ACRE - Earnings call transcript Q1 2024 | Ares Commercial Real Estate Corporation

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Operator

Good morning and welcome to the Ares Commercial Real Estate Corporation's First Quarter Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded on Thursday, May 9, 2024.I will now turn the call over to Mr. John Stilmar, Partner of Public Markets Investor Relations. Please go ahead.

John Stilmar

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

companies.Now to may call could to of results The prepared subject accompanying CEO, our measures well accordance not performance. any Many measures of the made a judgment. current like course expressions. to like of are call a obligation measure such such an the of I want of to including filings. call, that we These the forward-looking will SEC of during our non-GAAP number risks expectation use this be website Bryan? uncertainties. in we statements Investor the accounting statements addition measures will, as press operating from update a Ares our to The remind the words or as turn anticipates, listed materially intends, statements over by involve refer statements and guarantees we not measures certain the of not used webcast, are management's similar of and documents, its These to company's performance, accepted those and and comparable principles. assumes result measures. Bryan and In begin, a by expressed with isolation market actual www.arescre.com.Before XX-Q Real Commercial as conditions identified Resources Estate factors, filed number contain in section forward-looking with forward-looking to of these these conference those should, risks as a Donohoe. in other and titled differ may, future We expects, presentation everyone SEC, believes, of earnings statements uncertainties. considered as posted can are condition, to no should forward-looking results, the I'd this statements.During at we've management's forward-looking use such substitute financial as under the release be on for be generally that These or that in comments from based

Bryan Donohoe

Thank you, John.

the earnings, progress reducing at property approximately common balance nonaccrual the outstanding outstanding further during an first by compared losses, X first to quarter, of made goal million, principal the than sector as less meaningful $XX balance of quarter, to of excluding our the we end $X.X total billion underperforming properties. loans loans of prior by $X.XX million, loans the by loans, our of million backed resolving by by towards $XXX the well to our our total By reducing During distributable the office commercial delevered a nonaccrual we of first per sheet addressing or quarter. our X% quarter, increased $XXX balance exposure and office share, as

of dividends Our to its business focus first shareholders.Let real an income more details attractive remains in provide on for earn commercial loans of now managing our backed consistent to the originating loans level properties during estate by on that portfolio returning a to and were core order loans support quarter. resolved of the me ACRE

that that million end $XX by sale was year loan California located we was held property at that in nonaccrual. a mixed-use on sold we for XXXX a First, backed

multifamily on of XXXX. a was that in $XX Second, state by of we loan located agreed at the to a property a million the discounted backed end loan payoff nonaccrual of Washington

on we securitization.Third, nonaccrual a that X million XXXX $XX commercial we consistent end balance realized office risk collateralized a by initiatives, loan fair debt down and at our mark loss a also a loss of property with XXXX. Chicago result and in the sheet $XX value FLX our reserves end held of these was As on million exited year at rated year paid

than in New loss York against disposition, higher $XX At of $X located Note. restructure, $XX million was borrower Note a end million Class million loss newly this the this split reducing of by $X we of held the As million a down restructured finally, building a B $XX balance million A office a loan City. this A reserve realized backed XXXX. closing loan and rebuilt to a And which that the was we million, principal, result $XX at year a paid between

the capital, repayment tenant by of loan, returning while is subordinate to in note incentivize the the Note In agreed sponsor. borrower the initial will the it building $XX allowances. the of costs, additional anticipated resulted note for into improvement to new the that additional status including capital leasing $XX contribute including to we addition, contributed equity contribution To new restructuring million additional This the B remains interest-earnings million our have on A million nonaccrual. B $X

a and X X first outstanding portfolio. nonaccrual principal addressing or better. of principal on balance of XXXX.Shifting now by and these or share risk We balance majority rating increased these of collateralized by billion the properties. reduced of across billion, XX% hospitality quarter our result $X.X with losses, loans of was are XX of self-storage, loan XX% excluding industrial, loans by our totaling distributable quarter The of to multifamily, per common portfolio, loans. earnings, for our the outstanding the a loans, XX loans ended $X.XX had As overall X

better the our committed a of quality loans, these As to continue of or risk borrowers underlying properties. be to X rated reflection

loans capital the $XXX or economically all interest better time and million period XX their at the strike during prior have additional reserves. amounts deposited relating more rate been or renewed been past caps have Over months, same contributed borrowers X have equivalent into to risk rated than in

time, our loss that that X by on At realized on in reserve reduce an office backed as we rated this forward, rated loan this believe with our risk on the to office risk line loan, of a remaining a our and resolving California, substantially in take loss. REO $XX building Going million nonaccrual. will expect focus is exposure.During we and estimate second X potential we is current currently to loans continue our X quarter, to

