Good day, ladies and gentlemen, and welcome to the Third Quarter 2024 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, Kyle Brengel, Vice President, Operations. You may begin.

Good morning, and thank you for joining our call. I would like to highlight that we have posted the third quarter 2024 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 the 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 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 for 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 Eldron Blackwell, 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 operations, real estate investments and the health of the investment portfolio, while Eldron Blackwell will discuss the financial statements, liquidity condition, book value and operating results for the third quarter of 2024. 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 developing a pipeline of high-quality investments, actively managing the portfolio and continuing to focus on growing earnings, and book value for our shareholders. Loan payoffs during the period were $118.1 million. Foreclosures were $23.7 million and funded commitments during the quarter was $7.4 million, producing a net decrease to the loan portfolio of $134.4 million. The weighted average spread of the floating rate loans in our $1.6 billion commercial real estate loan portfolio is now 3.73% over one-month term SOFR rates. Portfolio generally continues to perform, demonstrating sound and consistent underwriting and proactive asset management. The company ended the quarter with $1.6 billion of commercial real estate loans across 56 individual investments. At September 30, there were 11 loans rated four or five, which represented 23% of the par value of our portfolio, an increase of 2%, as compared to the second quarter 2024, and our weighted average risk rating was 2.7% at both June 30 and September 30. 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 deferred tax assets, and we expect to retain the equity and reinvest potential gains into our loan portfolio. Our student housing development near Florida State University opened in August at 95% occupancy, and we initiated a marketing effort in September to explore a sale of the asset. We will provide updates in future quarters on the monetization of this asset. During the period, we foreclosed on two loan assets. One asset is an office property in Austin, Texas. Upon conversion, we recorded a $2.8 million unrealized gain based on market offers for the property. The second asset is a $9.3 million multifamily property in Memphis, Tennessee. We are working on a plan to bring this asset to stabilization, and exit with a positive outcome. In summary, the ACRES team continues to be focused on the overall quality of the investment portfolio, including investments in real estate with the goal of improving credit quality, and recycling capital into performing assets. We will now have ACRES' CFO, Eldron Blackwell, discuss the financial statements and operating results during the third quarter.

Thank you, and good morning, everyone. GAAP net income allocable to common shares in the third quarter was $2.8 million or $0.36 per share diluted. GAAP net income for the quarter included $10.5 million in net interest income, a net loss on real estate operations of $665,000, which included depreciation of $1.3 million and as Mark previously mentioned, a gain of $2.8 million or $0.35 per share resulting from the conversion of a CRE loan to real estate owned. We saw a decrease to current expected credit losses or CECL reserves of $291,000, or $0.04 per share as compared to an increase in CECL reserves, during the second quarter of $1.3 million. The decrease in the general CECL reserves was primarily driven, by a decrease in modeled credit risk resulting from payoffs modifications, and net improvements in property level performance, offset by a minor worsening of macroeconomic factors. The total allowance for credit losses at September 30 was $34.7 million, and represented 2.19% or 219 basis points on our $1.6 billion loan portfolio at parents, and comprised $4.7 million in specific reserves and $30 million in general credit reserves. Earnings available for distribution, or EAD, for the third quarter was $0.24 per share as compared to $0.51 per share for the second quarter. The difference primarily resulted from a $0.14 decrease in real estate operations, and a $0.06 decrease in dividends on our preferred stock due to the Series C stock, converting from a fixed rate to a floating rate. Lastly, we saw a $0.04 run rate decline in net interest income resulting from net payoffs that occurred during the quarter. GAAP book value per share was $27.92 on September 30, versus $27.20 on June 30. During the third quarter, we used $1.7 million to repurchase 114,000 common shares at an approximate 46% discount to book value, and there was approximately $2.3 million remaining on the Board-approved program at quarter end. Available liquidity at September 30 was $79 million, which comprised $70 million of unrestricted cash and $9.7 million, of projected financing available on unlevered assets. Our GAAP debt-to-equity leverage ratio slightly decreased to 3.3 times at September 30 from 3.6 times at June 30, primarily as a result of payoffs on our two remaining CRE securitizations. And our recourse debt leverage remained consistent at 1.1 times at both September 30 and June 30. With that, I will turn the call to Andrew Fentress for closing remarks.

