Q1 2024 Ares Commercial Real Estate Corp Earnings Call
Operator: Good morning and welcome to the Ares Commercial Real Estate Corporation's First Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. As a reminder, this conference is being recorded on Thursday, May 9, 2024. I would now turn the call over to Mr. John Stilmar, Partner of Public Markets Investor Relations. Please go ahead.
Good morning, and welcome to the areas commercial real estate corporations first corner earnings conference call.
At this time all participants are in a listen only mode. As a reminder, this conference is being recorded on Thursday may 9th 2024.
Now I'm trying to turn the call over to Mister Johnston War partner of public markets Investor Relations. Please go ahead.
John W. Stilmar: Good morning, and thank you for joining us on today's conference call. I'm joined today by our CEO, Bryan Donohoe, our CFO, Teresa June, and other members of the management team.
John W. Stilmar: Good morning, and thank you for joining us on today's conference call I'm joined today by her she Brian Donahoe, CFO Tricia and other members of the management team.
In addition to a press release and the 10-Q that we filed with the F. C C.
Earnings presentation of the Investor resources section of our website.
W. W. W Dot <unk> dot com.
John W. Stilmar: In addition to our press release and the 10Q that we filed with the SEC, we've posted an earnings presentation under the investor resources section of our website at www.arescre.com. Before we begin, I want to remind everyone that comments made during the course of this conference call and webcast, as well as the accompanying documents, contain forward-looking statements that are subject to risks and uncertainty. 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.
Speaker Change: Sure we begin I want to remind everyone that comments made during the course of this conference call and webcast as well as the accompanying documents inching forward looking statements and is subject to risks and uncertainties.
Speaker Change: Many of these forward looking statements can be identified by the use of words, such as anticipates beliefs expects contends will should make some more such expressions.
John W. Stilmar: These forward-looking statements are based on management's current expectation of market conditions and management's judgment. The 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 statement as a result of a number of factors, including those listed in its SEC Final Code. Ares Commercial Real Estate assumes no obligation to update any such forward-looking statement.
Speaker Change: Forward looking statements are based on <unk> current expectation of market conditions and the management structure.
Speaker Change: Eight minutes or not guarantee of future performance condition or results involve a number of risks and uncertainties.
Speaker Change: Actual results could differ materially from those expressed in a forward looking statements.
Speaker Change: Salt of a number of factors.
Speaker Change: Those listed in its athletes.
Speaker Change: Various commercial real estate and since no obligation to update any such forward looking statements.
John W. Stilmar: During this call, we will refer to certain non-GAAP financial measures. We use these as a measure of operating performance. These measures should not be considered in isolation from, or as a substitute for, measures prepared in accordance with generally accepted accounting practices. These measures may not be comparable to like-titled measures used by other companies.
Speaker Change: During this call will refer to certain non-GAAP financial measures. We use these as a measure of operating performance.
Speaker Change: There should not be considered in isolation from what was a substitute for measures prepared in accordance with generally accepted accounting principles. Please.
Speaker Change: These measures may not be comparable to like title measures used by other companies.
Speaker Change: Yeah, I would like to turn the call over to our C E O Brien Donahoe Brian.
Speaker Change: Thank you John.
Bryan Patrick Donohoe: During the first quarter, we made meaningful progress towards our goal of resolving underperforming loans, reducing the outstanding principal balance of nonaccrual loans by $133 million, as well as reducing our exposure to the commercial office property sector by $70 million, or 8% of our total loans backed by office property. By addressing a total of four non-accrual loans during the first quarter, we increased our distributable earnings, excluding losses, compared to the prior quarter by approximately two cents per common share and further delevered our balance sheet by $138 million to an outstanding balance of less than $1.5 billion at the end of the first quarter.
Bryan Patrick Donohoe: During the first quarter, we made meaningful progress towards our goal of resolving underperforming loans.
Bryan Patrick Donohoe: Do you sing the outstanding principal balance of nonaccrual loans by $133 million as well as reducing our exposure to the commercial office property sector by $70 million or 8% of our total loans back to my office properties.
Bryan Patrick Donohoe: By addressing a total of four nonaccrual loans during the first quarter.
Bryan Patrick Donohoe: Increased started distributable earnings excluding losses compared to the prior quarter by approximately two cents per common share and further delevered, our balance sheet by $138 million to an outstanding balance of less than $1.5 billion at the end of the first quarter.
Bryan Patrick Donohoe: Our focus remains on returning Acre to its core business of originating loans and managing a portfolio of loans backed by commercial real estate properties in order to earn consistent income to support an attractive level of dividends for our shareholders.
Bryan Patrick Donohoe: Our focus remains on returning acre to its core business.
Bryan Patrick Donohoe: Originate loans and managing a portfolio of loans backed by commercial real estate properties in order to earn consistent income to support an attractive level of dividends for our shareholders.
Bryan Patrick Donohoe: Let me now provide more details on the loans that were resolved during the first quarter. We sold a $38 million loan that we held for sale at year end 2023 that was backed by a mixed-use property located in California that was on non-accrual. Second, we agreed to a discounted loan payoff of a $19 million loan backed by a multifamily property located in the state of Washington that was on non-accrual at the end of 2020.
Bryan Patrick Donohoe: Let me know I'll provide more details on the loans that were resolved during the first quarter.
Bryan Patrick Donohoe: First we sold the 38 million dollar loan that we held for sale at year end 2023.
Bryan Patrick Donohoe: By a mixed use property located in California that was on non accrual.
Bryan Patrick Donohoe: Second we agreed to a discounted loan to pay off of a 19 million dollar loan backed by a multifamily property located in the state of Washington.
Bryan Patrick Donohoe: Nonaccrual at the end of 2023.
Bryan Patrick Donohoe: As a result of these initiatives, we realized a loss consistent with the fair value mark and lost reserves held on our balance sheet at year end 2023 and paid down 54 million of debt in our FL4 securitization. Third, we exited a $57 million Chicago risk rated five loan collateralized by a commercial office property that was also on non-accrual at year end 2020. As a result of this disposition, we realized a loss that was $3 million higher than the loss reserve held against this loan at year-end 2020.
Bryan Patrick Donohoe: As a result of these initiatives, we realized loss consistent with a fair value Mark and loss reserves held on our balance sheet at year end 2023, and pay down $54 million of debt and R. F L for securitization.