Additionally, the loan positioning. property will to the to level if to despite me nonaccrual defaulted becomes our is located flowing provide over North quarter that, that Tae-Sik We've a property the of process sheet on in million with and property more call let financial after office and property details be this property such when REO, cash taking and earnings turn begun balance an the on recognized.With ongoing end. the negotiations currently $XX office Carolina borrower, of title importantly, results

Tae-Sik Yoon

good Thank everyone. Bryan, morning, and you,

we first $XX.X loss share. the XXXX, a net reported common $X.XX of For per GAAP of quarter million, or

or earnings $XX.X share, exiting loss a X $X.XX of the common common loans was per distributable due XXXX earlier. losses, driven by excluding the million, that for $XX.X these quarter. per or was or Distributable quarter share, first loss Our $X.XX million, share per to Bryan earnings, realized first cents of mentioned common $XX.X and for the were $X.XX million, realized

finally, reduced X.X% I XX, by $XX million X XX% with CECL activities the goals, of is including overall rated our condominium driven million the X million rated Our been continue risk collateralized we our X downgrade to and $XX quarter a risk the of reserve was reserve on X million, X sheet. versus XX, residential common risk our of by as office or outstanding as $XXX reversal there rated outstanding XX% as for at risk first respect want held $XXX were dividend X CECL are which our to our by resulting borrower $XX multifamily in $XX associated million, This billion X significant X December reduction risk with XXXX. we of the X the the borrowings million at and liquidity totaling regular of during now existing principal existing of which total declared $XXX we debt. provide by exit reserves with or quarter. reduced our to Consistent X timeline million of than our cash principal $XXX of X loan our of loans.Further, of million Overall, of rated a the end balance million the the $XXX $XX managing March share that to second of X on rated loans loans, XX% the stands third-party X outstanding underlying offset $XX.X declined end, rated outstanding for X.X% X investment, loans or of quarter, by or concluding, $XXX relates third-party CECL XXXX. our We CECl or extended.Before the X X losses, at approximately risk of And reserves from rating $XXX $X.X background on the realization maintain per million balance down $X.XX a in Texas of at on loans principal loans more quarter X principal less we process balance. partially prior by of first reserves additional sale are quarter Driven of and the the of represents reserve to reserve, property. the of did and reserves our balance loans million loans total in loans from by reserves loan property balance portfolio. of further million loss loans. outstanding quarter held debt during has overall on XXXX. the loss represents of our of such million, our risk The

stockholders for as the of over be will to common XXXX.With back dividend closing quarter remarks. some will second on The record I July XXXX, Bryan June of call XX, to XX, payable turn that,

Bryan Donohoe

you, Thank Tae-Sik.

the be recovery of the markets cautiously markets our CMBS near-term in estate seeing capital spreads we supportive in the commercial goals. are about are optimistic will in We real and the tightening modest execution

asset which of resolving appreciate and and loans our due on building timing us distributable to quarter identified second questions. make year, underperforming open to focused loan to quarterly addressing a focused achieve firmly enable we we'd we in Operator? the to management are our our number as X will including higher XXXX, today, may seek We of liquidity our X current uneven shift to happy maximize trajectory the from resolving call resolutions. risk for to X believe order investing. The the We we this in earnings and line always, remain on outcomes further some rated rated joining you be our X focus earnings.As path and to and loans loans in risk

Operator

Doug Instructions] question with our [Operator come will UBS. And Harter from first

Douglas Harter

going talked about You the back using quarter. this potentially to investing move

down You to resolution used pay the debt. proceeds

when the balance delever think to versus Just about might how should you sheet? continuing to investing we pivot

