Kyle Brengel; Vice President - Operations; Acres Commercial Realty Corp
Mark Fogel; President, Chief Executive Officer, Director; Acres Commercial Realty Corp
Eldron Blackwell; Chief Financial Officer, Senior Vice President, Treasurer; Acres Commercial Realty Corp
Andrew Fentress; Chairman of the Board; Acres Commercial Realty Corp
Matthew Erdner; Analyst; JonesTrading
Chris Muller; Analyst; Citizens Bank
Operator
Good day ladies and gentlemen, and welcome to the fourth quarter 2024 Acres Commercial Realty Corp earnings conference call. (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.
Kyle Brengel
Good morning and thank you for joining our call. I would like to highlight that we have posted the fourth-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 this call are not based on historical information and may constitute forward-looking statements. When used in this conference call, the words believe, 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 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 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.
Mark Fogel
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 fourth 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 $107.5 million. We closed one new commitment of $47.9 million with an unfunded commitment of $28.4 million and funded existing loan commitments during the quarter of $6.2 million, producing a net reduction of the loan portfolio of $81.8 million. The weighted average spread of the floating rate loans in our $1.5 billion commercial real estate loan portfolio is now 3.73% over one-month term SOFR rates.
The portfolio generally continues to perform, demonstrating sound and consistent underwriting and proactive asset management. The company ended the quarter with $1.5 billion of commercial real estate loans across 53 individual investments and one loan held for sale at $11.1 million.
At December 31, our weighted average risk rating was 2.9%, an increase from 2.7% at September 30, and there were 12 loans rated 4 or 5, which represented 27% of the par value of our portfolio, an increase of 4% as compared to the end of the third quarter of 2024.
Subsequent to December 31, a 4-rated loan with a principal balance of $30 million paid off at par, bringing off 4 or 5 rated loans to approximately 25% of the par value of our portfolio and our weighted average risk rating to 2.8% on a pro forma basis.
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. One of those investments, an office property in Pennsylvania, was sold during the period for a gain of $7.5 million.
In January, we sold a loan on an underperforming hotel in Orlando that was risk rated 4 at 94% of our bases. We've already recorded the impact on book value at December 31, and we will have a charge off to EAD of $700,000 in the first quarter. The sale will allow us to redeploy the capital into new loans.
Our student housing development at Florida State University opened in August 2024 at 95% occupancy. Pre-leasing for the 2025 to '26 school year has been tracking well ahead of the current year in terms of both occupancy and rental rates. One assets pre-leasing is approximately 20% higher as compared to this time last year, while another asset is seeing double-digit rent growth compared to 2024, 2025 school year. We are working with our partner to sell the asset and we will provide updates in future quarters on the monetization of this asset.
As we exit our real estate investments, we expect to redeploy the capital into our CRE loan book and look to increase our levered returns on the portfolio. Along those lines, we are working on the liquidation of our two CRE securitizations structured in 2021. The leverage profile on an aggregate basis declined to 77% at December 31, and we will look to refinance the assets in the first quarter. We have $2.3 million of unamortized debt issuance cost as of December 31 and we will incur a charge with the acceleration.
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 categories.
We will now have ACR's CFO, Eldron Blackwell, to discuss the financial statements and operating results during the fourth quarter.
Eldron Blackwell
Thank you and good morning, everyone.
The GAAP net income allocable to common shares in the fourth quarter was $4.1 million or $0.52 per share diluted. GAAP net income for the quarter included $8.6 million in net interest income, a net loss on real estate operations of $2.3 million which included depreciation of $1.4 million and, as Mark previously mentioned, a gain of $7.5 million or $0.95 per share resulting from the sale of our interest in a real estate property.
We saw a decrease in current expected credit losses or CECL reserves of $1.2 million or $0.15 per share as compared to a decrease in CECL reserves during the third quarter of $291,000. The $1.2 million fourth quarter reversal of CECL reserves was primarily driven by loan payoffs and improvements in expected macroeconomic factors offset by an increase in model credit risk resulting from worsening property level performance on certain loans and a direct charge off of $700,000 to the reserve related to the Orlando hotel loan Mark previously discussed, which was sold in the first quarter of 2025.
The total allowance for credit losses at December 31 was $32.8 million and represented 2.2% or 220 basis points on our $1.5 billion loan portfolio at par and comprised $4.7 million in specific reserves and $28.1 million in general credit reserves.
Earnings available for distribution or EAD for the quarter 2024 was $0.48 per share as compared to $0.24 per share for the third quarter. The difference primarily resulted from a $0.67 increase to EAD from previously mentioned gain on sale of property and was offset by a $0.24 decrease in net interest income driven by loan payoffs and a decline in SOFR, a $0.15 decrease in real estate operation, and a $0.03 increase in operating expense.
GAAP book value per share was $28.87 on December 31 versus $27.92 on September 30. During the fourth quarter, we purchased $2.3 million from our previous repurchase plan, and our Board approved an additional $5 million on our buyback program. In total, we used $2.5 million to repurchase 155,000 common shares at an approximate 43% discount to book value on December 31. There was approximately $4.8 million remaining on the (inaudible) program at year end.
Available liquidity at December 31 was $76.9 million, which comprised $56.7 million of unrestricted cash and $20.2 million of projected financing available on unlevered assets. Our GAAP debt to equity leverage ratio slightly decreased to 3 times at December 31 from 3.3 times at September 3, primarily as a result of payoffs in our two remaining CRE securitizations, and our recourse debt leverage ratio remained consistent at 1.1 times at both December 31 and September 30.
