ACRES Commercial Realty Corp. Price & Performance (ACR)

Gross and revenue increased substantially year over year. Compared to Q4 twenty twenty three. Up from €246,000,000 in 2024. This large increase is explained by the previously announced portfolio sale that was conducted in Q4.

More about that later. Adjusting for this transaction, the revenue declined 4% year over year.

However, it is worth noticing that the 3PC revenue increased by 10% year over year on a like for like basis. Cash EBITDA ended at 130,000,000 up from 55,000,000 the previous year. Again, the main explanation is the portfolio sale. Adjusted for this, the cash EBITDA declined 6%.

As most of you remember, we announced already in November that primarily due to the challenging macro environment we saw during the whole of 2024, we will have to do a substantial negative revaluation in Q4.

The final number ended at €104,000,000 Please note that this negative revaluation does not have any cash impact, but will obviously impact financial metrics. Also, the revalued claims remain valid and will continue to accrue interest where applicable.

Given this negative revaluation, return on equity to shareholders ended at negative 19% for 2024. Excluding the revaluation, the return on equity was 6% for the year. AkceaTru still has a solid balance sheet with an equity ratio of 26% after the revaluation. In addition, we have more than €100,000,000 in available liquidity So even though the revelation is, of course, unfortunate, we still have a very strong financial position. Let us move to Slide four for more details on the revaluation. Although it's never decided to do a negative portfolio revaluation, some it can be necessary. The size of the regulation corresponds to 9% of Q3 book value after the Spanish portfolio sale and amortization. Since the reason for the regulation primarily can be explained by the long lasting soft macroeconomic environment, it is natural that all Luxembour markets are affected by it. However, the largest adjustments are done in Sweden and Germany. As you can see from the graph, our NPL book values are down 14% in Q4 compared to in Q3. With the two main explanations, the Spanish portfolio sale under revaluation. However, on the positive side, the revaluation will effectively lower our estimated collection curves which will in turn make sure to improve our collection performance.

The adjustment will make sure that the book values are correct and the improved collection performance will give us very comfortable headroom towards the collection performance covenant on the RCF. As I mentioned in the introduction, despite the revaluation of our balance stands out as very strong. Let's move on to the next slide for more details. I can understand that can be a bit challenging to evaluate individual company risk for investors in the Axactor. Especially when you're reading about peers in Chapter 11 processes and other types of restructurings. However, I think in order to understand the differences between the companies, it is necessary to dive a bit into the details as the companies are very different in terms of business models, geographical risks, funding structures, etcetera. A good place to start will be to have a look at the balance sheet. If you do that, you will see that our software has a very tangible asset side, probably the most tangible in the industry. Where only 5% of the balance sheet [indiscernible] Further, close to 90% of the balance sheet is either portfolios, repossessed assets [indiscernible] Even though revaluation like the one we announced today, has reduced the book value of the NPL portfolios, stockholders still have a rock solid equity ratio of 26%.

In addition, we have more than €100,000,000 in liquidity that could be used for either bond buybacks or portfolio investments. As you can understand, Absaerta is in a good position to handle all the coming debt maturities and prolongment of the RCF. We will talk more about that later. But first, a quick reminder about the Q4 portfolio sales on the next page. A part of our deleveraging strategy was demonstrated through the very important portfolio sales we announced in Q4. We sold off the earliest Spanish vintages representing close to 6% of our total NPL book value. And the transaction generated approximately €80,000,000 in cash. The price was 102% of book value it was a true same to our competitor. Hence no continued servicing or servicing fee that impacted the sales for us. We believe this transaction visualizes Afzalter's valuable and liquid balance sheet. It also shows that we are both willing and able use the secondary market that has become much more active over the last two years in those active countries. The transaction has several positive effects. Obviously, it gave an immediate improvement on our financial covenants, which was important, especially on ICR and leverage ratio. But it was also important as part of renewing our Spanish MBL book opening up the opportunity to buy more fresh debt.

Where we can create additional value by using our platform structure [indiscernible] The transaction gave us improved financial flexibility as you can see on the [indiscernible] This flexibility, we already took advantage of in Q4. As the liquidity gave us the opportunity to start refinancing of our ACR O3 bond. Matures in September 2026. During Q4, our stock repurchased bonds in the market for approximately €51,000,000 at 94.2% on par. Hence, we achieved a gross gain of close to €3,000,000 due to these buybacks. Our sector now holds approximately €70,000,000 of ACR03. We believe this demonstrates approximately €70,000,000 of transactions such as further accretive bond repurchases and portfolio divestitures. Moving on to the next page for an overview, of our current debt structure. It is for the most part self explanatory, but I would nevertheless give a few pointers. The RCF draw by year end was SEK472 million, leaving SEK73 million in headroom for MAX Draw. The first maturity is in one point five year and it is the RCF expiring in June 2026. Total remaining bond debt is now €425,000,000 Finally, the total outstanding interest bearing debt by year end was a little shy of €900,000,000 Before I give the word to NIMA, I would like to just give a few comments on how we are thinking around the upcoming maturities.

