Earnings call transcript Q4 2022

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John Stilmar

Good afternoon, and thank you for joining us on today's conference call. I'm joined by our CEO, Bryan Donohoe; and our CFO, Tae-Sik Yoon.

In addition to our press release and the 10-K that we filed with the SEC, we have posted an earnings presentation under the Investor Resources section of our website at www.arescre.com.

Before we begin, I’ll remind everyone that comments made during the course of this conference call and webcast as well as the accompanying documents contain forward-looking statements and 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.

based judgment. current are conditions of statements management's and forward-looking on expectations management's market These are guarantees and statements involve These not a results condition number and or of risks uncertainties. of future performance, differ The company's forward-looking as its including result a SEC from factors, expressed a of listed in statements number materially of those actual the those filings. could results in Ares statements. forward-looking update any Commercial such Real Estate Corporation assumes no obligation to

these of measures measures a non-GAAP conference not financial refer measures. may operating comparable like-titled call, performance, Accepted these use substitute accordance not this in and During considered to measures Generally to measures measures should as be Principles. companies. isolation prepared we We or by These used Accounting be with will from in for other

over call to the turn our Bryan to like I'd Donohoe. CEO, Now,

Bryan Donohoe

earnings morning $X.XX afternoon, distributable capped and share fourth highest was we sensitive Thanks, distributable overall the distributable rate results, of nearly which quarterly off rate share our floating record previous base. level strong the in of where This strength XXXX, our earnings XXXX. history XXX% John per reported our matched Throughout primarily good benefits in our of the by everybody. second interest continued our annual year, included a and earnings $X.XX asset driven in of quarter per

dividends year we earnings In distributable successful fully fixed which in liabilities. and from very approximately hedged a we supplemental or our XXXX addition, one-third of at was our covered XXX%. regular

balance addition, year. throughout the bolster liquidity much In our and further conscious a sheet strengthen our we made to decision of

higher market. higher commercial interest for of the to the estate same overall distributable rates the some our earnings led strong While from rates, headwinds tailwind benefited have real also interest

pause interest owners as seeing take business market these to on we're plans Specifically, rates. historic increases in property executing many adjust they a

time, same are trends. markets occupancy the and weaker certain experiencing leasing At

office particular challenges market been is post-pandemic economy. from As in demand in a publicized facing has well shifting

aren't we carefully these effects oriented immune senior that portfolio our constructed, believe has market loan we headwinds to Although, been present. the

credit these you'll on greater hear Tae-Sik, ratings. As of number from non-accrual higher in are elevated industry-wide have loans status risk and resulted reserves, a in movements default

on handle maximizing and are situations these we to them. well focused the outcomes very equipped we are We for believe

the review context a volatile on markets positioning At headwinds Ares, and important industry navigating believe capitalizing to a on in take the environments. minute of demonstrated broader illiquid our It's we we have to playbook and capabilities.

more Our investments. towards billion $XX these of investment liquidity Real first managed significant over markets X,XXX eye in periods approach and has globally understand and during experience. an Group over ACRE than foremost tapping management by level additional XXX extensive assets properties is under The to opportunistic with provides and keeping operate Ares into advantages professionals. then asset while helping This Estate to

more puts into complex market real us to These in in navigate better position to XXXX us a estate shift going and insights led a posture defensive a more forward.

$XXX Our new in our enhanced a was XXXX, repayments during loan company. overall liquidity for principal by record million

the successful below of many $XX repayments, total property property. the first outcomes plan. highlights executed the life from we Westchester property where to the positive sale XXXX, operating and COVID quarter the for through we return In the these we the in realized ways This can to XXXX. the of operationally led loan navigated plan a one of million Marriott in the a through business than with and addition the was investment successfully of of achieve This more owner proceeds became

XXXX, $XXX in during we activity new multifamily commitments more investment originated our million of with of the loan commitment than one-third terms In exceptional sector.

loans. diverse of AAA underlying in opportunistically backed Additionally, a securities pool we by invested

significant commercial values. property estate is there real regarding the and forward, Looking uncertainty market

our believe property-level into capital be to us on while well outcomes, opportunities. maximize certain current attractive resolve will deploying focus We capitalize environment. and prudently expertise navigate the to successfully and ultimately situations liquidity new position to Our investment

turn over me to and that details the through capital walk call further now our to position. let financial some Tae-Sik on portfolio With highlights of and our

