ACRE - Earnings call transcript Q3 2020 | Ares Commercial Real Estate Corporation

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Operator

Good afternoon, and welcome to Ares Commercial Real Estate Corporation's Conference Call to discuss the company's Third Quarter 2020 Financial Results.

As a reminder, this conference is being recorded on October 29, 2020. I will now turn the call over to Veronica Mayer from Investor Relations.

Veronica Mayer

Good afternoon and thank you for joining us on today's conference call. I am joined today by our CEO, Bryan Donohoe; David Roth, our President; Tae-Sik Yoon, our CFO; and Carl Drake, our Head of Public Company, Investor Relations.

of press SEC, the earnings we the Resources our filed that presentation to www.arescre.com. Investor the at with have section addition release XX-Q and we under In website our posted an

Real Before believes, we everyone made accompanying or and the uncertainties. uncertainties. conditions during listed to of obligation documents statements. judgment. forward-looking call of to contain these including in SEC and filings. results statements of statements company's not words conference can of expressed forward-looking the The be Commercial intends, and the and factors, These Corporation and a result by involve management's guarantees may, of a number results that risks anticipates, are this subject from risks such management's those comments in are are materially course forward-looking current forward-looking webcast its number could update statements identified I such expectations performance, a use begin, differ similar as any and Many expects, Estate want on market statements of remind the and These forward-looking statements actual assumes should, those will, and of condition expressions. as Ares of based to future no

With will turn to These like-titled used be to over in accordance measures I isolation as in conference this Bryan measures accounting considered with operating of measures performance, these now companies. may other or financial prepared call, not and substitute generally use be not for, During we call Donohoe. principles. measures measures We will non-GAAP refer accepted as the certain measures. these should by a comparable that, to from

Bryan Donohoe

today. Thanks, Veronica. And everyone joining for thanks

we that the withstand well As conditions positioning how ACRE, on market downturns. you inception remind order everyone we think are to brought the despite portfolio perform business defensively earnings to since focused to see pandemic. understand to positioned it's our important are today, first on In can by release, continues I our from of our

with loans spreads. industrial especially as such of more demographics. areas office our respect and successfully with state and changes long-term based floors. to are covenant diversified our market cycle strategic rates maintained We and funding protections to For taxes, securities. lower on multi-family, to with to and structured properties we from XX% decisions. with these our focused that and allocation this cost We to sure LIBOR we by what shied the we that falling we held more portfolio carefully can structured and we mortgage gateway our margin volatile calls asset getting our in example, hospitality, interest we to pivoted growing believe do with rights. ensure viewed ability firm leases, properties a protected living, in on in overpriced deal away is avoided sources, loans, as senior from lower protect navigate We our and meaningful We have financing not marketable more negotiations purposefully markets so We to due make classes part

our $X.XX, in a stability It earnings be levels. of can the can quarter result, remained our As quality, have dividends second through our be earnings, third quarter. in share our portfolio quarter all relatively stable. credit seen per portfolio the and performance of also with This seen is core consistent which

primarily loans and drive portfolio across is XX of Our collateralized that well properties. has It office, attributes number stability. and very industrial multi-family, by different is a diversified this

are and collateralized [operative] loans, retail no select that We service have which a are hotel loans centers. or total of of standalone all by models, five limited

these may flows full that exist. service increasing are transitional growing gateway XX properties gateway cities. cash portfolio, cities any Our our of there and light counteract and Within exposure minimal across assets with macro generally markets XX no different where and multi-family on to headwinds spread which with we tenancy, loans in office are some believe focus lodging we

portfolio of leases. respective office properties is Class A tenants and institutional with quality their and primarily Our comprised long-term markets

