Q4 2020 Ares Commercial Real Estate Corp Earnings Call
Good afternoon, and welcome to Ares commercial real estate Corporation's conference call to discuss the company's fourth quarter and full year 2020 financial results.
As a reminder, this conference is being recorded on February 18th 2021.
I will now turn the call over to Veronica Mayer from Investor Relations.
Good afternoon, and thank you for joining us on today's conference call.
I'm joined today by our CEO Bryan Donohoe, David Roth, our president ease of use our CFO and Carl Drake head of public company Investor Relations.
This is of our press release and the 10-K that we filed with the SEC.
Have posted an earnings presentation under the Investor resources section of our website at Www Dot Ares CRE dotcom.
Before we begin I want to remind everyone. The comments made during the course of this conference call and webcast and 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 expressions.
Forward looking statements are based on management's current expectations of market conditions and management's judgment.
These statements are not guarantees of future performance condition or results and involve a number of risks and uncertainties.
The company's actual results could differ materially from those expressed in the forward looking statements as a result of a number of factors, including those listed in its SEC filings Ares.
Areas of commercial real estate Corporation assumes no obligation to update any such forward looking statements.
During this conference call, we will refer to certain non-GAAP financial measures. We use these as measures of operating performance and these measures should not be considered in isolation from or as a substitute for measures prepared in accordance with generally accepted accounting principles.
These measures may not be comparable to like titled measures used by other companies.
With that I will now turn the call over to Bryan Donohoe.
Great. Thanks, Rocco and thanks, everybody for joining today.
In 2020 of the global pandemic had a severe impact on each of our lives on the economy as a whole.
Despite these challenges acre outperformed in 2020 and delivered strong distributable earnings distributable earnings that more than fully covered our dividends for the fourth consecutive year. While we are certainly proud of what we accomplished in 2020 I want to focus on what we did to put ourselves in a position for an even stronger year ahead from 2002.
The one.
We outperformed during this volatile period because of our business model is designed to be stable and resilient.
Our playbook is true originated senior loans with strong covenant protections in defense of property sectors.
We are highly selective of the credit first approach and we lend to experienced real estate sponsors seeking to add value to institutional quality properties.
As a result, we built a highly diversified portfolio across sectors and markets.
The out 2020 of our business demonstrated that it was well positioned to navigate volatile markets as we maintained consistently high interest collections and no losses related to credit performance.
Our portfolio is well constructed with 94% in senior loans with the majority of collateralized by multifamily office and industrial properties.
As stated previously we entered last year underweight hotels and had no loans collateralized by Standalone retail centers and.
In addition, we never invested in real estate Securities.
Throughout the year, we also built strong excess liquidity and deleverage the overall portfolio.
Some of the underlying factors in our performance, where our stable credit quality the strong diversification of our funding and structural benefit of the LIBOR floors on our loans.
In fact for the fourth quarter, we announced our strongest quarterly results of 2020 with distributable earnings of 41 per share.
This was well in excess of our dividend levels and translates into an annualized return on equity of 11%.
The higher earnings have enabled us to grow book value per share by <unk> 11, and.
And retain excess earnings for future investments.
We are very proud of our performance during 2020 and belief that we are heading into the new year, very well positioned to opportunistically grow our portfolio.
Thus far in the first quarter of 2021, we closed the $667 million CLO debt significantly increased our matched term nonrecourse financing that now represents about two thirds of array of overall debt funding.
Concurrently with the closing of the securitization, we closed on seven new loans totaling $146 million in unpaid principal balance that were being held at the Ares warehouse the.
The loans were collateralized by one well located office property with the strong sponsorship from a well capitalized institution and six institutionally managed self storage assets managed by one of the largest players in the self storage industry.
Our ability to bring these loans on balance sheet from the areas warehouse speaks of the significant capital efficiency benefits, we derived from this facility and the power of the Ares platform.
As Tae Sik will later discuss this transaction is expected to be accretive to earnings and demonstrates the excellent capital markets execution capabilities of our team.
As we look forward, we remain positive on the recovery of the real estate sector. Our team is active and seeing a substantial increase in both the quantity and quality of transactions in our pipeline we.
We are seeing loans with all in spreads roughly in line of greater than pre pandemic levels.
And our primary areas of focus we continue to target loans to high quality sponsors on multifamily industrial self storage in the certain office properties in markets with attractive demographic trends and healthy supply and demand dynamics.
We are actively working on certain alternative asset classes like single family home rentals and life Sciences building for our portfolio.
We also continue to leverage the extensive networks deal flow and the infrastructure of Ares, leading global investment platform to source of investments and inform our invest in investment decisions.
