NYSE:ACRE Ares Commercial Real Estate Q1 2024 Earnings Report $3.81 +0.04 (+1.06%) As of 04/24/2025 03:59 PM Eastern Earnings HistoryForecast Ares Commercial Real Estate EPS ResultsActual EPS-$0.64Consensus EPS -$0.30Beat/MissMissed by -$0.34One Year Ago EPS$0.26Ares Commercial Real Estate Revenue ResultsActual Revenue$18.69 millionExpected Revenue$43.77 millionBeat/MissMissed by -$25.08 millionYoY Revenue GrowthN/AAres Commercial Real Estate Announcement DetailsQuarterQ1 2024Date5/9/2024TimeBefore Market OpensConference Call DateThursday, May 9, 2024Conference Call Time9:00AM ETUpcoming EarningsAres Commercial Real Estate's Q1 2025 earnings is scheduled for Thursday, May 8, 2025, with a conference call scheduled at 9:00 AM ET. Check back for transcripts, audio, and key financial metrics as they become available.Q1 2025 Earnings ReportConference Call ResourcesConference Call AudioConference Call TranscriptSlide DeckPress Release (8-K)Quarterly Report (10-Q)Earnings HistoryCompany ProfileSlide DeckFull Screen Slide DeckPowered by Ares Commercial Real Estate Q1 2024 Earnings Call TranscriptProvided by QuartrMay 9, 2024 ShareLink copied to clipboard.There are 8 speakers on the call. Operator00:00:00Good morning, and welcome to the Ares Commercial Real Estate Corporation's First Quarter Earnings Conference Call. At this time, all participants are in a listen only mode. As a reminder, this conference is being recorded on I would now like to turn the call over to Mr. John Stilmore, Partner of Public Markets Investor Relations. Please go ahead. Speaker 100:00:23Good morning and thank you for joining us on today's conference call. I'm joined today by our CEO, Brian Donahoe our CFO, Jason Kyun and other members of the management team. In addition to our press release and the 10 Q that we filed with the SEC, we've posted an earnings presentation under the Investor Resources section of our website at www.arescre.com. Before we begin, I want to remind everyone that comments made during the course of this conference call and webcast as well as the accompanying documents contain forward looking statements that are subject to risks and uncertainties. Many of these forward looking statements can be identified by the use of words such as anticipates, believes, expects, intends, will, should, may and similar such expressions. Speaker 100:01:06These forward looking statements are based on management's current expectations of market conditions and management's judgment. The statements are not guarantees of future performance, condition or results, involve a number of risks and uncertainties. The company's actual results could differ materially from those expressed in the forward looking statements as a result of a number of factors, including those listed in its SEC filings. Ares Commercial Real Estate assumes no obligation to update any such forward looking statements. During this call, we will refer to certain non GAAP financial measures. Speaker 100:01:37We use these as a measure of operating performance. These measures should not be considered in isolation from or as a substitute for measures prepared in accordance with generally accepted accounting principles. These measures may not be comparable to like titled measures used by other companies. Now I'd like to turn the call over to our CEO, Brian Donahoe. Brian? Speaker 200:01:58Thank you, John. During the Q1, we made meaningful progress towards our goal of resolving underperforming loans, reducing the outstanding principal balance of non accrual loans by $133,000,000 as well as reducing our exposure to the commercial office property sector by $70,000,000 or 8% of our total loans backed by office properties. By addressing a total of 4 non accrual loans during the Q1, we increased our distributable earnings excluding losses compared to the prior quarter by approximately $0.02 per common share and further delevered our balance sheet by $138,000,000 to an outstanding balance of less than $1,500,000,000 at the end of the Q1. Our focus remains on returning ACRE to its core business of originating loans and managing a portfolio of loans backed by commercial real estate properties in order to earn consistent income to support an attractive level of dividends for our shareholders. Let me now provide more details on the loans that were resolved during the Q1. Speaker 200:03:09First, we sold a $38,000,000 loan that we held for sale at year end 2023 that was backed by a mixed use property located in California that was on non accrual. 2nd, we agreed to a discounted loan payoff of a $19,000,000 loan backed by a multifamily property located in the State of Washington that was on non accrual at the end of 2023. As a result of these initiatives, we realized a loss consistent with the fair value mark and loss reserves held on our balance sheet at year end 2023 and paid down $54,000,000 of debt in our FL IV seconduritization. 3rd, we exited a $57,000,000 Chicago risk rated 5 loan collateralized by a commercial office property that was also on non accrual at year end 2023. As a result of this disposition, we realized a loss that was $3,000,000 higher than the loss reserve held against this loan at year end 2023. Speaker 200:04:17And finally, we restructured a $74,000,000 loan backed by a Class A newly rebuilt office building located in New York City. At closing of this restructure, the borrower paid down $5,000,000 of principal, reducing the balance to $69,000,000 which was split between a $59,000,000 A note and a $10,000,000 B note. In addition, B note. In addition, it is anticipated Speaker 300:04:48that the borrower will Speaker 200:04:49contribute additional capital into the building for additional new leasing costs, including tenant improvement allowances. To incentivize the contribution of additional capital, including the initial $5,000,000 repayment of the loan, we have agreed to subordinate our $10,000,000 B note to new equity contributed by the sponsor. This restructuring resulted in returning the $59,000,000 A note to interest earning status, while the B note remains on non accrual. As a result of addressing these four loans, the outstanding principal balance of loans on non accrual was reduced by 31% and our distributable earnings, excluding losses, increased by $0.02 per common share for the Q1 of 2024. Shifting now to our overall portfolio. Speaker 200:05:41We ended the quarter with $2,000,000,000 of outstanding principal balance across 44 loans. 