First up is our RCF. We aim to prolong or renew this during the first half of this year. We will continue to invest in attractive portfolios, but at the same time, have a close eye on the leverage ratio. Given natural seasonality, first half will show a moderate investment level. Depending on how the bond market develops, in general and how the spread specifically for our sector develops, we expect to reemphasize ACR03 during 2025. As we have expressed earlier, will aim for a more diversified maturity profile with smaller bonds, primarily with annual maturities. Compared to the current structure, we have some years without any maturities and some with relatively high maturities. This will reduce the point timing risk which we think is an advantage for both us and the bond investors. As part of the refinancing strategy, we could potentially consider further portfolio sales during 2025 However, there are no ongoing processes at the moment. [indiscernible] Thank you, Jolene. So now I'll take you through the Q4 financial performance.

Starting with the overall figures and then a bit more context on what is behind the numbers. Gross revenue for the group almost doubled. From €85,000,000 in the fourth quarter of twenty twenty three to €161,000,000 in the fourth quarter twenty twenty four. The high increase in gross revenue stems from the sale of Spanish portfolios for an average premium of 2% over book value. Excluding the sales proceeds, gross revenue was €82,000,000 equal to a decline of 4%. Then sales segment reported a gross revenue of €144,000,000 The segment gross revenue excluding the sales proceeds was €66,000,000 on a decline of 6% compared to Q4 twenty twenty three. The Triple C segment delivered revenues of 6,000,000 up 5% for fourth quarter last year. Look a bit more into details on each of the business segments. Starting with MPL on the next slide. MPL segment delivered a negative total revenue of €59,000,000 for the quarter, The negative total revenue is mainly caused by net negative and PEL revaluation from revised ERC curves of €104,000,000 The revaluations came mainly as a result of continued challenging collection environment across all [indiscernible] In the fourth quarter, the overall collection performance and the net 94% up from 90% in the third quarter. [indiscernible] When we sold the Spanish portfolios, we amortized the remaining book value.

Thus, the effective amortization rate for the quarter was significantly higher.

The effective amortization rate ended at 68% for the quarter up from 29% in the fourth quarter last year.

On the more positive side, we continue to have success with ongoing cost improvement projects. The next slide for comments on the development on the Triple C segment. The T2C revenues ended at €16,000,000 for the quarter, equal to a growth of 10% if we exclude Sweden and Finland, which were closed down last year. The increase was driven by double digit growth in Norway, Germany and as well as a strong development in Spain. The Norwegian UPC business is performing particularly well. With solid growth from new sales within the Banking and Finance segment a key focus area of Axactor strategy. The contribution margin is slightly lower this quarter, compared to the previous year. Due to one off revenue items following in the aforementioned GPC business closures. Positive trend. With the full year margin increasing to 38% from 36% in 2023 without adjusting for a positive one off item Let us move on to the next slide where I'll present more details on the reported If you look at the two charts to the left, you clearly see the impact of the revaluations on the total revenue and the EBITDA for the quarter. Total revenue at group level ended at negative $4,043,000,000 euros while the EBITDA was minus €74,000,000 Cash EBITDA ended at €130,000,000 for the fourth quarter up from €55,000,000 in the corresponding quarter last year.

The increase was mainly driven by the proceeds from the Spanish portfolio sales. Now on to the next slide, we'll look at the development in the return on equity. With the adverse impact from the impale regulations in the fourth quarter, the return on equity for the full year 2024 ended at minus 20% on a fully consolidated basis. And at minus 19% for ROE to the shareholders. Despite the negative result for the year, AXA2 still have a robust financial position with an equity ratio of 26% and a comfortable liquidity position with approximately €100,000,000 available in cash and headroom on the RCF. Moving on to next slide for some comments on the status of the financial targets. Early last year, we communicated our four financial targets for 2026. Firstly, the annual and well investments for the period 2024 to 2026 should be in the range of €100,000,000 to €200,000,000 in 2024, Aksakti invested €128,000,000 well within the target range. Secondly, the annual dividend payment should be within 20% to 50% reported net profit. As net profit for 2024 was negative, dividends payments are not applicable for 2024. Next is a target of raising 12% ROE in 2026. And despite the 2024 result, we stay committed to these targets.