Tae-Sik Yoon

Great. Thank everyone. and good afternoon, Bryan, you,

For net income common $X.XX distributable or XXXX, GAAP of million fourth of $X.XX common per we of $X.X quarter reported or per the share. $XX.X earnings and million share

For full distributable $XX.X share. per or income GAAP year share net common million or XXXX, was and per common million were $X.XX $X.XX $XX.X earnings

Most distributable our we earnings company similar long-term both track regular continued and the supplemental history build or with For fully delays. consistent as a we XXXX, growing the delivered we our of and dividends dividend to XXXX, reductions full notably, than throughout of record no share of having have earnings in of to per on dividends. at year covered our more excess XXX%, through life distributable dividend

to Turning a balance outstanding an principal we senior base, with quarter billion the of asset portfolio across diversified consisting our loans. XX ended and loans loan XX% $X.X of

our of fourth the XX% contractual During rate. we quarter, interest collected

of XXXX. other XX% loan risk of declined rating metrics, better, three the in our a quarter our terms third had quality of In XX% of credit which or portfolio from

migration view change proper downgraded to four three were loan outlook submarkets. one This business their from respective to on due negative property and our of which the of office loan, reflects primarily their plans our macroeconomic mixed-used and respective one

$XX.X our increased during XXXX stands total and XXXX. our our CECL, the total As reserve at about we or by total million it fourth year-end $XX.X quarter X% reserve million at loan CECL of of commitments relates to

of cash investment management post recover of approximately we to successfully our by in our capabilities resolved XX% in cumulative in January activity Through located backed XXXX, we residential property senior a asset to the structuring team, able a this loan. quarter loan our California. were end Shifting and experience

expect in take basis, the $X.X realized first of a we loss On quarter XXXX. a to million GAAP

the GAAP loan. expect a was year-end the This as of amount, net XXXX loan with specific material held we XXXX. our connection do the only resolution this asset of quarter in five of in However, this not same loan at we reserve as year-end any loss XXXX first on in risk-weighted

by backed and properties XXXX dynamics market of earlier, one Since including by experienced loan mentioned that some collateralized additional mixed-use property. driven three loans broader senior by the two an year-end office maturity defaults Bryan loans

have different for is loans, each the we paths engaged a of team highly of of While financial pursue with outcomes each our maximizing situation. these management asset goal three to

confidence and stems capabilities experience and seek maximize our Our which from of situations in as outcomes. underperforming provide strength sheet, flexibility managing to we balance our the us and should liquidity

X.X million a very provides debt our our amounts of sheet additional facility. of more position amongst lows the remain available revolving than year-end capital for us draw We of and in peer our stability. debt-to-equity including available cash on $XXX XXXX, liquidity And of as group us to strong with balance and times ratio strength

share, common well Finally, of as quarterly a morning, we continuation dividend dividend $X.XX per of a announced this our quarter of $X.XX XXXX supplemental regular common first as per share.

the over remarks. with to some let back turn for And that, call Bryan closing me

Bryan Donohoe

Despite distributable Tae-Sik. markets rates earnings great. and dividend in and across volatility strong Thanks That's changes credit ACRE delivered coverage. significant rapid interest compelling in XXXX,

three are that positively for environment factors navigate key there helped this successfully us XXXX. and believe We position us

strong level The operating expertise. of property platform our and capability first is the

is liquidity sheet our of levered is financing. second use the balance The and our position. a strong third non-mark-to-market And low

for also trust that entire and have saying the by support me their to and in grateful team hard for confidence XXXX. Ares dedication our Let like company. demonstrated are their thank we of in to they our investors work I'd close and deeply the

I'll line operator Thank that, with questions. for to you. And the ask open the

Operator

Thank today first JMP from you. line question from the Our Steve ahead. [Operator Securities. Instructions] go comes Delaney of Please

now open. line Your is

Steve DeLaney

we noted off everyone. with, Appreciated start meaningfully comments. fairly shrink actually that first To quarter. your Hello the Thanks. did portfolio the in

of million so shrinkage $XX $XXX -- and a of had of million originations you of over little about think I a million. net XXX $XXX repays,