36 loans totaling $1,500,000,000 or 75% of our loan portfolio had a risk rating of 3 or better. The majority of these loans are collateralized by multifamily, industrial, self storage and hospitality properties. As a reflection of the quality of our risk rated 3 or better loans, borrowers continue to be committed to these underlying properties. Over the past 12 months, have contributed more than $130,000,000 in additional capital relating to loans risk rated 3 or better. Speaker 200:06:26And during the same time period, all interest rate caps have been renewed at their prior strike or equivalent amounts have been deposited into reserves. Going forward, we will continue to focus on resolving our remaining 45 risk rated loans and to reduce our office exposure. During the Q2, we expect to take a $33,000,000 risk rated 5 loan backed by an office building in California as REO that is currently on non accrual. At this time, we believe that our loss reserve on this loan is substantially in line with our current estimate of a potential realized loss. Additionally, despite ongoing negotiations with the borrower, a $69,000,000 loan to an office property located in North Carolina currently on non accrual defaulted after quarter end. Speaker 200:07:26We've begun the process of taking title of the office property and importantly, this property is cash flowing such that if and when the property becomes REO, property level earnings will be recognized. With that, let me turn the call over to Tae Sik to provide more details on our financial results and balance sheet positioning. Speaker 400:07:49Thank you, Brian, and good morning, everyone. For the Q1 of 2024, we reported a GAAP net loss of 12,300,000 dollars or $0.23 per common share. Our distributable earnings loss for the Q1 of 2024 was $33,500,000 or $0.62 per common share and was driven by a realized loss of $45,700,000 or $0.84 per common share due to exiting the 3 loans that Brian mentioned earlier. Distributable earnings excluding these realized losses were $12,200,000 or $0.22 per common share for the Q1. Our overall CECL reserve now stands at $141,000,000 which declined by $22,000,000 versus the $163,000,000 CECL reserve we held as of December 31, 2023. Speaker 400:08:51This reduction was driven by a $42,000,000 reversal of existing reserves associated with the realization of losses, partially offset by approximately $20,000,000 of additional reserves on existing loans in the portfolio. The overall CECL reserve of $141,000,000 at quarterend represents 6.9% of the outstanding principal balance of our loans held for investment, which is down from 7.6% as of the prior quarter. 89% of our total CECL reserve or $125,000,000 relates to our risk rated 4 or 5 loans, including $31,000,000 of loss reserves on our 2 risk rated 5 loans and $94,000,000 dollars of loss reserves on our 6 risk rated 4 loans. Overall, the $125,000,000 of reserves on our risk rated 4 or 5 loans represents 25% of the outstanding principal balance of such loans. Further, with respect to our loans that are risk rated 4 or 5 at quarter end, there were 8 loans totaling 503,000,000 in outstanding principal balance. Speaker 400:10:1077% of the outstanding principal balance of our risk rated 4 or 5 loans are collateralized by office and one residential condominium property. We did downgrade 197,500,000 Texas multifamily loan to a risk rating of 4 from 3 during the Q1 as the timeline and process of the sale of the underlying property by the borrower has been extended. Before concluding, I want to provide more background on managing our balance sheet. Consistent with our goals, we continue to maintain significant liquidity and further reduced our 3rd party debt. Driven by the loan exit activities during the Q1, we reduced our outstanding borrowings by 138,000,000 resulting in total third party debt of less than $1,500,000,000 at March 31, 2020 4. Speaker 400:11:13And finally, we declared a regular cash dividend of 0 point for the Q2 of 2024. The 2nd quarter dividend will be payable on July 16, 2024 to common stockholders of record as of June 28, 2024. With that, I will turn the call back over to Brian for some closing remarks. Speaker 200:11:39Thank you, Tae Sik. We are cautiously optimistic that the modest recovery we are seeing in the commercial real estate markets and tightening spreads in the CMBS Capital Markets will be supportive in the execution of our near term goals. We are firmly focused on addressing our underperforming loans and further building liquidity in order to maximize outcomes as we seek to shift our focus from asset management to investing. The timing and path to resolving some of our current 4 and 5 risk rated loans may make our quarterly earnings trajectory uneven this year, including in the Q2 due to loan resolutions. We remain focused on resolving a number of the identified risk rated 4 and 5 loans in 2024, which we believe will enable us to achieve higher distributable earnings. Speaker 200:12:31As always, we appreciate you joining our call today and we'd be happy to open the line for questions. Operator? Operator00:12:40Thank you. And our first question will come from Doug Harter with UBS. Please go ahead. Speaker 500:13:00Thanks and good morning. You talked about using the potentially move going back to investing. This quarter you used the resolution proceeds to pay down debt. Just how should we think about when you might pivot to investing versus continuing to delever the balance sheet? Speaker 200:13:24Yes, I appreciate the question, Doug. Good to hear from you. I think the playbook remains fairly similar to what we've said in prior quarters, which is a multi pronged path towards resolution where we're considering a lot of options with the pursuit of generating more liquidity, which will give us then the optionality as to when we see the opportunities, which have started to present themselves beginning in Q4 with some of the rate stability. We saw a bit of a pause with the rate movement of the past 6 or 8 weeks. But ultimately, we are seeing more liquidity, more acceptance of revised asset values. Speaker 200:14:05And ultimately, as we work through the coming quarters, we would intend to get back to that offensive side of the ledger once we've crystallized some more liquidity on the balance sheet. So the primary goal is to continue to resolve those risk rated 4 and 5 and the liquidity that should come with those types of resolutions will allow us that flexibility. Speaker 500:14:31Appreciate that, Brian. And Tae Sik, can you give us some sense, what sort of drag the 4 resolved loans, excluding the losses, had on earnings during the Q1 and kind of how to think about the path back towards the dividend? Speaker 400:14:53Sure. Thanks for your question, Doug. As we mentioned, the 4 loans that were either exited or restructured this quarter, So really the resolution of those 4 loans, either through, for example, the restructured loan, having an A note come back on earnings and then the 3, exit of loans really paying down debt. The combination of that really added around $0.02 of distributable earnings during the Q1. That run rate, if you want to call it that, the full quarter impact of will be higher than the $0.02 But for the Q1, I think it was roughly $0.02 positive impact that it had on our first quarter earnings. Speaker 500:15:41Great. Thank you, Tae Sik. Speaker 400:15:43Thanks, Doug. Operator00:15:46Our next question will come from Jade Rahmani with KBW. Please go ahead. Speaker 300:15:55This is actually Jason Sabshon on for Jade Rahmani. It would be helpful to hear an update on how things are going with your repo lenders and on the term loan? Speaker 400:16:09Sure. Good morning. Speaker 200:16:10Jason, do you want to kick off? Yes. Speaker 400:16:12Yes. No, thank you. Thanks for the question. Yes, I think we've had and always maintained what we think is a very strong relationship with all of our lenders, warehouse lenders, term loan lenders, revolving credit facility lenders. And in fact, as you'll notice in our filing this morning, we have continued to work with them and we greatly appreciate the partnership we have with all of our lenders. Speaker 400:16:38But you can see that we continue to, for example, amend our credit facility so that we can, again, as