Bryan Donohoe

Doug. appreciate Yes, you. question, the Good hear from to

is rate opportunities, pause the a where on which optionality remains or we've of path more ledger I are of liquidity quarters, back would will ultimately, in generating as that we sheet. to playbook a more lot some with of a pursuit options a once rate give fairly towards X us bit with saw considering We coming to to the side intend balance think acceptance in the X of we resolution, we the which some the then the offensive but more liquidity, weeks, multipronged the see crystallized present get which revised what the we've themselves movement ultimately, to to of asset with work said the we through beginning when started quarters, the stability. of seeing liquidity, past and QX have values, similar prior of as more we're

So, to resolutions types will allow those the resolve those goal liquidity Xs, should risk rated us to and X is that and with come continue of the primary that flexibility.

Douglas Harter

you back dividend? earnings the to us can resolved of sort the what sense had path that, about Appreciate during excluding Tae-Sik, the quarter give And think and X loans, on drag first some losses, the Bryan. the how towards

Tae-Sik Yoon

Sure.

be paying back having loans, we the quarter, A exited the the were X come or distributable combination it quarter. and our debt, loans restructured through, roughly first down restructured mentioned, first the rate, will the the resolution either quarter, full so call of X earnings. earnings, $XX.X on during than had I want you positive that for quarter $XX.X higher impact on exit that really Note really that an those the earnings loans run of first of that think, quarter the really loan But the it if impact this of to then it was either $X.XX. around As that, added X example, That for of

Operator

Our next come Jade Rahmani will KBW. question from with

Jason Sabshon

the going Sabshon with This It term is on would and loan. helpful hear Jade actually things Jason your are lenders for an how on repo update to be Rahmani.

Bryan Donohoe

Tae-Sik, do you want off? to kick

Tae-Sik Yoon

Yes.

warehouse partnership of I to credit credit had all of we lenders, And in we sheet we appreciate them, facility this have with and our what goal revolving lenders, resolve our can, loan morning, of you'll optimize relationship that think as and facility a with notice fact, again, But maintained we've the we with our strong work to for lenders. lenders. our continue in to, greatly lenders, is filing always you term think very we balance see amend loans, the as we have our with part so underperforming all overall that flexibility. can example, continued

flexibility important willing And had, the to balance with work all appreciate our us. our that So, to we to have flexibility on been partnership again, very who we've sheet. create us additional is lenders

Jason Sabshon

that helpful be Also, see more on Carolina playing office how to color hear out. the North on default, you it would loan

Bryan Donohoe

that give shot. I'll Yes, a

attempting I the obviously think, were work borrower. we with to look,

restructure However, upside we prepared necessarily occupancy for on mentioned, that has covered an we corporate in some York a remarks positive flows keeping accomplished probably what didn't rational. market cash positive the has necessary loan some has tenancy. capital it seen the us loan with as that we in that of It's flow, New and also asset, make that to in the

value some there's think we a So, ownership functional with be to added group.

timeline So, resolution a be. resolution necessarily. what this, both it see see on to those of And at will to position with the I clearly, X both the position a as in situations those in feel look to when a and don't bring our expertise fallback like we will it's earnings for think deck, attempted think, want X we But I we be to quarter assets. you we're to bear that capital to come as borrower. work there having

be a I we the will think have XX more timeline in next when concrete plan XX XX we'll over days. with to you all So, determined days, chat And there.

Jason Sabshon

unique, as on what how would severities in a seeing well? compared for understanding loans, final loss respect to be And but book, question, the generally, to expectations specifically asset commentary severities market your helpful that is loss multifamily and general your each office have you're with as and in

Bryan Donohoe

in we've had the I calls doing I'll to over our of outlook. prior And we've I estimate or what dramatic to start. give attempted has and expect on think best do Look, where resolve assets really quarters to we that. these been surprises success changes our limit think some

as gone industry, As That has on in I through would as said, we've surprised we've those. office worked put that the in the many sector what's an forth as downside transparent to resolutions. terms possible of been

said lack I we're that see I resolutions degree delayed think the as the throughout I with in in of stability market space. some has And to probably the transparency earlier, to crystallize think, broader rates. some starting generally

expectations. the over So, I think in keeping see more quarters, coming you'll with resolutions