Bryan Patrick Donohoe: Third we exited a 57 million dollar Chicago risk rated five loan collateralized by a commercial office property that was also on non accrual at year end 2023.
Bryan Patrick Donohoe: As a result of this disposition, we realized the last that was $3 million higher than the last reserve held against this loan at year end 2023.
Bryan Patrick Donohoe: And finally, we restructured a $74 million loan backed by a Class A newly rebuilt office building located in New York City. At the closing of this restructure, the borrower paid down $5 million of principal, reducing the balance to $69 million, which was split between a $59 million A note and a $10 million B note. In addition, it is anticipated that the borrower will contribute additional capital to the building for additional new leasing costs, including tenant improvement allowance, to incentivize the contribution of additional capital, including the initial $5 million repayment of the loan.
Bryan Patrick Donohoe: And finally, we restructured a 74 million dollar loan backed by a class a newly rebuilt to office building located in New York City.
Bryan Patrick Donohoe: At closing of this restructure the borrower paid down $5 million a principal.
Bryan Patrick Donohoe: Reducing the balance to $69 million.
Bryan Patrick Donohoe: We have agreed to subordinate our $10 million B note to new equity contributed by the sponsor. This restructuring resulted in returning the $59 million A note to interest-earning status, while the B note remains on non-accrual. As a result of addressing these four loans, the outstanding principal balance of loans on non-accrual was reduced by 31%, and our distributable earnings, excluding losses, increased by two cents per common share for the first quarter of 2025.
Bryan Patrick Donohoe: Which was split between a 59 million dollar a note and a 10 million dollar peanuts.
Bryan Patrick Donohoe: In addition, it is anticipated that the borrower will contribute additional capital into the building for additional list new leasing costs, including 10 improvement allowances.
Bryan Patrick Donohoe: To incentivize the contribution of additional capital, including the initial 5 million dollar repayment of the loan.
Bryan Patrick Donohoe: We have agreed to subordinate or a 10 million dollar P. Note to new equity contributed by the sponsor.
Bryan Patrick Donohoe: This restructuring resulted in returning the 59 million dollar a note to interest earnings status, while the Beano remains on non accrual.
Bryan Patrick Donohoe: As a result of addressing these for loans the outstanding principal balance of loans on non accrual was reduced by 31%.
Bryan Patrick Donohoe: And are distributed earnings excluding losses increased by two cents per common chair for the first quarter of 2024.
Bryan Patrick Donohoe: Shifting now to our overall portfolio, we ended the quarter with $2 billion of outstanding principal balance across 44 loans. 36 loans totaling $1.5 billion, or 75% of our loan portfolio, had a risk rating of 3 or better. The majority of these loans are collateralized by multifamily, industrial, self-storage, and hospitality properties, as a reflection of the qualities of a risk-rated three or better low. However, bars continue to be committed to these underlying properties.
Bryan Patrick Donohoe: Shifting now to our overall portfolio.
Bryan Patrick Donohoe: We ended the quarter with 2 billion of the outstanding principal balance across 44 levels.
Bryan Patrick Donohoe: 36 loans totaling 1.5 billion or 75 per cent of our loan portfolio had a risk rating of three or better.
Bryan Patrick Donohoe: The majority of these phones are collateralized by multifamily industrial self storage and hospitality properties.
Bryan Patrick Donohoe: As a reflection of the quality of our risk raided three or better loans.
Bryan Patrick Donohoe: <unk> continued to be committed to these underlying properties.
Bryan Patrick Donohoe: Over the past 12 months, borrowers have contributed more than $130 million in additional capital relating to loans risk-rated three or better. And during the same time period, all interest rate caps have been renewed at their prior strike, or economically equivalent amounts have been deposited into reserve.
Bryan Patrick Donohoe: Over the past 12 months borrowers have contributed more than $130 million in additional capital relating to loans risk raided three or better.
Bryan Patrick Donohoe: And during the same time period, all interest rate caps had been renewed at their prior strike or economically equivalent amounts had been deposited into reserves.
Bryan Patrick Donohoe: Going forward, we will continue to focus on resolving our remaining four and five risk-rated loans and reduce our office exposure. During the second quarter, we expect to take a $33 million risk-rated 5 loan backed by an office building in California as an REO that is currently on non-accrual. At this time, we believe that our loss reserve on this loan is substantially in line with our current estimate of a potential realized loss.
Bryan Patrick Donohoe: Going forward, we will continue to focus on resolving our remaining.
Bryan Patrick Donohoe: Four and five risk raided loans and to reduce our office exposure.
Bryan Patrick Donohoe: During the second quarter, we expect to take a 33 million dollar risk rated five loan backed by an office building in California as Oreo that is currently on non accrual.
Bryan Patrick Donohoe: At this time, we believe that our loss reserve on this loan is substantially in line with our current estimate of a.
Bryan Patrick Donohoe: Potential realized loss.
Bryan Patrick Donohoe: Additionally, despite ongoing negotiations with the borrower, a $69 million loan to an office property located in North Carolina, currently on non-accrual, defaulted after quarter end. We've begun the process of taking title of the office property. And importantly, this property is cash flowing such that if and when the property becomes REO, property-level earnings will be recognized. With that, I will turn the call over to Tasek to provide more details on our financial results and balance sheet position.
Bryan Patrick Donohoe: Additionally, despite ongoing negotiations with the borrower.
Bryan Patrick Donohoe: 69 million dollar loan to an office property located in North Carolina.
Bryan Patrick Donohoe: Currently on non accrual.
Bryan Patrick Donohoe: Defaulted after quarter and.
Bryan Patrick Donohoe: We've begun the process of taking title of the office property and importantly, this property is cash flowing such that if and when the property becomes Oreo property level earnings will be recognized.
Speaker Change: With that let me turn the call over to <unk> to provide more details on our financial results and balance sheet positioning.
Teresa June: Thank you, Bryan, and good morning, everyone. For the first quarter of 2024, we reported a net loss of $12.3 million, or $0.23 per common share. Our distributable earnings loss for the first quarter of 2024 was $33.5 million or $0.62 per common share, and was driven by a realized loss of $45.7 million or $0.84 per common share due to exiting the three loans that Bryan mentioned earlier. Distributable earnings, excluding these realized losses, were at $12.2 million or $0.22 per common share for the first quarter.
