Q2 2021 Ares Commercial Real Estate Corp Earnings Call
Good afternoon, and welcome to the Ares commercial real estate corporations.
Bulk and skull to discuss the company's second quarter 2021 financial results as a reminder of this conference call is being recorded on July 30th 'twenty 'twenty 1.
I'll now turn the call over to John still more from Investor Relations.
Good afternoon and thank.
Thank you for joining us on today's conference call I'm joined today by our CEO, Bryan Donohoe, Tae Sik, Yoon, our CFO and Carl Drake head of public company Investor Relations.
In addition to our press release and the 10-Q that we filed with the SEC. We've posted the earnings presentation under the Investor Resources section of our website at Www Dot Ares.
CRE dotcom.
Before we begin I want to remind everyone that 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.
Many of these forward looking statements can be identified by the use of words, such as anticipates believes expects intends.
Will should may and similar such expressions. These 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 of uncertain and the uncertainties.
The company's actual results could.
Serially from those expressed and the forward looking statements as a result of the number of factors, including those listed in its SEC filings.
Commercial real estate Corporation assumes no obligation to update any such forward looking statements.
During this call or for we will refer to certain non-GAAP financial measures we use.
Differ for the matter of presentation for operating performance and these measures should not be considered and isolation from whereas the 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.
Now I'd like to turn the call over the Ares commercial.
And the states CEO, Bryan Donohoe, who will walk through our second quarter earnings results.
Ryan.
Thanks, Sean and good afternoon everybody.
This morning, we announced another strong quarter with distributable earnings of 37 cents per share up 16% year over year for.
We're pleased with our performance.
<unk>, which is primarily being driven by our portfolio of strong and diverse credits increased investment activity reduced funding costs and the continuing benefits we received from our LIBOR floors.
Our company continues to benefit from Ares scaled real estate platform alongside of growing economy and the more active.
Real estate market with improving fundamentals.
Overall as individual property transaction activity has increased.
Over the quarter, we are now at levels commensurate with the second quarter of 2019.
The improving economy is also driving broad base rent growth, which is improving across all.
Of real property sectors, with particular strength and multifamily 1 of our favorite and targeted sectors.
Against this backdrop of improving fundamentals, we are seeing and attractive competitive landscape highlighted by postponed epic market inefficiencies on the origination side, while stronger players like.
And all major able to benefit from more attractive funding.
This has resulted in the more fragmented marketplace that enables scaled platforms such as those of affiliated with Ares to finding attractive investment opportunities and grow market share.
And the.
<unk> and reach of the broad Ares platform.
Gossiping and sourcing advantages throughout our space and even more specifically and high conviction property types, such as industrial and multifamily as well as and favorite segments, such as self storage student housing and select office opportunities.
The increased size and diversity of our investment pipeline enabled.
And our drive to remain highly selective closing less than 5% of the loans, we evaluate while maintaining a strong deployment pace.
The result of this debt is that we are seeing loan opportunities with all and spreads that are approximately in line with pre pandemic levels, but what the attachment points and credit terms that tend to be more.
Enable the active than pre pandemic structures.
The strength of our platform and the market opportunities.
Enabled us to accelerate our new investment commitments.
In fact, the second quarter commitments of $311 million represented the third consecutive period and which.
For true new commitments and origination volumes.
This higher loan activity is also driven by incumbent borrower relationships as approximately 64% of our commitments this quarter came from repeat borrowers.
However, we were also pleased to find strong receptivity for new.
We grew quality sponsors given the breadth of our product offerings.
As an example during the second quarter.
The $38 million multifamily loan with the new sponsor and its 1 of the largest multifamily owner operators and the southeast with more than 30000 units under management.
This origination.
Hi, Gautam is continuing into the third quarter with approximately $254 million of new commitments closed the thus far in July.
In order to support our expanded investment pipeline and greater investment activity, we issued $6.5 million common shares to raise just over $100 million of common equity at.
That of 10% premiums of book value and near the end of the second quarter.
