ACRES Commercial Realty Corp. (NYSE:ACR) Q4 2022 Earnings Conference Call March 2, 2023 5:00 PM ET
Kyle Brengel - VP
Mark Fogel - President and CEO
Dave Bryant - CFO
Andrew Fentress - Chairman
Conference Call Participants
Stephen Laws - Raymond James
Steve Delaney - JMP Securities
Good day, ladies and gentlemen, and invited to the Fourth Quarter 2022 ACRES Commercial Royalty Corp. Earnings Conference Call. Currently, each participants are successful a listen-only mode. Later we volition behaviour a question-and-answer league with instructions to travel astatine that time. [Operator Instructions] As a reminder, this telephone is being recorded.
I would present similar to present your big for today's conference, Kyle Brengel, Vice President. You whitethorn begin.
Good day and convey you for joining our call. I would similar to item that we person posted the 4th fourth net presumption to our website. This presumption contains summary and elaborate accusation astir the quarterly and twelvemonth extremity results of the company.
Before we begin, I privation to punctual everyone that definite statements made during this telephone are not based connected humanities accusation and whitethorn represent forward-looking statements.
When utilized successful this league call, the words believes, anticipates, expects, and akin expressions are intended to place forward-looking statements. Although the institution believes that these forward-looking statements are based connected tenable assumptions, specified statements are based connected management's existent expectations and beliefs and are taxable to respective trends, risks, and uncertainties that could origin existent results to disagree materially from those contained successful the forward-looking statements.
These risks and uncertainties are discussed successful the company's reports filed with the SEC, including its reports connected Forms 8-K, 10-Q, and 10-K, and successful particular, the hazard factors conception of its Form 10-K.
Listeners are cautioned not to spot undue reliance on these forward-looking statements, which talk lone arsenic of the day hereof. The institution undertakes nary work to update immoderate of these forward-looking statements.
Furthermore, definite non-GAAP fiscal measures whitethorn beryllium discussed connected this league call. Our presumption of this accusation is not intended to beryllium considered successful isolation oregon arsenic a substitute to the fiscal accusation presented successful accordance with GAAP.
Reconciliations of non-GAAP fiscal measures to the astir comparable measures prepared successful accordance with Generally Accepted Accounting Principles are contained successful the net presumption for the past quarter.
With maine connected the telephone contiguous are Mark Fogel, President and CEO; and Dave Bryant, ACRES' CFO. Also disposable for Q&A is Andrew Fentress, Chairman of ACR.
I volition present crook the telephone implicit to Mark.
Good day everyone and convey you for joining our call. Today, I volition supply an overview of our indebtedness originations, existent property investments, and the wellness of the concern portfolio, portion Dave Bryant volition sermon the fiscal statements, liquidity condition, publication value, and operating results for the 4th quarter. Of course, we look guardant to your questions astatine the extremity of our prepared remarks.
The ACRES squad continues to execute connected our concern program by selectively originating high-quality investments, actively managing the portfolio, and continuing to absorption connected increasing net and publication worth for our shareholders.
We originated 1 $18 cardinal caller multifamily indebtedness committedness successful the 4th quarter. Loan payoffs during the play were $114.6 cardinal and nett funded commitments during the 4th were $22 million, producing a nett alteration to the portfolio of $74.6 million.
The recently originated indebtedness pays coupon involvement astatine one-month SOFR positive a weighted mean dispersed of 4.8%. The weighted mean dispersed of the floating complaint loans and our $2.1 cardinal commercialized existent property indebtedness portfolio accrued to 3.78% implicit the one-month benchmark rates. We expect to support an concern portfolio of $2 cardinal to $2.3 cardinal done 2023.
Finally, a fewer comments connected equilibrium expanse items arsenic we cognize this taxable is apical of caput for galore investors fixed the caller marketplace volatility and basal complaint increases. During the quarter, the institution finalized presumption with MassMutual nether its non-mark-to-market statement to upsize the committedness to supply for idiosyncratic indebtedness series, which volition each person five-year word for the day -- from the day of issuance.