XX% of So that portfolio. was the

from about Thank chunky we it but standpoint or I looking of in size? the more a and current modeling it be try you. portfolio close can to know we're goal cautious relatively shrinkage, we that out your or period. to is anomalies, expect can the even things this maintain continued XXXX the as So some think to to mid-XXXX at end be Should

Bryan Donohoe

position enough be started seen today for enviable arch to then here environment positioned get attack to a one as what can believe is assets well of in for wouldn't past identify, is Yeah. as I Steve. I that highest of capital, sit having we've I obviously of cycles. to as or Tae-Sik -- defensively couple a liquidity an set relative over candidly Thanks both values some values jump that pretty and in don't point we of the to that I best Well, will question that need the the we think think relative I'll data

positions but to in to rather point it's that to take we of So very idiosyncratic advantage risk think to I market. don't continue fruitful to positioned we're shrink, expect the a portfolio something

Steven DeLaney

loan given that That see guys you about loan the upper that question. great office, opportunistic, Thanks into for the backdrop Bryan. the investment Midwest. new of surprised my your lead million. Does chatter was office into in you one bit make a being next this noticed made on to about we just might an were you the But that's chose to and property caused attractive your quarter the portfolio? that an loan in comments tie to all what maybe think a be We $XX

Bryan Donohoe

absolutely. Yeah,

I return of building that prior are generally made see -- borrower we look there don't really an we to we us. as for on that of this the debating we noted group, continued by could right? infusion asset certainly profile touched industry-wide. I in as and the the think and office footprint cash quarters, time, there's an – attractive assets are going one-off cash But increase headwinds I you office see industry continue as think think I plenty you're think spent to situations our over time in attractive but risk flow

that think doesn't assets but be aren't not I successful. headwinds are mean will the insignificant, there that

Steven DeLaney

Got it. Thanks for the comments.

Bryan Donohoe

it. Appreciate you. Thank

Operator

Thank you.

from Please Your line the of go comes from next ahead. question Jade Rahmani KBW. today

now line is Your open.

Jade Rahmani

Thank you much. very

REIT as experiencing credit broader reserves overall think insurance that characterize the a consistently trends Are and widespread the banks you In debt credit? been and believe you well one-off the this have and in credit seeing do in loan life increasing But would uptick mortgage number same? that the within Do of sort of and the an terms estate or an how as environment? seeing space, of you real experiencing are mortgage fund taking CMBS defaults. maturity we're REITs companies focused downturn is commercial you

Bryan Donohoe

eventually Jade. is it. base real the uniform factor we is say foremost I'd question, in first assets the years What back benefit good cap stress rates hurts and you increase of lending increase for also from when certainly right? LIBOR the types coverage rates have rates, a that XXX is from I think throughout well. system all basis going a saw lower obviously precipitous the and as appreciate two, It's perspective, so point I three in a but in estate

to sector in over the to will I think you if available lending through you point as private for or you REIT some some Tae-Sik anything see might want the if different. fee to I more that these the bit advantage obviously see I the is a But the CMBS active that you with could capitalization asset add And might turn the of let is of as without one respect management think us well. space me is to mortgage issues. loads work you to --

Tae-Sik Yoon

movements the maybe for increase of obviously the drop in are the seeing in in is who are most given points. Jade, now the to just Bryan sharp Yes, what we're impacted I dramatic are some interest being the rates. impacted and rates volatility the that most think, ones on borrowers your to by rates add

maybe execute also as different have certain on happening bit example in just interest maybe what We're business terms for of into we that a again volatility, define in market who more of borrowers where but a more harder rate seeing to markets. office plans utilization a challenging second coming are category supply not trends little

interest rates. challenged then have or are again rates really are business really difficult don't challenges And in and primarily plans by I environment. impacted difficult So more just more are in trends seeing I by those a would those we're but execute changes of directly more macro changes those general just that or to a say that buckets bit say interest challenge that two in the

Jade Rahmani

are five watch risk of can you funded the considered loans the I Thank that those much. there funded and CLOs liquidity and The ACREs are would you four credit very capital? to within facilities be list? that talk percentage in available And believe and the would what from on be those requirements rated

