ACRE - Earnings call transcript Q2 2024 | Ares Commercial Real Estate Corporation

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Operator

Good afternoon, ladies and gentlemen. Welcome to Ares Commercial Real Estate Corporation's Second Quarter Earnings Conference Call. [Operator Instructions]. And as a reminder, this conference is being recorded on Tuesday, August 6, 2024. I will now turn the call over to Mr. Public Relations. of Partner Stilmar, Markets Investor John Mr. Stilmar, ahead. please go

John Stilmar

thank for afternoon, on today's Good us conference you joining and call.

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

and made contain subject as Before similar webcast well anticipates, such I expressions. comments and remind Many should, forward-looking will, of are course uncertainties. the everyone to begin, may the forward-looking expects, risks believes, use this be documents statements these as to that by we identified and intends, that as of company statements want during of conference call such words can the

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

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

Brian Donahoe. the call turn to Brian? like CEO, our I'd to Now over

Bryan Donohoe

everyone. you, Thank and John, afternoon, good

new as be August wanted moment Tae-Sik quarter a to Both will begin we our Operating XX, Jeff Chief I our Yoon second effective Chief take Financial Officer a as Treasurer. results, of appointments XXXX. new and and as review these Officer; to Gonzales congratulate Before XXXX our of of

our our help management management capital our to members our team with Jeff and and with and XXXX. to debt joined partnering in team. further been goals, XXXX in with both know, Jeff the execute asset you having strategic have working sheet team bolster balance continue As strength of Tae-Sik of markets long-term our Tae-Sik will Tae-Sik

XX portfolio expertise worked our closely CFO. next natural with ACRE in long Jeff During a various at Jeff management understanding our roles, since as years, are team, past and tenure valuable senior the XXXX. of our and highly make has finance financial Jeff's Tae-Sik and company as including controller and our deep choice serving

some sheet. driven improving, believe market amount the results conditions that, of real from available comments with are by rate let invested positioning and our future impacting the sidelines. interest reduced how market supply Commercial give brief dynamics and on expectations, we sentiment capital to is estate financial me So these be balance of trends and our modestly

While to the these more CRE of positive potential properties financing dynamic. increased activity levels and broadly, sales dynamics are and pointing of remains activities values bottoming

turn, impacts our near-term These and trends the timing which, exits are informs earnings. of strategy resolutions, and our in impacting

the did quarter, multifamily one senior anticipated forward our sale of not second property As the loans of one anticipated. example during as a move securing

a around we on the process, a in loan sales nonaccrual Given the X the rating and ultimate uncertainty the put risk the revised X. from execution to

of significant the resolution. near-term sale property to second to increasing under has likelihood the a of market, maintain the further reduce Due to since in the quarter, and is for of levels deposit, with a leverage. our the strategy this variability to hard liquidity subsequent However, gone end contract

to positioned below results potential to the we addressing these in will return earnings. in our level company loans, and a Our underperforming of expect focus drive on maximum sheet uneven profitability. of and Upon in higher strengthening our to of be order levels loans resolution invest balance further flexibility

quarter, loans underlying X ] Furthermore, X/X rated XX over for support [ to During X approximately of better committed XX of loans. about saw X negative borrowers the loans. have last million These risk portfolio. or second billion risk no loan the account capital $XXX of our in months our the migration we rated in total $X the

to X principal. our X Now $XXX turning ended and risk totaling X of quarter We loans. second outstanding approximately loans with rated the million

risk property property Three Grid second was the Also, loan title we a sale. a $XX REO and office realized million office rating In loss for These XXXX. of the by and of of March recorded earlier, a risk held rating I loan on risk comprised this, million are a California on Carolina, conjunction X. senior In in loans financed during nonaccrual of to loan XX, was the quarter, from the classified $XX million loans migrated as North multifamily mentioned and second that a $XXX at in X $XX X took to California. quarter, loan with we previously million

loans. all We focused addressing X reduce would risk are the X and these loans, rated of X of which balance significantly on

over With our and position. earnings provide Tae-Sik, the capital call will quarter that, to who second I'll turn on more details

Tae-Sik Yoon

I Brian. too congratulate many years forward our have look to worked partnership. and new I moment take continued CFO, you, Gonzalez Jeff want Thank and to and together Jeff a as our and for