The benefits of scale from our 2 equity raises this year will enable us to further gain market share during and attractive time to invest as the overall economy continues to recover.
As far as the capital we raised in June we are working hard.
Asian biomass of the majority of the net proceeds and the third quarter, but do expect that the additional shares that we have issued to have a temporary modest impact to our earnings per share and the third quarter.
However, given our expected pace of capital deployment, we do not expect that our fourth quarter earnings will be impacted.
For 2 and the most importantly, as we have said consistently from the beginning of this year and connection with the announcement of our supplemental Tucson per share quarterly dividend. We continue to expect full coverage of both our regular and supplemental dividends from our distributable earnings for the full year 2021.
For the portfolio, our book remains 98% invested and senior loans and approximately 2 thirds of our loans are collateralized by multifamily office industrial and self storage properties.
We continue to be underweight hotels and retail exposures.
And against the backdrop.
Chop of an improving economy and further bolstered by the strength of our asset management capabilities. We continue to see strengthening of our the credit of our portfolio as reflected in our weighted average internal loan risk rating, which improved for a third consecutive quarter to 2.8 as of Q2.2021.
Turning to 2.9 and the first quarter and 3 point O.
At year end 2020.
Additionally loans on non accrual declined from 3 to 1 reflecting the healthy recovery of underlying property performance.
While the COVID-19, pandemic and all of the uncertainty and challenges.
Is it broad not over we of optimism for the remainder of 2021 and beyond.
With that I'll now turn the call over to <unk> to provide more details and our second quarter results and financial position.
Yeah.
Thank you, Brian and good afternoon, everyone earlier today, we reported.
GAAP net income of $17.6 million or 43 cents per common share and distributable earnings of $15.1 million for 37 cents per common share.
Our earnings continue to benefit from our of LIBOR floors with the 1.36% weighted average 1 month LIBOR floor.
And on our loan portfolio at the end of the second quarter of 2021.
Our second quarter GAAP earnings also benefited from a $3.9 million reduction and our seasonal reserve.
18% decline and our 6 of reserve was primarily driven by the improved macroeconomic forecast.
And as further evidence of the improvement of our loan portfolio of risk ratings.
And in addition to strong earnings we continue to grow our book value per share for the second quarter supported by continued improvement and the credit performance of our portfolio and the accretive.
<unk> 6 and a half million share of common equity offering that we just executed before quarter end our book value per share increased by 22.
The $14.45 per share the.
This marks our fourth consecutive quarter of improving book value per share.
Now, let me talk about the other side of our balance sheet and specifically the strength of our capitalization and liquidity funding mix.
Our debt to equity ratio was 2.1 times as of the end of the second quarter, excluding seasonal reserve.
Additionally, our earnings and balance sheet.
We continue to benefit from highly efficient match funded and non recourse sources of CLO financing and now comprise 69% of total outstanding borrowings.
Up from 34% and the second quarter of 2020.
Our non recourse.
And the equity ratio now stands below 1 times.
And going forward, we believe that we have additional avenues to further optimize our leverage capacity and further lower our cost of capital.
As Brian mentioned, we have increased our common equity capital base.
Of course by more than 45% since the second quarter of last year.
These 2 equity offerings totaling more than $200 million and common equity have enabled us to begin leveraging some of the benefits of scale.
For example, this greater scale and it has allowed us to invest in larger and more.
Based on all of the loans to build even a more diversified portfolio.
And on the liability side, there's greater scale, how does allowed us to execute on more efficient forms of financing such as being able to complete our second CLO financing.
Before I turn the call back over to Brian.
Hi, I did want to briefly discuss 2 loans that are beyond their contractual maturities.
While we continue to work with the respective borrowers.
Other than simply agreeing to extend the maturity of these loans, we have decided to keep these loans and the current status to put ourselves and the best position to negotiate successfully.
Ryan solutions and outcomes.
Please note that we believe that we are of protected through sufficient collateral values and have not taken any impairment or put these 2 loans on non accrual status as of the second quarter of 2021.
And with that let me turn the call back over to Brian for some.