In remaining X.X loans. lease Top longer term by XX fully fact, the the than average leased the of of area for our percentage tenants average is our years extended

service continuing properties, In X% have exceptional, has portfolio. been performance a office We our in In multi-family in rent team is portfolio. our of avoided management dedicated our is loans non-accrual rate tenant quarter, The status. exposure our loans collections of portfolio luxury their we October we major number occupancy high and for have at the strength is our of the multi-family quarter in platform. less average mid-XX% tenants debt third of the on real of and also office multi-family held payments cities to approximately reflected payments and portfolio, the in asset our rises. than for positive there XX%. to made changes contractual underlying no to both in are Similarly, And the for were our work and the This date. for trends the investment see range and XXX% co-working our

three rating of scale, risk average also better, rating being the being rated lowest our of five one a XX% loans risk highest, loan a internal an were with to X.X. remained Our or with steady. ratings and one On the five

stable approximately In addition, $XX at our liquidity million. position remains

investment senior reduce X.X times of have X.X now leverage. times to consisting further basis, overall, debt-to-equity We XX% taken sit portfolio financing the levels and that are We believe loans. we a also recourse for at on our initiative appropriate

position improving safety we've albeit in high a time are begin with believe we we to and selectively bar making with this a returns. for pandemic investments, new liquidity, As appropriate navigated

self from parts and storage, industrial, in multi-family, both true Our states migration. team's property historically quality of in less have volatility types in This transactions. other the and seeing benefiting is of active been in substantial a pickup quantity we're business had that like and our especially tax

ACRE’s optionality and efforts credit the to-date, offense on having our proud on really opportunity based rigorously team our excited to ability we're to to financial have while the some Overall, which quality, and and for which to Tae-Sik the stable now shareholders. to consistent dividend set, additional about. to third I'm going on details call quarter of resulted remains a results we're over go turn goal position. in our Our pay preserve

Tae-Sik Yoon

$XX.X reported per our you, or everyone. $X.XX largely earnings Thank Bryan. Great. or prior and of common share, $XX.X And million core common consistent good Earlier we today, million afternoon, net with GAAP of results. per $X.XX quarter income share,

rate a XX% LIBOR earnings to X.XX%. Our from of built-in weighted having loans of benefit average with floors, such our protection continue at

million last These As and at third Westchester during common monetized the with quarter our between including second call, reduced an With in improved of respect the these to cash position, third and XX% $X.XX of and we $X core or leverage. our hotel loan. sold GAAP in [in earnings of our earnings or The hotel exposure, one our difference share quarter. transactions Marriott, the par, associated performance discussed loans. continue average to overall of quarters, five loss] reflects loans improve in lowered the our per the sale two third

our rebuild positive the expenses our We plan base. and impact are revenue of reduce to seeing

that our has central Our workers. closed. sales are from other temporarily successfully and And less team benefited permanently government other and either hotel marketing the from properties competition solicited or area in

we to XX, per end the value XXXX, September As $XX.XX at share, common $XX.XX second of to versus of continued build XXXX. up book quarter the of

Turning yesterday's to our of in $XX as liquidity, million had approximately we close, unrestricted cash.

liquidity that operations current flow our from levels are believe needs, we cash earnings our and outlook appropriate. Given

to us, However, should the the have for need of Ares reinvestment cash including capacity under liquidity warehouse. arise, we further additional available sources

discuss Now, let our debt liabilities facilities. me and

debt times times. and excludes leverage the spreads. the of basis, X.X CECL our as reminder, equity to financing a debt-to-equity end that times borrowing as second the on quarter, remarketing of market quarter, of ratio the based mark-to-market none X.X We times which continue changes contain to versus provisions reduce recourse our X in warehouse our facilities of first a end to And all at Reserves. On are X.X is of

pay turn remarks. in average the that, $XX And at of term commitments approximately with million the attributable million will to remaining lower overall third quarter, at portfolio. primarily reduction some contract in reductions Finally, end the and the CECL was Reserve from our This the shorter the CECL $X call quarter. now prior was by back and closing and for the loan over I loan downs, Bryan to Reserve

Bryan Donohoe

defensively differentiated we prior conclusion, took believe we In pandemic. to are Tae-Sik. portfolio our we Thanks, structure well the on based to positioned very actions the

continue be in from has our we With going the more actions liquidity the geographically and opportunities, by questions. we and support position portfolio funding defensively selectively will the Thank investment attractive and of With time forward. to ask operator current that, market our of deliver have consistent to of to the positioned you. see All expect line which advantage today. out earnings position diversify we position, we us to to our our open dividends. you the market We to in loans spread thank our sources take I'll for and a appreciate believe the for And the employees. shareholders taken