Speaker Change: Thank you, Brian and good morning, everyone.
Speaker Change: For the first quarter of 2024, we reported eight GAAP net loss of 12.3 million or 23 cents per common sure.
Speaker Change: <unk> earnings loss for the first quarter of 2024 was 33.5 million or 62 cents per common sure.
Speaker Change: And was driven by a realized loss of 45.7 million or 84 cents for common sure do too exiting the three loans that Brian mentioned earlier.
Speaker Change: Distributable earnings excluding these realize losses were 12.2 million or 22 cents per common share for the first quarter.
Teresa June: Our overall CISO reserve now stands at $141 million, which declined by $22 million versus the $163 million CESA reserve we held as of December 31, 2023. This reduction was driven by a $42 million reversal of existing reserves associated with the realization of losses, partially offset by approximately $20 million of additional reserves on existing loans in the portfolio. The overall CESA reserve of $141 million at quarter end represents 6.9% of the outstanding principal balance of our loans held for investment, which is down from 7.6% as of the prior quarter.
Speaker Change: Our overall Cecil reserve now stands at $141 million.
Speaker Change: Which declined by 22 million versus 163 million C. So reserve, we held as of December 31st 2023.
Speaker Change: This reduction was driven by a 42 million dollar reversal of existing reserves associated with the realization of losses.
Speaker Change: Actually offset by approximately $20 million of additional reserves an existing loans in the portfolio.
Speaker Change: The overall Cecil reserve of 141 million at quarter and represent 6.9% of the outstanding principal balance of our loans held for investment.
Speaker Change: Which is down from 7.6% as of the prior quarter.
Teresa June: 89% of our total CESA reserve, or $125 million, relates to our risk-rated 4 or 5 loans, including $31 million of loss reserves on our two risk-rated 5 loans and $94 million of loss reserves on our six risk-rated 4 or 5 loans. Overall, the $125 million of reserves on a risk-rated 4 or 5 loan represents 25% of the outstanding principal balance of such loans. Further, with respect to our loans that are risk rated four or five at quarter end, there were 8 loans totaling $503 million in outstanding principal balance.
Speaker Change: 89% of our total seats are reserved or 125 million relate.
Speaker Change: Relate to our risk rated four or five loans.
Speaker Change: Including.
Speaker Change: 31 million of loss reserves on our two risk greatest five loans.
Speaker Change: In 94 million of loss reserves on our six risk created for loans.
Speaker Change: Overall, the $125 million of reserves on a risk rated four or five loans represents 25% of the outstanding principal balance of such loans.
Speaker Change: Further with respect to our loans that are risk rated four or five at quarter and they.
Speaker Change: There were eight loans totaling 503 million an outstanding principal balance.
Teresa June: Seventy-seven percent of the outstanding principal balance of our risk-rated four or five loans is collateralized by office and one residential condominium property. We did downgrade one $97.5 million Texas multifamily loan to a risk rating of 4 from 3 during the first quarter as the timeline and process of the sale of the underlying property by the borrower have been extended.
Speaker Change: 77% of the outstanding principal balance of a risk rated four or five loans are collateralize My office and one residential condominium property.
Speaker Change: We did downgrade 197.5 million, Texas multifamily loan to a risk rating of four from three during the first quarter.
Speaker Change: Timeline and process of the sale of the underlying property by the borrower has been extended.
Bryan Patrick Donohoe: Before concluding, I want to provide more background on managing our balance. Consistent with our goals, we continue to maintain significant liquidity and further reduce our third-party debt. Driven by the loan exit activities during the first quarter, we reduced our outstanding borrowings by $138 million, resulting in total third-party debt of less than $1.5 billion at March 31, 2021. And, finally, we declared a regular cash dividend of $0.25 per common share for the second quarter of 2024. The second quarter dividend will be payable on July 16, 2024, to common stockholders of record as of June 28, 2024. With that, I will turn the call back over to Bryan for some closing remarks.
Speaker Change: Before concluding.
Speaker Change: I want to provide more background I'm managing our balance sheet.
Speaker Change: Consistent with our goals, we continued to maintain significant liquidity and further reduced our third party debt.
Speaker Change: Driven by the loan exit activities during the first quarter, we reduced our outstanding borrowings by 138 million.
Speaker Change: Resulting in total third party debt of less than 1.5 billion at March 31st 2024.
Speaker Change: And finally, we declared a regular cash dividend of 25 cents per common sure for the second quarter of 2024.
Speaker Change: The second quarter dividend will be payable on July 16th 2024 to common stock holders of record as of June 28th 2024.
Speaker Change: With that I will turn to call back over to Brian for some closing remarks.
Bryan Patrick Donohoe: Thank you <unk>.
Bryan Patrick Donohoe: We are cautiously optimistic that the modest recovery we are seeing in the commercial real estate markets and tightening spreads in the CMBS capital markets will be supportive in the execution of our near-term goals. We are firmly focused on addressing our underperforming loans and further building liquidity in order to maximize outcomes as we seek to shift our focus from asset management to investing. The timing and path to resolving some of our current four and five risk-rated loans may make our quarterly earnings trajectory uneven this year, including in the second quarter due to loan resolution.
Bryan Patrick Donohoe: We are cautiously optimistic that the modest recovery, we are seeing in the commercial real estate markets and tightening spreads and the C. M. B S capital markets will be supportive in the execution of our near term goals.
Bryan Patrick Donohoe: We are firmly focused on addressing are underperforming loans and further building liquidity in order to maximize outcomes as we seek to shift our focus from asset management to investing.
Bryan Patrick Donohoe: The timing and path to resolving some of our current foreign five risk rated loans.
Bryan Patrick Donohoe: May make our quarterly earnings trajectory uneven this year, including in the second quarter due to loan resolutions.
Bryan Patrick Donohoe: We remain focused on resolving a number of the identified risk-rated four and five loans in 2024, which we believe will enable us to achieve higher distributable earnings. As always, we appreciate you joining our call today, and we'd be happy to open the line for questions. Operator?
Bryan Patrick Donohoe: Remain focused on resolving a number of the identified risk rated four and five loans in 2024.