As always we will continue our rigorous emphasis on credit quality loan structure and strong sponsorship.
Before I turn the call over to taste the for a more detailed financial review I want to touch on our dividend announcement. This morning.
Based on our enhanced funding structure, along with our positive earnings outlook, we declared a first quarter of regular dividend of <unk> 33 per share.
And we are introducing an additional quarterly supplemental dividend of <unk> <unk> per share beginning in the first quarter of 2021.
This new supplemental dividend reflects a portion of the additional earnings that we would like to share share with shareholders that is derived from the benefit of our LIBOR floors that we expect to remain in place throughout 2021.
Let me turn the call over to <unk> to walk you through a detailed financial review and some of the dynamics behind our dividend decision.
Great Thanks, Brian and good afternoon, everyone.
Before going over our fourth quarter 2020 results similar to a number of our publicly traded commercial mortgage REIT peers. Please know that we have renamed core earnings on non-GAAP net measure the distributable earnings or <unk>.
This was the terminology change only and we have made no material modifications of the calculation itself or the reconciliations of GAAP earnings.
Turning now to our results earlier today on the fourth quarter of 2020.
We reported GAAP net income of $14 4 million or <unk> 43 per share and distributable earnings of $13 7 million or <unk> 41 per share.
For full year 2020, GAAP income was 21 8 million or <unk> 66 per share.
Distributable earnings were $45 1 million or of dollars 36 per share.
As a result of the fourth consecutive year acre fully earned or exceeded its cash dividend through distributable earnings.
Now, let me discuss our liabilities of debt facilities.
As you know we have historically, followed a number of core principles.
When managing our liability structure.
First we attempt to match fund our assets and liabilities with respect to both interest rate and term.
So for example, 98 per cent of our assets are floating rate loans and 100% of of our liabilities are similarly floating rate.
All of which are index of one month U S LIBOR.
Second we diversify our funding needs across multiple providers and funding vehicles.
This practice of served US well during 2020 for example, where no single warehouse lender at more than one collateralized loan part of hotel.
Third.
We of course hard not to take mark to market spread bears on our warehouse lines.
Again in 2020 acre did not have any margin calls based on the initial sharp increase in spreads.
Onset of the pandemic.
And finally over time, we have pushed hard of winter at the percentage of indebtedness that has recourse to acre.
Here, we have completed the additional one off low non loan financings as well as CLO securitizations that are non recourse to acre.
It is in line with these core principles that in January of 'twenty 'twenty. One of few weeks ago that acre completed its fourth and largest CLO securitized financing transaction.
Here.
Of course contributed 23 senior loans with an unpaid principal balance of 667 million and the CLO so $540 million.
Senior certificates the third party investors.
Representing and ended the true an initial advance rate of 81% and then the initial weighted average coupon of one month LIBOR plus 1.17%.
Looting transaction costs.
The securitization further enhances our financing core principles in particular.
Cash funding no mark to market spread risk and further reducing our share of recourse indebtedness from 64%.
On the 33 per cent.
In addition, the sport securitization will provide the acre with additional investment of capital, enabling acre of purchased seven new loans on the Ares warehouse totalling $146 million.
And finally, the sport securitization is expected to materially reduce our funding costs, resulting in incremental initial distributable earnings of approximately two cents per share per quarter.
Let me also note that Aker just recently entered into a number of interest rate hedging transactions with respect to its liabilities.
As you'll recall acre of significantly benefited from LIBOR floors that are built into its loans as one month U S. LIBOR has dropped dramatically from the beginning of 'twenty 'twenty two to debt.
In fact as of year end 2000, 2095 per cent of Baker's loans have LIBOR floors on an average rate of one point 73 per cent.
Therefore, while almost all of the acres loans are technically floating rate. They are generating interest income similar to that of fixed rate loans.
In contrast, all of acres liabilities are floating rate and have few Bob on the floor is built in.
So unlike our loan assets or liabilities continue to incur interest expense on our floating rate basis.
Therefore in furtherance of one of our core principles to match fund our assets and liabilities.
<unk> entered into a number of hedging transactions.
Wap out or cap the impact of changes in one month U S. LIBOR on the substantial portion of our floating rate liabilities.
More specifically, we entered into an interest rate swap, where aker pays a fixed rate of approximately 21 basis points and received floating rate based on one month of U S. LIBOR on $870 million of notional balance which declined over the next three.
The years.
And in addition, we purchased 275 million notional balance interest rate cap, which again declines over the next three years with the strike of 0.5 per cent one month U S. LIBOR.