Operator

from be first Suisse. of Doug question The Credit Instructions] [Operator Harter will

Doug Harter

your that prioritize about liquidity? down, that coming would that quarters? you current that talk think you kind comes know, just over you number Can that how progresses assuming holdings, you Thanks. And, the liquidity how of deploying

Tae-Sik Yoon

Tae-Sik. Sure, Doug. is This

the building of paramount is obviously over amount quarters. liquidity few the we been liquidity have importance know, You past a and

cash a you see, level into up as know, we're loans overall flow what it can you a our as XX and look very our of basis. you just we're at even, of the look anticipate also million, know, a last we're we appropriate as it know, from to which As on we go-forward a our if you know, consideration, couple about days, operations of Obviously, taking at equity, potential you at of percentage think be you today. to percentage needs,

you we I you know, cautious. that, remain said all think we – know, having

want business. position. we're a the do liquidity are At this so markets good make volatile, we know, of to we sure the point, levels support to appropriate that have, you You continue to know, we you quite feel in know,

we at we that have So, of and while quickly we opportunities, level, very is liquidity, decisions actually we you offense have including, other the time, to uses at that sheet no you a liquidity appropriate making add know, if plans firm we in that have the good that can know, know, some onto sure capital start that the made capital, deploying defensive we investments, believe same the on amount cash do that necessary. you new but to at of move balance are additional look place that. can where, on into But, been evaluating

Doug Harter

Got know, during asset yield ticked Tae-Sik, kind average it. And the of it quarter. like, you up looked the

in there aware out of we was there kind that would should you know, be kind that call anything – You would of of?

Tae-Sik Yoon

mean, I really. not

I But partial potentially you think the composition, or portfolio, bit to know, of you'll some big, little see think, in you asset on changes you based repayments, fine no, I changes upon in, full upon some repayments. in portfolio a big, significant based modifications, tuning yields, not changes the know, portfolio. its it's really due know, of potentially

one know, of again, XX%, know, floating with portfolio our XX% of LIBOR about rate, fixed you things, nice that, the You a either is our you is floor. know, portfolio

We know, of small loans. fixed in, also mix amount you rate a

the in have unleveraged not a, we've know, yield. effective with LIBOR you in changes even So drop change you seen, sharp and overall that our seen

are so relatively changes far, know, see you changes the you due be, sort to to not know, whatever any this we significant portfolio. in expect steady So, you quarter-to-quarter do of and

Doug Harter

thank you. Great,

Tae-Sik Yoon

you, Thank Doug.

Operator

from DeLaney Steve Securities. of is JMP question next The

Steve DeLaney

standpoint? everybody. any on seeing you strategy, any there could drain if Westchester Hi, quarterly estimate And your of the from changes if you Wondering property? update could us you're Thanks. the now an on quarter. strategy hotel, Congratulations cash on that the a sort give

Bryan Donohoe

Yes. question. Thanks for the

you Marriott that the outset with was portfolio, in and think, and take thought served the to strategy really Marriott. mirrors of which Westchester certainly lot well I Westchester about at the the a we I a the us think overall to respect know, way the we took portfolio view with long-term

we've remarks, temporarily has permanently. a his from closed As good portion fact of either that Tae-Sik in set our competitive the benefited indicated or

know, So, our we've and [while as national that in less of able demand you've it’s] than more seen prior to of certainly into this kind years, you all assets. uptick been harness demand as

the that to to we business relatively benefits opaque some been basis, have benefit seeing Obviously, costs, respect one-off really downsides of events it's our on us. staying continued go-forward open, and there's book containing group but a to still of any that minimized of asset. are with So

Steve DeLaney

on your would what of the impact currently results, approximately And, Bryan, in earnings? terms quarter-to-quarter you operating just is say

Bryan Donohoe

relatively Really overall. flat

Steve DeLaney

Okay.

Bryan Donohoe

And revenues. I think assets you it's of obviously know, the mark-to-market risk is generally the, daily in lodging as

Steve DeLaney

Sure.