Bryan Patrick Donohoe: Which we believe will enable us to achieve higher distributable earnings.
Speaker Change: As always we appreciate you joining our call today and we'd be happy to open the line for questions operator.
Operator: Thank you, and at this time, if you would like to ask a question, please press star 1 on your telephone keypad. You may remove yourself from the queue at any time by pressing star 2. Once again, that is star 1 to ask a question, and our first question will come from Doug Harter with UBS. Please go ahead.
Speaker Change: Thank you and at this time, if you would like to ask a question. Please press star one on your telephone keypad, you may room mates yourself from the queue and any time, they pressing star too.
Speaker Change: Once again that is star one to ask a question.
Speaker Change: And our first question will come from job harder with P. B S.
Job Harder: Please go ahead.
Douglas Michael Harter: Thanks, and good morning. Uh, you talked about using the, you know, potentially going back to investing. This quarter, you used the resolution proceeds to pay down debt. Just how should we think about when you might pivot to investing versus continuing to de-lever the balance sheet?
Job Harder: Thanks, and good morning.
Job Harder:
Job Harder: You talked about using the.
Job Harder: You know potentially moot going back to investing this quarter use the resolution pursuits to pay down debt you know just how should we think about.
Job Harder: You know when you might pivot to investing versus continuing to the dealer for the balance sheet.
Bryan Patrick Donohoe: Yeah, I appreciate the question, Doug. Good to hear from you.
Speaker Change: Yeah I appreciate the question good to hear from you I I think the the playbook remains fairly similar to what we've said in prior quarters, which is a multi pronged path towards resolution, where we're considering a lot of options with the pursuit of generating more liquidity.
Speaker Change: Which will give us then the optionality as to when we see the opportunities which have started to to present themselves beginning in queue for with some of the rate stability, we saw a bit of a pause with the right movement of the past six or eight weeks.
Bryan Patrick Donohoe: I think the playbook remains fairly similar to what we've said in prior quarters, which is a multi-pronged path towards resolution where we're considering a lot of options with the pursuit of generating more liquidity, which will give us then the optionality as to when we see the opportunities, which have started to present themselves beginning in Q4 with some of the rate stability we saw. But ultimately, we are seeing more liquidity and more acceptance of revised asset values.
Speaker Change: But ultimately we are seeing more liquidity more acceptance of I've revised asset values and ultimately as we work through the coming quarters, we would.
Bryan Patrick Donohoe: And ultimately, as we work through the coming quarters, we would intend to get back to that offensive side of the ledger once we've crystallized some more liquidity on the balance sheet. So the primary goal is to continue to resolve those risk-rated four and fives, and the liquidity that should come with those types of resolutions will allow us that flexibility.
Speaker Change: Tend to get back to that offensive side of the ledger. Once we've once we've crystallized some some more liquidity on the balance sheet. So that the primary goal is to continue to resolve those risk rated four and five and the liquidity that should come with those types of resolutions will allow us allow us that flexibility.
Teresa June: Appreciate that, Bryan. And Tasek, can you give us some sense of what sort of drag the four resolved loans, you know, excluding the losses had on earnings during the first quarter and, you know, kind of how to think about the path back towards the dividend.
Speaker Change: I appreciate that Brian and <unk> can you give us some sense, what sort of drag the the four resolved loans, excluding the losses had on head on earnings during during the first quarter and you know kind of had to think about the the past <unk>.
Speaker Change: The dividend.
Teresa June: Sure. Thanks for your question, Doug.
Speaker Change: Sure. Thanks for your question Doug.
Speaker Change: We mentioned the four loans that were either.
Teresa June: You know, as we mentioned, the four loans that were either exited or restructured this quarter, so really, the resolution of those four loans, either through, for example, the restructured loan, having an A note come back on earnings, and then the three exited loans really paying down debt. The combination of that really added around $0.02 of distributable earnings during the first quarter. You know, that run rate, if you want to call it that, the full quarter impact of that, you know, would be higher than the $0.02, but for the first quarter, I think it was roughly $0.02 positive impact that it had on our first quarter earnings.
Speaker Change: Either exited or restructured this quarter, so really the resolution of those for loans either through for example, the restructured loan having.
Bryan Patrick Donohoe: Having a note come back on earnings and then the three exited loans really paying down debt. The combination of that really added around two cents.
Bryan Patrick Donohoe: Distribute earnings during the first quarter.
Speaker Change: That run right. If you want to call that a full quarter impact of that will be higher than in the two cents, but for the for the first quarter I think it was roughly two cents positive impact that it had on our first quarter earnings.
Operator: Great. Thank you, Jason. Thank you, Doug.
Speaker Change: Great. Thank you.
Speaker Change: Thank you Doug.
Operator: Our next question will come from Jade Rahmani with KBW. Please go ahead.
Speaker Change: Our next question will come from.
Speaker Change: W.
Speaker Change: Please go ahead.
Jason Sapshon: Hi, This is actually Jason Sapshon on behalf of Jade Rahmani. It would be helpful to hear an update on how things are going with your repo lenders and on the
Speaker Change: Excuse me Hi, this is actually Jason sat down on Virginia, <unk>. It would be helpful to hear an update on how things are going with your repo lenders and on the term loan.
Speaker Change: [noise] sure. Good morning, Thank you Wanna kick us yeah.
Operator: Sure, good morning. Hey, do you want to kick us?
Teresa June: Yeah, no, thank you. Thanks for the question.
Speaker Change: Yeah no. Thank you thanks for the question Yeah.
Speaker Change: Yeah, I think we've had and always maintain what we think is a very strong relationship with all of our all of our lenders warehouse lenders term loan lenders revolving credit facility lenders.
Teresa June: You know, I think we've had and always maintained what we think is a very strong relationship with all of our lenders, warehouse lenders, terminal lenders, revolving credit facility lenders. And in fact, as you'll notice in our filing this morning, we have continued to work with them, and we greatly appreciate the partnership we have with all of our lenders. But you can see that, you know, we continue to, for example, amend our credit facility so that we can, again, as part of our overall goal to resolve underperforming loans, optimize the balance sheet with flexibility. So flexibility is, you know, very important to us. And, again, we appreciate all the partnership we've had with our lenders, who have been willing to work with us to create that additional flexibility on our balance.