In total we didn't we put in place 114 of 5 billion and then the initial notional amount of interest rate protection.
By entering into these interest rate hedging transactions on our liabilities. We believe that our earnings will continue to largely benefit on the LIBOR floors on our loans should one month U S LIBOR start to increase.
We also expect the treat the interest rate hedging has the.
On our GAAP financials.
Before turning the call back over to Brian Let me provide some color on our dividend announcement.
As you heard from Brian in addition to declaring a regular 33 cents per share cash quarterly dividend. We also of the club a supplemental <unk> per share dividend starting this first quarter day.
On a positive outlook for our distributable earnings for 2021.
As we have done for the past several years, we expect the fully cover or exceed our dividends inclusive of the two cents per share per quarter supplemental about.
Distributable earnings for 2021.
In particular, our confidence in our 2021 distributable earnings comes in part from our LIBOR floors and on largely swapping out for capping our interest rate exposure on our liabilities.
And as Brian indicated we want to share a portion of this expected benefits with our shareholders in the form of of two cents per share per quarter supplemental dividend 2021 and potentially be on.
We expect to retain the remaining earnings benefit the continued to build book value and to make additional loan originations to further grow our interest earning loan portfolio.
This regular first quarter dividend of 33 per share as well as the first quarter's supplemental dividend of <unk> per share both payable on April 15th 2021, the shareholders of record on March 31 2021.
And with that I will turn the call back over to Brian.
That's great. Thanks, so much tae sik.
In conclusion looking ahead, we believe we are well positioned to pursue new opportunities and continue to scale, our business supported by our liquidity and attractive balance sheet positioning.
For all of the reason cited today, we have high confidence in our 2021 distributable earnings outlook and we are pleased to share a portion of the expected excess earnings with our shareholders through supplemental dividends, while retaining the rest to make attractive new investments throughout the year.
I would like to conclude by thanking the team for all of their hard work to deliver for our stakeholders in these challenging times.
We're proud of what we've been able to accomplish delivering consistent returns to our shareholders. We also deeply appreciate all of our investors continuing support for our company and thank you for the time today.
With that I'll ask the operator to open the line for questions.
At this time, if you wish to ask a question you May Press Star then one on your Touchtone phone.
If you would like to withdraw your question. Please press Star then two.
The first question will be from Stephen laws of Raymond James.
Hi, good morning.
You know I guess the.
To start with you know can we touch on the first half maturity is the sheer noticed a couple of January February where the the scheduled maturity of our.
I guess the original maturity date of thank you've got two of your of hotel loans scheduled for May can you talk about you know the.
Any of those that are repaid or extended how those discussions are going with the hotel loans and any details you can provide the kind of on the first half of scheduled maturities.
Yeah absolutely.
Certainly the asset management remains a big part of what we're doing and we're in active dialogue with each of our borrowers and think of it in each case their extension conditions or extensions available.
And those loans than in normal course, obviously cash flow covenants and the like are something that we're actively managing discussions with those borrowers with them and I think we've talked through a little bit of amendments that we've made in keeping with with whats going on with Covid with respect of certain asset classes.
So active dialogue.
With respect to those extensions, but certainly the return of capital markets.
Availability for for refinancing recapitalization, and willing buyers and sellers coming back to the table and real estate as a whole I think speaks to what we would expect to see with some of those assets as well.
Great. Thanks, Brian and the you know it looks like you'd be pulled down the 150 million on most of loans from Ares facility around the the execution of the CLO can you talk about the remaining balance of sitting at that are on that facility and certainly.
Being able to do that you know cheap capital deployed certainly highlights.
Why that's debt facilities. So attractive so can you talk about the balance there and how much turnover you think youll see from repayments and pulling additional investments down from that over the next couple of quarters.
Yeah of course, and obviously, that's something that's structural component is something we've talked about a lot with you and others of it over previous quarters, and it's a huge value add to what we do kind of as.
As part of the CLO debt.
That warehouse facility is now fully available to us and I think the execution that we have of that CLO proved out exactly the value proposition that we think we have there and so as we enter the the remainder of the year, having full capacity on that line plus the increased liquidity year over year, that's part of the theme.
We touched on in her prepared remarks, right as well.
We're open to new business, we think to do so as efficiently as we did earlier in the first quarter is obviously the way we've designed our business, but theres other avenues available as well.
Great. Thanks for the comments today.
The next question will be from Tim Hayes of B T I G.
Yeah.
Hey, good afternoon, guys and thank you for taking my questions.
My first one here I just wanted to touch on the dividend policy and you know what great to see.