Thanks, Eldron, and thanks, Mark, and appreciate everybody joining the call this morning. As we've talked about, we're in the process of monetizing not just the assets that we proactively acquired over the last couple of years, but also some of the REO assets that have arisen. We've got two examples of having done that profitably recently. And we expect that over the next two quarters, the current fourth quarter and probably the calendar first, that much of that work will be completed, and we'll be able to report back to you on the results, and how they're going to impact book value per share. But directionally, our projection is that it's going to be flat to better, than where it is today. With those sales and monetization, we expect to redeploy that capital back into the loan book, and really turn the page to focus on earnings, and our ability to drive to a market-based dividend over the forward 12 months. And so that's really where the team is organized and focused today. And we'll try to share as much specifics as we can with you, during the Q&A and look forward to your questions. So with that operator, if you can open the line-up, we'll look forward to the first question.

[Operator Instructions] We'll hear first from Matthew Erdner with Jones Trading. Please go ahead.

Hi, good morning guys. Thanks for taking the question. So when it comes to monetizing these equity assets and REO, are you guys looking to fully clear this stuff off of your books before turning to originations? Or are you guys open to kind of doing it hand-in-hand together while you're disposing of assets and originating at the same time?

It will be the latter. So as we monetize, we'll redeploy gradually. We're not going to wait until they're all completed to begin that process.

Okay. That's helpful there. And then turning towards the dividend, what are you guys looking for there to kind of get that back up and going? Is it full monetization of the assets and getting ex amount of capital deployed? What are you guys looking for there as targets?

We haven't set a specific target, but what we're going to do is to continue to monetize the assets, drive EAD and then pay out of EAD a dividend that we believe will be growing as we again, relever the balance sheet, and get back to focusing on driving earnings. As you're aware, one of the things that we're fighting, if you will, on the EAD front is the deleveraging that's occurring as a result of the current CLOs being paid down. And so, the liquidity that gets created for monetization first goes to pay down the AAA tranches. So, we're going to have to flip at some point, to thinking about how to issue a new one, and that will impact our ability to drive earnings as well. So that's all in the near future for us.

Right, right. That's helpful there. And then can you remind me how much you guys used for share repurchases this quarter and then what's left? I think I missed those two numbers. I saw the 114,000 shares, but what was the amount there?

We used - this is Eldon. We used $1.7 million, and we have about $2.3 million left on the program.

Okay. Great. Thank you, guys.

Thanks, Matt.

Next, we'll hear from the line of Stephen Laws with Raymond James. Please go ahead.

Good morning. I'm close to the year, so I want to congratulate you guys. I think your stock has doubled over the last year and best-performing mortgage REIT year-to-date. So I know you guys have accomplished a lot. And it seems like the next six months are going to be pretty exciting, Andrew, given your comments. And so, I wanted to follow-up on that. I think student housing with the FSU asset likely is the first domino to fall or first REO sale. Can you talk about what other assets do you think are near-term liquidations, and how we should think about the sales playing out over the next six months?

Yes. Without getting too specific, Stephen, because we want to report on the results rather than give projections on that. But what I would say is, in addition to the one that you mentioned, there are three others that are in process now that we have a high degree of certainty on being executed, over the next couple of quarters.

Great. And then as you think about turning the loan pipeline back on, how is that going? Are you reengaged there where you do loans on any of these assets to the buyer, as a way to put some money to work on assets you already know? Kind of how do we think about ramping up the pipeline, and when we'll start to see new originations close?