Bryan Patrick Donohoe: Great, thank you. Also, on the North Carolina office loan default, it would be helpful to hear more color on how you see that playing out.
Speaker Change: And in fact is you'll notice in our filing. This morning, we have continued to work with them and we greatly appreciate the partnership we have with all of our lenders, but you can see that we continued to for example, Amanda credit facility. So that we can again, it's part of our overall goal to resolve underperforming loans.
Speaker Change: Optimize the balance sheet with flexibility.
Speaker Change: So flexibility is very important to us and again, we appreciate all the.
Speaker Change: Partnership we've had our lenders who have been willing to work with us to create that additional flexibility on our balance sheet [noise].
Speaker Change: Great. Thank you also on the on the North Carolina Oarfish loan default it would be helpful to hear more color on how you see that playing out.
Bryan Patrick Donohoe: Yeah, I'll give that a shot. I think we obviously were attempting to work with the borrower. However, the capital necessary for us to restructure that loan and in keeping with what we accomplished on the New York loan that we covered in the prepared remarks. So I think the timeline for resolution there will be what it will be. I don't think it's a one to two quarter resolution necessarily.
Speaker Change: Yeah, I'll I'll I'll give that a shot I think look we obviously, we're attempting to work with the borrower.
Speaker Change: However, the the capital necessary.
Speaker Change: For us to restructure that loan and in keeping with what we accomplish on the New York loan that we that we covered in the prepared remarks.
Speaker Change: Necessarily make it rational hey, it's also an asset as we mentioned that has positive cash flow.
Speaker Change: Probably has some occupancy upside in a market that has seen some positive flows of of corporate tenancy. So we think there's some value to be added with with a functional ownership group.
Speaker Change: So I think the the timeline for resolution there will will be what it will be I don't think it's a one to two quarter resolution necessarily but when we look at situations like this clearly we want to see both expertise and capital come to bear on those assets and.
Bryan Patrick Donohoe: But when we look at situations like this, clearly, we want to see both expertise and capital come to bear on those assets. And as you see in our earnings deck, we feel that way. We're in a position to bring both of those as a fallback position to having attempted to work with the borrower. So the timeline will be determined over the next 60 to 90 days. And I think when we chat with you all in 90 days, we'll have a more concrete plan there.
Speaker Change: As you see in our earning stack we feel that.
Speaker Change: We are in a position to bring both of those as a fall back position to having attempted to work with the Bahrain. So timeline will be determined over the next 60 to 90 days and I think when we when we chat with you all and 90 days we'll have.
Speaker Change: More concrete plan there.
Bryan Patrick Donohoe: And as a final question, understanding that each asset is unique, but generally, in your book, how have legal severities compared to your expectations, specifically for office and multifamily loans, and general commentary on what you're seeing in the market with respect to legal severities would be helpful as well.
Speaker Change: Great. Thank you and as a final question understanding that each as it is unique but generally in your book have lost severities compared to your expectations I'm, specifically for office multifamily loans and general commentary on what you're seeing in the market with respect to loss of areas would be helpful as well.
Bryan Patrick Donohoe: I'll start it. Look, I think what we've attempted to do over the past prior quarters has been to give our best estimate of where we expect to resolve assets and really limit surprises on these calls or dramatic changes in our outlook. And I think we've had some success doing that. As an industry, I would put forward that what's gone on in the office sector has surprised many to the downside in terms of resolutions.
Speaker Change: Oh I'll start at like I think what we've attempted to do over the path. Prior quarters has been to give our best estimate of where we expect to resolve assets and really limit surprises on these calls or dramatic changes in our outlook.
Speaker Change: I think we've had some success doing that as an industry.
Speaker Change: Put forth that what's gone on in the office sector has surprised many to the downside in terms of of resolutions that said, we've been as transparent as possible as we work through those I think the lack of transparency generally in the market has probably delayed some resolutions throughout the the broader.
Bryan Patrick Donohoe: That said, we've been as transparent as possible as we've worked through those. I think the lack of transparency generally in the market has probably delayed some resolutions throughout the broader space. And I think, as I said earlier, we're starting to see that crystallize to some degree with stability and rates. So I think over the coming quarters, you'll see more resolutions in keeping with expectations.
Speaker Change: Space and I think as I said earlier, we're starting to see that that crystallized to some degree with with stability in rates. So.
Speaker Change: I think over the coming quarters, you'll see more resolutions in keeping with expectations.
Speaker Change: Great. Thank you.
Operator: Our next question comes from Steven Laws with Raymond James. Please go ahead.
Speaker Change: Our next question comes from Steven.
Steven: Please go ahead.
Steven Laws: Hi, good morning. At the risk of asking something you already mentioned, Bryan was a few minutes late. But, you know, can you talk about the non-accruals?
Steven: Hi, good morning <unk> at.
Steven: At the risk of of asking something you already mentioned, Brian was it a few minutes late but you know.
Bryan Patrick Donohoe: I think it was, I believe there are 292 remaining. I know you guys made a lot of progress. But, you know, is there a goal for a summer near-term resolution, a summer longer-term, but maybe if you look to year end, you have to say an idea of where you'd like to exit the year at that number?
Steven: Can you talk about the Nonaccruals I think it was I believe it's 292 remaining in that you guys made a lot of progress, but you know is there a goal on a summer near term resolution some are longer term, but maybe if you looked at year end do you have a say an idea of where you'd like to exit the year at that on that number.
Bryan Patrick Donohoe: Yeah, thanks for the question, Steven. I'll start, and I'll let Tasek chime in as well.
Speaker Change: Yeah. Thanks for the question, Steven I'll start and I'll I'll, let tasted chime in as well I think.
Bryan Patrick Donohoe: I think part of the challenge of the industry is measuring a lot of what we do by quarter, but certainly, year-end is a good landmark date to turn the page, so to speak, philosophically and financially. I think what we see is, especially with the offensive side of the market being so compelling, that while managing resolution price, we're going to balance that with resolution timing. Our conversations with borrowers, if you were to go back to what feels like a long time ago, three plus years, where extending the duration of assets on the book was really the primary playbook.