Operator

next Our question Raymond Stephen James. comes with from Laws

Stephen Laws

goal the $XXX made nonaccruals? million remaining. asking already about lot talk know but do late, but some guys I you something but you few to believe a the like maybe of number? progress, I you a of resolution, Bryan, there on of year At have, year I the idea risk you minutes that say, was look can a if term, you some mentioned, to it's on is you'd an are where near-term are end, exit a longer

Bryan Donohoe

let Yes. well. Tae-Sik as I'll in Stephen, and I'll chime start,

challenge by lot measuring the the hallmark is quarter, of financially. so the a of I good turn part year-end what and date to a we of to philosophically do think speak, industry certainly page, is but

of that going price, timing. especially that with balance to being what compelling, with we we're market offensive resolution think is, managing side while the the I resolution so see

were you where X-plus long back, ago, So, our with years, a duration book go to like time feels what on if the playbook. assets primary extending of was conversations the borrowers, really

and As those crystallize here today, lot get resolutions to as we'd offensive sit we like soon side the back assets resolve to of possible. a and as

of terms lines tough put the demarcation So, in to calendar.

quarters good X the forward plant some to free look a year we feel that's color flag. to But end, Tae-Sik, a there. when certainly However, place to pretty add

Tae-Sik Yoon

probably our Yes, and one to the earnings, about I be quarters quarter, Bryan this a past We're will as remarks well our resolutions is on X we as further We our on very lot provide you from it underperforming think coming clarity to in priorities. we accretive our some loans, to that including resolve, covered that precise But balance hope the of we news you as as really it's as opening mentioned. I Bryan, ahead. mentioned, hyper-focused continue certainly think, sheet Stephen, loans loans, think, effort. We to report bring difficult that nonaccrual said, to numbers. heard did well. I think better resolving top-top-top our

Operator

Delaney Our will next question with Citizens come from JMP. Steve

Steven Delaney

for and it quarter like you, Busy continuing. sounds it's

and first chance quarter, that in in and the little With the these X what REOs roll tell X the I'm point X us the can office go second left quarter to then after you in a through. trouble, the at after a deck to is nonaccrual loans X reworked, resolved But you REOs, this all loans just second had REOs? haven't quarter, this the having rated

Tae-Sik Yoon

can try if shot can take at I that. to Yes. I Sure. a see

we that X mentioned, are certainly includes we of X are it X in And X you the future. quarter as office risk the end. anticipate that and properties as going rated mentioned So, that REO there loans

originally million X that X it a the We anticipated. taking loan, we this multifamily a longer in a just property, And is is new X property was multifamily had loan. remarks, Texas, process to in underlying closing downgraded mentioned also reason than of the from $XX.X sale as rated mentioned we our the bit

it so, because And downgraded. of was that,

that plus the balance you of look remainder And have the some in you out on in of our loans have put multifamily it an in what it's York, Illinois, then portfolio, again, the loans is had mezzanine mentioned, for out call we at you California. for X office the million while. the and then loans, in asset the then of loan. really really really, we the loan sheet that's X it a loan on that X $XX example, it, New have nonaccrual, the REO out California, X condominium the X development So, is and We been that is industrial large and when

I are recollect but X are just loans that think, category. to and remaining the X in think covers that rated trying I loan So, X others, the up -- that there makes I'm

Steven Delaney

guess X less progress understand this loans, current But a in and know as book even problems $X.XX at this for X. certainly coming going the I buybacks to are to the maintain and fluid value, of we sit X market this dividend see and And some be Board are thinking that there. you I you're Bryan, and probably things a with everybody quarter. of your and opportunity would probably issue the you're every today, goes where month or looking some and mid-teens resolutions stock that through I is is a and little below than with loss How the your nice going, still working to share but XX% having every about is of book. dividend yield. decision

between know. you the in bought If best notice please that how buying or shareholders let on back please, I your that the cash served any overlooked shares first quarter. shares thoughts, I paying your didn't here. out company me Just are or that,

Bryan Donohoe

Steven. question, the appreciate No,

prior in and is the market is something quarter. your the As you fluid, considers and Board each fairly comment, said management that it