So it really is about liquidity. So as you've seen, we've got about $80 million of liquidity available to the company right now. So, we want to be mindful of the appropriate amount of liquidity to keep on the balance sheet. And then as these assets again, repay, we'll be able to redeploy that because many of them are, as you're aware, not on a CLO. And so it doesn't - when they sell, we don't have to pay down bonds associated with it. So they're just really - it's equity that becomes available to put in a warehouse, and go and reoriginate. To give you also a reminder, ACRES as a platform manages capital away from this REIT. And so, we are very much engaged with the marketplace each and every day, and originating new loans weekly. And so, we expect to just be able to move some of that flow into the REIT once the dollars are available. So we have not been absent from the marketplace. And so, this will be just allocating some of the origination to this vehicle, once the liquidity profile is appropriate.

Great. Appreciate you highlighting that. And a little follow-up on your comments around the securitizations. I've got to get in the filings to see exactly what the - FL1 and two have paid down to. But when you look at the blended financing cost of those, how do they compare with kind of where the CLO markets are today? I know a couple of other mortgage REITs have recently done deals that included both a ramp period, and two to three year reinvest period. How close are we to collapsing one of these vehicles, and looking at doing a new deal? And kind of how does the financing costs, compare to where the CLO markets are today?

So as it relates to the FL1 and two terms, those were done, obviously, in a market environment that were particularly attractive. So I'm not sure if we collapse these two and redeploy into a new one, they're going to be at the same levels, but spreads are wider as well. So what we really focus on are the ROEs that the structure can deliver to the shareholders. And we expect based upon what's happening in the current market with the CLO executions that we'll be able to drive that kind of mid to high teens ROE outcome, based upon the collateral that we have, what we're warehousing, what we see in a pipeline, assuming that the CRE, CLO market stays at approximate levels to where they are today. So, we're definitely thinking about that and have developed plans for it.

Great. I'll look forward to coming announcements, and appreciate the comments this morning.

Yes, thanks Stephen.

[Operator Instructions] We'll hear next from Chris Muller, Citizens JPM. Please go ahead.

Hi guys, thanks for taking the question. So I guess following up on some of the REO topic here. I see in one of your footnotes in the deck that valuations are as of the date you acquired it. So have you guys had any type of appraisal since then? Or just any general thoughts of directionally, I guess, where valuations could be today given you've held some of those properties for a little while now?

So you're right, that we hold these at cost, or depreciated value if they're being - on a depreciation schedule. So we're not going to mark them until they actually get monetized. So when we actually sell the asset as part of the process, we'll record the gains then. Does that answer your question?

Yes. And just any thoughts of what those gains could be? I mean it's about $200 million of those assets on the balance sheet there. So is that like a $300 million type number? Or is there just going to be some incremental gains on top of that $200 million?

I would categorize it as the latter sort of incremental gains. But we're not - I don't want to be specific in terms of giving projections. We'll give you the results when they actually get completed. And I think, look, they're going to be positive gain. There are going to be gains, not losses, I'll put it in that category.

Got it. And then I guess on a similar note, just a quick housekeeping one. So on that unrealized gain with the REO conversion, once that is realized, will that flow through EAD?

That's correct. This is Eldron. When we monetize that asset, you'll see that as an adjustment to EAD.

Got it. Got it. And then just one last quick one here. So it looks like the four rated loans declined by one loan in the quarter. Was that one of the foreclosed loans? Or did that loan pay off or was it upgraded?

That's correct. This is Mark. It was a conversion to REO.

Got it. And I guess just following up on that real quick. So what drove it from going to a four to REO? Was that something that was on your guys' radar? Just any color you could give on that would be helpful.

Yes. I mean it was always on our radar. It was a borrower that we have been working with. The borrower essentially has other issues within his portfolio and kind of run out of steam and his ability to keep the loan current. And we went ahead with the foreclosure as our remedy in the quarter.

Got it. Thanks for taking the questions and look forward to seeing this story play out over the next couple quarters.

Thank you.

Thanks, Chris.

[Operator Instructions] It appears we have no further questions at this time. I'd like to turn the floor back over to management for any additional or closing comments.

Thank you, everyone, for joining the call. Everyone, have a happy and safe Halloween.

Thank you. Once again, ladies and gentlemen, that will conclude today's call. Thank you for your participation. You may disconnect at this time.