Steven: What part of the challenge of the industry is measuring a lot of what we do by quarter, but certainly year and it's a good hallmark date to to turn the page so to speak philosophically and financially I think what we see is especially with the offensive side of the market being so compelling that.
Steven: While managing resolution price, we're going to balance that with resolution timing. So our conversations with borrowers. If you were to go back with what feels like a long time ago, three plus years, where extending duration of assets on the book was really the.
Steven: Primary playbook as we sit here today, we'd like to resolve assets and Chris.
Bryan Patrick Donohoe: As we sit here today, we'd like to resolve assets and crystallize a lot of those resolutions and get back to the offensive side as soon as possible. So, tough to put demarcation lines in terms of the calendar. However, certainly when we look forward the three quarters to year end, that's a pretty good place to plant a flag. But Tasek, feel free to add some color there.
Steven: Crystallised a lot of those resolutions and get back to to the offensive side as as soon as possible. So tough to put demarcation lines in terms of the calendar. However, certainly when we look forward to three quarters to two year and.
Speaker Change: That's a that's a pretty good place to plant a flag, but tasted feel free to add some color there.
Teresa June: Yeah, Bryan, I think you covered it well. Steven, I think you probably heard from our opening remarks that resolving our underperforming loans, certainly including the non-accrual loans, is really one of our top, top, top priorities. We're hyper-focused on that effort. We think that'll bring a lot better clarity to our balance sheet, as well as be accretive to our earnings, as we mentioned. But as Bryan said, I think it's very difficult to provide precise numbers. We did resolve, as we mentioned, about four loans this past quarter, and we hope to continue to report some news on further resolutions in the quarters coming ahead.
Tasted: Yeah, Brian I. Thank you you've covered it well Steven I mean, I think you probably heard from our opening remarks that resolving are underperforming loans certainly, including the nonaccrual loans is really one of our top top top priorities.
Speaker Change: Hyper focused on that effort.
Speaker Change: We think that'll bring a lot better clarity to our balance sheet as well as be accretive to earnings as we mentioned, but as buying said I think it's very difficult to provide precise numbers. We did resolve as we mentioned.
Speaker Change: About four loans this past quarter, and we hope to continue to report.
Speaker Change: Some news on on further resolutions in the quarters coming ahead.
Operator: Great. That was the main one I had today. I so appreciate your comments this morning.
Speaker Change: Right that was the main Wanna add today. So I appreciate your comments this morning.
Operator: Thank you so much, Steven.
Speaker Change: Thank you so much Steven.
Operator: Our next question will come from Steve DeLaney with Citizens J&P. Please go ahead. Good morning, Brian.
Speaker Change: Our next question will come from Steve Delaney with citizens.
Steven Cole DeLaney: Citizens JMP. Please go ahead.
Steven Cole DeLaney: Good morning, Bryan and Tasek. It's been a busy quarter for you, and it sounds like it's continuing. With the four loans, non-accrual loans, that you reworked, resolved in the first quarter, and then the two office REOs in the second quarter, having a little trouble, haven't had a chance to go to the deck and just roll all this through. But as we, after these second, at this point in five rated loans after the REOs, the two REOs.
Steven Cole DeLaney: Good morning, Brian It tastes like a busy quarter for you and it sounds like it's continuing with with the four loans nonaccrual loans that you reworked resolved in the first quarter and then the two office oreos in the second quarter, having a little trouble I haven't had a chance to go to the deck.
Steven Cole DeLaney: Just roll all this through but as we after these second quarter Oreos can you tell us what is left.
Steven Cole DeLaney: At this point and five rated loans after the Oreo two barrios.
Teresa June: Uh, sure, I can, uh... Steve, I can try to take a shot at that. Yeah, so as we mentioned, there are eight loans that are risk rated four and five as of quarter end. Okay, and certainly includes the two office properties that you mentioned that we anticipate going REO in the future. We also mentioned a new four-rated loan, a $97.5 million multifamily loan. As we mentioned in our closing remarks, the reason it was downgraded from three to four is that the sale process of the underlying property, this multifamily property in Texas, is just taking a bit longer than we had originally anticipated. And so because of that, it was downgraded.
Bryan Patrick Donohoe: Sure I can.
Speaker Change: See if I can try to take a shot at that yeah. Okay. So.
Teresa June: So that's really, call it three of the eight loans, again, the two REO plus the one multifamily loan. And then when you really look at the remainder of the portfolio, what you have is some loans that have been kind of, You know, on our balance sheet for a while. We mentioned, for example, one of the mezzanine loans that we put on nonaccrual, and, um... And then really, it is, you know, the condominium development that we have in New York, and then it's the large office loan out in Illinois, and it is So I think that covers it, I'm just trying to recollect, are there others? But I think that makes up the remaining five loans that are in the four and five-rated loan category.
Speaker Change: As we mentioned.
Speaker Change: There are eight loans that are risk rated four and five as of.
Speaker Change: Has a quarter and.
Speaker Change: Okay.
Speaker Change: Fluids, two office properties that you mentioned that that we anticipate.
Speaker Change: Going Oreo.
Steven Cole DeLaney: Future.
Steven Cole DeLaney: We also mentioned a new four right alone and $97.5 million multifamily loan.
Steven Cole DeLaney: And as we mentioned in our closing remarks. The reason it was downgraded from three to four is that the sale process of the underlying property, there's multifamily property in Texas.
Steven Cole DeLaney: It's just taking a bit longer than.
Steven Cole DeLaney: Then we had originally anticipated.
Steven Cole DeLaney: And so because of that you know it was downgraded.
Steven Cole DeLaney: So that that's really call it three of the the eight loans again to two arjo plus one.
Steven Cole DeLaney: Multifamily loan.
Steven Cole DeLaney: And then when you really look at the remainder of the portfolio.
Steven Cole DeLaney: You know what you have is you have some of loans that have been kind of.
Steven Cole DeLaney: On our balance sheet for Awhile, we mentioned for example.
Steven Cole DeLaney: One of the mezzanine loans.
Steven Cole DeLaney:
Steven Cole DeLaney: That we put on non accrual.
Steven Cole DeLaney: And.
Steven Cole DeLaney: And then really.
Steven Cole DeLaney: It is.
Steven Cole DeLaney: The condominium development.
Steven Cole DeLaney: We have.
