Good day, ladies and gentlemen, and welcome to the Second Quarter 2021 ACRES Commercial Realty Corp. 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. [Operator Instructions] As a reminder, this call is being recorded. I would now like to introduce your host for today's conference, Jaclyn Jesberger, General Counsel. You may begin.

Good afternoon and thank you for joining our call. 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 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, 10-K, and in particular, the Risk Factors section of our Form 10-K and Form 10-Q. 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 will 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. Reconciliations of these non-GAAP financial measures to the most comparable measures prepared in accordance with Generally Accepted Accounting Principles are contained in our earnings presentation for the past quarter. With me on the call today are Mark Fogel, President and CEO; and Dave Bryant, our CFO. Also available for Q&A is Andrew Fentress, Chairman of ACRES. 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 strategic initiatives and updates on our portfolio and loan originations, while Dave Bryant will discuss our financial statements and operating results for the second quarter. And, of course, we look forward to your questions at the end of our prepared remarks. This week marks 1 year since ACRES Capital acquired the management contract for what was then known as Exantas and is now ACRES Commercial Realty. Since acquiring the management contract, we have sought to stabilize the legacy loan portfolio, grow loan originations and enhance our funding sources. During the second quarter, we were able to make market progress in all 3 areas. Our aggressive asset management process has resulted in a healthy portfolio, including a net reduction of $133 million of loans risk-rated, a 405 during the second quarter of 2021. There are $177.8 million of loans risk-rated, a 405 at the end of second quarter of 2021 from the peak of $410.8 million at the onset of the pandemic, at the end of the second quarter of 2020. From a capitalization standpoint, we successfully executed on the largest CLO in our history, and completed a preferred stock offering during the quarter. By doing so, we have positioned the company to fund a robust and attractive pipeline of opportunities. Loan origination volume in the second quarter was up over 3 times the prior quarter. This is a direct result of the hard work by our entire team in creating and executing on unique financing solutions for the marketplace. We expect that hard work to provide for continued expansion of our portfolio for the remainder of this year. The portfolio has continued to perform demonstrating sound and consistent underwriting and asset management.…

Thank you, and good afternoon. Our second quarter results reflect our continued positive progress. Our GAAP net income allocable to common shares for the 3 months ended June 30, 2021 was $10.1 million or $1.04 per share, compared to $10.5 million, or $1.03 per share in the first quarter. These results reflect the contributions from the new loan production and accelerated fees from increased payoff activity offset by lower interest spreads due to loan payoffs, as well as accelerations in amortization of deferred debt issuance costs from the 2019 CLO redemption and paydown of CLO notes. The quarter-to-quarter change also includes a higher level of CECL reserve recoveries compared to last quarter. Second quarter GAAP net income includes $10.3 million, or $1.06 per share in CECL reserve recoveries, primarily due to ongoing improved macro-economic factors, a significant amount of loan payoffs of riskier loans and improved property level operations in the loan portfolio. Net interest income was $7.1 million, or $0.73 per share, down from $11 million, or $1.08 per share for the first quarter as higher interest income was offset by an acceleration of deferred debt issuance costs of $4.5 million from the termination of a legacy CLO and the significant loan payoff value that resulted in existing CLO debt paydowns. The weighted average spread of the floating rate loans and our $1.6 billion loan portfolio expanded to 3.78% over 1-month LIBOR, all but one of which had a floor with a weighted average of 1.31% at quarter end. These LIBOR floors are in the money on all our floating rate loans with 1 month LIBOR at approximately 9 basis points at the end of July. We expect to continue to see a benefit to net interest income as the forward LIBOR curve projects rates to remain low in…

Thank you, David. As Mark mentioned, this week is the 1-year anniversary of ACRES managing this REIT. We are proud of the progress we've made as we continue to secure new capital source, underwrite, close and asset manage loans, and grow the company's earnings power. I want to thank the entire team for their ongoing hard work, and to our stakeholders for their continued support. This concludes our opening remarks. And I will now turn the call back to the operator for questions.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Stephen Laws with Raymond James. Please go ahead.

Hi, good afternoon. I guess, to everybody, Mark, Dave, Andrew, congratulations on a first year that a heck of a time to step in, but you've accomplished a lot against a difficult backdrop. One of those things, so you should be complimented for the $20 million repurchase. A lot of companies have not repurchased stock to that level. With that completed in July, can you maybe give us an update on how you think about use of capital, either additional buybacks, common dividend or retain against some type of NOL to use to fund new investments?

Sure, Stephen, this is Andrew. I'd be happy to answer that. And thanks for the support and the questions. So with respect to capital allocation, as we mentioned, we did complete the authorized repurchase program of $20 million. And the way the Board and the management team are viewing share repurchases is that when we believe there is an opportunity to repurchase shares at a greater than 25% discount to book value, that's when we would be interested in revisiting that conversation. At the current levels, we're inside of that. And so, we believe the return on equity that we can generate for shareholders through new originations is a more compelling use of capital. And as you'll note or as we noted in the remarks and in the release, the company issued preferred shares to continue the loan book origination. And so, that's the first use of capital that we have as a priority at the moment, is to continue to grow the loan book and get the company back to being fully invested, using those proceeds to invest in the areas that we believe are most compelling today. We also, as we've noted, and as you just mentioned, do have a tax asset in the amount of about $60 million, that enables the company to retain that capital and hold it for the benefit of shareholders. And in doing, and until we've gotten through that, the view is at the moment that we will continue to refrain from a common dividend while we're retaining that capital and then turn that dividend back on once the capital has been fully earned. Does that answer your question?