part of our overall goal to resolve underperforming loans, optimize the balance sheet with flexibility. So flexibility is very important to us. And again, we appreciate all the partnership we've had, our lenders who have been willing to work with us to create that additional flexibility on our balance sheet. Speaker 300:17:09Great. Thank you. Also on the North Carolina office loan default, it would be helpful to hear more color on how you see that playing out? Speaker 200:17:21Yes, I'll give that a shot. I think, look, we obviously were attempting to work with the borrower. However, the capital necessary for us to restructure that loan and in keeping with what we accomplished on the New York loan that we covered in the prepared remarks didn't necessarily make it rational. It's also an asset as we mentioned that has positive cash flow, probably has some occupancy upside in a market that has seen some positive flows of corporate tenancy. So we think there's some value to be added with a functional ownership group. Speaker 200:18:00So I think the timeline for resolution there will be what it will be. I don't think it's a 1 to 2 quarter resolution necessarily. But when we look at situations like this, clearly, we want to see both expertise and capital come to bear on those assets. And as you see in our earnings deck, we feel that we're in a position to bring both of those as a fallback position to having attempted to work with the borrower. So timeline will be determined over the next 60 to 90 days. Speaker 200:18:35And I think when we chat with you all in 90 days, we'll have a more concrete plan there. Speaker 300:18:43Great. Thank you. And as a final question, understanding that each asset is unique, but generally in your book, how have loss severities compared to your expectations, specifically for office and multifamily loans and general commentary on what you're seeing in the market with respect to loss severities would be helpful as well. Speaker 200:19:06I'll start it. Look, I think what we've attempted to do over the prior quarters has been to give our best estimate of where we expect to resolve assets and really limit surprises on these calls or dramatic changes in our outlook. And I think we've had some success doing that. As an industry, I would put forth that what's going on in the office sector has surprised many to the downside in terms of resolutions. That said, we've been as transparent as possible as we've worked through those. Speaker 200:19:41I think the lack of transparency generally in the market has probably delayed some resolutions throughout the broader space. And I think, as I said earlier, we're starting to see that crystallize to some degree with stability in rates. So I think over the coming quarters, you'll see more resolutions in keeping with expectations. Speaker 300:20:04Great. Thank you. Operator00:20:08Our next question comes from Stephen Laws with Raymond James. Please go ahead. Speaker 600:20:14Hi, good Speaker 300:20:14morning. At the risk of asking something you already mentioned, Brian, was a few minutes late. But can you talk about the non accruals? I think it was I believe it's $292,000,000 remaining. I know you guys made a lot of progress. Speaker 300:20:28But is there a goal on the summer near term resolution, summer longer term, but maybe if you look to year end, do you have, say, an idea of where you'd like to exit the year at that on that number? Speaker 200:20:42Yes. Thanks for the question, Steven. I'll start and I'll let Tae Sik chime in as well. I think part of the challenge of the industry is measuring a lot of what we do by quarter, but certainly year end is a good hallmark date to turn the page, so to speak, philosophically and financially. I think what we see is, especially with the offensive side of the resolution timing. Speaker 200:21:15So our conversations with borrowers, if you were to go back what feels like a long time ago, 3 plus years, where extending duration of assets on the book was really the primary playbook. As we sit here today, we'd like to resolve assets and crystallize a lot of those resolutions and get back to the offensive side as soon as possible. So tough to put demarcation lines in terms of the calendar. However, certainly, when we look forward the 3 quarters to year end, that's a pretty good place to plant the flag. But Tae Sik, feel free to add some color there. Speaker 400:21:56Yes. Brian, I think you covered it well. Stephen, I mean, I think you probably heard from our opening remarks that resolving our underperforming loans, certainly including the non accrual loans is really one of our top, top, top priorities. We're hyper focused on that effort. We think that will bring a lot better clarity to our balance sheet as well as be accretive to our earnings as we mentioned. Speaker 400:22:21But as Brian said, I think it's very difficult to provide precise numbers. We did resolve, as we mentioned, about 4 loans this past quarter, and we hope to continue to report some news on further resolutions in the quarters coming ahead. Great. That was the main Speaker 300:22:42one I had today. So appreciate your comments this morning. Speaker 400:22:44Great. Thank you so much, Steven. Operator00:22:48Our next question will come from Steve Delaney with Citizens JMP. Please go ahead. Speaker 600:22:54Good morning, Brian and Tae Sik. Busy quarter for you and it sounds like it's continuing. With the 4 loans, non accrual loans that you reworked, resolved in the Q1 and then the 2 office REOs in the 2nd quarter, having a little trouble having that chance to go to the deck and just roll all this through. But as we after these 2nd quarter REOs, can you tell us what is left at this point in 5 rated loans after the REOs, the 2 REOs? Speaker 400:23:34Sure. I can see if I can try to take a shot at that. Yes. So as we mentioned, there are 8 loans that are risk rated 45 as of quarterend. Okay. Speaker 400:23:49And certainly, it includes the 2 office properties that you mentioned that we anticipate going REO in the future. We also in the future. We also mentioned a new 4 rated loan, a $97,500,000 multifamily loan. And as we mentioned in our closing remarks, the reason it was downgraded from 3% to 4% is that the sale process of the underlying property, this multifamily property in Texas, it's just taking a bit longer than we had originally anticipated. And so because of that, it was downgraded. Speaker 400:24:30So that's really, call it, 3 of the 8 loans, again the 2 REO plus the 1 multifamily loan. And then when you really look at the remainder of the portfolio, what you have is you have some loans that have been kind of on our balance sheet for a while. We mentioned, for example, one of the mezzanine loans that we put on non accrual. And then really, it is the condominium development that we have in New York. And then it's the large office loan out in Illinois. Speaker 400:25:22And it is an industrial asset out in California, the $20,000,000 loan out in California. So I think that covers just trying to recollect other others, but I think that makes up the remaining 5 loans that are in the 4 and 5 rated loan category. Speaker 600:25:42Five loans, as we sit today, less than 45. And I understand this is fluid and things are going to be coming and going, but nice to see some resolutions and some progress there. Brian, I know this is a decision