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

for distributable the $XX.X million of quarter mentioned. $X.XX Distributable quarter. a taking upon common excluding per or or or loss was common common office per XXXX by share and approximately property the Our California driven million to title or $X.X $X.XX $X.XX that of share earnings of second loss the share second per loss for realized million the $X.X $XX.X million was REO as realized Brian earnings,

than XXXX. as reserve was $XXX about XX, $XXX end million the represents the incurred that for California of associated overall reserve X% was loss of million realization reserve now of The March quarter Our overall on by less property. outstanding our principal office million the CECL reduction approximately stands held $XX loans approximately of at $XXX reversal an the investment. about million, balance of existing reserve a $X of This million driven at with approximately CSR

Our total $XXX representing risk of in reserve to XX% of rated balance loans, and approximately $XXX X X our outstanding CECL and principal X relates around held million investment. risk million X or the are for loans rated

lower we objectives maximize We mentioned, resolutions the loans our steps of Brian near with priorities. our in continue take that financial balance maintaining of leverage liquidity positions support term, maintain company. company appropriate underperforming operating to the and As to flexibility the order best higher strategic sheet long-term levels to to in advance of believe at and our

a per XXXX. third share cash $X.XX of regular declared for we dividend Finally, the common quarter of

as on September quarter with XX, will third be The And will remarks. turn the some back call payable XXXX. closing of that, record dividend for XX, common stockholders I to over Bryan XXXX, of to October

Bryan Donohoe

Thanks, Tae-Sik.

the value. lead investment we the portfolio of necessary on profitability. the executing and on to rated of of and will the a near intently growth are resumption higher which to we've steps the we further risk As and activity, term, focused In X new certainty discussed, loans goals X believe state [indiscernible] what bringing ultimately portfolio we're we believe towards book ACRE taking are

to the we'll call be always, for and As happy questions. appreciate line you we today, open joining our

Operator

We'll go Shane Rick to first of this afternoon JPMorgan.

Richard Shane

guess of is look, we'll shape conditions based everybody. changed your Yes. just quickly. question the this I a try. to well. upon asking been give some Good as Outlook of we've this that the and I've morning, but peers radically changing don't very I worse. know who curve. called Anyway, been a are has forward is,

sentiment is seeing and Some work changing, resolve obviously to of of the how try properties Are behavior loans fundamental are forward given -- change, on what behavior dictates a the it hold quickly driven. borrowers their is outlook with of terms lot just expectations the you in from better willingness to you but their you curve.

Bryan Donohoe

to year-over-year I in prepared of story QX. rate that's that And may on I but the value. Rick. listen with holidays creep And the rates, of cost increase. pretty declining of week, question, the more to the Xx think beginning in we started change last remarks to of touched mean, investor long-term volatile we of over the and think crystallize a I market starting great think with activity that have the I last the inerts a alongside the movement, -- it's the back which benefit And in we you the certainly that cost accretive that values the optimism really noted be to and funds reflective of Ares of see into if all real you about management markets starts backdrop some supply sentiment year around capital estate is estate to Yes, presentation, real

has time, decline I know don't market, behaviors there so sentiment month but and in the yet of crystallized positive. out last and should the that the terms directionally the changing are I fully of in move real all is or the think So

Operator

We'll now Raymond Laws Stephen go next James. to of

Stephen Laws

but think may a go kind and off I little to is want bit to is same First, it -- the -- about does of the or way. continue run earnings sounds like may that to probably going leverage not portfolio down, mean

the think on going how that facilitate new things needle to about there, of resolution declining help earnings move even nonaccrual when I a Can it's potentially kind will the to you earnings we assets, ex are trough losses about portfolio financing think distributable the talk So whether about as do the loans trough. given size. a

Tae-Sik Yoon

been in Bryan very mentioned much asset in higher a We've purposeful call Sure. Certainly, prior been maintaining as making our question as our maintaining the have delevering of smaller purposeful great sheet. drivers in in mentioned current well Chad, remarks, as been Thanks terms overall it's of in in your Stephen. we've our as for and flexibility. the purposeful We've we of calls, levels size this very are liquidity. and balance financial very for very question, earnings. what

has on All that obviously impact had earnings. its of

the risk we're that potentially $XX.X nonaccrual, multifamily rated thing of of in on number big a are we recognizing nonaccrual, loans down resolve either assets. we are on impact can that has putting and example, earnings impact loan for have and debt, put We're associated loans we other had that And positive call. this as debt start including, million for able we The But those think big obviously I risk-rated X But and purposes. we continue to other in our loans, these earnings. that cash resolve those. assets those down mentioned many said, on Bryan has from our in income earnings. Again, and interest we those Each X as a X as these that a activities to nonaccrual. of X to utilize with movement not pay on pay

plan. that that to the of through strategic things one expect mentioned uneven work think earnings Brian I we have is we as our do

also of Brian as earnings, are mentioned, current levels below Our potential earnings.

