team of professionals who have been through several cycles during their careers. We remain vigilant in our mission to deliver shareholder value over the long term. We do this by investing in and managing high-quality assets that will produce a stable and growing book value for our shareholders. This concludes our opening remarks. I'll now turn the call back over to the operator for questions. Thank you.

We will now begin the question-and-answer session. The first question today comes from Chris Muller with JMP Securities. Please go ahead.

Hey, guys. Thanks for taking the question. I'm on for Steve today. So, I'm sorry, if I missed this at the beginning, I jumped on a few minutes late. But we've seen a lot of headwinds in the office space with a couple of other peers downgrading a bunch of loans, and as you guys did two office loans in the quarter. So I guess, what do you guys look for in an office loan in this environment? And do you expect to do more office loans in the near-term? Thanks.

Yeah. This is Mark. Thanks for the question. It's not our strategy to go after office loans and make it a focus of the company. But we've always been a lender that identifies good opportunities in the marketplace, where our borrowers, our sponsors are buying properties at a really good basis. These two particular loans were purchased at prices that made a lot of sense to us. We went in at a really good structure, low LTC and the deals work very well in the markets in which they exist. So looking for high-quality assets always. And as you might imagine in the office sector, there's a lot of availability for lenders and we're trying to pick the best of the best with the best sponsors.

Got it. That's helpful. And then just the other one I have the big jump in spreads from quarter-to-quarter. Is that just a heavier construction component on loans, or is there anything else behind that?

No, I think that's really just a function of the market. There's certainly a widening of spreads out there amongst our peer group in that what we're seeing is a lot of lenders sitting on the sideline giving groups that have capital the opportunity to really dictate terms as compared to 12 months ago or even nine months ago. And none of that is construction lending. We don't do construction lending in the REIT.

Okay. And then what are the unfunded commitments for? Is that just like milestones they have to hit on the projects?

It's hold backs for lease-up and capital improvements but it's not for ground-up construction.

Got it. Appreciate the questions today. Thanks.

Thank you.

The next question comes from Stephen Laws with Raymond James. Please go ahead.

Hi, good afternoon. Mark, can you talk a little bit about use of capital relative attractiveness between repurchasing your stock new investments. Obviously, you mentioned the originations at 600 or more over or simply building some liquidity for maybe more attractive opportunities that you may think present themselves in the quarters ahead? And finally, additional real estate investments if that's something you're looking at?

Hey, Steve, it's Andrew. On the first part of the question with respect to capital allocation. So as you know, we have an open repurchase program ongoing in the marketplace. And we're able to really repurchase the maximum amount that is available to the company under their share repurchase rules which are really governed by the average daily volume that shares trade on the exchange each day. So we're limited in that regard in terms of share repurchases and we're doing the best and the most the company can. So with regard to liquidity after that there's – first up is to originate high-quality assets that will go into the loan portfolio. Spreads as we identified did widen to levels where we're 600 over now. And we're certainly mindful of liquidity. We think the company has a healthy amount of liquidity on balance sheet today with over $85 million of cash and then more available to us as assets obviously repay will redeploy. So we think we're in a good place on those three fronts.

Great. Thanks for that. And Dave, can you touch base on CECL I think you're doing to adopt early next year. Will that be similar to initial adoption a few years ago where there's an overnight write-down to book and then you take provisioning or releases through the income statement, or will it all run through the income statement? Can you give us any color on how that's going to work?

Yeah, it would actually run through the income statement if in fact it resulted in a change for us. We've taken a look at what some of the proposed model changes that we use, it's an outsourced model that most of the commercial mortgage REITs are using, all the ones that I'm aware of anyway. And we actually don't think it will result right now in a significant change and it might actually be a slight recovery. But we don't expect there to be a significant change. I think the bigger risk for our reserves would be what the macroeconomic outlook is and how that plays itself out in the modeling, a longer period of inflation, a recession, or things that would worsen the outlook.

Yeah. Understood. Thanks for the color there. Appreciate it.

Yeah.

This concludes our question-and-answer session. I would like to turn the conference back over to Andrew Fentress for any closing remarks.

Thank you everybody for joining the call. We appreciate everybody's participation and input and look forward to any follow-up questions over the coming days and weeks. Have a good evening everyone. Thank you.

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