the Board goes through probably every month or every certainly every quarter. But the issue of your current $0.25 dividend and working to maintain that and the opportunity for share buybacks, I would guess even with the loss of book value, you're still probably a little below 70% of book. How are you thinking about that in this market where everybody is having problems and you're looking at your stock with a mid teens dividend yield. Speaker 600:26:35Just your thoughts please on how the company or shareholders are best served between paying out that cash or buying back your shares here? I didn't notice that you bought any shares in the Q1. If I overlooked that, please let me know. Thank you. Speaker 200:26:53Now that appreciate the question, Stephen. As you said in your prior comment, the market is fairly fluid and it is something that the Board and management considers each quarter. As we characterized when we chatted 60, 90 days ago, what we established when with the dividend at 25 was what we felt was attainable over the near to medium to long term, right? And I think that's something that we will continue to evaluate. And over the past 18 months, I think we as an industry have contemplated the best way to serve our shareholders and that is a combination of dividend, which is the core charge I think of the mortgage REIT business as well as the relative value of buying back shares, which we've done previously. Speaker 200:27:44So it's a balanced approach alongside managing liquidity and ultimately crystallizing the best returns possible for our investors. So I would put forth that I think we'll continue to evaluate that in the coming quarters based on the results of that fluid market you mentioned. Speaker 600:28:03Got it. Glad to hear that it's going to remain on the table regardless of and I know your Board will make the right decision quarter by quarter. Thank you both for your comments. Speaker 200:28:15Thanks, Steve. Operator00:28:21And our next question will come from Rick Shane with JPMorgan. Please go ahead. Speaker 700:28:27Hey, guys. Thanks for taking my questions this morning. I apologize if some of this has been covered. First, as you sort of move from pain down shrinking the balance sheet to moving back to offense, Curious if there are any covenants that you need to be aware of or any limitations related to your debt that could make that more challenging? Speaker 400:28:53Yes. Rick, thank you very much for your question and good morning. As we mentioned in response to some of the prior questions, we have been actively in dialogue with our lenders. And as you'll notice in our filing this morning in the queue, that we are starting to make some amendments to those facilities to make sure that we have the flexibility to implement the strategy that we talked about, right? So our strategy, as Brian mentioned, is to focus on resolving our underperforming loans. Speaker 400:29:30And in order to do that, we want to make sure we optimize the balance sheet to provide that flexibility. Deleveraging has been certainly a big part of that strategy as well as maintaining good levels of liquidity. And so we continue to focus on those two elements. And then again, we're proactively working with our lenders to make sure that the covenants and the loan facilities provide us that flexibility to obtain the overall objective of resolving underperforming loans. So the answer to your question is yes, we are definitely proactively working with our lenders on this. Speaker 700:30:05Got it. Yes, I did a search of the queue for covenant and amendment and I got 150 of each. So I didn't I wasn't able to find my answer. I'm sure it's in there. 2nd question, look, if we look at the forward curve and compare 1 month forward so for 25 today versus where it was in January, expectations are rates are up 100 to 125 basis points from where expectations were in January. Speaker 700:30:38I am curious in your conversations with borrowers or what you're seeing if that expectation that rates are going to be so much higher for longer? And again, it's the forward curve, so we have to take it with a grain of salt. But is that driving capitulation? Is it driving people's behaviors to change in a material way from what sentiment was even at the beginning of this year? Speaker 200:31:07Yes. Good question, Rick, and a few questions in there, and I'd say summarily yes. I think that the stability in rates in Q4 was catalytic in terms of causing some transactions to be consummated and I think we saw a good pop of activity in Q1, much of which was in the headlines in terms of apartment industrial trades and fairly sizable ones. I think that the that started the process. I don't know, maybe capitulation isn't a perfect word, but for the real estate market to get back to forward looking and to consummate transactions. Speaker 200:31:48And so while the rise in rates since that period of time has not been accretive to values, right, it's clearly in the public and private markets, You'll see a strong correlation to rates in terms of the prints. I do think that the trains started to leave the station to some degree. And therefore, we expect people to either realize that their assets are worth what they are worth and therefore move on. So there's a financial capitulation, but also the time allocation for legacy holders of assets is may no longer be worthwhile. And on the other side of that more positive tone would be that higher for longer means the yields available as a lender continue to be high and widely publicized when there is this level of duress in the market, it can be a generational opportunity to invest in equities and structured debt, things like that. Speaker 200:32:46So I think that the stability in rates and then the backing up is kind of either way going to lead to more resolutions, whether it's characterized as capitulation or great opportunities. Speaker 700:33:01I appreciate that, Brian. Thank you so much, guys. Speaker 200:33:04Appreciate it, Rick. Operator00:33:08And with no further questions, I would like to turn the conference back to Brian Donahoe for any additional or closing remarks. Speaker 200:33:18Appreciate that operator. Yes, I just want to thank everyone for their time today. We appreciate the continued support of Ares Commercial Real Estate and we look forward to speaking to you again on our next earnings call. Thank you. Operator00:33:33And ladies and gentlemen, this concludes our conference for today. If you missed any portion of today's call, an archived replay of this conference will be available approximately 1 hour after the end of this call through June 9, 2024 to domestic callers by dialing 1-eight hundred-seven fifty nine-seven twenty eight and to international callers by dialing 1-four zero two-two two zero seven two two nine. An archived replay will also be available on a webcast link located on the homepage of theRead morePowered by Conference Call Audio Live Call not available Earnings Conference CallAres Commercial Real Estate Q1 202400:00 / 00:00Speed:1x1.25x1.5x2x Earnings DocumentsSlide DeckPress Release(8-K)Quarterly report(10-Q) Ares Commercial Real Estate Earnings HeadlinesJMP Securities Reaffirms Market Perform Rating for Ares Commercial Real Estate (NYSE:ACRE)April 23 at 2:27 AM | americanbankingnews.comBrokerages Set Ares Commercial Real Estate Co. (NYSE:ACRE) PT at $5.19April 