The institution arsenic good has lines unfastened with JPMorgan and Morgan Stanley with performing collateral connected each. In addition, we person had the reinvestment model disposable connected our 2 ACR securitizations done May 2023 and December 2023.
The bulk of the company's existent portfolio was originated successful 2021 and 2022, comprising 84% of the existent par equilibrium and person archetypal maturities of 2024 oregon aboriginal and extended maturities of 2026 oregon later. The portfolio mostly continues to perform, demonstrating dependable and accordant underwriting and proactive plus management.
We ended the 4th with $2.1 cardinal of commercialized existent property loans crossed 82 idiosyncratic investments. As of December 31st, 2022, determination were 5 watch-list loans, including 3 delinquent loans representing 5.4% of the portfolio. This represents a alteration from December 31st, 2021, astatine which determination were 11 watch-list loans, representing 8.1% of the portfolio.
In January 2023, 1 watch-list indebtedness connected a edifice portfolio successful the Southwest portion with a par worth of $56.5 cardinal was paid disconnected successful full, which reduced the worth of our watch-list loans successful fractional arsenic compared to year-end 2022.
We had 1 circumstantial recognition lawsuit during the quarter. We reserved 100% against the remaining mezzanine indebtedness from our acquisition of the institution successful 2020. The mezzanine indebtedness has a par worth of $4.7 cardinal and the underlying collateral is an bureau spot successful the Northeast region.
As ACRES does not originate mezzanine loans, you should not expect to spot investments successful this portion of the superior operation again. We proceed to clasp 4 investments successful existent property that we expect to monetize astatine gains successful the future. These anticipated gains volition beryllium offset by the existing NOL carryforwards with equity retained and reinvested into the indebtedness portfolio.
In February 2023, we sold 1 edifice plus located successful Plymouth Meeting, Pennsylvania, with a ground of astir $14 cardinal that we received done a foreclosure successful July 2022. We expect to grounds a humble summation connected the merchantability successful the archetypal 4th of 2023.
In summary, the ACRES squad is pleased with the prime of the concern portfolio, including investments successful existent estate, on with the improved equilibrium expanse profile, and the prospects for caller originations and superior appreciation going forward.
We volition present person ACR's CFO, Dave Bryant, sermon the fiscal statements and operating results during the 4th fourth of 2022.
Thank you, Mark and bully afternoon. GAAP nett nonaccomplishment applicable to communal shares successful the 4th fourth was $7.4 cardinal oregon $0.87 per share. Our guidance was for betwixt $0.10 and $0.20 per stock of GAAP nett income for the year, and we ended 2022 with a $1 nett loss, which was mostly a effect of the $1.28 per stock of CECL reserves recorded successful the 4th quarter.
The institution recorded a 4th fourth summation successful CECL reserves of $11 million. The summation includes $6.5 cardinal attributable chiefly to a diminution successful the macroeconomic outlook and a circumstantial proviso to afloat reserve the antecedently mentioned mezzanine indebtedness with a par worth of $4.7 million.
The full allowance for recognition losses astatine December 31st was $18.8 million, which represents 0.91% oregon 91 ground points of the $2.1 cardinal indebtedness portfolio astatine par. Earnings disposable for organisation oregon EAD for the 4th fourth were $0.60 per share.
GAAP publication worth per stock decreased to $24.54 connected December 31st from $25.08 connected September 30th. Available liquidity astatine December 31st, 2022, was astir $118 million, which comprised astir $66 cardinal of unrestricted cash, $14 cardinal of projected financing disposable connected unlevered assets, and $38 cardinal of re-investable currency disposable successful CRE securitizations.
Our GAAP indebtedness to equity leverage ratio decreased marginally to 4.2 times connected December 31st from 4.3 times connected September 30th. Our recourse indebtedness leverage ratio besides decreased marginally to 1.4 times connected December 31st from 1.5 times connected September 30th. The decreases to the leverage and recourse indebtedness leverage ratios were chiefly owed to decreased borrowings connected our slope word facilities arsenic a effect of nett indebtedness payoffs during the period.
