Good day, and welcome to the ACRES Commercial Realty Corp., First Quarter 2023 Conference Call. All participants will be in a listen-only mode. After today's presentation, there will be an opportunity to ask questions. 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 first quarter 2023 earnings presentation to our website. This presentation contains summary and detailed information about the 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 beliefs, 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 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 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 first quarter. Of course, we look forward to your questions at the end of our prepared remarks. The ACRES team continues to execute 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 one $16 million new self-storage loan commitment in the first quarter. 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 to $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 31, 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 31, 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 by net operating loss carryforwards, and 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, Dave Bryant, discuss the financial statements and operating results during the first quarter of 2023.

Thank you, and good afternoon. GAAP net loss allocable to common shares in the first quarter 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 31 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 first quarter were $0.52 per share. GAAP book value per share decreased to $24.51 on March 31 from $24.54 on December 31. Available liquidity at March 31, 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 4.1x on March 31, 2023, from 4.2x on December 31, 2022. Our recourse debt leverage ratio also decreased to 1.3x on March 31 from 1.4x on December 31. The decrease in 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 fourth quarter of 2022 to $1.8 million in the first quarter of 2023, due primarily to the seasonality of hotel operations. Currently, there are two hotels in the portfolio, both of which experienced some natural seasonality in their revenue and earnings. Included in the first quarter property operating loss was approximately $946,000 of noncash depreciation and amortization. Focusing on G&A, the first quarter 2023 expense was $3 million versus fourth quarter expense of $2.6 million, reflecting 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 first quarter. Our annual G&A expense projection remains unchanged. Regarding share repurchases, during the first quarter, 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 31. 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 to $2.25, which, if paid as a cash dividend, would represent 7% to 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 to $1.25 per share. Now 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.

Our first question comes from Steve Delaney from JMP Securities.

I'm looking at Slide 17, which discusses the properties. I noticed you've mentioned the seasonality of the hotels. Regarding the multifamily and student housing, it seems that while the student housing project has just started construction, the multifamily is indicated as land to be developed. Could you provide more details about the multifamily and its current level of development? I'm trying to understand when both the multifamily and student housing might start generating cash flow.

Steve, it's Mark. Thanks for the question. That multifamily property has been sort of in the predevelopment stage. We've been working with a general contractor to get the best possible price for construction. And we're likely to start construction probably in the next 60 to 90 days, and it's likely to be an 18-month construction process.

Yes. It will take some time. Okay. And students...

The plan, by the way, Steve, is to sell the property upon completion.

I understand. So it's not really about wanting to hold onto it for several years and increase the rents. It seems you want to sell it completely and view it as a development opportunity for your land investment.

Yes. Well, the other part of the equation was to take advantage of the NOLs that we had. So the idea is to sell the property and offset the gain with the NOLs.

Got it. Of course, that makes sense. The same applies to the student.

Same thing. Yes, we're looking to open that spring of next year and sell it at that same point in time.

Okay. As you consider today, it doesn't seem that there is significant concern regarding the portfolio and its potential decline, along with being very selective about new loans. When you think about how to allocate capital, do you envision increasing investments to generate capital gains in the future? Can we anticipate some additional investments in early-stage real estate with the potential for valuation growth?

No, that's not the plan. As we stand today, the plan is regular way origination.

Okay. So stick with the real estate you've got now and any additional capital would go into the loan portfolio.

That's right.

Can you discuss the margin? We are noticing that after a period of stagnation, lending activity is beginning to increase slightly. I'm not sure if this is linked to expectations for lower rates, but there is a noticeable uptick in bridge lending. Can you describe how the return profile of an additional $20 million bridge loan today compares to the period of 2021 and the first half of 2022 when interest rates were low and competition was high for those loans? Is this a more profitable business now than it was at that time?

Yes, this is Andrew. Thank you for the questions. The answer is yes. Our first protocol for new loans in this environment focuses on lower leverage, quality, and sponsorship, along with the return. We can adjust all three aspects to achieve a more favorable outcome. We are seeing lower leverage, higher quality sponsorship, and wider spreads compared to 18 months or even 24 months ago. We have some reinvestment left on our two CLOs, with the first one closing this quarter and the second one toward the very end of the fourth quarter this year. Replacing any liabilities with today's spread is highly beneficial for our shareholders.

Interesting. Okay. But do you have cash available now, Andrew, that could be reinvested as well? Or is it just about anticipating payoffs and reinvesting those payoffs?

Anticipating new. Any cash that gets created through a payoff is redeployed pretty quickly.

Pretty quickly. Okay. Well, there is a...

Either from assets that are recently put on a warehouse facility that we have opened with two banks. Did you guys know and/or transactions that are in our closing pipeline.

Our next question comes from Stephen Laws from Raymond James.

Congrats on a solid quarter. I enjoyed the commentary you provided on Steven Delaney's questions, that touched on a few things I wanted to ask about. But maybe a couple of specifics. One on the model. Dave, with regards to expenses in Q1, I think there are some one-time expenses there. I'm not sure in the G&A line, but can you talk about the run rate going forward as we think about noninterest expense?

Sure, Steve. I would tell you that 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 to 2.5 range when we remove that seasonality. And so that would lead you to about a 10 to 10.5, somewhere in that range. I know that's kind of a 5% range there for the year.

That’s good to hear. I was impressed with the LIBOR floor of 4.5% on the new loan. Looking at the forward curve, that could be very beneficial for your loans. However, given the potential for rapid rate changes, much of your capital might not adjust at a five LIBOR. Would you consider purchasing your own floors? How do you plan to capitalize on the current market conditions and take measures to safeguard future earnings, considering you may not see a lot of capital turnover?

That's an interesting idea, and we haven't thought about that. So we appreciate the insight. As you mentioned, when assets start to change, we are issuing new loans based on the current SOFR rate as the base rate, which is set at the time of closing. This means that as assets change, the average floor rises in line with today's rates. Additionally, I want to note that while this is somewhat of an exception, whenever there are negotiations regarding credit terms or modifications in the portfolio, we always aim to address the increasing base rate with the sponsors as part of the overall negotiation strategy.

Great. And then one last question, just out of curiosity, regarding the different uses of capital for investments. Outside of loans or buying back your own stock, which obviously has limits around the amount you can buy, liquidity, and leverage related to retiring capital, do you consider anything else like buying stock in other mortgage REITs? Given your understanding of loan books from underwriting and competing for many of those loans, it wouldn't reduce your leverage. It's solid REIT income and assets, and you could sell it when needed to fund new investments. Is that something you would consider, or do you see reasons to think it doesn't make sense?

The short answer is it's not something we've done or plan on doing. I think what you're saying makes sense, and I think we do have a reasonable perspective on what's happening across the landscape, but we just don't consider that to be part of our mission.

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, operator, and thank you, everybody, for joining the call. We appreciate everybody's time and interest in ACRES. And please follow up if you have any questions or comments, if you'd like to speak to any one of the management team in the coming days, weeks, and months. Much appreciated. Talk to you soon.

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