The closing remarks.
Great. Thanks Tae sik.
In summary, we're continuing to execute against our strategic and financial goals for the company.
During the second quarter, we delivered strong earnings and healthy and improving credit quality and our portfolio.
We are well capitalized to invert.
First our capital into the attractive market opportunities, we see in front of us.
We believe we remain on track to continue to deliver strong profitability for our shareholders and to meet our financial goals for the year.
We greatly appreciate the support of our investors and for your time today.
With that I'll turn it over to the operator.
To open the line for questions. Thank you.
We will now begin the question and answer session.
And if you'd like to ask a question. Please press Star then 1 on your Touchtone phone.
If you would like to withdraw your question Please press star and 2.
This time real pause momentarily.
Some of our roster.
Our first question will come from Steve Delaney with JMP Securities. Please go ahead.
Thanks, Hello, everyone.
And really just my my 1 main question that I have listening to your comments and the debt.
[noise] repays it looked like they were fairly light and the second quarter at 125 million or about 7% of the funded portfolio do you have some insight or view to what might a hell of that level of repay might play out over the second half of this year. Thanks.
Yeah. Good question I think.
1 of the factors is the active asset management that are that our team works through and the portfolio and we're in constant dialogue with our borrowers to understand and try and again as much transparency as we can.
About future repayments and the work.
<unk>.
The kind.
And of what we can keep what makes sense and the portfolio and extend the lifecycle of loans and I think that active asset management that is certainly a big part of our platform benefits us to some degree there.
The way, we're managing it that would probably most importantly is that we're going to operate as if the expectation is that.
And as our loan portfolio matures that we will see some accelerated repayments. So we're going to manage the book as if it's coming.
But thus far and it has been probably more muted than we would've expected and will continue to manage it as actively as we can.
And I've really tough to put a specific point on it but.
And certainly a focus of ours.
And.
Some of your you're trying to ramp up lending and take advantage of current opportunities to have that pipeline.
And in case that you do get a spike right and where you can maintain and hopefully slightly grow your portfolio of especially with the new new common equity would you. Let me let me put it this way and I understand you don't want to give a specific.
And a lot of this is unknown right in terms of borrower behavior over the next 5 months, you know of the year, but yes.
I think I heard you say that the recent rate or at least at 7% and a quarter. It sounded like you do view that as maybe a little surprisingly on the white side.
If I heard you correctly.
To the degree of and I look and thank each of the assets and we invested and if you think about the bottoms up underwriting approach each each asset.
Under it and specifically and each asset and it's gonna have a different lifecycle, but if we portfolio wide and normal course, right and we're thinking about these loans being kind.
2 and a half the 3 years of weighted average life and some of the repayments is where all of the wherever muted last year and so we're managing the book is if.
We're going to and we're gonna see more of that repayment and to your point. So you really focus on making sure that we are a net positive from a deployment perspective.
And beyond.
All of the active dialogue with these borrowers to to understand and have as much transparency as possible.
Yes.
At a macro level, we just we think about it and in terms of weighted average life and being around that 30% to 36 month period.
Thanks for the comments, Brian and I'm, a I'm and leave the rest.
Of of the topics to the guys.
And that just the guys coming up hobby that kind of appreciate it.
Our next question will come from Rick Shane with J P. Morgan. Please go ahead.
Hey, guys. Thanks for taking my questions. This morning.
Look there's been a.
Steady ramp in original.
The <unk> nations and if we look back.
You are on pace to potentially have your strongest year ever, especially if we sort of think about what July looked like in terms of fundings and volume.
I am curious when we think about the binding constraints on the.
The model going forward, and we think about capital and we think about repayments.
And I'm curious how much scale ability you think you have on the origination side I think it's pretty clear that you can source of a $1 billion of funding of year. Do you think you can go meaningfully above that and again I'm not asking.
The asking for guidance I'm, asking just from a capability perspective, the balance sheet supports it.
Yes, great question, and I think that and we tried true.
And to touch on and and our earlier discussion.
And it was really the breadth of the platform.