Little bit of a bump there through the supplemental but you know maybe why you didnt decide to raise the regular quarterly dividend because it would be look at distributable earnings versus where the pro forma of payout is now there's still a nice delta there in some cushion for earnings power to come down.
But you know.
You already locked in a good amount of your your spread there with the hedging transactions you recently completed and so the I guess the only other things that would result in lower earnings power or the delta between where distributable earnings and you're in your new dividend debt is.
Either gross which it seems like the pipeline is pretty strong asset yields, which you know it seems like spreads are relatively in line with the pre COVID-19 levels or credit and so I'm just curious if.
You know there is an expectation of that that one of those drivers might narrow the gap over time, and that's why you decided to pay of supplemental dividend versus raising the regular dividend or if theres anything of any other color you can provide on that decision.
Sure and.
Thanks for the question, Tim I'll start just to give a bit of background and then I'll, let I'll, let tae sik adds some additional detail, but but as with prior quarters, we when we're discussing and deciding on the dividend we want something that reflects the stability of our platform, which I think the the regular way of dividend on the supplemental does.
And the consistency of being able to deliver it and I think we are of very high confidence interval with respect to what we put forth, but we always balance that with with gross and as we think about the pipeline as you reference we want to make sure of that we're able to balance the.
The confidence interval that we have of delivering the dividend that we stated but also continue to invest in and what we see as a very positive environment in our space right. Now. So those are the high level things that we're balancing and I'll, let tastes of got a little bit more detail.
Sure no thanks, Brian and Tim It's on an excellent question and obviously, it's certainly something that you know we have been very focused on you know as you know one of our core principles of course is to make sure that we started dividend debt management and the company is of high level of confidence that we will be able to fully cover two of distributable earnings.
No and we've certainly done that the last four years and also if you look back at our historical earnings on an annual basis.
We've been at that call. It dollar of $36 40 range, right, which is kind of that 33% to 35 cents and distributable earnings per quarter.
So I think we've demonstrated through you know very different market conditions, the ability to consistently generate those type of returns you know.
33 cents is also a number that represents you know right around the almost exactly of 9% ROE on our book value. So we think that's a very attractive consisted of reliable returns to our shareholders. So that's the only a number that we have the aim to reach and want to maintain.
Then maybe the final point is the two sense of we talked about in our.
Opening remarks is of course, a portion of the.
The additional earnings that we expect the generated from these LIBOR floors, the particularly now that we have hedged out.
The interest rate component of the liabilities reached the substantial portion of that so you know.
Even the two sense again represents a portion of the not not all of it.
And so I think this is a great first step for us in terms of determining what the right level of dividends.
We could've come out as you suggested with the with something more permanent or we felt you know at this point that this was the best approach for the company in the past reflective of ours.
I was coming out of the pandemic conditions still not knowing with any certainty of exactly how things are going to play out. So we felt overall debt. This was the the right call.
Got it yeah that makes sense I really appreciate you guys walking through your decision there and a little bit more detail I'd certainly yeah.
Menu for expressing a little bit of caution there, but also allowing shareholders to participate on the upside so that's great.
Let's see.
I it looks like maybe one loan was downgraded to afford this quarter and maybe a couple were upgraded to a true I'm. Just wondering if you could maybe touch on those loans broadly and the drivers behind the changes if if I read that correctly.
And then obviously, there's a few loans on non accrual, which hasnt changed over the past few quarters, but just curious if maybe we can get an update on those as well.
Yeah absolutely.
First with respect to the the upgrades I think.
As we've all thought about this this COVID-19 pandemic delaying business plans I think the uptick of those particular assets is reflected in further progress on our long the regular way business plan execution. So clearly.
The positive and so think about that progression of business plan as completion of construction or whatever value add component there may have been or additional leasing or prospects releasing so obviously the straightforward from of positive perspective.
With respect to the downgrade that that's sort of mixed use assets in a in a college town and that was the newbuild assets, a mix of retail and office and notwithstanding.
The fact that there has been continued leasing of that asset. So continued progression along the business plan.
On one of the tenants has not been paying current so just to take that into account we chose to do.
Downgrade that asset two of four but you know the.
Fact that its well located newbuild assets on the college town institutional sponsor both in terms of the LP and the operating partner there gives us of a positive view of long term, but we just took the cautious approach to.
To downgrade that particular asset.
With respect to three loans on non accrual.
Each of those remains stable and paying at least a portion of current debt service of them as we touched on.
When we put those assets on non accrual, including the fourth which has since been removed.
We felt that was the most cautious on judicious approach to two of those assets, but we still feel and I think reflected in their current payment of debt service on the fact that sponsors continue to contribute speaks to long term value.