Bryan Donohoe

to still with contained how you as able been to that we've But I extremely competitive tough as we've at it's created we've We're mean, set. manage, possible, be. will the done this decisions But and say so made be reduction pleased XX% pleased asset know, said, given successfully like asset. really harness have consistent that – the there. I much and our what with to in revenue cost

Steve DeLaney

a morning Thanks Blackstone for noticed as billion this they CLO then, quarter. had we follow-up, in fourth the And that. announced done that $X

Your believe March. XXXX in that CLO, I reinvestment expires

Thanks. financing expires, how if know, CLO curious you flexibility what these market either Just when plan and you before it that have or, to you your is, seeing call spring? you're that days, know, market, – reinvestment when next the your

Bryan Donohoe

as our lot indicated earlier call. of options at the with to financing, respect look we on we Yes, different a

the markets that for for couple right? First to that have returned and [willing] positives, I fact and the buyers think, allow the really helps back a CLOs and foremost, to think table. capital are sellers generally, of I to CMBS, fluid come

lines the obviously, more a normal partners finance for efficient in repayments more so, over continue as going market extremely types I to time, normal the of and And the business. on do of think certainly a course. said financings, our accretive long CLO something look the constructive. to And those general, the quarters, assets. markets we've the side so we're prior most relative in course like, should term, in have solutions to we into it's right, We open allowing been way certain being our like allow just evaluate to there's warehouse today, constant basis, But on in financing over and

Steve DeLaney

Okay, for the you great. Thank comments.

Bryan Donohoe

Thank you.

Operator

will next Raymond of The question from be Stephen James. Laws

Stephen Laws

morning. good Hi,

you LIBOR and continues noted from to floors. certainly know, benefiting your remarks, decline, in know, You you leverage you're

to consider know, You surprise how evaluate the You something know, size, know, returning amount you know, Is book? comment shareholders to a of relative guess, you you possibly so the pretty repurchases stock and do small here total think against you stock valuation made? thinking that about leverage you how you've I on about maybe capital repurchase? through the unfunded the commitments, can to you valuation, potential portfolio declines – and given

Tae-Sik Yoon

Yes, [indiscernible].

Bryan Donohoe

Yes, ahead, go Tae-Sik.

Tae-Sik Yoon

Sure, Great, Stephen. great. Yes.

several know, and trading discount value. attractiveness I know, we significant did of current doing we So, evaluate, capital years so, in of, during mean, terms a a obviously, a, perspective with a know, you be levels, you you our you And, you book markets meaningful ago as know, continue share shares. buyback. value timing, repurchase, know, per some know, the do you It certainly to shares at from [indiscernible] to ahead share repurchase share go book to our would you accretive know,

that making well about, have of of we same great well time, uses opportunities in given talked defense that other at as obviously including the capital, the terms just know, and liquidity sure the as purposes the market. having we as for just offense volatility cash some You we have some of of things enough

market of we So, evaluate. continue obviously a is per buyback haven't but in and you liquid recently, liquidity, account also, certainly, sure share. And take also we sustain will continue know, to you considerations we sufficient a that certainly it shares to that will But capitalization something share a know, know, again, sustain our will into we level the market. that is level make of to you accretion value book making the that done

us do of buybacks, And including one extent balance at know, capital. equity but our further, that size take something that obviously is is to have to sheet, of will doing it, won't we ACRE the – share factors share again, the as You small certainly that which that stop it know, overall decrease challenges from of the capital a into certainly, it's one we consideration. want we you would just

Stephen Laws

with quarters. you half the probably but you of the leverage have almost you know, should over side, down last a you turn Great. guess, And know, started brought I leverage couple

to you know make a investments? there are that You to on term? you is – Can you trend to like you over get see focused you'd you about that where, near X.X talk X next a see leverage know, target to like You where somewhere months? where new you maybe else? level know, start there you'd Is to do know, or the XX

Bryan Donohoe

Sure.

all we're know, know, focused know, You pay other to dividend question. of you the you to balancing other with, you our been continuing you cash consistent have And, know, great a we know, our factors our leverage leverage – and we've all generating investors, very reducing the important important about, on attractive factors, right, to ROEs investors. been our

You delever our and it safe of so knock on further easy called know, the more relative and basis. pay us that to reducing balance be reducing a But ability its to it'd make dividends. delever enough obviously, effect to and earnings conservative sheet for has on