Bryan Donohoe

to... want you do Tae-Sik Yes

Tae-Sik Yoon

And we question. finance asset when know you goes when there's our asset liquidity absolutely. capability wrong Yes. a it's and the if are a with obviously that something very, Jade careful as Sure. we resolve asset making that you, the No sure know that very with Thank portfolio about that great we Bryan. look through that. have an that or that we challenge we to

So our we have obviously certainly one is we warehouse in amount deal $XXX CLOs than of available today on have uses we that more of to remarks. liquidity loans that the potential the us either And that mentioned any lines. the things with of potentially that or opening of one of is our million to in one

with some five, on handle that situations have warehouse loans five, And again, status status situations. for situations. in been the have are the to those we while, are clearly that had or working ones the have or a those So on we those in loan either had status four liquidity we one the we unlevered lender the that

ones mentioned in situation, more that as diversification vehicles it's loans mixture year-end. some we CLOs. default Again, utilize. our as But, recent that our given warehouse had three maturity of again, well that in a The have the financing of that issues, lines the are or liquidity since either we

you two know, we different As have CLOs.

lenders and that We different vehicles. financing we have diversification line those have make five we sure by

to we're risk-weighted of in Xs our the good be that pretty this leverage point. to senior deal spot So at able a loans are with

Bryan Donohoe

it. Maybe, question, one Jade's just thing add to Yes. some just specificity I'll around

think those are that And to as of can Tae-Sik was we've loans You unlevered. half four approach the I assume taken five speaks outlining. consistently or roughly risk-weighted

Jade Rahmani

credit facility? Unlevered including and CLO both

Bryan Donohoe

That's correct.

Jade Rahmani

you much. very Thank

Bryan Donohoe

Thanks.

Tae-Sik Yoon

Thank you, Jade.

Operator

Thank Please, the Rick comes from today from The go you. Shane question next line of JPMorgan. ahead.

Your line is now open.

Rick Shane

question and everybody taking Thanks, hope well. everybody, my is for

on we K, fourth the what the look million quarter is when non-accrual. were So $XX there that, end you disclosed of the at at

the and defaults incremental $XXX As I'm if discussed in million of curious, million on on of beginning the additive to call $XXX this already $XXX that the an -- is the or you is the non-accruals, there's that also quarter. $XX K, at non-accrual. of million maturity this of some million

Tae-Sik Yoon

there. Hi,

I Byran. will So Thanks, -- Rick. yes. Yes. the take

that that So loans as does default not include the are any that we XXXX of loans first the of into XXXX. non-accrual XX/XX loans in went mentioned quarter on the three

obviously, will, to evaluate we So continue those loans.

subsequent XX/XX XXXX. evaluated we've Obviously had event to them certainly that. of now a We as

your non-accrual it. of we So evaluate three so as subsequently loans included that question, the the will But into XX/XX answer to none went loans of XXXX default.

Rick Shane

like too not accounting $XXX Got doesn't read will on it. the And to I -- be by on sound non-accrual. cute here, but it non-accrual resolution there's end, a be defaulted million for quarter when any unless those discretion that there's loans policy, correct? But

Tae-Sik Yoon

still of not that look Yes. at historically are will situation. some we're we each Again, I loans that Basically, put we have and non-accrual have -- have in default on the paying think, loans interest. been

maturity any and other are of defaults, now And, three now end in with again, And to the there between think of will forward quarter each well situations. that as loans. so certainly I these time evaluate is going the we work loans as

the work each each we unique. Again, quite situations. is will situation to three But with continue of

proper very I do carefully quarter. work in today. too make or of loans we estimate So end those potentially situations maybe But, the certainly non-accrual that of the the to three through it's some assessment default first -- are make will quarter status a early three think again, forecast and of end maturity at of sort all at

Rick Shane

it. Got

that There's accountants. nonaccrual works visibility placed yield. were obviously a that. potential impacts moving $XXX outcome an Okay. there That lot about were to potential think There's out discussion about assuming an assume -- said, all on parts in quarter That's of the that if way to to million, the a contribution with we That -- from there. there's roughly are it? right that million, Is X% interest $X perspective. to they income resolutions