And obviously, we're continuing to actively asset manage that through our team in continuous dialogue with the sponsors to bring those to resolution.
Thanks, Brian that's a really helpful. I'll leave it there and hop back in the queue, but thanks again for taking my questions. This afternoon of course.
Thank you.
The next question will be from Doug Harter of credit Suisse.
Hum.
I was hoping you could help us with low how do you view the the all in cost of funds on the new CLO compared to one of the warehouse lines on the better paying off from you know kind of how that the compares.
Sure no absolutely.
So Doug I think you know when we looked at the CLO. So unlike the third CLO, we did the sports yellow as you saw as the static CLO.
And so you kind of have to take the you know the initial cost of capital versus what we would expect to be kind of the average over.
Over the over the sort of expected life of the.
The transaction itself like I saw at least from an initial perspective, we received excellent the dance right.
Just over four to one on just over 80 per cent.
On the industrial coupon on the senior certificates that we sold to third parties that was L. Plus 117 again, excluding excluding expenses. So we're still going through the final you know counties of the transaction. We believe it will certainly be lower cost than the warehouse lines.
In addition to the lower cost obviously, there is a number of other benefits, including the non mark to market positions of the non recourse. The match funding all of that we bought it isn't equipment as well, but just to kind of give you.
The last estimate I think we were estimating that the all in cost of capital will be lower all of the buy.
Call It 40 to 50 basis points versus warehouse funding costs.
And just sort of is that on kind of the the blended basis you were talking about it was the kind of day one.
Yeah, more or less on a blended basis right. So when you take into account all of the amortization of expenses bolt on the warehouse line and on the.
You know on the securitization itself again.
Again, a lot of estimates go into that obviously, depending on how quickly or slowly you expect the CLO two two.
Two to start to amortize down.
Again, that's why we're sort of still working through the final numbers, but I would say good estimate of 40 to 50 over the life of the of the CLO.
The well known really go do up to 67 per cent in front of the non recourse financing.
What would be your appetite to the kind of continued to add to that or you know kind of is that the real.
Right the right mix.
Yeah, you know I think there's no there's no magic number I mean, we'd certainly like to make the per.
Some of our debt.
That is recourse acre as low as low as possible.
Bad debt as you know one of the factors one of the core principles that I talked about in terms of what we're hoping to achieve in terms of our liability structure. So non recourse match funding.
Those are all important concepts and non recourse will be one of those critical concept, but I do think you know getting to a level where.
The recourse level is about equal to your shareholder equity would make a lot of sense.
So that's not a specific target, but I think that would that would give us even more comfort than where we are today. So you know we're sort of approaching those kinds of levels.
And certainly securitization one off from low non loan type of financing other types of non recourse financing from makes sense, but yeah. There is you know very attractive benefits to some forms of recourse on everything whether it's warehouse line, whether it's term loans, where the roads convertible notes of where it's working.
Couple of facilities.
So I think it will always be a blend of the two but obviously all else being equal we would always want the lowest recourse ratio of possible.
Thank you Jessica.
Absolutely. Thank you Doug.
The next question will be from Steve Delaney of JMP Securities.
Hello, everyone and I hope that every one of the Akers doing well Tae sik.
The CLO execution sounded exceptionally good can you just confirm that between the advance rate the initial advance rate and the weighted average spread on the the senior notes is is this the best execution that you've had on on any of your four clo's.
Steve. Thank you. Thank you for the comment and question you know, we're very very happy with the execution I think coming out of 2020.
Seeing the markets improve as quickly as it has and frankly, having the right collateral base that we did you know of.
At that time, particularly taking advantage of the Ares warehouse line, you know really price that was put this together.
So certainly yeah. It was it was very favorable market conditions.
Again, having said all of that there all of a little different because as I mentioned F. L. Three was also a very attractive and certainly price a bit higher but it is certainly something that we did very efficient range given that it's a matter of structure.
And even 40 years later effectively almost four years later that we still have the full balance of the senior certificates outstanding means that it was the very very attractive and efficient financing source for us.
Hum on we have been able to amortize those types of expenses of a much longer period as.
As well as keep that full outstanding balance outstanding.
And by the fact that the guy using the resources of Ares management, we were able to do that third securitization.
During those mark conditions on the private placement basis, and therefore, the Kurt less interesting upfront expenses right. So again.
Can you sort of compare you know compare that's all three of US all for I would say you know, it's not an apple to Apple comparison, because of the different nature of the two transactions.
So yeah, no. We think that's how far was was terrific.
We still think that's all three even looking back at the time. We did it was also a good they're very attractive transaction of continues to be of great benefit to us right.