And we built out of and origination team.
<unk>.
2 to match the scale that we feel we have capacity for and this business and I think some of our capital raises at that pace of touched on what it allows us to do is improve upon the.
Quality of our borrowers right just scale does.
The larger loan sizes will ultimately come.
And with with more institutional sponsorship groups.
But the scale that we can now.
<unk> 2 in terms of originations is such that its larger loan sizes and so it's not just.
The number of deals that is going to increase the size of the loans and I think the quality of the sponsor and properties kind of kind of comes in the income and with.
With that so.
I think we've built the team.
Summarized we've built the team certainly attack of the opportunity set that we see in the space, but it's not just simply adding to the quantity of deals of dialing to the size of the deals that allows us to do that.
Got it okay, that's very helpful and Oh look.
And I understand there's been a long term investment in the origination platform and I think right now that the opportunity is really sort of catching up with that thank you guys.
Thank you.
Our next question will come from Jade Rahmani with <unk>. Please go.
Yeah.
Thank you very much what are your thoughts around the sustainability of the supplemental dividend and you think about future.
The run off on the portfolio incremental investment yields cost of financings and other capital avenues. The company may explore.
Go ahead, yeah, Great question, Jamie I'll, let <unk> take it at the outset here and I'll add some color.
Great Yeah, no that's it.
Great question Jade.
Earlier this year, when we instituted the supplemental dividend of <unk> <unk>.
And we obviously.
Said that we expect the 2 set dividend.
The in place for the.
Full year of 2021 and that towards the end of the year, we would reevaluate kind of what to do with the <unk> supplemental dividend obviously.
So far we've announced 3 quarters of that dividend and consistent with our initial indications.
And to the and again, we're certainly on pace for the fourth quarter to do the same obviously, we haven't declared that yet, but I think we're on pace to do that.
As you referred to the the LIBOR floors with a limited amount of repayment that we've had so far for the <unk> for the first 6 months of this year.
And we've been able to continue.
The maintain very strong.
Benefit from LIBOR floors.
And so you can see that.
And as of the end of second quarter. The weighted average LIBOR floor was 136% versus call. It 10 basis points spot 1 month LIBOR today. So we're.
Well within the money of our of our LIBOR floors. There has been some write off obviously since the beginning of the year, but continue to generate very strong positive incremental.
The incremental income from the LIBOR floor is itself the other.
And the thing we're doing obviously as we know this is a finite life.
Asset.
And therefore, we are positioning the portfolio and we have a number of levers that we think we can.
Extra size and take advantage of to make sure of that when these LIBOR floors are of much smaller benefit and they are today debt.
We will have sufficient earnings to continue to pay out of very attractive.
The dividend, obviously, 1 of them who we.
<unk> talked about and the context of further scale is even more efficient forms of financing right. So with greater scale. We believe we can.
We can take advantage of more efficient forms of financing that provides higher proceeds, but most importantly low.
Practice of cost of debt.
We think our deployment levels and we'll continue to grow so that we will have more and more of our available capital put to work.
We will always obviously push for our spreads on our assets try to push down at the same time our cost of funding.
And then finally with greater scale.
The lower I mean, obviously, we've grown our capital base as we mentioned by 45% and with greater scale, we believe that.
And that we will also enjoy some G&A savings right as a percentage of our equity base.
Today, we find ourselves at 2.1 debt to equity so the.
If you want to call.
Scale Yannick earnings that we're able to generate.
Is is sort of under optimize right now because of that under leverage position today, but we do plan on adding incremental leverage to our balance sheet to get much much closer if not right at the target of 3 point of debt to equity So I think those.
Those are all the levers that we believe will we have available to us. We're obviously very very busy implementing all of those strategies.
And so as the LIBOR floors and run off we will implement those strategies to maintain our earnings as much as possible.
And at that time, I think we'll make the decision of.
And the already do with the supplemental dividend longer term, but for now again, we are comfortable.
Saying that for 2021, and we will maintain our supplemental dividend and debt towards year end and we'll be in a much better position to talk about what to do with it on a go forward basis.