Finally, it is Assaptor's ambition to be at or below 3.5 on leverage by the end of twenty twenty six. The leverage ratio at the end of twenty twenty four was below target at 2.7. I'll now hand it back to Johnny for some comments on the outlook. Thank you so much, Seina.

Regarding collections, we expect higher collection performance after negative revaluation in Q4. On OpEx, we continue to have very good cost control and aim to absorb any cost inflation and to keep OpEx flat. Cost of funding will continue to go down due to lower LIBOR rates and bond buybacks. Leverage is substantially reduced. On the investment side, we expect to do high quality investments However, we believe that this year investments will be in the lower end of the financial target of €100,000,000 to €200,000,000 on an annual basis. Our pan European position continued to give us valuable access to attractive MPL markets in Europe. Finally, we expect the 3PC business area to continue to deliver solid growth at healthy margins. We'll now be open up for questions.

Okay. At this time, we currently have no registered questions. So I'll hand back to Yoni Solis.

Yes.

Thank you. So we have a few questions on the chat here. So I'll start off with the first one. What was the ordinary operating collection for Q4? The number is €65,600,000 and you can find that on the Page seven of the report under financial chapter under the revenue, under the financial chapter. Second question, what was the nonrecurring expenses and operating expenses in Q4? And we don't disclose that number, but it's a relatively moderate one. And my follow-up on this was, was it connected to the portfolio sales? And yes, the last majority was was in connection with the portfolio sales, more specifically, advisory cost most of it. And then we have a second question here. Could you please give some flavor on the significant shortfall in interest income in Germany before credit loss? And here I assume that since it says per definition, it's not possible on interest income. But But I guess it's the shortfall against on collection And then the flavor to so to speak is that this is due to the financial situation in Germany, primarily, the believe the country is still in. Recession. But also here, it's worth to add that we did during 2020, '4, we did substantial cost cut initiatives in in Germany that did create some operational issues that we have been handling during the fall.

And the situation is now under good control. And also the question about how will this going forward. Well, we have also adjusted curves in Germany. We now expect in Germany, as for the rest of the countries, to be at 100% collection performance. Plusminus. Going forward. Is there any risk of covenant breaches now? And the short answer to that is no. How did you sell? Who did you sell the portfolio FPL portfolio to? That is not disclosed, so that will not be disclosed. But I've said earlier that it is competitor So it is a true sale. So, but I cannot disclose which one. Could you share the EBITDA generated by the portfolio sold in Q4? No. We don't share that information. Do you have any guidance of potential revaluations for 2025? No. We don't where do you trend in January on collections? We don't guide during our quarter. So you have to wait until the first quarter report to get information on collections for January. Second question, do you know if the RCF lenders wish to be paid down for being extended The question is no. So no, they don't want. To be paid down as far as I know.

Can you tell us a little about the outlook for collections in Q1 twenty twenty five? We don't give more guiding than we already do in the report. We haven't adjusted the curves and we are putting in the estimated ERC in the report. So you could find it there. Next question, is there a possibility to increase size or CF? When you extend it? Well, in the documentation today, there is a possibility extend RCF with by including more banks. But it's an option That's not something that we are working on currently. So we we expect regarding the RCEF, we expect to just prolong it more or less exactly as it is today. Since we have this option that, of course, requires credit committee approval, but it will be on the same documentation and the same margin levels and so on. Question is, will you do more bond buyback? Yes. So that we have said that in the the presentation, like I said, we have more than €100,000,000 available for liquidity. It could be used both to bond buybacks or to buy portfolios. Yes. That was all the questions that we have received. I don't know if the operator has received any incoming calls.

Currently no registered questions. Apologies, we do have one. We have a question from Lars Dusser from Deutsche Bank. Your line is now open. Please go ahead.

Good morning. Thank you for taking the questions. Sure. First of all, if I look at your Q4 net debt, that benefits from the asset sale proceeds. And the cash EBITDA at the same time benefits from the asset sale proceeds, right? Because you are are capturing them, it's flowing through the collection numbers. So okay, fair enough. I can strip out these roundabout EUR 80,000,000 of asset sale proceeds from the reported cash EBITDA But then what is the pro form a adjustment for the asset sale itself, given that you now will look at quite a bit less collections from from the sale. Do you disclose that?

No, unfortunately not.

Right, right. And then if I look for modeling purposes, if I look at ERC, I see that year one ERC now in Q4 is down to $258,000,000 which is roughly $70,000,000 lower quarter over quarter. How do you guys try to offset that operating deleveraging this year? Will you step up the purchases? I mean, you guide for a very wide range, right, dollars 100,000,000 to 200,000,000. That would be the next question basically.

