ACRE - Earnings call 3 2023 | Ares Commercial Real Estate Corporation

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Operator

Good morning. Welcome to Ares Commercial Real Estate Corporation's Third Quarter September 30, 2023 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded on Friday, November 3, 2023.

I will now turn the call over to your host, Mr. John Stilmar, Managing Director of Investor Relations. you. Thank

begin. may You

John Stilmar

the and I'm for CEO, joined Tae-Sik members our everyone, today's Bryan us conference CFO, of other and call. today Yoon team. thank morning, joining you on Donohoe; management Good by our

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

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

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

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

Bryan Donohoe

everyone. morning, good and Thanks,

continued previously. execute third on have the we quarter, goals primary we During X to discussed

levels of moderate maintain to leverage. liquidity First, we and intended strong

loans originate structure that to our our the of of wanted assets. Secondly, earnings. lending market value would advantage we selectively maximize And we wanted accretive the to underperforming to and finally, new our liability to take continue be to

In respect as we rated and to progress the modestly level general, stability performance of the declined credit of made loans goals. portfolio, With these universe we defaults X and we are executing experienced in pleased our against general with the have X quarter-over-quarter. risk

interest real believe balance approach which dramatic the in will leverage sheet market. operating market. greater We favorable today's the for values. in and of While strength as and for has still higher of selectively new in of investments rate advantage our estate construction, ultimately in distinct benefit real our Ares reductions impact environment as today's well interest underperforming of platform to is the attractive leading income, further gives the and estate moderate future. Specific best commercial a broader earnings investing This lending the we of values result to generating net cost our served deliberate us attractive believe with uncertainty to our addressing enhance longer fundamentals and of drive the has rate believe ACRE, in for we the strategy headwinds environment to is in commercial higher while navigating support capital also dynamics today's resulted economic supply capabilities

loans. approach actions our in underperforming took maximizing Now we some value discussing of this and of let spend quarter the me some time our

our collateralized as in balance the REO we loan quarter, foreclosed is on located loan million mixed-use This by now $XX sheet. facility This on Florida. a held

has is to the is cash office of loan. leased we equivalent XXX% and a continues roughly is an a As the this X-year a the reminder, aim to a AAA-rated remaining. interest and with about retail mixed-use well at space manage in generate the weighted even of flow that years. tenant average pushing retail term average to XX% leased Tallahassee property occupancy property occupancy retail This higher. that over earned leased actively will XX% weighted we, of office term and X is is income is The that as to a with space lease where approximately also Ares, approximately continue

property that It's hold the not important and to when point property out recognize we an currently impairment did foreclosing on the unlevered.

business leading support plan. As opportunistic and own our capabilities execute Ares one of the add at value and ability managers, real to estate the this

operational property, our are flow capabilities Given cash of profile this strong optimistic asset. we and the the value of balance position, the about sheet long-term

a loan discounted exited through quarter. million also a this loan payoff We $XX hospitality

complete flow we the of value, believe to this cash volatile well it interest as plan the best profile the property, into as of this ACRE's the in the loan was higher-earning capital redeploy future to Given business view capital investments. and required exit our

of sheet As balance and both illustrate, maximizing of with these allow asset to each platform loans position goal take capabilities unique our value. the to strategies us

in self-storage. to sheet invest market. on secular financing allows classes performing as today's such focused multifamily balance position opportunistically industrial, remain also and Our drivers, strong us with property We demand

with originated example, newly multifamily in Cincinnati, reset property spreads located city A located of loan-to-value, loan this XX% $XX For and part is This property property valuations. an We historically property in that local affluent leased. levels dynamics. Ohio at of supply we compelling senior Class financed demand quarter, a million built past lower this well wider modestly is a the backed by and

into and in year-end, on forward out on some first further further loans. office year. With to Tae-Sik, $XX more into let's extend quarter, office but expect that, we well fourth in of to cleared reducing progress of are than principal walk a combination capital to quarter the principal quarter million we position. the paydowns outstanding highlights of may and financial exits, and through next make Through fourth balance our the exposure and of that portfolio targeting our be Looking our loans details