Alright, thanks to the call. It is force now the CLO is done and your warehouse is significantly cleaned out if not completely your appetite can you just comment Brian on your appetite for new net loan growth in the first half of the sheer can we expect that you know you.
You you you'll plan to at least cover of repayments and is there any possibility of a small amount of net gross I guess I would have to come from cash of $19 million coming down a little bit.
Yeah.
Yeah, absolutely I think.
Okay, 2020th of difficult year for the real estate industry with the I think I saw the transaction volume as a whole down.
15 to 25 per cent, but throughout the greater Ares real estate debt platform. We we still we're very active and I think grew our market share and we saw significant uptick in activity throughout the industry in the fourth quarter and I think that continues.
In the into the first quarter and looking forward into this year and I think we're very well positioned to continue to grow our footprint on our market share and what will be a really interesting environment. So the fact I think you hit the nail on the head of the fact that we've got access to various liquidity sources that are proprietary.
True to ourselves and with respect to the warehouse line.
We also obviously you repaid a lot of our third party.
Our warehouse providers and as part of the CLO are sitting in a pretty enviable position with respect to two of our cash position right and when you combine all of those things I do think we expect to be active utilizing all of those resources to two of taxes. This market that we see as really attractive today.
Great well, it's nice to hear that cautious prudent but optimistic tone in your voice and your outlook. So thank you both of those comments of course, thank you.
Thank you Steve.
The next question will be from Jade Rahmani of K B W.
Yeah.
Yes, thank you very much.
I guess the start off with supplemental dividend coverage.
Covered the industry since the.
2007, I don't think I've seen that terminology before maybe maybe I missed something but you know what I'm, saying the special dividend. So can you just clearly enunciate, what you're trying to communicate to the market here.
Historically, the special dividends in the mortgage REIT space, you know they don't really add much to the valuation of the things companies because it's not really viewed as the promise not something set in stone in terms of of recurring dividend. So.
I guess for for the foreseeable future or are you, saying that we will be shareholders will be receiving a 33 of these that regular way of dividend and a <unk> <unk> supplemental dividend at least maybe over the next four quarters and beyond that.
Maybe I'm reluctant to potentially have to reduce the debt burden. So that's why you're classifying it as such just wanted to put a finer point on that so that shareholders can be.
The extremely clear as to what you were trying to articulate.
Yeah, sure Jade I'll, I'll, I'll start and I'll turn it over to Tae sik.
By way of background, obviously within the Ares family of companies, we've got a lot of difference.
The corporate structures and the the Genesis since we started to talk about this over the past weeks and months was really.
That it is something that is used within the BDC realm are fairly widely and and so that's that was the genesis of why we thought it was appropriate as of as a to.
So the transition it into the mortgage REIT space on specific to acre, but it takes like why do you I mean, maybe you can give a little bit more color as to as to the conversations we've had.
Sure and Jade I think it's a great question.
Each of the opportunity to sort of further clarify the.
The distinction of if you want to call. It between maybe the nomenclature. The has been used previously in the word special vs supplemental debt that'd be chosen here bawling from you know again the BDC space.
No special to Us Ah I guess, Matt a little bit more on day, one quarter or of one transaction base types of dividend payment to shareholders right. So for example, if you sold a large asset and you realize the gain.
Could make a special one time dividend to clear up some of the earnings from that one time sale.
Or if you found yourself in a position where for tax purposes, you needed to make you know a cash dividend of Oregon kind of dividend to make sure that you met your of requirements, but it was really driven by a unique circumstance of special circumstance, we think it would be appropriate to call. It special I guess, we wanted to distinguish.
From that type of one transaction one quarter type of situation because we do feel this is ongoing maybe not ongoing into perpetuity, but ongoing for at least more than a couple of quarters and so as we indicated you know because of a positive outlook on the earnings benefit that we have from the line.
More of floors.
And from walking in the interest rate on the substantial portion of our floating rate liabilities.
Feel comfortable that certainly over the next.
Four quarters that we will be able to continue to share of some of that excess benefit in earnings with our shareholders in the form of this incremental <unk> number.
And that's why we felt you know borrowing from the terminology of the BDC space that the supplemental what's the right way to go with it and I do have to give our credit to our IR team, who really thought of this and so that was the best nomenclature to kind of describe the circumstance and so while it is unique.
On the commercial mortgage REIT space to use that terminology. We felt it was the most appropriate terminology that we come up with.
Thank you Yeah, I mean, just looking at the stock's performance today granted the space seems to be down you know most of the mortgage rates down maybe 1% acres the up 1% the dividend increase if you factor in the supplemental would be of six per se. So.