Regarding the investment level, The lower range of the interval. And that is because of several of our priorities, [indiscernible] deleveraging is vulnerable. So we have said that until we have a little bit better control of ACR03, maturity that matures in September 26, we will be a little bit careful with investing. But But we don't know exactly, of course, where we will land. I think my personal opinion is that I think that we will be able to refinance the bond. And we have said that we will do it during this year. So most likely just before or just after the summer. And I think we will be able to refinance it at attractive margins. And that we will roll part of it. And that will open up the possibilities to also invest quite substantially more than our replacement CapEx. For 2025.

Right. So on my numbers, right, I mean, you don't disclose GMM, but I think you guide investors to around two times. Which is also probably what is implied by the book value at the moment. If you If you work with that assumption, what do you need to invest to keep your ERC steady year over year? Right? I mean, when I think about the ERC bridge, I have the beginning of the period I then have collections, which drive it down, which is obviously the back book, but also any sort of front book And then I have acquisitions or portfolio purchases against that multiplied by the GMM. Basically, ERC acquired And maybe you can help me there, but like I get to a level of pretty much the midpoint of your range, like you need to invest 150,000,000 to keep ERC steady, And hence, if you tell us you are now going to the lower end of the range this year, you basically suggest you want to run off this ERC for a bit and the book value for a bit? Just to be conservative. Is that correct?

To be honest, I haven't been thinking so much in the details as This is a very detailed question. I suggest that you take it offline so we could really understand exactly the question and have some time to think but I don't have a clear answer to you on the phone now, unfortunately. Sorry.

Right, right. And then the next question Obviously, this book write down, right, was quite large, 10%. Give or take. I guess investors want to know now how confident are you in the marks going forward? [indiscernible] do you really categorically rule out further write downs at this stage? Will we see performance at 100% throughout the year? Obviously, I appreciate this depends also on macro Axactor. But like if macro remains as it is, is that your expectation?

Our expectation is to reach, like I said, plusminus 100% collection performance for 2025. That is what we have aimed for. Can I guarantee you that there will not be any write downs or revaluations positive or negative? Of course not. Of course not. That's impossible. No one can in the industry, but we believe that we have now done, like you say, we have done a substantial [indiscernible] And we believe that it should be sufficient to reach the curves going forward.

Got it. Got it. And then maybe last but not least, right? I mean, it's obviously the challenge the entire industry is facing. And you mentioned that two peers have already gone through A and E's because of that, I guess. If I look at your return of invested capital, [indiscernible] where such players in that sector can refinance It looks like that your cost of capital or your cost of funding will be above your return of invested capital. Right? Like, what makes you confident that you can start again generating excess returns? And what makes you you confident that you can refinance at attractive margin. Based on what we are seeing at the moment basically, right? Like do you think like we need a rights issue for this? Do you think we need sponsor support how can you basically get that right that you can create value again going forward? Because clearly, being in runoff is not something I think John will be fond of. And clearly, shareholders want want to see some sort of value creation and growth going forward again, right?

Well, that's that question has a lot of elements to it.

First of all, we do more than just NPL. So if you look at our 3PC business, it grows substantially. For we have strong beliefs that it will continue to grow close to double digits in in 2025. At attractive margins. So that will certainly help. The The right issue you could just forget about, There's no need for any any right issue. We will have the opportunity to borrow in the market. And if you compare to what you don't set on of information that we have is that we see the returns on the different vintages. And what I can say is that the last vintages are 2021 to 2024. Have substantially better return than the vintages from 2016. To 2021.

So we know that the new vintages or what VNS then has much better returns than the average for Akcekdal. And that is why you also can see if you look at the gross IRR average gross IRR the company, we haven't disclosed it. I don't know if we have it in this presentation. But we are disclosing it more or less on a quarterly basis. You will see that the gross IRR on the back book has gone from around 15% and now I think we have reached 19%.

And this will continue to go up just as we continue to blend the book. So I'm confident that we will be able to invest in very attractive deals also going forward. Our challenge has been the MacBook, and we are cleaning up a lot of it with this revaluation And on top of this, we are still, obviously, industry leading in reducing the cost level. So this industry is about a lot of things. And funding cost [indiscernible] But it's also about operational excellence and keeping the cost level down where I think we are industry leading. And it's about doing the right valuations and having the access to the most attractive deals where I think we are in a really good position. If you compare our gross IRRs to the industry, I think you will see that it's we have access to very attractive deals in markets like especially like Spain and Norway, where we actually invest the vast majority of our CapEx.