23 at 1:33 AM | americanbankingnews.comTrump’s treachery Trump’s Final Reset Inside the shocking plot to re-engineer America’s financial system…and why you need to move your money now.April 25, 2025 | Porter & Company (Ad)UBS Group Cuts Ares Commercial Real Estate (NYSE:ACRE) Price Target to $3.75April 19, 2025 | americanbankingnews.comAres Commercial price target lowered to $3.75 from $5.25 at UBSApril 17, 2025 | markets.businessinsider.comAres Commercial: Smoked Like Cheap BrisketApril 10, 2025 | seekingalpha.comSee More Ares Commercial Real Estate Headlines Get Earnings Announcements in your inboxWant to stay updated on the latest earnings announcements and upcoming reports for companies like Ares Commercial Real Estate? Sign up for Earnings360's daily newsletter to receive timely earnings updates on Ares Commercial Real Estate and other key companies, straight to your email. Email Address About Ares Commercial Real EstateAres Commercial Real Estate (NYSE:ACRE), a specialty finance company, originates and invests in commercial real estate (CRE) loans and related investments in the United States. It provides a range of financing solutions for the owners, operators, and sponsors of CRE properties. The company originates senior mortgage loans, subordinate debt and preferred equity products, mezzanine loans, and other CRE investments, including commercial mortgage-backed securities. It has elected and qualified to be taxed as a real estate investment trust for the United States federal income tax purposes under the Internal Revenue Code of 1986. 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There are 8 speakers on the call. Operator00:00:00Good morning, and welcome to the Ares Commercial Real Estate Corporation's First Quarter Earnings Conference Call. At this time, all participants are in a listen only mode. As a reminder, this conference is being recorded on I would now like to turn the call over to Mr. John Stilmore, Partner of Public Markets Investor Relations. Please go ahead. Speaker 100:00:23Good morning and thank you for joining us on today's conference call. I'm joined today by our CEO, Brian Donahoe our CFO, Jason Kyun and other members of the management team. In addition to our press release and the 10 Q that we filed with the SEC, we've posted an earnings presentation under the Investor Resources section of our website at www.arescre.com. Before we begin, I want to remind everyone that comments made during the course of this conference call and webcast as well as the accompanying documents contain forward looking statements that are subject to risks and uncertainties. Many of these forward looking statements can be identified by the use of words such as anticipates, believes, expects, intends, will, should, may and similar such expressions. Speaker 100:01:06These forward looking statements are based on management's current expectations of market conditions and management's judgment. The statements are not guarantees of future performance, condition or results, involve a number of risks and uncertainties. The company's actual results could differ materially from those expressed in the forward looking statements as a result of a number of factors, including those listed in its SEC filings. Ares Commercial Real Estate assumes no obligation to update any such forward looking statements. During this call, we will refer to certain non GAAP financial measures. Speaker 100:01:37We use these as a measure of operating performance. These measures should not be considered in isolation from or as a substitute for measures prepared in accordance with generally accepted accounting principles. These measures may not be comparable to like titled measures used by other companies. Now I'd like to turn the call over to our CEO, Brian Donahoe. Brian? Speaker 200:01:58Thank you, John. During the Q1, we made meaningful progress towards our goal of resolving underperforming loans, reducing the outstanding principal balance of non accrual loans by $133,000,000 as well as reducing our exposure to the commercial office property sector by $70,000,000 or 8% of our total loans backed by office properties. By addressing a total of 4 non accrual loans during the Q1, we increased our distributable earnings excluding losses compared to the prior quarter by approximately $0.02 per common share and further delevered our balance sheet by $138,000,000 to an outstanding balance of less than $1,500,000,000 at the end of the Q1. Our focus remains on returning ACRE to its core business of originating loans and managing a portfolio of loans backed by commercial real estate properties in order to earn consistent income to support an attractive level of dividends for our shareholders. Let me now provide more details on the loans that were resolved during the Q1. Speaker 200:03:09First, we sold a $38,000,000 loan that we held for sale at year end 2023 that was backed by a mixed use property located in California that was on non accrual. 2nd, we agreed to a discounted loan payoff of a $19,000,000 loan backed by a multifamily property located in the State of Washington that was on non accrual at the end of 2023. As a result of these initiatives, we realized a loss consistent with the fair value mark and loss reserves held on our balance sheet at year end 2023 and paid down $54,000,000 of debt in our FL IV seconduritization. 3rd, we exited a $57,000,000 Chicago risk rated 5 loan collateralized by a commercial office property that was also on non accrual at year end 2023. As a result of this disposition, we realized a loss that was $3,000,000 higher than the loss reserve held against this loan at year end 2023. Speaker 200:04:17And finally, we restructured a $74,000,000 loan backed by a Class A newly rebuilt office building located in New York City. At closing of this restructure, the borrower paid down $5,000,000 of principal, reducing the balance to $69,000,000 which was split between a $59,000,000 A note and a $10,000,000 B note. In addition, B note. In addition, it is anticipated Speaker 300:04:48that the borrower will Speaker 200:04:49contribute additional capital into the building for additional new leasing costs, including tenant improvement allowances. To incentivize the contribution of additional capital, including the initial $5,000,000 repayment of the loan, we have agreed to subordinate our $10,000,000 B note to new equity contributed by the sponsor. This restructuring resulted in returning the $59,000,000 A note to interest earning status, while the B note remains on non accrual. As a result of addressing these four loans, the outstanding principal balance of loans on non accrual was reduced by 31% and our distributable earnings, excluding losses, increased by $0.02 per common share for the Q1 of 2024. Shifting now to our overall portfolio. Speaker 200:05:41We ended the quarter with $2,000,000,000 of outstanding principal balance across 44 loans. 