Tae-Sik Yoon

you, morning, and everyone. good Thank Bryan,

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

our or $X.X impacted in realized about per a loss increase which was was the share. quarter. or $X.XX the was Our $X.XX third XXXX defaulted or $X.X impacted CECL loan earnings share million per of common net hospitality that by GAAP third common quarter $XX.X the common share, million Distributable in provision for income on million the net per resolved was $X.XX by

to balance portfolio. loans. which We with senior Turning XX% portfolio investment of of XX our ended $X.X the an for quarter principal held billion, were a loans outstanding diversified with of

and During of loan the repaid the quarter, as hospitality including we $XX as at self-storage million par. $XX properties that total well proceeds million third were of by repayments, loans industrial backed from loan received

risk XX% had X of X metrics, the reduction REO. was which or portfolio The converted risk XX% a such and In rated improvement terms were driven improved of as rated loan to loans our credit rating of better, either loans or quality from in X the X quarter. of resolved by our second

new of a rating risk office CECL reserve with the X downgrade X unpaid of quarter, a risk XXXX. During to reserve, total X quarter. risk to loans specific million from We of a and in no third rating rating loan did or X quarter originated X $XX.X third $XX X a from our specific the increased a million in the $X.X this we principal established by net reserve overall of balance Inclusive million. of a

of total outstanding our stands about reserve $XXX principal now Our balance. CECL at or X.XX% million

which to and the of per total share our of provide components further $XXX equates our $XX.XX CECL details per some million around $X.XX me book XX, common common impacted as of Let value September share reserve, reserve XXXX.

$XXX the million the in $XX $XX X of XX% the reserves, XX% remaining loan against we in specific $XX XX% As million, outstanding rated which in balance million risk million reserves previously rated quarter on principal balance accrued rated of representing have risk balance loans, loans. of and mentioned, is compares of X Of the to $XX equates the total million X X prior. outstanding approximately principal of risk to

] total of or The a loans better reserve is investment $XX XX reserve points billion of basis risk about ratio for of final rating better. held our the $X.X X or with loans against X held of an average million rated of for [

remains for market as September believe While current XX, takes account and outlook we XXXX. the our macroeconomic appropriately that level investment CECL market for of conditions held loans the challenged, reserve into our

office the XXXX. risk be loan continue resolve which that property, million on this will the respect or million of realized loss is in to rated target result quarter $XX fourth quarter $XX a X, of we XXXX to first With to approximately in possibly

end, Bryan As moderate end. to ratio for earlier, $XXX draw liquidity million over facility. capital net amounts our and had of referenced we at available we debt-to-equity in working and X.X quarter cash At us under maintained quarter significant

liquidity. to unlevered, are addition, we which REO holding increase we believe further In our can be financed our

our $X.XX declared per of we fourth Finally, share. dividend quarter

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

Bryan Donohoe

you, Thank Tae-Sik.

some will While likely this longer environment attractive we it will rate also extend and present challenges, unforeseen a present investment highly believe opportunities. for higher cycle will

leverage moderate healthy Our us ultimately these shareholder well positions to of and returns. liquidity dynamics and attractive deliver navigate level

appreciate for line? could the line happy open questions. we Operator, please always, call the our you and As open today, we'd to joining up be you

Operator

Instructions] [Operator

BTIG. Our question Barcomb with first Sarah comes from

Sarah Barcomb

more to So you X rated that mostly out a and about will book? California loan. that? mentioned X Or on result X office resolution Chicago is includes that refinancings? about from that between And include be targeting QX. it office you're should how sales asset QX Does Or in we the $XX or balance And the of the those potential loan? the cleared the like prepared million rated office sounds in to think of remarks principal that

Tae-Sik Yoon

quarter. quarter. of And the we loan target may in the that quarter. it for as your Again, office made up include But loan we Yes. fourth an is in on now, very slip Yes, for other million Thank believe much the into targeting California, office the that we Chicago for the does right first $XX you then mentioned you amount is question. resolution said. fourth are

Sarah Barcomb

contract portfolio you I was over We fundings way growth repayments. outlook it saw loan about the due to net next Okay. foreclosure Great. bit in outpaced And like the quarters. portfolio could your few sales, regular the looks for the talk hoping actually, new a but then

just new think for to outlook and how growth. investments on curious continuing any So I'm should make thoughts your that about net for we

Bryan Donohoe

question, Sarah. It's good Yes. a

think be. exactly will the cadence tough to what determine I

set little seeing industry in volatility As rates of good we prepared do we in across I rhythmic us opportunities. you're surrounding it's we the a the But less have given the said that a us. think see, remarks, and

situations the to arise. yields portfolio opportunistic. use specifically, growth, when we do we'll And balance the but whether we the sheet to to to Tough that this be continue be will with continue we enhance we'll associated that most continue I those investments to still -- at think point legacy liability make. to structures determine quarter-to-quarter So on leads have we'll opportunistic

Operator

is question Steve next Securities. with JMP Our from Delaney

Steven Delaney

Good an returns compare to if the you're to see you look would new of you capital. able the deploy opportunities today loans of more that to at setting, I'll we levered environment. normal terms versus XXXX that I'm you're in curious call of type I you obtain finding your XXXX a average which were of how a environment, sort half first guess if back