Tae-Sik Yoon

our of account you own certainly, roughly and rated we outlined sheet, you right? particularly, we loans. its think be the is as calculation. yes, tell sounds will believe of all I we loan, lot think to interest will can those considerations the that mentioned, right you And these have that outcome what I And about rate. the Yes. a scrutinizing each I I ultimate on But, mean, attention we'll And think into three included. certainly, four paying loans, take again,

one think, situation. attention. rating individual very sort opening I thing these a warrants each remarks, rated is and a loss, loans, four particularly A one loan higher does indicate doesn't that mentioned but his in that four scrutiny a is Bryan it indicate indicate that deserves nonaccrual, of and doesn't of

from up I these strong very to team, suffice given it and that of think loans sort what quarter finance to moment, we attention loans the we there say the leave team, believe it's management and So, going just classification of But we very, attention appropriate getting our accounting our are closer is make from very mid-quarter. forward. asset will these at appropriate end this about, should strong that, decision

Rick Shane

Fair with with intent. your interests different that the analysts, sell-side involved call resolution enough. appreciate I all fact the of not on out of negotiating probably the the

Tae-Sik Yoon

Thank you, Rick.

Rick Shane

guys Thanks,

Bryan Donohoe

Rick. Thanks,

Operator

Laws line open. from My is Thank today Please of the ahead, your James. now you. question line Stephen from comes go Raymond next

Stephen Laws

reserve? see specific that are To morning, on through in material good Good. QX reserve events be or QX? will general, up the in comments. flow as a much expect Rick's as increases is to move afternoon. in far you reserved to uh How for Hi, we we the -- follow that -- in this QX, as quickly, its do reallocated should going How already

Bryan Donohoe

if here, all started get right. Yes. Tae-Sik, why that's don't you

Tae-Sik Yoon

Sure. Stephen. Absolutely. Great question,

residential $XX of that loan year-end, just the that that at is our reserve rate CECL close to four reserve, carry change California, related was obviously, is that balance year-end, mean loans. $X.X that $XX million reserve. down. when resolve we $XX XX% we did that overall, at five four was thing as that mentioned, in the about important million isn't it level rated we five think recognize to under It the up to five out million that reserve the or of resolved doesn't But to or five tied alone of or look million loans. was at I total and to four or We or the rated one going is

we But allocated focused strong from to four is our majority and certainly, that five-rated derive do the believe of is on reserve a or loans.

is risk connection the amounts. so, there mean doesn't And there any change. between clearly a again, reserve But and ratings the won't that be

the companies California. In our only from $X.X which X. realized That specific specific, again specific general to migrating terms had one reserve was the Obviously, far a in in a once that rated came like, residential reserve of We loss carried the close to thus amount. million specific loan we've resolved was very reserve, asset. was it against

rated loans, assessment. too quarter continue So, evaluate four again, classified its of we year-end particularly to not believe we any we four-rated any Again, early any warranted. on think or in forecast XXXX, really But to loans again that I that forecast of to But too any or migration believe do give all to still otherwise. through general further for from early I is see specific will you four general we or to other if basis make have it's reserves think the to as from certainly the insight life. that five any it's appropriately specific there are those was the

Stephen Laws

on that the loans one a office loans believe in about I have three how mixed in you you four repayments in like -- office Do or two It use or there and looks Tae-Sik. for went talk four or into those of date QX. To the loans office the those comments, Can maturity of base non-accrual loans exposure, one, expect discussions? I of office two loans Thanks you guess, of know extensions QX. those three exposure? your I Kind modifications? it's expect largest was touch those do

Bryan Donohoe

Stephen. question, Good Yes.

working think we're through I folks. dialogue and with in we're those

we're what said to to they're of point we three outset there's And profiles where not business bit their at you'd think enough normal things a I working those course each of of normal plan in are discussions set some this through in loans. a it the to I necessarily in to occur at ongoing. terms expect at dynamic, and think be similar will point. different data have the but with They that

Stephen Laws

great. Okay, Thanks Bryan.

Bryan Donohoe

Thank you.