What time did you have any additional comments.
And I think I think Tae sik covenant well I think you talked about the different avenues that we would explore and I think the primary 1 and <unk> finished with which is it is just our leverage capacity.
And as Theres, a lot of different forms of leverage available to us and I think.
And continue to press on that efficiency and I think we will see the benefit from that moving forward.
Yes.
The first couple of questions on credit.
The decline and non accrual loans to $31.3 million from $66.8 million.
And if I didn't get the chance to.
We can throw all of the footnotes, but could you just discuss what took place there.
Okay. Thanks, Thank you Ana on the cover that.
Sure.
So so Jason I mean, obviously, we had 3 loans on non accrual status.
And.
And just this last quarter.
And we took 2 off non accrual of 1 as a student housing project. The other 1 is the hotel.
Student housing project itself was sold.
And a new party came in and.
Put in additional equity.
We're fortunate enough to be able to work with this new buyer to key.
<unk>.
Keep the property and our portfolio there was basically $6 million net equity injected into the property.
And we think the new owner of the new operator sponsor here is of great business plan to to sort.
Reinvigorate this property, but certainly with.
Having the same collateral.
And the role, but $6 million less and proceeds we felt it was appropriate and certainly because of its a new loan as well to no longer have that property on non accrual status.
And the amount of repayment that we had on our original loan.
Was sufficient to the certainly more than cover our.
Our carrying value of the loan. So we took no loss and in fact showed a small gain versus our carrying value versus what we received in terms of the principal repayment.
The second property that we took off non accrual status as the portfolio of hotel loans again as you know we were very scrutinizing.
And of our hotel portfolio during the pandemic.
This portfolio of hotels, particularly in the last 3 months of share.
And sort of area of robust increase in and <unk>.
Occupancy and ADR and Revpar frankly.
Frankly, it's probably come back to beyond pre pandemic levels.
And now that it has shown sustained recovery of its performance again, we felt it was appropriate to tick it off of non accrual status. So as you mentioned that leaves us with 1 property collateralized by 1 loan collateralized by a hotel that remains on non accrual status.
Again, we're hopeful that this.
This property will continue to show some improvement.
We don't think that improvement has been and.
<unk> and Hasnt been sustained enough to make the transition, but certainly trending in the and the right direction as well.
And on the modification side I think you.
Usually you guys disclose number of modifications or the aggregate amount of principal and that it relates to and I didn't see that and the 10-Q I'm, assuming perhaps there were no modifications, but wanted to double check that.
Yeah.
Yes, Jade I think that's right.
Again, nothing really worth noting.
Obviously, the 2 loans that we mentioned that our past the maturity, we have not modified and.
We have.
Allow them to be and their status quo, but.
But yes, nothing nothing material.
And just the the 2 loans in maturity default, what do you think the timing.
Of the resolution is for for those and it seems you did not take and impairment or book of reserves anything of that nature. So you feel is adequate.
Coverage on the asset side.
Part of the real.
Sorry go ahead, and Tae sik I'll jump in after.
Okay, sorry, Brian Yes, no I'm, just kind of just mentioned on the impairment side, Yes, no Jade I think that's the most important point here right is.
We do believe there is sufficient collateral to protect us from from an impairment and obviously that's the reason we.
Don't believe of an impairment in either case and warranted.
As you know we've had situations and the past, where we've had defaults and we felt it was and our best interest to put the loans in default.
We will have proper positioning with the borrower to negotiate the best resolution.
But Brian and once you go ahead I just wanted to make the comments certainly on the on the impairment question.
Yes, and I'll just add specific to your question Jade on timing.
I think we've.
And I mentioned, the active asset management earlier, we've got the capacity and the expertise of kind of work through.
Loan issues.
A lot of different formats right, there's a lot of arrows in the quiver so to speak from <unk>.
The acceleration.
And through just kind of calling the default and in this case, we think that the the best resolution and most timely is through just allowing us pace et cetera, why don't these loans to sit and the.
The status they are.