Bryan Donohoe

question. higher It's investments a for clearly, new good is today. I'd bar the that say

where So of were excess you can expect time. to in that see at those point levered in yields they

back of tailwind One more margin and which and our we're the lending right whole to banking to or of net that more a and get is the warehouse the appetite gap pricing seeing now is between investments. factors think loan interesting side levels, board, I counterparts repo the interest from normalized the on see new more starting to some across for

a So with in maybe those historically. space, degree can scarcity as better capital though, dictate capital that, you'd than of the given there's subtlety some to the beyond terms expect,

that said more impact leverage valuation certainly, So the starts basis. to as Steve, makes and just attractive it prepared we the remarks, covenants, reset in a

allow in that invest an it. for certainly to time So attractive those circumstances

Steven Delaney

X conditions that the lenders well. an next interest Interesting would rate ahead with year for evolve be of opportunity the as outlook right or improved may seeing the we those over

were there's answer there. long you pretty a a out One and in I position. So final all, I your sounds in but about lot remarks. good was Chicago I mean one, had you of distress think, property, a just to don't need like it's at you're just a that take talking it back strategic

first to deals the workout lender going Some up or find some and and end area. the a back former --

even out seeing what is you call higher the rescue are you I'm of curious et any cetera. may opportunities guys I the opportunities, balance, if property, capital yield like would cetera, where you et loan

you equity could mezz with unless you Is out get unique also given would is slice of in senior open to banking a that would Or come I for could a You playbook for these more a little think nice your and that mezz encourage bridge a the don't like to you of the bit times, up do that you like that a type market? thing lender? as see of it merchant deal.

Bryan Donohoe

Yes. great think pretty most part, say for the gap that on the any we focused thus of we that And or seen nature type structures, the widely those the throughout opaque the us I uncertainty, you've volume call. mezzanine I'd a or that uncertainty heard industry. outlined It's really point. certainly, market it -- the pref yet. far, And on financing haven't the keeps flexibility in

a the broader financing space opportunities But for want we of open the focused remain platform, think continue best-in-class for mortgage although seek that been talk a markets. the first I idiosyncratic. degree those up lender conviction our times So do playbook a see than lender it's the that across the we we'll estate and and being around to consistently throughout core that of rather is pieces in will Ares about to high mezzanine. on charter to out this, like GAAP real

Operator

comes Fargo. Fandetti question Wells with from next Our Don

Donald Fandetti

go profile offshore-type do alone, it sell to how the the Is the bid? buyer? what's is you When And investors? of

Bryan Donohoe

there's of base the say not that's a that going conviction Don, location. sector of this enough that or to the probably market in level to one on is participate the or to way set some other. the going data have Yes. Clearly, investor trend

enough basis have demand, of buyer as where advantage to of and one supply reduction general, asset you XX, familiar kind touched another. In that take are to and of as the it's the with part world we into on in unique no trying long-term capital consistency And coming to with is But expect it's XX to to parties don't reset that forwarding say of or point from we coming that yet. especially trends this of see supply So that terms going of the dynamic. fast months. see we from is a in an

Donald Fandetti

Got and if X -- do a how done next your the how then the over impact does yield it. XX is eases to you that bit, And XX-year business Fed months? the

Bryan Donohoe

based, that least I'd impact What we'll that get that can of think I that I can stability, free are values assets become consistency say across capital and people if and we part If move to with think in rates, clearly get underwritable we think forward. the up more is resetting I the respect to at sector, some on allow think rates. I

see you So volume and if digest I think think remain they you'll foremost, -- be of rates able range-bound, to you'd first transaction up. I kind pick and

Operator

comes Jade from question next Rahmani KBW. with Our

Jade Rahmani

been flow For from bit me, important is one the cash it's little of and the operations, running below dividend. pieces a

thoughts your be this would point? at what dividend So as to sustainability

Tae-Sik Yoon

Jade. question, the for you Thank

very in are some I'll a carefully. referring our to versus that reconcile seeing. help of operating cash is extremely cash differences that statement monitoring Now we that you're And our you an Maybe things Jade, dividend. flow financials actual out activities our question. just from may point our are important the flow few obviously, maybe probably

have about as loan. under that received, as part $X.X flow again, already already that it's example, obviously, you million, So origination of third add, $X.X million. for cash $XX.X But quarter at operating don't flow. we making our $XX.X for amortize net fees is example, I a actual you around for have to we if of cash addition think example, in cash activities we XXXX, And adds it that that received think because is would but provided that million. cash look And statement, the by fees upfront, million we

thing really the up million not at for quarter quarter, supplemental, quarter the which the -- then obviously included is declared in for third $X.XX you're about cash paid you'll in dividends look think there. And see the flow, third if out $XX I again, was So the declared point you for is payable to from to and second dividends just that our of dividend. third quarter, which the you'll see to the was second again, what dividends kind

difference So you be where is than a I the you smaller started that might maybe seeing out with. think bit little

