Good day, and welcome to the ACRES Commercial Realty Corp. Second Quarter 2023 Earnings Conference Call. Please note, this event is being recorded. I would now like to turn the conference over to Kyle Brengel. Please go ahead.

Good morning, and thank you for joining our call. I would like to highlight that we have posted the second 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 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 to the financial information presented in accordance with GAAP. Reconciliation 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 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 morning, 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 second quarter. 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 one $22.5 million mixed-use loan commitment in the second quarter, which pays coupon interest at one-month SOFR plus a spread of 6.25%. Loan payoffs during the period were $47.3 million, and net funded commitments during the quarter were $14.8 million, producing a net decrease to the portfolio of $10 million. The weighted average spread of the floating rate loans and the $2 billion commercial real estate loan portfolio increased to 3.94% over the one-month benchmark rates. During the quarter, we acquired an office property in Chicago via deed in lieu. At the time of the foreclosure, the asset was valued at $20.9 million. This property was classified as held for sale at June 30, 2023. 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. The portfolio generally continues to perform, demonstrating sound and consistent underwriting and proactive asset management. The company ended the quarter with $2 billion of commercial real estate loans across 78 individual investments. As of June 30, 2023, there were five loans rated 4 or 5, including three loans not current on contractual payments, representing 4.9% of the portfolio. This represents a slight decrease from March 31, 2023, at which there were also five loans rated 4 or 5, but represented 5% of the portfolio. We continue to manage several investments in real estate that we expect to monetize at gains in the future. These anticipated gains will be offset by net operating loss carry-forwards, 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 second quarter of 2023.

Thank you, and good morning. GAAP net income allocable to common shares in the second quarter was $817,000 or $0.10 per share. Included in that net income is an increase to CECL reserves of $2.7 million or $0.31 per share as compared to CECL reserves during the first quarter of $5.1 million. CECL reserves this quarter are made up of $1.8 million in general reserve increases plus a charge-off of $948,000 upon taking the deed in lieu of foreclosure on the office property in Chicago. The second quarter increase to general reserves is primarily attributable to the expected negative impact of macroeconomic factors on the general economy. Those factors are partially offset by improvements in general portfolio credit risk. The total allowance for credit losses at June 30 was $25.7 million, which represents 1.3% or 130 basis points of the $2 billion loan portfolio at par and comprised $4.7 million in specific reserves and $21 million in general credit reserves. EAD, or our earnings available for distribution, for the second quarter was $0.60 per share, which compared favorably to $0.52 per share in the first quarter. GAAP book value per share was $24.50 on June 30 versus $24.51 on March 31. Available liquidity at June 30, 2023, was $91 million, which comprised $57 million of unrestricted cash, $20 million of projected financing available on unleveraged assets and $14 million of reinvestment cash available in a commercial real estate securitization. GAAP debt-to-equity leverage ratio decreased to 3.9x on June 30, 2023 from 4.1x on March 31, 2023. Our recourse debt leverage ratio also decreased to 1.2x on June 30 from 1.3x on March 31. The decrease in the leverage and recourse debt leverage ratios were primarily due to decreased borrowings on our bank term facilities. Turning to results from our real estate investments. Net loss from real estate investments decreased to $1.6 million in the second quarter of 2023 from $1.8 million in the first quarter of 2023. During the second quarter, we incurred $1 million of property tax arrears on the asset that we acquired via deed in lieu of foreclosure. Included in the second quarter property operating loss was approximately $946,000 of non-cash depreciation and amortization. Focusing on general and administrative expenses, the second quarter 2023 expense of $2.3 million versus first quarter 2023 expense of $3 million reflects seasonality in quarterly general and administrative expenses, primarily due to the incurrence of the year-end audit expense, which amounted to approximately $600,000 in the first quarter. Our annual general and administrative expense projection remains unchanged. Regarding share repurchases, during the second quarter, we used $1.2 million of the share repurchase plan to redeem 135,000 shares at an approximate 64% discount to book value on June 30. There was approximately $5.3 million remaining on the Board approved program at quarter-end. With respect to full year 2023 guidance, we still expect EAD in a range of $1.75 and $2.25, which if paid as a cash dividend would represent 7% to 9% of book value, approximately in line with the peer group. In addition, we still expect GAAP EPS of $0.75 to $1.25 per share. Now, I will turn the call to Andrew Fentress for closing remarks.

Thank you, David. As you're all aware, the environment for the mortgage REIT sector remains challenging. The ACRES team is focused on managing a high-quality portfolio that is primarily invested in multifamily assets throughout the United States. Fundamentals remain strong in this segment as low levels of unemployment and strong demographic trends continue to drive low vacancy and positive rent growth. We're mindful of the margin pressures our sponsors are facing, given higher costs of capital and other inputs. Credit quality on our portfolio remains stable, and we're actively monitoring for any early signs of weakness. Our long-run mission remains unchanged, namely to deliver value to our shareholders by increasing earnings and book value over time. This concludes our opening remarks, and I'll turn the call back to the operator for questions.

Our first question comes from Chris Muller with JMP Securities. Please go ahead.

Hey, guys, thanks for taking the question. So, I want to talk about spreads on your new originations. Looking at the last couple of quarters, there's been a nice steady trend of improvements there. So, I guess the question is, is this something that you guys are seeing more broadly? Or are the loans that you guys are originating more to the outliers in the group? Thanks.

Mark, do you want to take that one?

Sure. Good morning, Chris. How are you? Yes, there are opportunities to invest in loans with some higher spreads in the market today. Frankly, we're really focused more on high credit quality, good sponsorship in markets in which we believe. So a couple of those deals were just sort of outliers, and they are good assets where we were able to gain good spread. But for the most part, our real focus on originations going forward is to ensure that we have high credit quality assets coming into the portfolio, good sponsorship, strong loan-to-value ratios and in markets that are highly liquid.

Got it. And being able to check all those boxes is obviously the best case scenario. So the other question I have is on the share repurchases. So it's nice to see some repurchases in the quarter, especially with where you guys are trading at book to book. But can you talk about how you guys think about or how the Board thinks about further buybacks versus originating new loans, even if you're cherry-picking some of those better opportunities?

Yes, this is Andrew. We consider share repurchases as long as we achieve a return on equity greater than 15%. Currently, we are exceeding that target, so we plan to allocate some of our liquidity towards share repurchases. We have a $20 million share repurchase authorization, with about $5 million remaining. If our stock continues to trade at current levels, we will likely use the remaining $5 million and then reassess our position.

Got it. That's very helpful. Thanks for taking my questions.

Ladies and gentlemen, this concludes our question-and-answer session for today. I would like to turn the conference back over to Andrew Fentress for any closing remarks.

Thanks, everyone, for joining, and we appreciate the attendance and the questions, and we look forward to speaking with you again next quarter. Thank you very much.

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