But I think that the default interest and some other economic factors will accelerate the resolution of these transactions.
In the near term.
Thank you for taking the questions.
Hey, Jay just 1 thing before you leave and just wanted mentioned.
In terms of modification.
The answer is no we didn't make any modification in terms of what a borrower would typically request just to be complete I. Just wanted to mention that we did make so called 1 modification of a loan on.
On a multifamily loan.
Because we wanted to.
A potential.
Maturity was coming up and we wanted to keep that low and on our books. So we did I guess, if you want call it technically modify it but it wasn't due to.
The low nonperforming in fact, it's the opposite this is the loan that we wanted to keep and so we were able to do that and keep this loan on our books.
Potentially.
Thanks, and good to continue and no none of that.
Got it.
Thank you thank you Jade.
Our next question will come from Stephen laws with Raymond James. Please go ahead.
Hi, good morning, good discussions so far and wanted to touch base.
And I touch on the the <unk>.
Asset <unk>.
Revenue came in.
You know a good bit above what I was looking for can you talk about the.
The trajectory there with that asset and you know how do we think about seasonality with the asset versus more of a straight line and recovery from from Covid on the hotel.
Yes, good question I think the.
And the performance of the asset somewhat speaks for itself and I appreciate you picking up on that and.
And I think thematically, it's based on a lot of what we've touched on in prior quarters reduction and kind of an unnatural and reduction in supply and and the market.
And a lot of work the harvest as.
As much demand as we could and that and that.
Geography.
And it's tough to say how see.
My gut is that seasonality, which impacts most hotels.
We'll be a little bit tougher to predict this year just as people.
Come out of Covid, and and make their plans and kind of.
I don't necessarily think you'll be as tethered to the traditional calendar and as we've been of historically.
Typically in the in the market the first quarter for couple of months of the year is kind of a little bit slower.
But demand has been has been positively trending for the asset.
And.
And then just to add to that I'd say that.
Because we talk about it and in most quarters in terms of where we see the ultimate resolution.
Based on the recovery you've seen the numbers and I think we will continue to.
The monitor and explore.
The ultimate resolution.
And of the asset over the next few quarters as well.
Great and when I think about the operating expenses. There I mean can we can we take the sequential change and think about that is the the variable expenses associated with the amount of incremental revenue.
Are there other factors either plus or minus the.
That number that we should.
Consider.
I think it's been pretty constructive and general and in terms of the way we've worked with with the manager there.
And to kind of operate and a as we've described the kind of the mid service model.
And I think to the extent that.
We're seeing increased revenues clearly.
Some operational expenses will come part and parcel with that.
I think we will will continue to be constructive in terms of limiting expenses and making sure that we're focused on.
Margins as well as revenues.
Great and then I wanted to follow up on Steve's question earlier, just as far as the managing portfolio of growth and repayments.
Coming on.
And went back and looked at a couple of years ago unfunded commitments were and the mid teens. You know you guys have those and the high single digits now under 10.
I know you've got the pipeline you've got the Ares facility is thought of is that enough to manage the upcoming repayments as those start to come in and in 6 or 12 months or so.
Thank you we'll take back.
Back that out and give you the unfunded commitment side backed up into the mid or high teens.
The good question and takes like you want to touch on that a little bit.
Sure No I think.
Obviously, we have.
Number of things that we can do on the balance sheet.
And to help manage REIT.
Payments and making sure that we're as fully deployed and.
Interest, earning as possible I mean, you certainly mentioned, 1 which is the the areas warehouse line.
Ares warehouse line as you know is about 200 million plus of capacity that we would have to do senior loans there.
It is something that has been very very valuable to us, particularly during the pandemic to help manage the liquidity needs of the acre and.
And I think going forward I think it will be extremely helpful for us to again put loans on the Ares warehouse line. So that again real time, we have the ability to bring.
Onto the balance sheet as loans pay off.
On the on the acreage side itself.
We have as we mentioned significant debt capacity right now we are significantly under levered from our target of 3 O. So I think the best strategy to manage repayments.