Turning to results from the company's existent property investments. Net nonaccomplishment from existent property investments remained comparatively level astatine $369,000 successful the 4th quarter. Included successful the 4th fourth spot operating nonaccomplishment was astir $811,000 of noncash depreciation and amortization.
Focusing connected G&A, the 4th fourth disbursal of $2.6 cardinal versus 3rd 4th of $2.1 cardinal reflects the seasonality for quarterly G&A, chiefly owed to the incurrence of the twelvemonth extremity audit expense.
Regarding stock repurchases, during the 4th quarter, the institution utilized $934,000 of the stock repurchase program to redeem 98,000 shares astatine an approximate 61% discount to publication worth per stock connected December 31st. There is astir $7.2 cardinal remaining connected the Board-approved programme astatine twelvemonth end.
With nett indebtedness maturation of $190 cardinal successful calendar twelvemonth 2022, we expect to person nett income and for our net disposable for organisation to stay affirmative and steadily turn successful 2023.
Of note, we expect to spot a simplification successful EAD during the archetypal 4th of 2023, driven chiefly by the seasonality successful G&A expenses and edifice operations, on with anticipated nett indebtedness payoff activity.
We presently task that the institution volition nutrient GAAP income successful a scope of $1.25 to $1.75 per stock and EAD successful a scope of $1.75 to $2.25 per stock for the calendar twelvemonth 2023.
Our projection remains taxable to benchmark complaint volatility, indebtedness payoff volume, CECL reserve adjustments and different nonrecurring oregon unexpected items that whitethorn originate during the year.
Now, I volition crook the telephone to Andrew Fentress for closing remarks.
Thank you, Dave. As we adjacent the 4th fourth connected a productive twelvemonth astatine ACRES, we privation to admit the full extended squad and accidental convey you to everyone that works to present these results. We besides privation to admit our shareholders for trusting america to execute connected our strategy. We stay committed and disposable astatine immoderate clip for questions and requests for information.
As I've said previously, we are mindful of the changes successful the complaint marketplace and corresponding volatility successful plus prices has created a heightened consciousness of anxiety. As you've heard from our CEO, Mark, and CFO, Dave, the institution is performing well, has a beardown portfolio, ample liquidity, and is managed by a squad of professionals, who person been done respective cycles during their careers.
We stay vigilant successful our ngo to present shareholders' worth implicit the agelong term. We bash this by investing successful and managing high-quality assets that volition nutrient unchangeable and increasing publication worth for our shareholders.
This concludes our opening remarks and I'll present crook the telephone backmost to the relation for questions.
Thank you. We volition present statesman the question-and-answer session. [Operator Instructions]
And the archetypal question volition beryllium from Stephen Laws from Raymond James. Please spell ahead.
Hi, bully afternoon. I conjecture archetypal off, congratulations connected the bully quarter. I cognize GAAP was impacted by CECL, but nett involvement income looks truly coagulated connected what smaller portfolio than I was looking for and a coagulated distributable net number. So, a bully adjacent to the year.
Having said that, tin you speech about, Mark, a small spot astir your near-term appetite investments versus repayments, repayments outstripped caller originations oregon outpaced a small spot successful Q4? How are you reasoning astir that successful the archetypal fractional of the year? Should we expect the portfolio size benignant of flat, nett down, nett up, arsenic we look retired implicit the adjacent mates of quarters?
Hey Steve, acknowledgment for the comments. We expect done the -- astatine slightest the archetypal fractional of this year, astir apt passim the twelvemonth to stay comparatively level with respect to nett production.
When you're looking astatine the turnover there, I cognize you talked astir there's not a batch of turnover, but with the replenishment, benignant of wherever are you putting caller assets spreads contiguous versus things you're seeing paying off?
So, for the astir part, you're seeing loans paying disconnected that are astir apt spreads of 3.5% to 4.5%. Today, we're putting spreads connected the books that are betwixt 4.5% and 5.5%.
Okay. So, a small spot of prime up determination connected the turnover?