Hey, it would be underperforming.
Holding on a dividend yield constant you know what the sector is doing and I I've seen there's a lot of times the special dividends. These one time non.
Announcements, even if there for the next few quarters shareholders never you know capitalize those into earnings. So maybe at some point you could consider a halfway point of modest increase the dividend I think that'd be more accretive to the stock price then using terminology like supplemental.
I also would say that we are recommending the stock so I'm I'm not trying to be overly harsh, but something just to think about.
So as of today.
Are there still three loans on non accrual I think Brian said that the fourth loan that came off non accrual, including another loan that was modified could you clarify that comment.
Alright, Yeah. It was three loans on non accrual on earlier in the midst of last year, we removed. The force so that was from from prior quarters, sorry for the confusion, but the three loans remain on non accrual as I said continue to pay at least.
A portion of interest and outlet.
Outlook remains stable, but working towards the resolution on each of those remaining three.
Great and when you say, 100% on interest collections I noticed the gave the number for the full year, but not for the fourth quarter. So the fourth quarter would be helpful. But also I know that when loans were modified and Theres been 11 modifications in 2020.
You know obviously the interest contract changes so how would those interest collections compared with the pre pandemic portfolio. If you could give some sense I mean, it shouldn't be of just take the non accruals, which are about two per cent of the portfolio. So so interest collections pre pandemic would be about 98%.
Is that an accurate statement or is there any other nuances you would want to put on that.
The.
A good question and you know.
I'd say that like I said with respect to the three assets on non accrual we are continuing to receive some interest but classifying that differently.
There have been.
I think the pace of amendments clearly has slowed down from the acute portion of of last year.
And when we are pursuing those amendments in concert with our bar of groups that that's generally coming with as we've touched on in previous quarters, new equity coming in from borrowers and return in general for additional duration or.
Some leniency with respect to extension covenants.
The continued high pay rates throughout the fourth quarter with respect to just kind of an apples to apples comparison versus versus the 100% collections pre COVID-19 line, let us come back to you a little bit with greater detail of sensor it.
Yeah. That's great. Thank you very much just in terms of the earnings the outlook I know you guys don't provide guidance you know another none of the appears do so not expecting that but.
Clearly you know distributable earnings have been running well in excess of the dividend.
And I think you've articulated what you expect the dividend policy it could be for the next few quarters, but do you think that there's enough visibility into what's the project sort of a consistent level of distributable EPS.
There could be some timing differences with respect the originations and repayments, but overall.
You are you projecting consistency for for 'twenty 'twenty, one 'twenty 'twenty, one and I think also there could be upside potential based on the CLO you put in place as well as the.
LIBOR floor hedges.
As well.
Yeah.
I'll start.
Good question I think like we touched on the philosophy behind our of our dividend announcement is one of confidence and stability right in and as much transparency as we have based on what we see we tried to reflect that notwithstanding the non.
The one feature that.
That you cite.
So.
We feel good about where we sit today with respect to specifics Tracey I don't know if you have anything to add to James' question here.
Okay.
The only thing I would add is we've been able to generate we think very attractive returns and you know rather challenging environment, while still maintaining a pretty defensive posture right. So in other words, we have 15% to 20% of our book values sitting in cash effectively earnings year.
Ro.
And yet we still have been able to generate the you know the distributable earnings that we have the past few quarters and so as conditions change you know, we will then look to potentially deploy that excess capital as well as take advantage of Ares warehouse line, but once you start to deploy that capital into.
The more interest earning assets low again, we could find ourselves with.
Further avenues of growth either to add incremental to where we are today or to replace some of the earnings that may run off of the next couple of quarters. So I guess, it's sort of a long winded way of saying that there's a number of moving pieces of the good news is that we find ourselves in the very advantageous position to have a few levers that we can.
Continue to you know continue to take advantage of two.
We would tell you is at least maintain the kind of earnings that we've been able to generate.
Yeah.
Thanks, very much lastly, I just wanted to ask about the M&A something we used to talk about quiet.
Frequently.
Think acres trading at very close to book value and there's a number of mortgage REIT as well as probably.
There's some valuations on private vehicles substantially below you know close per.
Which is diversified and internally managed is that 75% of.
Book value of what what is the company's interest in the in.
Pursuing M&A at this point or given where we are in the cycle you know it doesn't make sense to be more prudent with capital not reached for an M&A transaction to the grab scale and rather wait until things become more certain.
We don't we don't have anything specific with respect to the M&A.
Opportunity that exists today I think clearly we we see the value of a scale business and as we think about some of the retained earnings I think that speaks to that continued growth of the dock in scale and in further deployment and as Tae sik pointed out I think we feel really good about having the.