Steven Cole DeLaney: New York.
Steven Cole DeLaney: And then it's the it's the large office loan out in Illinois.
Steven Cole DeLaney: And it is an industrial asset out in California.
Steven Cole DeLaney:
Steven Cole DeLaney: $20 million loan out in California. So I think that covers just trying to recollect gather others, but I think that that makes up the remaining five loans that are in the foreign primary loan category.
Bryan Patrick Donohoe: Five loans, as we said today, less than four and five, and I understand this is fluid and things are going to be coming and going, but nice to see some resolutions and some progress there. Bryan, I know this is a decision the board goes through probably every month or every – certainly every quarter, but the issue of your current $0.25 dividend and working to maintain that, and the opportunity for share buybacks.
Steven Cole DeLaney: Bob loans as we face today left and four and five and I understand this is fluid and things are gonna be coming and going but <unk> nice to see some resolutions and some progress there Brian.
Steven Cole DeLaney: This is a decision the board goes through probably every month.
Steven Cole DeLaney: Or every.
Steven Cole DeLaney: Certainly every quarter, but the issue of your current twenty-five Saint David in and working to maintain that.
Bryan Patrick Donohoe: You know, I would guess even with the loss of book value, you're still probably a little below 70% of the book value. How are you thinking about that? You know, in this market where everybody is having problems and you know, you're looking at your stocks, you know, with a midteens dividend yield. Just your thoughts, please, on how the company or shareholders are best served between paying out that cash or buying back your shares here. I didn't notice that you bought any shares in the first quarter. If I overlooked that, please let me know. Thank you.
Steven Cole DeLaney: The opportunity for share buybacks.
Steven Cole DeLaney: Yes, even with the loss of book value, you're still probably a little below 70 per cent of book how are you thinking about that in this in this market, where everybody's having problems and you know you're looking you're looking at your stock you know with a mid teens dividend yield just your thoughts.
Steven Cole DeLaney: Please on.
Steven Cole DeLaney: How the company or shareholders. The best served between paying out that cash or buying back your shares here.
Speaker Change: I didn't I didn't notice that you bought and shares Indy.
Steven Cole DeLaney: The first quarter, if I overlooked that please let me know thank you.
Bryan Patrick Donohoe: Now, I appreciate the question, Steven. As you said in your prior comment, the market is fairly fluid, and it is something that the board and management considers each quarter. As we discussed when we chatted 60, 90 days ago, what we established with the dividend at $25 was what we felt was attainable over the near to medium to long term, right? And I think that's something that we will continue to evaluate. And over the past 18 months, I think we as an industry have contemplated the best way to serve our shareholders, and that is a combination of dividend, which is the core charge, I think, of the mortgage REIT business, as well as the relative value of buying back shares, which we've done previously.
Steven Cole DeLaney: Now that I.
Speaker Change: Appreciate the question Steven as you said in your prior comment the market is fairly fluid.
Speaker Change: It is something that the board and management considers each quarter as we characterize when we when we chatted 60 90 days ago, what we establish when with the dividend at 25 was what we felt was attainable.
Bryan Patrick Donohoe: Over over the near to medium to long term right and I think that's something that that we will continue to evaluate and over the past 18 months I think we as an industry have contemplated the best way to serve our shareholders and that is a combination of dividend, which is the the the core charge I think of the mortgage.
Bryan Patrick Donohoe: Three business as well as the relative value of of buying back shares, which we've done previously so it's a balanced approach Ah alongside managing liquidity and ultimately crystallizing the best returns possible for our investors. So I would put for it that I think will continue to evaluate that in the coming <unk>.
Bryan Patrick Donohoe: So, it's a balanced approach alongside managing liquidity and ultimately delivering the best returns possible for our investors. So, I would put forward that I think we'll continue to evaluate that in the coming quarters based on the results of that fluid market you mentioned.
Speaker Change: <unk> is based on the results of that fluid market you mentioned.
Operator: Glad to hear that it's going to remain on the table regardless of, you know, and I know your board will make the right decision quarter by quarter. Thank you both for your comments.
Speaker Change: Got it.
Speaker Change: Glad to hear that it's that it's going to remain on the table, regardless of you I know you're bored to make the right decision quarter by quarter. Thank you both for your comments.
Speaker Change: Thanks to you.
Operator: And once again, that is star number one, if you would like to ask a question. And our next question will come from Rick Shane with J.P. Morgan. Please go ahead.
Speaker Change: And once again that is star one.
Steven Laws: Ask a question and our next question will come from Rex with J P. Morgan.
Richard Barry Shane: Hey, guys. Thanks for taking my questions this morning. I apologize if some of this has been covered. First, as you sort of move from paying down – shrinking the balance sheet to moving back to offense, I'm curious if there are any covenants that you need to be aware of or any limitations related to your debt that could make that more challenging.
Rex: Go ahead.
Richard Barry Shane: Hey, guys. Thanks for taking my questions. This morning, and I apologize if some of it's just been covered first does she sort of move from pain down shrinking the balance sheet to moving back to often.
Richard Barry Shane: I'm curious if there are any covenants that you need to be aware of or any limitations related to your debt that could make that more challenging.
Teresa June: Yeah, Rick, thank you very much for your question. And good morning.
Speaker Change: Yeah, Rick Thank you very much for your question and good morning.
Teresa June: You know, as we mentioned in our response to some of the prior questions, we have been actively in dialogue with our lenders, and as you'll notice in our filing this morning in the queue, we are starting to make some amendments to those facilities to make sure that we have the flexibility to implement the strategy that we talked about. Our strategy, as Bryan mentioned, is to focus on resolving our underperforming loans.
Speaker Change: As as we mentioned.
Speaker Change: And are.
Speaker Change: In response to some of the prior question, we have been actively in dialogue with our lenders and if you'll notice in our filing. This morning in the queue that we are starting to make some amendments to those facilities to make sure that we have the flexibility.
Speaker Change: To implement a strategy that we talked about right. So far our strategy is Brian mentioned is too focused on resolving are underperforming loans.
Teresa June: And in order to do that we want to make sure we optimize the balance sheet to provide that flexibility.
Teresa June: Leveraging has been certainly a big part of that strategy as well as maintaining good levels of liquidity.