So of resolve that there's your loans different one. a great lot we're going that think and as do a back to in a of get these things our loans earnings. basis. go-forward we into margin move question the net I earnings business be and hopeful ACRE is are will interest investing stabilize and able And on to the we that increase new earning

Stephen Laws

follow annualized earnings declared rate run rate at Great. potential for a that on And earnings the the the on longer-term dividend current run return to you a QX look up basis? portfolio with -- value. you still current feel X.X% that, is Are you comfortable about on book of and as the

Tae-Sik Yoon

Yes.

current pursuing. dividend the a the I $X.XX do have and again, the think But upon quarter, we we've position, review for our our some financial third obviously, earnings upon balance was sheet, as outlook. our unevenness said, activities think, in strategic that we're will based the we declared our that based of Board

impact the the factors. in earnings also macroeconomic markets in interest of terms estate other our real going always, commercial As of will terms rate, market forward

quarter-by-quarter the will to all dividend think consideration. business a I our So our evaluate continue on Board take basis,

As we is the of that certainty now, terms believe in and do right said, we've variable market timing. both

a evaluate basis. to continue will and dividend on decisions these we'll quarter-by-quarter our make So the Board

Stephen Laws

much loss did in And much regarding the realized guess, contribute contract how the distributable then new multifamily QX. went quarter to last -- sale I third me on income how that earnings? And nonaccrual. it we under a did the interest two for now, parts. Great. assuming flow asset that the should expect it's then through How much vibrated question of

Tae-Sik Yoon

Sure.

quarter, second recognize not loan. from any any income this multifamily we for So interest income, the did

So the entirety quarter. for the second of it nonaccrual was on

thought We As we of you interest can sort -- not see, we income, but of receive did indicator cost one recognize did as as recovery. it actually interest did it again, income.

from value carrying by you that go the And outstanding so the loan can down one did $X value of see the its carrying of principal is this to things million. about balance

I you And you'll in at was loan. interest terms as an how that or we million it of loss if against income. recognize, of under gives we income being about Again, should you a approximation see the I given revenue our CECL but received the much recognized just potentially think that more not have $X.X So contract, then reserve be this could XX-Q, specific. of think don't we sensitivity multifamily look

happened quarter of But can of about million post end. All as you we CECL multifamily X/XX, reserve $X.X had this that a against see loan.

Operator

next to now go KBW. We'll Rahmani Jade at

Unknown Analyst

on think Jade. ultimately REO book per value of value for expect? Sachin might dollar Jason do actually you do What is where you trough? share This And

Bryan Donohoe

the beginning that question. tough of had I hearing a time

Unknown Analyst

trough? where do might think I what Yes, of value dollar share do REO and value expect per you book ultimately said you

Bryan Donohoe

part it's the I much REO understand do you first to question, how the portfolio? ultimately if see expect the within So of

Unknown Analyst

Yes.

Bryan Donohoe

real when where their in are tough our available do we'd large we the value I situations. to in financially, a we is in times work added that active have of those primary seeing to step of the find that either those we're the the by like as borrowers arrow everybody obviously, operationally predict. think And or significant each keep it's through And And to will dialogue value we, us. think we to extent important are There an company sponsor, charge and Obviously, with can I seat. to situations certain of discussions. assets. add that's those to operator natural estate

ledger. ownership the side ] return short I'll equity extent duration So it stood to we and on to but the put the to, time it's in amount, stabilize something for them be step of tough rightful finite point you will of a do that, assets see would as say, we the a [ in likely

Unknown Analyst

in a from monitoring are there you're And Great. would more closely? X any drive particular what follow-up, And to X migration loans as loans? some risk in that

Bryan Donohoe

-- account components management Tae-Sik sentiment taking our But to say both well out, rating rate of technical team asset and let portfolio, I'll monitoring is definition. into I'd the every the our through financial our interest in applied like. walk the single some risk of is environment very and built asset results,

account risk as would just And Tae-Sik, give taken of we all through that factors maybe So the think come through those that can definition. are viewpoint ratings. into you the