36 loans totaling $1,500,000,000 or 75% of our loan portfolio had a risk rating of 3 or better. The majority of these loans are collateralized by multifamily, industrial, self storage and hospitality properties. As a reflection of the quality of our risk rated 3 or better loans, borrowers continue to be committed to these underlying properties. Over the past 12 months, have contributed more than $130,000,000 in additional capital relating to loans risk rated 3 or better. Speaker 200:06:26And during the same time period, all interest rate caps have been renewed at their prior strike or equivalent amounts have been deposited into reserves. Going forward, we will continue to focus on resolving our remaining 45 risk rated loans and to reduce our office exposure. During the Q2, we expect to take a $33,000,000 risk rated 5 loan backed by an office building in California as REO that is currently on non accrual. At this time, we believe that our loss reserve on this loan is substantially in line with our current estimate of a potential realized loss. Additionally, despite ongoing negotiations with the borrower, a $69,000,000 loan to an office property located in North Carolina currently on non accrual defaulted after quarter end. Speaker 200:07:26We've begun the process of taking title of the office property and importantly, this property is cash flowing such that if and when the property becomes REO, property level earnings will be recognized. With that, let me turn the call over to Tae Sik to provide more details on our financial results and balance sheet positioning. Speaker 400:07:49Thank you, Brian, and good morning, everyone. For the Q1 of 2024, we reported a GAAP net loss of 12,300,000 dollars or $0.23 per common share. Our distributable earnings loss for the Q1 of 2024 was $33,500,000 or $0.62 per common share and was driven by a realized loss of $45,700,000 or $0.84 per common share due to exiting the 3 loans that Brian mentioned earlier. Distributable earnings excluding these realized losses were $12,200,000 or $0.22 per common share for the Q1. Our overall CECL reserve now stands at $141,000,000 which declined by $22,000,000 versus the $163,000,000 CECL reserve we held as of December 31, 2023. Speaker 400:08:51This reduction was driven by a $42,000,000 reversal of existing reserves associated with the realization of losses, partially offset by approximately $20,000,000 of additional reserves on existing loans in the portfolio. The overall CECL reserve of $141,000,000 at quarterend represents 6.9% of the outstanding principal balance of our loans held for investment, which is down from 7.6% as of the prior quarter. 89% of our total CECL reserve or $125,000,000 relates to our risk rated 4 or 5 loans, including $31,000,000 of loss reserves on our 2 risk rated 5 loans and $94,000,000 dollars of loss reserves on our 6 risk rated 4 loans. Overall, the $125,000,000 of reserves on our risk rated 4 or 5 loans represents 25% of the outstanding principal balance of such loans. Further, with respect to our loans that are risk rated 4 or 5 at quarter end, there were 8 loans totaling 503,000,000 in outstanding principal balance. Speaker 400:10:1077% of the outstanding principal balance of our risk rated 4 or 5 loans are collateralized by office and one residential condominium property. We did downgrade 197,500,000 Texas multifamily loan to a risk rating of 4 from 3 during the Q1 as the timeline and process of the sale of the underlying property by the borrower has been extended. Before concluding, I want to provide more background on managing our balance sheet. Consistent with our goals, we continue to maintain significant liquidity and further reduced our 3rd party debt. Driven by the loan exit activities during the Q1, we reduced our outstanding borrowings by 138,000,000 resulting in total third party debt of less than $1,500,000,000 at March 31, 2020 4. Speaker 400:11:13And finally, we declared a regular cash dividend of 0 point for the Q2 of 2024. The 2nd quarter dividend will be payable on July 16, 2024 to common stockholders of record as of June 28, 2024. With that, I will turn the call back over to Brian for some closing remarks. Speaker 200:11:39Thank you, Tae Sik. We are cautiously optimistic that the modest recovery we are seeing in the commercial real estate markets and tightening spreads in the CMBS Capital Markets will be supportive in the execution of our near term goals. We are firmly focused on addressing our underperforming loans and further building liquidity in order to maximize outcomes as we seek to shift our focus from asset management to investing. The timing and path to resolving some of our current 4 and 5 risk rated loans may make our quarterly earnings trajectory uneven this year, including in the Q2 due to loan resolutions. We remain focused on resolving a number of the identified risk rated 4 and 5 loans in 2024, which we believe will enable us to achieve higher distributable earnings. Speaker 200:12:31As always, we appreciate you joining our call today and we'd be happy to open the line for questions. Operator? Operator00:12:40Thank you. And our first question will come from Doug Harter with UBS. Please go ahead. Speaker 500:13:00Thanks and good morning. You talked about using the potentially move going back to investing. This quarter you used the resolution proceeds to pay down debt. Just how should we think about when you might pivot to investing versus continuing to delever the balance sheet? Speaker 200:13:24Yes, I appreciate the question, Doug. Good to hear from you. I think the playbook remains fairly similar to what we've said in prior quarters, which is a multi pronged path towards resolution where we're considering a lot of options with the pursuit of generating more liquidity, which will give us then the optionality as to when we see the opportunities, which have started to present themselves beginning in Q4 with some of the rate stability. We saw a bit of a pause with the rate movement of the past 6 or 8 weeks. But ultimately, we are seeing more liquidity, more acceptance of revised asset values. Speaker 200:14:05And ultimately, as we work through the coming quarters, we would intend to get back to that offensive side of the ledger once we've crystallized some more liquidity on the balance sheet. So the primary goal is to continue to resolve those risk rated 4 and 5 and the liquidity that should come with those types of resolutions will allow us that flexibility. Speaker 500:14:31Appreciate that, Brian. And Tae Sik, can you give us some sense, what sort of drag the 4 resolved loans, excluding the losses, had on earnings during the Q1 and kind of how to think about the path back towards the dividend? Speaker 400:14:53Sure. Thanks for your question, Doug. As we mentioned, the 4 loans that were either exited or restructured this quarter, So really the resolution of those 4 loans, either through, for example, the restructured loan, having an A note come back on earnings and then the 3, exit of loans really paying down debt. The combination of that really added around $0.02 of distributable earnings during the Q1. That run rate, if you want to call it that, the full quarter impact of will be higher than the $0.02 But for the Q1, I think it was roughly $0.02 positive impact that it had on our first quarter earnings. Speaker 500:15:41Great. Thank you, Tae Sik. Speaker 400:15:43Thanks, Doug. Operator00:15:46Our next question will come from Jade Rahmani with KBW. Please go ahead. Speaker 300:15:55This is actually Jason Sabshon on for Jade Rahmani. It would be helpful to hear an update on how things are going with your repo lenders and on the term loan? Speaker 400:16:09Sure. Good morning. Speaker 200:16:10Jason, do you want to kick off? Yes. Speaker 400:16:12Yes. No, thank you. Thanks for the question. Yes, I think