But measure very is cash earnings distributable we do our a flow. good that actual think our of

you'll X actual We our distributable a have operating I think think when that, those amount difference the probably there's of biggest measures, account payables, the cash between the loans. biggest between probably flow limited again, of fairly be some earnings. versus of payment-in-kind differences see probably difference taking into some receivables, you that would pay but we timing receive

Jade Rahmani

great a answer. Okay. That's

And the cash And to realize earnings. the on do from it do income be the of they also about thinking accrual the And distributable to going based taxable REIT consideration earnings? is which operations so the any when Board performance? I nature is dividend, the give flow statement, triggers

So piece. I appreciate around commentary your origination the

Tae-Sik Yoon

Yes, discuss present We a liquidity. great we Again, balance to discuss credit, flow Board. discuss that's discuss from all the we we we cash this operations, information question. we discuss outlook, sheet,

So X%. income into compare the our And the million, note just if quarter, $X.X factors setting income that think of account for to dividend. our of is by declaring around are around million. there One that the around PIK totaled that you it's are it whole against I taken for host Board quarter about thing a and interest $XX total in

considerations So setting the is believe, by again, manageable into think in Board we we a account that are, But number. of those do all taken dividend. the

Jade Rahmani

could on one. similar. the office, said be at decision Tae-Sik on specifically point, just would I If It another loan this sales Okay. something ask

management. CLO be to asset just of or management CLO decisions? liability your to of -- just those the wondering repo is deciding and it's prompting out proactive? buydowns out your So Or it potential related Are I'm buyouts if lenders

Bryan Donohoe

I perspective issues of going in. But a whatever think out-earning kind of forward. it certainly, future from inbound asset liability certainly new cash with may values by overlay resided starts redeploying on have and investments fundamental potential of an any that structure kind that there's

that valuations really a down it structure. view office comes alongside specifics or specific to the Jade, of liability So the valuations fundamental around asset

remains a really it basis. case-by-case So on

Operator

Our Laws Raymond with from next James. comes question Stephen

Stephen Laws

points of about you're kind prepared the think have, concerned and was Kind to it stress ratings downgrades, And how X. Tae-Sik, during focused to really those rated the in be I of wanted you just would loans, point that X those of your when mentioned you on to confirm level, past color that. new the in no a X and great. months about the migration? Kind think are what not I of X comfortable stress in at a maybe think higher that portfolio also negative more rating I still by X concerning to do X on? you the next that percentage any material you're XX think remarks

Tae-Sik Yoon

Thanks love comments. start Sure. question. Bryan would to add and for I'll the have my to

So migration have did X do mention to or second for migration the X were a to that X. correct, we negative loans rated We quarter. X X, any not from from from third quarter X negative loan

terms very briefly just start mean, Bryan. outlook, turn In to really it over I I'll of and

we assessing the and that did loans. to tell would into set we future want into today, but do account very every we with would you do assessing to we in carefully the be take we're macroeconomic I the account, think, taking I this volatile that? quarter. it's an Obviously, that which our what Bryan, again, are know in add hard quarter. to exact markets you But loans forecast environment is each all we

Bryan Donohoe

all time echo in the majority a of We're outside I business really asset just is there. our and in in with real uncertainty clearly spending time vast side the the kind sharing. of that, it good on bit sponsors Yes. management dialogue of the we're but I'll that of factors taking think out all collectively

some terms that be the seen felt real or impacts the being lot risks on balance industry. other, of the impact one in we of in will positive dynamics see So still the for sheet and and rate really values. when that earlier stability remain cognizant And estate we community. the as of rates certain supply of to movements a way discussions, borrower of clearly, statement some income a the But of markets of commercial

aware resolving and throughout next and each So I'd situation the asset focused can best few risk say it on individual as quarters. we

Operator

comes Instructions] with Shane question from JPMorgan. Our next Rick [Operator

Richard Shane

I you quarter graded do investors, in degree against transparency, appreciate so clear both quantifying analysts being loss creates very to a X are it for of the thank specific reserves individual and the loans. want helpful highlighting and say that. or terms also potential about greater what It's the much fourth and I for of the transparency in

this bit an liquidity couple I talk comments a paths X little What be potential can REO. wanted can unlevered. there. is There's you courses there that to really a -- there that -- is about X And now unlocked are here. the I investment were that guess of that

to that's unlevered. it to can continue but roughly And run this flow is yield, sounds the inefficient. You the like somewhat comparable cash