Teresa June: In order to do that, we want to make sure we optimize the balance sheet to provide that flexibility. Deleveraging has certainly been a big part of that strategy, as well as maintaining good levels of liquidity. And so, you know, we continue to focus on those two elements, and then again, we're proactively working with our lenders to make sure that the covenants and the loan facilities provide us with that flexibility to attain the overall objective of resolving underperforming loans. The answer to your question is, yes, we are definitely proactively working with our lenders on this.
Teresa June: And so we continue to focus on those two elements and then again, we're proactively working with our lenders to make sure that the covenants and loan facilities provide us that flexibility to obtain the overall objective of resolving underperforming loans. So the answer to your question is yes. We are we are definitely proactively working with our lenders.
Richard Barry Shane: Got it. Yeah, I did a search of the queue for covenant and amendment, and I got 150 of each, so I wasn't able to find my answer. I'm sure it's in there.
Richard Barry Shane: This.
Speaker Change: Got it yeah, I I did a search of the queue for Covenant, an amendment and I got 150 of each so I didn't I wasn't able to find my answer I'm sure. It's in there second question look in.
Bryan Patrick Donohoe: Second question, look at the forward curve and compare one month forward SOFR for 25 today versus where it was in January. Estimates are rates are up 100 to 125 basis points from where they were in January. I am curious in your conversations with borrowers or what you're seeing if that expectation that rates are going to be so much higher for longer. And again, it's the forward curve. So we have to take it with a grain of salt. But is that driving capitulation? Is it driving people's behaviors to change in a material way from what their sentiment was even at the beginning of this?
Bryan Patrick Donohoe: If we look at the forward curve and compare.
Bryan Patrick Donohoe:
Bryan Patrick Donohoe: One month forward so for for 25 today versus where it wasn't January expectations are rates are up 100, 125 basis points from where expectations were in January.
Bryan Patrick Donohoe: I am curious in your conversations with borrowers are what you're seeing.
Bryan Patrick Donohoe: If that expectation that rates are going to be so much higher for longer and again, it's the forward curve. So.
Bryan Patrick Donohoe: We have to take it with a grain of salt, but is that driving capitulation as a driving people's behaviors to change in a material way from what sentiment was he then at the beginning of this year.
Bryan Patrick Donohoe: Yeah, good question, Rick, and a few questions in there. And I'd say summarily, yes, I think that the stability in rates in Q4 was catalytic in terms of causing some transactions to be consummated, and I think we saw a good pop of activity in Q1, much of which was in the headlines in terms of apartment industrial trades and fairly sizable ones. I think that started the process.
Speaker Change: Yeah. Good question racking up in a few questions in there and I'd say similarly, yes, I think that the the stability in the Ray in rates in Q4 was catalytic in terms of causing some transactions to be consummated and I think we saw a good pop of activity.
Bryan Patrick Donohoe: <unk> and Q1 much of which was in the headlines in terms of apartment industrial trades in fairly sizeable ones.
Bryan Patrick Donohoe: I think that the that started the process I don't know maybe capitulation as in a perfect world.
Bryan Patrick Donohoe: I don't know if capitulation isn't a perfect word, but for the real estate market to get back to forward looking and to consummate transactions. And so while the rise in rates since that period of time has not been accretive to values, right, it's clearly in the public and private markets; you'll see a strong correlation to rates in terms of the prints. I do think that the train started to leave the station to some degree.
Bryan Patrick Donohoe: But for the real estate market to get back to forward looking into to consummate transactions and so while the rise in rates since that period of time has not been accretive to values right. It's it's clearly in the public and private markets, you'll see a strong correlation to rates in terms of the prints I do think that.
Bryan Patrick Donohoe: The the train started to leave the station to some degree and therefore, we expect people to either realize that their assets are worth what they are worth and therefore move on so there's a financial capitulation, but also the time allocation for legacy holders of assets is may no longer be.
Bryan Patrick Donohoe: And therefore, we expect people to either realize that their assets are worth what they are worth and therefore move on. So there's a financial capitulation, but also the time allocation for legacy holders of assets may no longer be worthwhile. And on the other side of that more positive tone, higher rates for longer mean the yields available as a lender continue to be high and widely publicized. But when there is this level of distress in the market, it can be a generational opportunity to invest in equities and structured debt, things like that. So I think that the stability in rates and then the backing up is kind of going to lead to more resolutions, whether it's characterized as capitulation or a great opportunity. I appreciate it.
Bryan Patrick Donohoe: Worth while.
Bryan Patrick Donohoe: On the other side of that more positive tone would be that.
Bryan Patrick Donohoe: [noise] higher for longer means the the the yields available as a lender continue to be high.
Bryan Patrick Donohoe: And widely publicized but when there is this level of duress in the market. It can be a generational opportunity to invest in equities and structured that things like that so I think that the stability and rates and then backing up.
Bryan Patrick Donohoe: Kind of either way going to lead to more resolutions, whether it's characterizes capitulation or great opportunities.
Bryan Patrick Donohoe: I appreciate that, Bryan. Thank you so much, guys.
Speaker Change: I I appreciate that thank you so much guys.
Speaker Change: I appreciate it Rick.
Operator: And, with no further questions, I would like to turn the conference back to Bryan Donohoe for any additional or closing remarks.
Speaker Change: No further questions I would like to turn the conference back.
Bryan Patrick Donohoe: For any additional or closing remarks.
Bryan Patrick Donohoe: I appreciate that operator. Yeah, I just want to thank everyone for their time today. We appreciate the continued support of Ares Commercial Real Estate. And we look forward to speaking to you again on our next earnings call. Thank you.
Bryan Patrick Donohoe: I appreciate that operated yeah I just wanted to thank everyone for their time today. We appreciate the continued support of areas commercial real estate and we look forward to speaking to you again on our next earnings call. Thank you.
Operator: And ladies and gentlemen, this concludes our conference for today. If you missed any portion of today's call, an archived replay of this call will be available approximately one hour after the end of this call through June 9, 2024, to domestic callers by dialing 1-800-759-0728, and to international callers by dialing 1-402-220-7229. An archived replay will also be available on a webcast link located on the homepage of the Investor Resources section of our website.
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Speaker Change: And ladies and gentlemen, this concludes our conference for today.
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