we've had and always maintained what we think is a very strong relationship with all of our lenders, warehouse lenders, term loan lenders, revolving credit facility lenders. And in fact, as you'll notice in our filing this morning, we have continued to work with them and we greatly appreciate the partnership we have with all of our lenders. Speaker 400:16:38But you can see that we continue to, for example, amend our credit facility so that we can, again, as part of our overall goal to resolve underperforming loans, optimize the balance sheet with flexibility. So flexibility is very important to us. And again, we appreciate all the partnership we've had, our lenders who have been willing to work with us to create that additional flexibility on our balance sheet. Speaker 300:17:09Great. Thank you. Also on the North Carolina office loan default, it would be helpful to hear more color on how you see that playing out? Speaker 200:17:21Yes, I'll give that a shot. I think, look, we obviously were attempting to work with the borrower. However, the capital necessary for us to restructure that loan and in keeping with what we accomplished on the New York loan that we covered in the prepared remarks didn't necessarily make it rational. It's also an asset as we mentioned that has positive cash flow, probably has some occupancy upside in a market that has seen some positive flows of corporate tenancy. So we think there's some value to be added with a functional ownership group. Speaker 200:18:00So I think the timeline for resolution there will be what it will be. I don't think it's a 1 to 2 quarter resolution necessarily. But when we look at situations like this, clearly, we want to see both expertise and capital come to bear on those assets. And as you see in our earnings deck, we feel that we're in a position to bring both of those as a fallback position to having attempted to work with the borrower. So timeline will be determined over the next 60 to 90 days. Speaker 200:18:35And I think when we chat with you all in 90 days, we'll have a more concrete plan there. Speaker 300:18:43Great. Thank you. And as a final question, understanding that each asset is unique, but generally in your book, how have loss severities compared to your expectations, specifically for office and multifamily loans and general commentary on what you're seeing in the market with respect to loss severities would be helpful as well. Speaker 200:19:06I'll start it. Look, I think what we've attempted to do over the prior quarters has been to give our best estimate of where we expect to resolve assets and really limit surprises on these calls or dramatic changes in our outlook. And I think we've had some success doing that. As an industry, I would put forth that what's going on in the office sector has surprised many to the downside in terms of resolutions. That said, we've been as transparent as possible as we've worked through those. Speaker 200:19:41I think the lack of transparency generally in the market has probably delayed some resolutions throughout the broader space. And I think, as I said earlier, we're starting to see that crystallize to some degree with stability in rates. So I think over the coming quarters, you'll see more resolutions in keeping with expectations. Speaker 300:20:04Great. Thank you. Operator00:20:08Our next question comes from Stephen Laws with Raymond James. Please go ahead. Speaker 600:20:14Hi, good Speaker 300:20:14morning. At the risk of asking something you already mentioned, Brian, was a few minutes late. But can you talk about the non accruals? I think it was I believe it's $292,000,000 remaining. I know you guys made a lot of progress. Speaker 300:20:28But is there a goal on the summer near term resolution, summer longer term, but maybe if you look to year end, do you have, say, an idea of where you'd like to exit the year at that on that number? Speaker 200:20:42Yes. Thanks for the question, Steven. I'll start and I'll let Tae Sik chime in as well. I think part of the challenge of the industry is measuring a lot of what we do by quarter, but certainly year end is a good hallmark date to turn the page, so to speak, philosophically and financially. I think what we see is, especially with the offensive side of the resolution timing. Speaker 200:21:15So our conversations with borrowers, if you were to go back what feels like a long time ago, 3 plus years, where extending duration of assets on the book was really the primary playbook. As we sit here today, we'd like to resolve assets and crystallize a lot of those resolutions and get back to the offensive side as soon as possible. So tough to put demarcation lines in terms of the calendar. However, certainly, when we look forward the 3 quarters to year end, that's a pretty good place to plant the flag. But Tae Sik, feel free to add some color there. Speaker 400:21:56Yes. Brian, I think you covered it well. Stephen, I mean, I think you probably heard from our opening remarks that resolving our underperforming loans, certainly including the non accrual loans is really one of our top, top, top priorities. We're hyper focused on that effort. We think that will bring a lot better clarity to our balance sheet as well as be accretive to our earnings as we mentioned. Speaker 400:22:21But as Brian said, I think it's very difficult to provide precise numbers. We did resolve, as we mentioned, about 4 loans this past quarter, and we hope to continue to report some news on further resolutions in the quarters coming ahead. Great. That was the main Speaker 300:22:42one I had today. So appreciate your comments this morning. Speaker 400:22:44Great. Thank you so much, Steven. Operator00:22:48Our next question will come from Steve Delaney with Citizens JMP. Please go ahead. Speaker 600:22:54Good morning, Brian and Tae Sik. Busy quarter for you and it sounds like it's continuing. With the 4 loans, non accrual loans that you reworked, resolved in the Q1 and then the 2 office REOs in the 2nd quarter, having a little trouble having that chance to go to the deck and just roll all this through. But as we after these 2nd quarter REOs, can you tell us what is left at this point in 5 rated loans after the REOs, the 2 REOs? Speaker 400:23:34Sure. I can see if I can try to take a shot at that. Yes. So as we mentioned, there are 8 loans that are risk rated 45 as of quarterend. Okay. Speaker 400:23:49And certainly, it includes the 2 office properties that you mentioned that we anticipate going REO in the future. We also in the future. We also mentioned a new 4 rated loan, a $97,500,000 multifamily loan. And as we mentioned in our closing remarks, the reason it was downgraded from 3% to 4% is that the sale process of the underlying property, this multifamily property in Texas, it's just taking a bit longer than we had originally anticipated. And so because of that, it was downgraded. Speaker 400:24:30So that's really, call it, 3 of the 8 loans, again the 2 REO plus the 1 multifamily loan. And then when you really look at the remainder of the portfolio, what you have is you have some loans that have been kind of on our balance sheet for a while. We mentioned, for example, one of the mezzanine loans that we put on non accrual. And then really, it is the condominium development that we have in New York. And then it's the large office loan out in Illinois. Speaker 400:25:22And it