At the end of Q4, the company's net operating loss carry forward was $32.1 million or approximately $4.31 per share. As Mark indicated, we will have some one-time charge events in the first quarter of 2025. As we transact on some of our assets, refinance our de-levered CLOs, and begin to reinvest the proceeds into our CRE loan book, we expect to see our EAD profile trend up from a low point in the early part of 2025.
With that, I will turn the call to Andrew Fentress for closing remarks.
Andrew Fentress
Thank you, Eldron.
We are at an important inflection point in the management strategy for the company. As discussed, we're actively monetizing the equity investments made to utilize the NOL inherited from when we took over management in August of 2020. We expect to redeploy that equity capital into the loan book for active origination activity.
We also expect to re-leverage the portfolio through the CRE CLO market and take leverage back to historical leverage of between 3.5 and 4 terms. Our mission is to drive mid-teens ROEs that net down to a run rate of 8% to 10% EAD range at book value. As always, careful origination and active asset management are the cornerstones of our approach to creating sound book value.
As the above transition unfolds over the next couple of quarters, there will be some noise associated with DDI and other charges, and it will take time to re-leverage the book. We're close and we're confident in the team. We will get to our stated objectives.
We are respectful of your confidence in us and look forward to your questions. Operator, this concludes our opening remarks, and I'll turn the call back over for questions. Thank you.
Operator
(Operator Instructions) Matthew Erdner, JonesTrading.
Matthew Erdner
Hey, good morning, guys. Thanks for taking the question. So looking at slide 8, looks like there's a little over $100 million in payoffs that are expected to occur this year based on the fully extended loans. Do you guys expect any additional payoffs to come through from some of those two rated loans and then? If you could, can you kind of give a little guidance in terms of portfolio growth and what you're targeting there on kind of a net basis?
Mark Fogel
Yeah, we do expect more payoffs on some of the higher rated loans. In fact, we've already had during Q1 a few more payoffs than we expected, so I would anticipate that given the fact that many of our properties are starting to stabilize, the fact that there's a lot of availability in the bridge loan market to refinance loans, there's certainly be a higher level of payoffs.
But we expect to roll those back into our loan book very quickly. Ultimately, we expect that by the end of the year, our portfolio will be somewhere in the range of $1.8 billion to $2 billion, up from where it is today, $1.5 billion.
Matthew Erdner
Right, that's helpful. And then, I guess in terms of opportunities, what are you guys seeing out there, I know you just mentioned bridge, but is the target still kind of do increase multi-family, I guess just what are you guys seeing out in the market right now?
Mark Fogel
We're seeing a lot more activity in the market for sure. I think it was obviously pretty quiet over the last couple of years. We're seeing a lot of multi-family refinancings for loans coming out of construction and at the same time there's other asset classes which are attractive to us where we're seeing certainly improved fundamentals, whether that's hospitality or self-storage.
There's just a lot coming in the door, more so than expected. So we'll be able to pick and choose some pretty good assets along the way.
Matthew Erdner
That's helpful. And then last one for me, as you guys kind of delever and refinance the CLOs, are you guys expecting to kind of have a reinvestment there to leave it open for future loan originations that you guys do make?
Andrew Fentress
Yeah, absolutely. So the new structures will include a revolving period of at least 24 months, so that'll give the company some flexibility to add names in the future while tying up liabilities at pretty attractive levels here.
Matthew Erdner
Great. Thank you, guys.
Operator
Chris Muller, Citizens Bank.
Chris Muller
Hey, guys, thanks for taking the question and congrats on a nice finish to a challenging year. So I guess you guys are in a really good position to grow your book value as you continue to harvest these gains from the REO in addition to share buybacks, and both of those were really nicely accretive in the fourth quarter. And that's really not something we're seeing in the rest of the group.
So I guess this has been a long strategy you guys have been working on, and it's nice to see it start playing out. So I guess my question would be, on the rest of the REO, are you guys expecting gains anywhere near what you saw on the office sale because that could really lead to some nice book value gains over the next year or two? So just any thoughts on the magnitude of those potential gains going forward would be really helpful.
Andrew Fentress
Yes, so we've been purposely careful and not guiding to specifically in terms of where we think those sales are going to land, but I would echo what you've said, which is we believe and we've said in the comments that there's going to be some future gain. And most importantly, when those gains are realized that capital gets recycled back into the loan book using the facilities that we're now creating.
I think that the strategy is the same as what we've discussed. And you'll see it play out over the next couple of quarters and then we'll be out of that part of our strategy and history around making those investments and be squarely back into the full-time loan-making business.
Chris Muller
Got it. And do you expect that to be mostly wrapped up in '25, or could some of those properties slip into '26?
Andrew Fentress
I would say it would be largely completed in '25.
Chris Muller
Got it. And then just the last one I have here, it's a little housekeeping one. So the increase in real estate expenses quarter over quarter, does that include some selling costs, or is there something else going on in that line item?
Eldron Blackwell
No, this is all I'm speaking. Now, for the most part there are a bunch of clean-up items. We call them one-time items and we don't expect to see them in 2025, but mostly clean-up, got some new managers in there. We've been hitting hard the properties to better understand the stabilized cost structures. So for the most part I would just say not. We're not looking forward to having those kinds of expenses and that expense load in 2025.
Chris Muller
Got it. So 4Q is probably not a good run rate to use going forward, though. That's very helpful. Thanks for taking the questions.
Operator
Thank you, and it appears that we know have no further questions at this time. I will turn the call back to Andrew for closing remarks.
Andrew Fentress
Thank you, operator, and thank you, everyone, for joining. We look forward to following up with you, if not before, at our next quarterly call.
Operator
And this does conclude today's program. Thank you for your participation. You may disconnect at any time.