And I wanted to interaction base, possibly a clarification first. I deliberation connected the existent property leafage successful the deck, the footnote mentions an plus that was sold consequent to twelvemonth end. Is that the aforesaid 1 you referenced successful your prepared remarks that's going to pb to a small, I guess, summation successful Q1?
That's correct, it was a tiny constricted work edifice successful Pennsylvania.
Great. Just wanted to marque definite it was the aforesaid asset. Great. Appreciate the comments. Thank you.
[Operator Instructions] The adjacent question is from Steve Delaney from JMP Securities. Please spell ahead.
Hello, Mark, Dave, and Andrew. Nice to beryllium with you this evening. You mentioned the CECL reserve astatine $18.8 cardinal astatine twelvemonth end. and I jotted down a fig of $6.5 million. Was that intended to beryllium the circumstantial reserve wrong the $18.8 million?
Go ahead, Dave.
Yes. Sorry, Mark. So, Steve, the $11 cardinal was the play disbursal and reserve. $6.5 cardinal of that was wide reserve, chiefly caused by a worsened macroeconomic outlook.
-- was general, right. Okay.
The different $4.5 cardinal got the mezzanine indebtedness to a afloat reserve of $4.7 million. So, I antecedently had a mates of 100 1000 done done the CECL model, but present that we are evaluating that indebtedness specifically, we added $4.5 cardinal to it and got it to the afloat reserve of $4.7 million.
Got it. So, arsenic of -- present that that has gone, are determination immoderate much circumstantial reserves connected your books arsenic we beryllium present today?
None arsenic we beryllium present today.
Excellent. Okay. Your guidance--
That was the lone mezzanine indebtedness we had connected our books.
Understood. You've got that. So, everything is archetypal velocity now. Got that. So, convey you for the guidance for the afloat year.
In the EAD, which is really higher than your GAAP. GAAP, I guess, is surely going to bespeak immoderate further CECL reserves that you person to enactment up. Within your EAD, are you trying to physique successful immoderate anticipation for realized losses that mightiness hap successful the year, which would past trim EAD?
There whitethorn beryllium a tiny magnitude of that, Steve. It's not a peculiarly meaningful number. I would accidental that the biggest presumption successful that guidance is that we expect -- we're keeping the CECL reserve astatine that 91 ground constituent level that we ended the twelvemonth at. Of course, that could alteration during 2023, but we don't cognize capable present to meaningfully oregon accurately foretell what that mightiness be.
I understand. So, the statement you've got is with the 91 ground constituent CECL reserve volition beryllium benignant of a changeless wrong that is what I'm proceeding you say, David.
Okay, great. Okay. And conscionable stepping back, 1 benignant of large representation thing. We are successful a antithetic marketplace contiguous than we were possibly six months agone successful presumption of commercialized existent estate, surely 12 months ago.
The superior nonaccomplishment carryforward you have, conscionable speaking with respective of you implicit the past twelvemonth oregon so, the thought is that it astir apt is hard existent property that is the plus people that volition make imaginable superior gains.
I'm funny successful this little definite market, however proactive you whitethorn beryllium and what you're seeing successful attractively valued commercialized existent property properties that you mightiness determine to put in, successful bid to hopefully utilize your superior nonaccomplishment carryforward? Thanks.
Steve, acknowledgment for the question. I wouldn't expect america to beryllium excessively progressive successful going aft further equity investments. I deliberation what we person for present is what we'll instrumentality with for the remainder of the twelvemonth astatine least.
Our concern is making commercialized owe loans and not truly making equity investments. So, I would deliberation that if determination is distressed opportunities retired there, it's astir apt not thing that we're going to beryllium going after.
Got it. Well, convey you for the comments.
Ladies and gentlemen, this concludes our question-and-answer session. I would similar to crook the league backmost implicit to Mark Fogel for immoderate closing remarks.
Well, convey you, everybody, for joining america today. We admit everybody's support, and we look guardant to speaking again successful the archetypal 4th of 2023 and hopefully, having immoderate robust net to discuss. Talk soon.
Thank you, sir. The league has present concluded. Thank you for attending today's presentation. You whitethorn present disconnect.