It does. It's helpful to prioritize it and to quantify the buyback levels. Thank you for that. Mark, thinking about originations, congratulations on the CLO, it's a great enhancement to the liability side of the balance sheet. That said, You've now got non-mark-to-market financing, I think I read at 94% in your deck. When we think about originations from here, and you can kind of look at yields on multifamily and things that fit into a CLO versus some of the yields on maybe hotels or others that have some limits or restrictions around CLO, where would you like to see that mix shake of kind of maybe higher ROE or higher spread investments that have to be funded with financing that has credit mark exposure versus kind of more middle-of-the-fairway CLO-type originations? How do you see that mix playing out in the coming quarters as you put this recently raised capital to work?

Yeah, hi, Steve. Thank you. Our basis will always be multifamily. I think for the most part, we'll always hover around that 60% level on the multifamily side. So we'll continue to originate down the fairway multifamily that fits neatly into the CLOs. We also have capacity within the existing CLO for office product. However, as you mentioned, hospitality and other asset classes are not really welcome in those vehicles. But we do see some really compelling opportunities in those asset classes. So we're looking at them on a one-off basis to determine which ones we like the best. We're not going to take any crazy risks. I think the pandemic really hasn't played out with respect to some of those asset classes yet. And so, we're being really careful. We're not going to take risk that seems unnecessary. And certainly, the warehouse lenders that we have are looking at it the same way. So, we're all in the same place where nobody's going to take risks, that makes no sense. And we're just going to have to be really careful about what we do with those other asset classes going forward. But we're certainly interested in them, but we're just going to be really picky and choosey.

Great. And then, lastly, could you touch on, I think, 86 of your 88 loans are current, but maybe could you provide us with an update on the 2 that aren't? I don't they're material. But I would love to get an update there and I appreciate your time this afternoon.

Sure. Thanks, Steve. So one is actually current now. It was not current at the end of the quarter, but it is currently current, if that's the right way to say it. And the other is an REO asset on a hospitality property in Philadelphia.

Great. I appreciate you identifying those for us and updating us on the one that's not current. Thanks for your time.

Thank you.

The next question comes from Steve Delaney with JMP Securities. Please go ahead.

Hi, good evening, everyone. I guess, I echo Steve's comments, congratulations on the obvious lending momentum and also on the - what, I think, I heard you say, Mark, is your first managed CLO. I'm curious given that it's actively managed. Do you have a - can you talk about the reinvestment period? Is it the standard 2-year reinvestment period on that facility, that structure?

That's correct. 24 months.

Okay, good. Thank you. And then, I'm looking at kind of the actual reported gap in core versus my number and Stephen's number, it - just going through it, it all comes down to interest expense. And we've sort of identified like a $5 million difference in interest expense, both sequentially, 1Q to 2Q, but also in our own model. And now, I think, I know now that, that $4.5 million in accelerated expenses from the 2019 CLO is - was actually run through the interest expense line. Is that correct, Dave Bryant?

That is correct, Steve. Absolutely.

Okay. Well, it makes me feel a little better about my modeling ability, because that was $0.46 a share. Makes a big - that's a pretty big lumpy item, right? But, net-net, we - the [NPV] [ph] of the CLO swap, I'm sure is very much net positive over the long-term. So we'll make sure that we highlight that in terms of the delta between estimates and the $0.10 reported. So no problem there. And then just a little cleanup on the facility, I guess, I'd call it that with the 7-year notes with Oaktree and MassMutual. You took down $50 million. We know what that looks like on the balance sheet and the income statement and related warrants. Can you comment on the one, how long do you have to call the remaining $75 million? And more importantly, your balance sheet and capital structure looks pretty good now, you got the press. Are you willing to comment on the possibility that you would draw that remaining $75 million? And how much time do you have to make that decision?

Yeah, this is Andrew, I'll give you the answer on the - we have a year remaining to be able to call the remaining $75 million if we so chose. We have no current plan to call it and we view it as very much of a sort of a standby piece of liquidity, which has no ongoing cost associated with it, there's no utilization fees or anything like that. So it's really an option that the company has in the event that it may need it, but there's no current plans to use it.

Thanks. Okay. Makes sense. As you continue to make your balance sheet more efficient and have other sources of capital, the existing $50 million, what would come into play just like we saw with the CLO, what would you be facing with makeup fees or minimum interest payments? What is your flexibility to pay-off the 12%, $50 million? And what kind of lumpy onetime costs might you incur, if you ever decided to do that?

There are some stipulated prepayment premiums that are due in the event that those notes were retired ahead of their scheduled maturity, and to the extent that we go to explore repaying those. We expect we have a robust dialogue with those capital providers to understand whether or not we could get to a mutual agreement on what those might look like.

Okay. Thank you for the comments, everyone, and good luck for the second half of the year.

Thank you.

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

Well, I just want to say thank you again to the ACRES team and to all of our stakeholders for your support over this first year. We look forward to working with you in the coming quarters and years ahead. And if there's nothing else, we'll conclude the call, operator. Thank you very much.

This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.