Bring about is to make sure that we are as fully invested as fan.
So as we can make good loans.
And find ourselves in a position, where we will be fully invested will have loans and the areas warehouse.
And we will be and a good position at that point.
And frankly and to to handle the.
And the upcoming repayments.
And again 1 of the strategies that we just covered and 1 example that will continue to push on and there will work very hard to keep the loans that we want on our books and if that means.
Generating more attractive terms for the borrower.
And we will do that to make sure that we're at least at market.
But there are certainly a number of strategies that we can do to help mitigate what we would anticipate to be the the growing repayments and the and the upcoming quarters.
Great I appreciate the color on that takes the thanks for the the commentary.
Absolutely Stephen thank.
Thank you.
Okay.
Our next question will come from Doug Harter with Credit Suisse. Please go ahead.
Thanks.
And you talk about the.
And the spreads that you're.
And then you got on kind of QQ loans, and <unk> to date and how that compares.
And to the existing portfolio.
Yes, good question and I think.
Yes.
And notwithstanding the scale deployments and as we mentioned the inefficiencies of the market in general.
Yes, there has been compression around multifamily and industrial.
Kind of and keeping with that financing costs are are similarly, compressed and really and Ah.
Pretty good state of equilibrium out of sight.
So if we took it as a whole.
We're seeing relative value and the space and real estate debt generally.
And with spreads that are in line with pre pandemic levels by.
And a little bit of disparity in terms of asset class allocation at this point.
Got it and and.
Brian You mentioned that you know 1 of the benefits of scale, and just kind of being able to move up and size and you know and.
The quality or the.
The underlying sponsors and bar.
And I guess, how does that translate do you give up some some spread to move to make that move up or you know just how would you compare relative value there.
Yes, I think.
I'd be remiss to say that that higher quality sponsors don't garner.
Some lower coupons I think of that.
Our hours, if we think about the underlying mission right, which is to create a stable platform the stable portfolio to deliver.
The yields to our Investor base, I think the higher quality sponsors and the performance and quality of asset that comes with that as a net benefit.
And again as Tae sik touches on each quarter.
And.
We certainly focus on the the spreads themselves of the loans, we make but the real focus is on the <unk>.
Margin between our borrowing costs and.
The loans, we make and so.
The higher quality loans, the more scaled positions allows us to have more pricing power as it relates to our.
Our lender.
Our counterparties so net net at the.
Might potentially coupons that debt come down and keeping with the quality of the sponsors I think we're in a better place overall.
Great. Thank you Brian.
Okay.
As the question will come from Tim Hayes with B T. I G. Please go ahead.
Hey, good afternoon, guys. Thanks for taking my questions.
First 1.
Obviously, it's a nice growth this quarter, but interest income was pretty flat sequentially. So just curious if there was the timing mismatch between.
<unk> originations being closed in the back end of the quarter versus repayments on the front end or if maybe there were just some older vintages that paid off so you got less prepayment income just trying to reconcile that.
Yes, Tim I think.
I think I think timing sort of any quarter.
Quarter, certainly certainly makes a big difference right and I think youre right I think some of the some of the loans that we closed in the in the second quarter really were much more back ended.
Back end of for the second quarter. So you didn't see as much.
Income being generated for the quarter.
The second thing of work is that because we are less deployed in terms of our leverage as I mentioned to 1 we continue to accrue.
The amortization of fees associated with much of our interest expenses and that is not.
Being spread over a bigger of borrowed amount and so youll see a little bit of a tick up and our borrowing costs as well. So I think those are probably your 2 major reasons were not seeing that that lift if you want to call debt with the with the higher originated.
Balance, but I think youll see that start to even out and the third quarter.
And as we've mentioned and the third quarter. So far we've kind of had the opposite situation, which is great right, which is that we've closed.
200, plus million dollars of loans and the first month of the quarter. Unlike second quarter, where again most of the loans for a little bit more back ended.
Right right.
It makes sense.
And then.
Excuse me on the the.
The capital stack.
