Good day, and welcome to the ACRES Commercial Realty Corp., First Quarter 2023 Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] 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 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 $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 NOL 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, 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 due to 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 of $3 million versus fourth quarter expense of $2.6 million reflects 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.

[Operator Instructions] Our first question comes from Steve Delaney from JMP Securities.

I'm looking at Slide 17, the properties. And I was wondering if you -- you talked about the seasonality of the hotels. I'm looking at the description of the multifamily and the student housing. And I'm getting the sense -- while I see that the student housing project -- we just started construction here recently, and the multifamily indicated that it was land to be developed. Can you just comment on the multifamily and explain what level of development has been made there? I'm trying to get a sense of when those two, multifamily and student, will possibly start cash flowing for you.

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.

Got it. Got it. So it's not really a -- you want to get it complete sold. You're not looking for hold for several years and roll up the rents. I get it. You're looking at it as a development, highest used for your land -- investment in the land, it sounds like.

Yes. Well, the other part of the equation was 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 student -- same thing on 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. So as you look here today, I mean, you're not -- doesn't seem to be totally concerned with like the portfolio and if it runs off a little bit and be very selective on new loans. As you look at the balance of where you would allocate capital, do you see yourself putting more -- given the need to create capital gains going forward? Could we expect some additional investments in early-stage real estate with valuation appreciation?

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.

And can you talk about at the margin -- we're seeing -- after freezing for a while, people are starting to lend a little bit more. I don't know whether that has anything to do with expectation for lower rates, but there seems to be a little bit of a pickup in bridge lending. Can you characterize sort of the return profile of an incremental $20 million bridge loan today compared to where we were, I guess, what, '21, first half of '22 when money was cheap and there was a lot of competition for those loans. Is it a more lucrative business today than it was then?

Yes. This is Andrew. So thanks for the questions. The answer is yes. So our first protocol in new loans in this environment is lower leverage and quality and sponsorship. And the third is return. So we're able to adjust all three of those in a more favorable -- to a more favorable outcome. So lower leverage, higher quality sponsorship and wider spreads from where we were certainly 18 months ago and even 24 months ago. We've got -- as you can appreciate, we've got some reinvestment left on our two CLOs. The first one closes this quarter, the reinvest period. The second one closes in the fourth quarter -- toward the very end of the fourth quarter of this year. And with those liabilities, anything that we can replace from there with today's spread is highly accretive to our shareholders.

Interesting. Okay. But not the -- do you have cash in there now, Andrew, that could be reinvested as well? Or is it just anticipating payoffs and reinvesting 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 [indiscernible] and/or transactions that are in our closing pipeline.

[Operator Instructions] 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's some onetime 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 removed 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.

Great. That's helpful, and where I am. So that's good to hear. A bigger picture question, I was impressed with the LIBOR floor of 4.5% on the new loan. Certainly, if you look at the forward curve, that could be really attractive to have in your loans. Unfortunately, with where -- how quickly rates may turn, not a lot of your capital is going to turn over up here at a five [number] LIBOR. So would you consider buying your own floors? How do you think about trying to take advantage of kind of where the market is today and do things to protect future earnings since you probably aren't going to have a lot of capital turnover here?

It's a good thought. We have not considered that. So thanks for giving us something to think about. And as you point out, as assets do turn, we are putting new loans on at today's prevailing SOFR rate as the base rate, and that rate is floored at the time of close. So as assets do turn, that average floor does rise at today's levels. And I would also say that -- and this is somewhat of an exception, but to the extent that there are any negotiations in the portfolio on any credit terms, mods, et cetera, increasing base rate is always one of the items that we try to focus on with the sponsors as part of an overall package.

Great. And then one last question, just out of curiosity, kind of on the different uses of capital for investments. But outside of loans and -- or buying back your own stock, obviously, which you have limits around, amount you can buy, liquidity, et cetera, leverage and its retiring capital. You look at anything else like buying stock and other mortgage REITs. It's something where you probably have as good of an understanding of loan books with -- given you underwrote and competed for many of those loans. It would not reduce your leverage. It's good REIT income. It's good REIT assets. You could sell it when you need it to fund new investments. I mean is that something you guys would consider? Are there reasons that you look at that and just say that it really 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.

[Operator Instructions] If there are no further questions, we'll conclude the question-and-answer session. And 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 on 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.