All of the different levers that we can pull available to us post CLO right on and I think in addition to normal course warehouse lines et cetera. We also have access to the greater Ares platform, including.
Some of some strategic thinkers in the execution folks to pursue strategies like that.
We don't have anything.
Specific to discuss but clearly it's something that we're always paying attention to and looking at a number of opportunities throughout the market.
Thank you very much.
The next question will be from Charlie arrest of J P. Morgan.
Hey, good afternoon, guys. Thanks for taking all of the questions. Most of been covered already I really appreciate it all.
All of the color, but I did want to ask about LIBOR floors of bit.
Given the significance of those floors, especially in the context of the supplemental dividend and the hedging transaction can you just help me understand sort of the cadence of how those floors are going to shift over the next few quarters.
Especially as the older vintages pay down and new loans are coming onto the book I'm, just trying to get a sense because the weighted average floor for the whole portfolio was sort of a snapshot of static analysis on the portfolio was obviously more dynamic than that.
Yeah absolutely.
A lot of thought went into exactly how this restructuring so on the I'll, let tae sik walk either through the specifics, but I think the questions again.
Yeah, No bright line and Charlie Thanks for the question no you're you're 100% on low while we can.
Can easily summarize the benefit of LIBOR floors on the fact that you've got 95 per cent of our loans have LIBOR floors with the weighted average of 1.73%.
It's quite a premium over where LIBOR is today.
Clearly the real analysis is done on a loan by loan basis.
So for example.
We do expect over the next call. It three years for the loans with LIBOR floors to you know to repay and that when we redeploy the capital from the proceeds of those repayments that we will not.
To be able to achieve a LIBOR floors, you know anywhere near the existing rates today.
In fact, you know most LIBOR floors are very low or even at market at the time, we close alone or Corp alone. So that is certainly all factored into our forecast and discipline. It is as we've always said on a deal by deal of loan by loan basis that we make that determination and one thing to do.
Note the.
The interest rate hedge that we did you know very very similar there is that you know as I mentioned you know both the swap in the cap.
Have the initial balances the initial known the balances of $870 million of $2 75.
They do amortize down over the next three years, and then getting back amortization schedule of even the interest rate hedging is largely based upon what we expect the run off of the loans with interest rate floors in the LIBOR floors, the prepay as well or to repay as well so it is.
Very granular exercise that we go to make sure that we are again continuing to maximize dependence of the LIBOR floor, but knowing that you know that those loans will eventually run off and we have to make sure that on our liability structure closely as matches that runoff as possible as well.
Okay. Thanks that makes sense.
And.
Just one more question some of your peers have made some comments recently that their warehouse lenders are actively looking to kind of grow their footprint and grow the facility utilization I'm. Just curious if you guys can provide any color around the conversations you guys are having with with your lenders and if you feel that that view is pretty consistent.
Across the sector.
Yeah, I think so on.
From a macro perspective, we've all seen what's occurred in rates over the past 12 months from you and clearly that is part of the Genesis for our hedging strategy.
The other impact of that is.
Across the board you've seen relatively positive credit performance and the search for yield throughout the globe right and what we are taking advantage of as of at a high level of the ability to land and what we'll call the private market sort of direct origination channels throughout our foot origination.
Offices in the country and then borrow in either the capital markets directly through the CLO or through our financing Counterparties and clearly as the CLO market has kind of cleared the decks for a lot of our warehouse lending counterparty save there.
They are seeking out additional assets right in the pursuit of NIM and that is absolutely something we're seeing almost universally with respect to our counterparties and something that we will we will likely benefit from of over the coming 612 months.
I appreciate the color guys. Thanks, so much.
Thank you.
This concludes our question and answer session I would now like to turn the conference back over to Bryan Donohoe for any closing remarks.
Great. Thank you.
In closing I just wanted to once again, thank everybody on the team for their contribution over the last 12 months of it really has been.
Exceptional and I want to thank everybody for joining today and for all of the all the questions from our from our analysts.
Appreciate all of the continued support of acre and we look forward to speaking to you again on our next earnings call. Thank you again.
Ladies and gentlemen, this concludes our conference call for today, if you missed any part of today's call an archived replay of this conference call will be available approximately one hour. After the end of this call through March 4th 2021 to domestic callers by dialing 1877344.
Seven five to nine and to international callers by dialing 141 to three one 700 H eight.
For all replays. Please reference conference number 1015 0859.
An archived replay will also be available on a webcast link located on the homepage of the Investor resources section of our website.
Yeah.
[music].