is an industrial asset out in California, the $20,000,000 loan out in California. So I think that covers just trying to recollect other others, but I think that makes up the remaining 5 loans that are in the 4 and 5 rated loan category. Speaker 600:25:42Five loans, as we sit today, less than 45. And I understand this is fluid and things are going to be coming and going, but nice to see some resolutions and some progress there. Brian, I know this is a decision the Board goes through probably every month or every certainly every quarter. But the issue of your current $0.25 dividend and working to maintain that and the opportunity for share buybacks, I would guess even with the loss of book value, you're still probably a little below 70% of book. How are you thinking about that in this market where everybody is having problems and you're looking at your stock with a mid teens dividend yield. Speaker 600:26:35Just your thoughts please on how the company or shareholders are best served between paying out that cash or buying back your shares here? I didn't notice that you bought any shares in the Q1. If I overlooked that, please let me know. Thank you. Speaker 200:26:53Now that appreciate the question, Stephen. As you said in your prior comment, the market is fairly fluid and it is something that the Board and management considers each quarter. As we characterized when we chatted 60, 90 days ago, what we established when with the dividend at 25 was what we felt was attainable over the near to medium to long term, right? And I think that's something that we will continue to evaluate. And over the past 18 months, I think we as an industry have contemplated the best way to serve our shareholders and that is a combination of dividend, which is the core charge I think of the mortgage REIT business as well as the relative value of buying back shares, which we've done previously. Speaker 200:27:44So it's a balanced approach alongside managing liquidity and ultimately crystallizing the best returns possible for our investors. So I would put forth that I think we'll continue to evaluate that in the coming quarters based on the results of that fluid market you mentioned. Speaker 600:28:03Got it. Glad to hear that it's going to remain on the table regardless of and I know your Board will make the right decision quarter by quarter. Thank you both for your comments. Speaker 200:28:15Thanks, Steve. Operator00:28:21And our next question will come from Rick Shane with JPMorgan. Please go ahead. Speaker 700:28:27Hey, guys. Thanks for taking my questions this morning. I apologize if some of this has been covered. First, as you sort of move from pain down shrinking the balance sheet to moving back to offense, Curious if there are any covenants that you need to be aware of or any limitations related to your debt that could make that more challenging? Speaker 400:28:53Yes. Rick, thank you very much for your question and good morning. As we mentioned in response to some of the prior questions, we have been actively in dialogue with our lenders. And as you'll notice in our filing this morning in the queue, that we are starting to make some amendments to those facilities to make sure that we have the flexibility to implement the strategy that we talked about, right? So our strategy, as Brian mentioned, is to focus on resolving our underperforming loans. Speaker 400:29:30And in order to do that, we want to make sure we optimize the balance sheet to provide that flexibility. Deleveraging has been certainly a big part of that strategy as well as maintaining good levels of liquidity. And so we continue to focus on those two elements. And then again, we're proactively working with our lenders to make sure that the covenants and the loan facilities provide us that flexibility to obtain the overall objective of resolving underperforming loans. So the answer to your question is yes, we are definitely proactively working with our lenders on this. Speaker 700:30:05Got it. Yes, I did a search of the queue for covenant and amendment and I got 150 of each. So I didn't I wasn't able to find my answer. I'm sure it's in there. 2nd question, look, if we look at the forward curve and compare 1 month forward so for 25 today versus where it was in January, expectations are rates are up 100 to 125 basis points from where expectations were in January. Speaker 700:30:38I am curious in your conversations with borrowers or what you're seeing if that expectation that rates are going to be so much higher for longer? And again, it's the forward curve, so we have to take it with a grain of salt. But is that driving capitulation? Is it driving people's behaviors to change in a material way from what sentiment was even at the beginning of this year? Speaker 200:31:07Yes. Good question, Rick, and a few questions in there, and I'd say summarily yes. I think that the stability in rates in Q4 was catalytic in terms of causing some transactions to be consummated and I think we saw a good pop of activity in Q1, much of which was in the headlines in terms of apartment industrial trades and fairly sizable ones. I think that the that started the process. I don't know, maybe capitulation isn't a perfect word, but for the real estate market to get back to forward looking and to consummate transactions. Speaker 200:31:48And so while the rise in rates since that period of time has not been accretive to values, right, it's clearly in the public and private markets, You'll see a strong correlation to rates in terms of the prints. I do think that the trains started to leave the station to some degree. And therefore, we expect people to either realize that their assets are worth what they are worth and therefore move on. So there's a financial capitulation, but also the time allocation for legacy holders of assets is may no longer be worthwhile. And on the other side of that more positive tone would be that higher for longer means the yields available as a lender continue to be high and widely publicized when there is this level of duress in the market, it can be a generational opportunity to invest in equities and structured debt, things like that. Speaker 200:32:46So I think that the stability in rates and then the backing up is kind of either way going to lead to more resolutions, whether it's characterized as capitulation or great opportunities. Speaker 700:33:01I appreciate that, Brian. Thank you so much, guys. Speaker 200:33:04Appreciate it, Rick. Operator00:33:08And with no further questions, I would like to turn the conference back to Brian Donahoe for any additional or closing remarks. Speaker 200:33:18Appreciate that operator. Yes, I just want to thank everyone for their time today. We appreciate the continued support of Ares Commercial Real Estate and we look forward to speaking to you again on our next earnings call. Thank you. Operator00:33:33And ladies and gentlemen, this concludes our conference for today. If you missed any portion of today's call, an archived replay of this conference will be available approximately 1 hour after the end of this call through June 9, 2024 to domestic callers by dialing 1-eight hundred-seven fifty nine-seven twenty eight and to international callers by dialing 1-four zero two-two two zero seven two two nine. An archived replay will also be available on a webcast link located on the homepage of theRead morePowered by