It's small, but I know you're of the term loan of about 60 million of term loan coming due.
I forget exactly 1 of its sometime in the next few months I believe and just curious how you feel.
All about addressing that if you're considering upsizing it or.
And refinancing at a lower cost given the other execution and the market or if there are other forms of debt capital you're considering the added the cap stack that can help kind of satisfy that maturity.
Sure.
No great question. So the the $60 million of term loan comes due in December of this year. So a couple of months away.
Basically as you know the history here is that of the began as a $110 million of term loan and we did pay down 50.
$50 million of it earlier this year, so, leaving a balance of $60 million.
Today's capital markets.
There are numerous options for us to pursue.
Mentioned.
They are getting our company closer or if not to the full target leverage over.
Over the next few months is a big priority of ours rights from 2.1 to closer to 3 point out and as part of that.
Leveraging up the balance sheet, I think paying paying down the $60 million of term loan debt and.
And recapitalizing the company with different forms of leverage it's certainly something that we are well underway analyzing and executing on whether we will replace it with another.
Term loan whether it will be financed with our existing lender whether it will pursue other forms of debt capital such as convertible notes unsecured.
And quite a few.
Debt available debt capital available debt is that is out there and.
And so.
And we feel we're in a very good spot. The do it final answer of course is that $60 million is a relatively small amount of debt.
As a bowl of maturity, so not too concerned about.
The amount of itself, but it is going to be basically refinance as part of and overall sort of recapitalization.
And of our of our debt as we continue to increase our.
Debt to equity from $2, 1 up 2.3 points.
And.
Yes makes sense.
Okay and then just my last question kind of on the.
The near.
Nearly 50% of your originations were and the industrial space. This quarter I know that the the mortgage REIT space of the commercial lenders have typically had a hard time finding a lot of.
Loans that kind of fit their strategy and that sector. So I'm curious.
And if you could just touch on your pipeline.
Where.
<unk> plus.
I guess, where that's coming from.
It really has to do with the Ares platform and your expertise on the equity side and that space, providing some resources to you guys and then.
Along those same lines are there opportunity as you target larger loans and there are opportunities for you to do.
And to do significantly larger loans that can be kind of syndicated across the different areas vehicles and <unk>.
Help you get.
Some of <unk>.
Exposure to higher quality sponsors are higher quality assets without having a giant capital commitment.
Yes. Good question, Tim I'll answer your second question first which is.
To say, yes.
There is the opportunity to.
Utilize different parts of the broader platform to capitalize the assets and the benefit.
In the ways that you are noting so I think that is a.
A significant progression of where we sit of the team today and I think.
Our.
Our investors and acre will benefit from that moving forward.
With respect for the industrial asset and question.
A couple of things come to mind first and foremost I think where youre direction. Youre question is headed is.
Is that the pricing for state of fully stabilized industrial is a little.
And our core and nature of that and which would and that which would likely fit into the mortgage REIT model.
And I think what we benefit from with respect to the asset and the question is really 2 things first and foremost.
It is the high conviction asset class for us historically and areas and the debt and equity space.
And we do think that the addition of Black Creek for the broader platform also bring some particular insights that allows us to participate and the asset class at different parts of the assets lifecycle right. So earlier and prior to stabilization, we can have higher conviction.
In the space based on and the expertise.
<unk> and the amount of investment history, we have and the sector.
And then secondly, the nature of this acquisition, specifically was with the repeat sponsor and.
And the timeline for closing was such that it really allowed us to take advantage of certain attributes of the closing process and.
And find and asset in the sector of that.
Matched up with the ROE targets that we have more broadly.
Understood well I appreciate the comments as always guys. Thank you.
Thank you too.
Ladies and gentlemen.
And this will conclude our question and answer session and I'd like to turn the conference back over to Bryan Donohoe for any closing remarks.
Yes. Thank you.
And thanks, everybody for the time today, we continue to appreciate all the support of acre and look forward to speaking to you again.
And a few months stay well thank you.
Ladies and gentlemen, this concludes our conference call for today.
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