And relative think, with done XX will to we I And near- of shareholders. the core what I we as previously. XX, have when days an attainable to value something best continue the And well the we to we contemplated buying $X.XX what dividend the right? characterized over was I way chatted business, long-term, of established mortgage past medium- was as we ago, that a of evaluate. the As we've as is think, industry, months, felt combination think the to the serve which that's that shares, we is at REIT XX which our dividend, back over charge,

it's ultimately our crystallizing balanced and approach the So, alongside for managing liquidity returns a possible investors. best

on think fluid would I in the results So, forth of we'll market put coming I quarters that to continue evaluate you that mentioned. the based that

Steven Delaney

quarter that regardless Glad Board will right it's by to on going know table quarter. of make remain the I -- to hear and the decision

Operator

our JPMorgan. will from with question And Shane Rick next come

Richard Shane

I this of covered. been apologize has if some

covenants of down, First, aware challenging? shrinking to if as balance back any that that need offense, could you any move limitations paying sheet moving to the from related make curious debt to there that more your to or you are be

Tae-Sik Yoon

this to make strategy those mentioned in flexibility response we in you'll that as talked we make as to we our prior we been the the Rick, to that amendments Q And our actively some that we Yes. in filing have facilities notice lenders. with implement are questions, of in sure to dialog some have the the starting morning to about.

So our liquidity. Bryan the as underperforming far, to strategy, part Deleveraging a on want order certainly as that good big has of been sure maintaining that we to to optimize mentioned, make of levels we in as flexibility. provide And balance focus loans. resolving to do well our strategy, sheet that, is

those facilities underperforming that objective the proactively to our loans. then to the loan we're sure And the make and so, resolving to And we attain working provide lenders focus covenants continue that of elements. flexibility with X on again, overall us

the to So, are yes, lenders definitely our proactively working we your answer is with this. question on

Richard Shane

and of of Q I I amendment, for Yes, $XXX got a search did covenant and each. the million

So, in I I'm there. sure find my able to wasn't answer. it's

basis points at beginning expectations curious with in am 'XX question, I January. up with driving much or the people's a it month in your forward take are in again, seeing and is from driving what if at rates versus longer. was look so today it Second for you're behaviors rates where the look, material a from what way grain XXX But conversations curve forward to to going of sentiment it's change that that SOFR for January, XXX And were salt. in was be where are if year? capitulation? expectations it even expectation to compare forward are that to borrowers, curve, X of so Is we this higher have we

Bryan Donohoe

good Rick, few there, a I'd say and yes. question, and Yes, summarily, in questions

catalytic stability a we consummated. And that pop think be in activity ones. saw rates the some QX, fairly QX in I in apartment, think much terms trades, I headlines of was the industrial good of to in of terms was causing in in of sizable and transactions which

started that know, think maybe isn't capitulation a into to I don't market the estate word, perfect consummate transactions. I process. get but forward for real looking the to back

And prints, think some started that to are move either worth realize on. we the I station therefore what therefore to of that so, has degree, private markets, the the expect values, that while rates clearly and a leave been do their in the public you'll not rise correlation and are the since to of see in assets period to worth time train to terms in rates it's people strong and accretive they

available in things and publicized. holders of So, there's be no that, of the legacy means would but a the duress level side When that may be positive there more yields market, continue equities other of it and be higher also to debt, can structured opportunity assets a widely capitulation, longer a on that invest financial lender allocation tone the time the for is this like And high that. longer for to in worthwhile. be as generational

way resolutions, as in to that characterized more is lead the to think then it's whether going backing and stability capitulation the or up I rates great So, either opportunities.

Operator

or would Bryan to I questions, like further to remarks. no additional the with conference turn closing any Donohoe for And back

Bryan Donohoe

appreciate look to of you Thank Commercial that, Appreciate speaking their just for I operator. time Estate, want We support and to Real we call. on earnings again next continued thank Yes, Ares today. to the our forward everyone you.

Operator

And, for gentlemen, ladies today. our this concludes and conference

also on this any missed XXXX, available and archived callers webcast link the our call archived a through this today's domestic of approximately dialing of on website. hour after will June X, section the replay be the replay you by of international Investor XXX-XXX-XXXX. call, to an dialing X of end X-XXX-XXX-XXXX located by Resources callers available conference homepage will An be portion of to If

Ares Commercial Real Estate (ACRE) 9 May 242024 Q1 Earnings call transcript