Right, right. Look, I just think if if this is really now about the front book and the opportunities you speak about there capturing these returns. The biggest bang on the buck, I guess, you would really get if you would get the cap structure in a better shape, right? And once of a sudden, you have a much lower bar a much lower cost of capital probably as well. And hence, you're much [indiscernible] prepared to create shareholder value again because quite frankly shareholders gone through a really tough time in the last few years And if there is no dramatic change on the capital structure we are basically left in limbo right? And we really have to hope that the market comes back And I understand obviously that you say the servicing business growing, but then at the same time, we all know it's a very, very small business. For you guys, right? It's not like interim where you have percent or so of cash EBITDA coming from servicing. I mean, you guys generate $55,000,000 pre PC revenue or so. Right? And we know it's a low margin business, right? So don't know if servicing here is really the needle for you as a business to really get back to shareholder value creation.

It can help a bit, clearly, it's all about the investing business. And for that, I feel like the capital structure maybe could look a bit better to make sure John can make returns again down the line. Yeah.

I didn't catch a question there, but yes, I agree. We are working on the capital structure. I think we there's still potential to improve. One thing that we do is that we try to split up the maturity profile on the bonds. So we can be in a position to and I think that will help to take down the point risk I think it will also give us better margins You also have to remember that more than 50% of our capital structure is RCEF, which we have really attractive margins. So I think So the mix is not that bad, but, of course, we think what will really improve our spreads on the bonds when we need to refinance is that We need to get back to 100% collection performance, which we are now taking the right steps to do. We need to continue to fight on costs I agree that the 3PC is is smaller than in interim, but it still is close to 25% of our business. And we have I hear that you say that it's a low margin business. It's not a low margin business in NatSafka. But it's for the market maybe, yes.

But also for the market, the margins are growing. We see that the are more and more willing to pay for our services as an industry and for our truckload in particular, I think. We see so I'm quite positive on the prospects of the three PCBs also increased volumes. I think yes, it helps. It could help quite a bit, I think.

Yes. You're right. We are not happy with [indiscernible] I don't I wouldn't say not just the last two years, I would say the last five years or even more so. So we are fighting every day to to improve the situation. [indiscernible] Thank you. Thank you very much. That was very helpful.

Sure. Thank you. We have gotten a few more questions here. And we have one RCF margins, we don't disclose it directly, but I think [indiscernible] [indiscernible] What we have said earlier is that it's in the it's more than competitive, it's competitive. So it's I don't think I could give any more flavor to that. [indiscernible] What about dividends in 2025? I think it's quite obvious that there will not be any dividends in 2025 based on 2024 financials.

And that is according also to our policies.

Okay.

Yes. And then the last question, Is it true that the portfolio you sold is the worst vintage? What I can say about the portfolio is that it's the earliest vintage.

So it's half of it is 2016 vintage. And then it's divided approximately 25% on 6% or 2017 and 2018 vintages. It's not [indiscernible] It's the first portfolios that we acquired in Spain that was booked into separate companies. So it's not a cherry picking deal. It's kind of the first portfolios that we bought. Yes. And yes, this is all about the Bacadia.

How do you manage to be industry leader in collection cost in a competitive market like Spain?

And how do you see the loan standing local players to react? [indiscernible] if we go back to the very beginning, we did a in 2015 in Spain, which was the definitely the best player in the industry on legal collection. So we so that was the starting point because it's Spain, the legal collection is extremely important. And this was relatively young company started by two founders, two two young lawyers that has spent five years to build up a structure very cost efficient, but also very effective in legal collection. So that was the starting point. And then we did not buy any other large companies to add on. So what we did is that we built it from scratch. We started off by hiring Greenfield. And set up a low cost collection center outside Madrid in a city called VIA Berlin. And then we have been really good at just holding back on cost, And then as in Spain, as in all the countries, we very quick [indiscernible] And went through the system side and went for all kinds all the systems are off the shelf system. It's no self developed systems and so on. So we have been really careful about not building too much structure.

And by what I've also now told them, there was no legacy structure or so to speak, in in Spain. That has been how we have been able to build this position in Spain. And the other local players to be honest, there's not so many local players in Spanish, but when we compete, we compete mostly against other international players.

Or against in last investment companies from The UK normally. When do you expect expect dividends? So we don't we're not going to guide the dividends, but we have the policy that says that we will pay 20% to 50% of of the result of the previous year. So I assume if we deliver a solid year in 2025, it it's up to the Board to evaluate if they will pay dividends or not in 2026 based on 2025. But it always depends on on several Axactor, but but this the policy is available for everyone to read. So That was the last question, I have. So with that, I would say thank you all for calling in and have a great day. Bye bye.