And right find balance. trying the so, we're to

I know, our we would attractive with, generate the we you to returns and helped continue have floors million liquidity know, can been, lower with so, that that say, by And of we have know, very you you fact leverage. so $XX LIBOR

of leverage market at right with happens or plus happens you a want right target you pipeline, conditions, call market and it. target it'll so with, you would that, are happens somewhere think you where continue know, X evaluate we're still we'll we again, think between potentially is Having know, comfortable you looking X leverage to are to today's we that there. know, all that, always context. to I XX], so, what change we of And, X.X now with, know, on kind range so looking And fluid right what now, our levels a snapshot we're the it, we that that said for [minus with X.XX. given you depending the our it's right overall X.XX around, know, know, it to X.X the today, saying conditions of midpoint be and But loan to overall is performance, what

Stephen Laws

a lot. Right, thanks

Bryan Donohoe

Stephen. you, Thank

Operator

question comes Jade KBW. from The next Rahmani of

Jade Rahmani

Thank you that attractive transaction Is an sector. participant mortgage very has space area rental the REITs active management could a in investment? commercial of called other that for be with much. fund Ares’ [indiscernible] one single new a an side. a debt in that partners, the participated potentially And [indiscernible] on through that family earmarked

David Roth

for Thanks the Yes. …

Bryan Donohoe

little you of intro an want to a there? give David, bit do

David Roth

Yes, reflects I comment side going was Was of the the a with say needless have so long involved a to did transaction. I've I'm do my we the spent announce time. time Obviously, in find long as that for sector to was, know, flows was [Blackstone], transaction, – really cash responsible life, the you and of homes, something sector. on lot but board that, on and you when the like it so you can't that, I equity the say, well obviously company public investment it's company [indiscernible] a public – business in initial the prior attractive. at for I a in you expertise.

would exist I so, opportunities that them like we might to understand And to in concept, work space, our obviously, on the [debt] hand-in-hand a partners that side with say space. as just and help

Bryan Donohoe

in I’ll debt and our I collaboration investments and And obviously, groups involvement in Yes. equity the different like the add Jade, that. between speaks mean, just between own to – David sectors

of think of as food cautious seeing, redlined with you I phenomenon in see the in consistent downturn the reduction we're investment around, this think or of universe, today, effectively makes look extremely you've temporarily, sector. the rental I normal you despite retail being four lodging kind least five assets when certainly collections that of at denominator on and right, you is And that extremely look outside groups right. what our one

think asset leverageable do it's very counterparts. place an I I so, to and play becomes it's also an by attractive And our think that

of that going pie forward. think will an the So, share I see something increased is it

Jade Rahmani

potential other Thank excited you're the you. a of You about capital. to the deploy some And you of for the pipeline? in can give flavor very transactions types said,

Bryan Donohoe

anchor provided certain the the And markets, well attractive typically we're that super mean, in in that has market. seeing have banks industrial banks I and the banked what from the regional multi-family back is, like. Yes. for continued certainly space, Freddie pulled we've as by Fannie been really liquidity more being by seen been and opportunities have the an

by just that And can cited almost assets we step in affected less markets these from the in the attach areas, and into that lease-up so, buildings fallout we to higher relative tax meaningfully virus some same mid-rise been migration the at that of are assets XX those create spreads the would and uniformly have months virus, traded really interesting have where or levels, ago.

know, real flowing industrial a seen esoteric incumbent that, asset to become continue think primary the certainly, of more that markets, in you there's I smattering is multi-family, estate Beyond focus you've to in equity and going cash be remain classes more but like. the the

Jade Rahmani

Thanks.

In non-accrual are on additional the individual number for And loans loans, terms the targeted non-accrual? of aggregate there loans what's sale? of any

Tae-Sik Yoon

Jade. Sure,

status is So in non-accrual the loans of three. number

You I know, pandemic, we four right of early onset at loans. year, had the the think this

We of which modifications some increased took a non-accrual. based loan that know, done funding of, non-accrual upon we partial that the likelihood resulted so have down off significantly both we you reserves really status and one the to interest pay able taken in off were the borrower, get with one of payments, some

we So, sale, of no loans XX/XX, have on And XQ as loans sale. non-accrual. loans terms held as in had now, we that of that are are for for three of

so you'll through loans activities quarter, but sale. third second no of as we loans in mentioned, had there marks you obviously loss there, a quarter, the for the quarter, for second of see quarter, reversed is in of that As the We held and some unrealized as were we third available that know, sale. took couple