Tae-Sik Yoon

disclosures, kind think ratings I you'll look some Again, of when Yes. of our definitive see definitions public that our more you through what risk entails.

that. address timing. kind what So just to I would encourage to try you Again, factors, to look of X and question certainty of the of and would maybe multitude some of a a would but But X. there's include factors your at drive summarize versus the

be maturity very X in as example, factored the that of matured shorter-term would increase for years if likelihood would a loan a potential the So likelihood has loss. mature well that event, that a have for versus loan the has you doesn't already and a a maturity or of obviously, short-term as

of really loss a increases, and would as therefore, a I to the timing a a from that certainty multiple of factors. combination of So X. say, X But potential there's it's again, migration

Operator

Doug We'll at next now go UBS. to Harter

Unknown Analyst

pace This of is credit the Doug I and credit us hoping confidence walk one. level for have through question the actually Masson actually a could Will I you today. current last your on was similar migration. migration,

going at versus balancing looking forward? problem resolutions development new of assets Just

Bryan Donohoe

good a it's Yes, question.

the in I our think market question in we our there touched on first remarks overall sentiment. around

entire right, look real of of very at portfolio portion small scale the industry, to our we're the you If relative that. a estate

having and we're sentiment of multuous appreciative positive its months the right certainly XX-odd backdrop So had backdrop a the here. is

the fundamentals underlying of in assets. stability seeing we're think I

in a their to making cost the is think borrowers it for of change the I more just in rates continue to likely invest as change in catalyst, assets, that funds.

near appropriately migration So as in we're assets term. those from we migrations and resolving no the on within X X X. the X certainly the on to small focused and touched And

So portfolio. supportive stability backdrop of I is think the continued in the

Operator

to go Citizens We'll with now Muller next Instructions]. Chris JMP. [Operator

Christopher Muller

and Jeff on Tae-Sik new to Congrats the roles.

Is back that that? type question or on type sediment to some Fed and more for my driven? problem more of is, it of the year guys working is you you of the half could a be offense? take guess I get or do it think it back So thing loans more would what And through XXXX

Bryan Donohoe

Chris. question, Good Yes.

look, I keeps through, not we're us earnings heard, yet, the think I that. ultimately, certainly starting I on that woods offense. team answer at such part as as unevenness think go it saw got prior ready there of to is you out out you uncertainty and some on the a stability, through. the come and see is of the to there the remains that we've but additional profile thinking light is And of that a mentioned

seeing broadly transaction market. the in We're activity increased

prospects by excited with we're but sound getting we the to that there. want So back we're of out so sure make footing. doing

So the ready as assets, stakeholders. have on once focus And those bringing team go remain additional clarity a clarity to said, that book. we to to then brought we I will that's, our the resolving

Christopher Muller

Got management things. staying on maybe side of the it. That's And asset then helpful.

So equity caps, replenishment it of or that I $XXX those? maybe paydowns, from guess towards? that million Is is a rate of going reserve all renewing of combination what loan contributions borrowers

Bryan Donohoe

a It's combination.

rate CapEx it rate the next and the think attributes that -- of tenant of more curve accretive movement like spends dollars. part is positive the projects about money be to think the iteration caps that interest carry I from So be reallocated and of some interest will improvement in and of in and

expensive. the we've have in and the even TI there, side in upticks office more as demand leasing stability market slight seen gotten So packages those

invest assets. important continuing that an their sponsors in to attribute is it So are

renovation creators will long-term at improvement certainly level. asset from runs So to dollars tenant the be the projects caps value and underlying carry gamut it to that

Operator

gentlemen, we appears I'd to Donahoe, And to any back questions comments. turn you like Mr. further this have it things for afternoon. no closing

Bryan Donohoe

joining to and again for you future. Thanks and near the the entire this team for we in forward look work thanks, and Thank time. quarter, you, speaking thank to the everybody, today, for all

Operator

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

of will If September Resources also to An X everyone. available of this call Again, archived homepage X webcast you the calling by by and XXXX conference hour be joining callers missed the after a international of call wish call, approximately any through domestic replay website. this on of today's our X, section end to callers an day. replay will XXX-XXXX (XXX) dialing Investor thanks a on for XXX-XXXX. (XXX) be Goodbye. available link of the all archived you We located us, great part

Ares Commercial Real Estate (ACRE) 6 Aug 242024 Q2 Earnings call transcript