Operator

comes Please today Eric Hagen from Thank BTIG. of you. The next ahead. line from go question the

Your line open. is now

Eric Hagen

is well. afternoon. specific seeing on in the think you Thanks. I where the debt Like loans, business general I Can the of of get weaker just funding additional the of an and kind Hey. are plan the seeing, you those hope noted you're how component downgraded guys much in Good In you're a what yield there? associated asset in loans affects or more general? with you business how deterioration value the plan.

looking how interest thinking point variables maybe at you're rate from then widen put about department? of what that either you And more risk Thanks. or that some some are to forward? hedging on hedges in potentially up this are Like the guys

Bryan Donohoe

a said remarks, question. to headwinds office, start right, in the plan the Eric, spirit on you. thank then think latter business of bit a we're the the in I your share Yes, Good the in Tae-Sik being I opening as sectors and point little obviously, degree. certain mic respect I'll just with to the with the question.

taking And of and then and so renovations. industry our certain the what costs is that associated throughout function those means supply plan issues of is longer component increased or instances business either with value-add in renovation broad chain

longer. taking I general, know, noted guarantees benefit have industry our I like while completion those And business you things associated the are that at would But in with plans. they think As underwriting lower is benefited were some the lower versus a simply by structures carry for time than of where cost higher earlier period of LIBOR of projected capital SOFR, these assets. their what times

side, did what intervals that's to stress towards. Tae-Sik, you really couple But of structure in was on talk that do ago? of we at proactively with some certain the the a the interest impacts from combine So, want years we've through I slower of thoughts element when rate leasing you capital what what speaking that and our are some assets, level seen

Tae-Sik Yoon

No our Eric, on thoughts great absolutely. Sure. hedging. question interest about rate

in has focused of bit little management, match this on a right? been liability and when keep rate thoughts always I'll we Just history, have floating context on But very very, funding, brief. just that we So our want match assets, floating to did liabilities. really reason, was rates a years to large rate very, And hedge ago, interest two would not really we move. with about very the forecast XX% which direction

with were even were policy in with were we and consistent XXX rate loans, basis our behaving the because again, points. when fortunate deeply they rate XX to so fixed floors consistent funding, that have basis where floating were economically with like in match was money points such XXX XX rate loans, LIBOR technically of a to money, our have floors But assets situation we our that the we they significant though on goal interest LIBOR

So were loans. like behaving they fixed rate

appropriate and therefore behaving consistent And match fund some rate assets fixed with so very we liabilities. felt it fixed economically very now rate to are

about very to course we have into enter of very I years that interest interest which move. are not ago. rate we when would that's hedge So about recall And obviously done billion, if large rates two fortunate direction a knowing $X.X

that of still around $XXX place we that, notional third million of have today. no in hedges Of about

my million that rate basis. here there well. we we when we loan, $XXX rate fixed -- our as million advantage sorry lock curve. refinanced in addition, very And a I on secured term about am -- decide the I In able did were to think $XXX to rate voice of take And a we're interest interest low take

our continue interest forward funding headed, right and base. prediction match be XX% think of say guided to our policy a really rates now, would rate again, are I liabilities. have we where but our I asset floating not we'll of by going And assets

And will a future floating so liability think focus on rate I we the base. in

Eric Hagen

Got very Thank much. it. guys That's helpful. you

Tae-Sik Yoon

Thank you.

Operator

ahead. Please Rahmani Thank Jade from today a go next you. from [Operator follow-up Our KBW. question question is Instructions]

Your now line is open.

Jade Rahmani

Thanks.

a I think, I value $XX there's -- clarification, value that the $XX to as wanted around Just the on I check quick loans said, million. million Shane number. Rick year-end. carrying around of of non-accrual thought was was just

Tae-Sik Yoon

think Jade, I it's good a point.

So million. is California that then, had a loan $XX that's been And residential the has residential resolved that million. one one loan the LA $XX asset million, again we of Angeles second loan the $XX subsequently about Los

those are non-accrual been but the three the two the year-end. that remaining. at loan Obviously, think resolved, California loans on were other I are has

Jade Rahmani

Okay. Thank you very much.

Tae-Sik Yoon

Yeah.

the of million XXXX. think I $XX year-end as was

And some thought, of but there XXXX. so maybe $XX million is year-end as was it

Jade Rahmani

Thanks.

Operator

Thank additional time. questions at this you. no There are waiting

over I'd Bryan Please closing ahead to to Donohoe, pass any the So conference remarks. like for go [ph].

Bryan Donohoe

to Appreciate it. for support want forward to we time I you just everybody. to today. on speaking Real continued next your appreciate their We And Thanks look Commercial Estate. thank everybody again Ares of our earnings call.

Ares Commercial Real Estate (ACRE) 15 Feb 232022 Q4 Earnings call transcript