You order than get why guys sort ACRE really property, that's business more go income in kind property, not do, third, core really lenders own to of to going curious banks model? this be it lien, I'm and be finance company first you and lever to business. wind generate you would sell whether that lenders in actually the to that out way the leverage. Or do your lenders to where environment up peer the rather a in the what could of prefer core on you And not this,

Bryan Donohoe

Yes, us, came allows And great hopefully, balance available and question. it's those all flexibility. are through just of us that remarks sheet to a that in the the avenues

available on. the there leases. this quality credit and are of cash upside we leasing of some terms is the tenants fixed and may of in to we income as right? stream duration property some like there respect It through unique a touched that flow with attributes, the management be I has But think think asset, the

fair a would if getting we looked be what then parcel we and historically. absolutely, have to -- would think part we sale what we're with do value, think I

perspective, senior debt go core our it that And fixed whether of competency. rate be rather we longer-duration mezzanine fit a to us, better does participate floating, takeout right, which a in because front from than allowing into would in

was these point our ways channels are available the hopefully to profile So one you the arms But it asset, getting enhancing of foremost, cash the being, put around that us. all and and first in the resolving forth. flow

So have specific sorry, don't I more a path.

is it I think like we what is the us all available for to best now, right that about company. it and we'll what's do

Richard Shane

Got there more is in it. fit I that, or No, actually, may appreciate, there fully is now that something of is different financing the for asset right a And makes not that is maximize long-term some uncallable guys did you there, interesting in which see sense probably, that locking to probably type value. an in may better in this if because fact, qualify value financing. ways, not long-term way

Bryan Donohoe

absolutely. Certainly, key consideration, that's a

Operator

KBW. Jade next from is with Rahmani Our question

Jade Rahmani

side. Ares know equity on does lot a the I

I So your to thoughts ask wanted multifamily. on

you rate with of as about nervous a do under signing maybe opportunity? multifamily from you there? significant price are pressure behavior Quite If Or merchant X% REITs lease in view have in credit concessions or and the up X%, floating this to attributing order are an change how market rent you update. the can who projects, increasing they're some October markets? But something Are to of else. making more viewing an you to their growth, give September the a overall few lease citing Sunbelt new so-called loans in that respect negative multifamily to developers the been

Bryan Donohoe

question. great a It's

in were right, instance, are that. lender I landscape that exposure think a We to for growth of are you're couple rent have the seeing beyond lot don't that what acute seeing enjoyed would a outsized a and certainly There of that underwritten have like Phoenix, years. markets past there, dynamic for out oversupplied, rents a the we reduction in more assets those.

you've maybe And that the little purposing rents market, digestion so supply. in where seeing dip the where had normalize, we're of a phase you're bit multifamily of

in think the you're here funds. And look seeing, sit fast right, see I capital little cost you and a the you approach forward a markets against long though, we loan the to reduction with patient you're we're based to that resetting. low term going today, double-digit into a that's of interruption valuations assets if if bit and that construction borrowing supply on

So to to a lower go markets we cognizant are the as see and are of at that interruption, But back levels that phase than months, housing of on in that based the capital certainly, over the the shift supportive. throughout you remain digestion XX long-term deficit next we're supply historical XX and fundamentals really certain seeing the we country, supply markets.

So it's I foreseeable expect TBD, bit the in this of but the a and participate future. for we to little reequitization relevering market think the

Tae-Sik Yoon

the of first mic, And we This just while Sarah that the million $XX was office question that have to to the fourth quarter. expect about I relates Barcomb. question just we asked want by in go back to repayments a

Just clarify to that bit. a

a $XX partial as the quarter office So of different loan million the consists fourth on repaid we $XX expect of that in to larger complex. of well a repayment loan million office Chicago loan, as the a be Chicago our

million loan, I that we Sarah office expect the don't loan until $XX to in that think California, referring XXXX. to was resolve

So I Sarah's comment just connection want question. to clarify that in with

Operator

to We now like call Donohoe Bryan the comments. for closing have of the question-and-answer session. reached I end back the turn to would

Bryan Donohoe

you look earnings Great. on time the Estate our with and to Commercial speaking next to Thank of again everybody thank continued support you. Thanks, appreciate I today. We certainly Real just everybody. your call. Ares forward for want

Operator

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

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Ares Commercial Real Estate (ACRE) 3 Nov 232023 Q3 Earnings call transcript