Jade Rahmani

for outlook you three [happening]? do those loans, the of terms anticipate what in And

Tae-Sik Yoon

progress basis maintain the borrowers. we've with entire dialogue respect I with them weekly those conversations And, three with and our a you think really very have loans, to constructive continued to on portfolio, know, remained right. look a the portfolios at throughout up been and we picking we're rent portfolio on mentioned, collections the trend you know, we've collections last the positive us makes And need three, think pretty will four fact that ultimately. feel to equity have borrowers I more continued cases into to ultimate for execute most confident assets, the certainly borrowers, and they resolution today, of confident these that still lot be infuse that time the in point their two line, And plan, throughout, the we a like the underlying think but increased business we If in or seeing outcome. I feel months.

Jade Rahmani

very Thank much. you

Bryan Donohoe

And just add that, to Jade…

Jade Rahmani

Go on.

Bryan Donohoe

situation value, just typical payments. that, to non-accrual that we to interest you receiving make and actually interest, not adds and pay accruing you're them non-accrual all put sure, steps that the amortizing and our non-accrual the payments. them know, and maintaining and we're not continue three interest the important think status. took the it's yet In you behind know, Just we you're to are on not yet, note that carrying not as know, interest receiving they are start unique payments an are is again, I this I know, interest, want these down still But think, where you you situations, the loans we're are non-accrual again, current so receiving on I to on they to three

Jade Rahmani

Thanks very much.

Bryan Donohoe

Jade. Thank you,

Operator

JP [indiscernible] next is The Instructions] from question [Operator Morgan.

Unidentified Analyst

all quarter. the were from modifications, wondering those good I'm talk to afternoon, the there in of if questions. for was the those in nature modifications Can met and the with sponsors? everybody. [Q] taking happened you that I the four Hi, additional contributions equity noticed loan Thanks

Bryan Donohoe

Yes, question. certainly. Good

be a normal course circuit, and and the to given it's I getting situation. has really for caused types think business accelerate, In if instance, as date, every you especially, almost do can and backdrop, of obviously, deferral on a the CMBS, going to in the loan where are decelerate of compare return in general, certain kind that assets and relative of in And of things maturity we're be that, we finance, what impact in like. specific as we closed progress, business the in plan modifications done based that plans deceleration plans business we certain makes the will tweak both and acceleration covenants, something COVID sense others. the

does I many that belief think in in think, ultimate indicated to we and cases, and – speaks as investment infusion that their speaks for has that equity been infusion. as made that equity outcome these own And positively borrowers So course earlier, the by the an include to in I debt equity normal investment, well. their

Unidentified Analyst

got progressing it. specifically how Okay, to things additional that the on then, if housing wondering And this provide extended the just student you Alabama December think just year, was could I of color loan, on maturity asset? any are

Bryan Donohoe

sold that's occur. certainly know, COVID You be that the a of asset an for current asset gives that that sale is And by to interrupted really by think a plan category that business just to plan for fits owner. into the runway and I the extension

Unidentified Analyst

it. Got

Okay, the question. for taking thanks much very

Operator

our conference remarks. Bryan over to the to I'd like concludes Donohoe this for question-and-answer And closing session. turn back now any

Bryan Donohoe

And you. next questions, on look the to support you today. continued Certainly, have team. appreciate time please forward just I want out thank everybody you. our if call. additional Thank with any again earnings their to speaking reach to and you Thank our for ACRE of IR

Operator

gentlemen, this and Ladies you. for concludes conference our Thank call today.

through part any X-XXX-XXX-XXXX after callers missed the X, dialing and X X-XXX-XXX-XXXX. of November replay you by If call call, call domestic conference to today's this of available XXXX approximately dialing by international an callers, end of be to will archived this hour

replay also webcast section Investor located the Relations on on be An please XXXXXXXX. of For homepage all our available archived Resources number reference link replays, the conference of will our website.

Ares Commercial Real Estate (ACRE) 29 Oct 202020 Q3 Earnings call transcript