Q1 2025 Ares Commercial Real Estate Corp Earnings Call
rinny dinny dinny dinner
um you
Please stand by, we're about to begin.
Speaker Change: Good afternoon. Welcome to 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 Wednesday, May 7th, 2025. I will now turn the call over to Mr. John Stilmar, partner of public markets investor relations. Please go ahead, sir.
Speaker Change: Good afternoon, and thank you for joining us on today's conference call. In addition to our press release and the 10Q that we filed with the SEC, we've put an earnings presentation under the investor resources section of our website at www.AresCRE.com
Speaker Change: 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 contained forward-looking statements and are subject to risks and uncertainties.
Speaker Change: Many of these four 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: in the forward-looking statements as a result of a number of factors, including those listed in its SEC filings. Ares Commercial Real Estate Corporation assumes no obligation to update any such forward-looking statements.
Speaker Change: During this conference call, we refer certain non-GAAP financial measures. We use these as measures of operating performance and these measures should not be considered an isolation from or substitute for measures prepared in accordance with generally accepted accounting principles. [inaudible]
Speaker Change: These measures may not be compared up to the like title measures used by other companies. Now I'd like to turn the call over to our CEO , Bryan Donohoe.
Bryan Donohoe: Thank you, John . Good afternoon, everyone, and thank you for joining us. I'm also joined today by Jeff Gonzalez, our Chief Financial Officer, Tate Sikyun, our Chief Operating Officer, as well as other members of the management and investor relations teams.
Bryan Donohoe: I'm pleased to report that we had a very successful quarter.
Bryan Donohoe: Achieved to one of our primary objectives by building liquidity to a level which we believe will allow us to accelerate resolutions of our risk-graded four and five loans, reduce our office loan concentration, and maximize our REO investments.
Bryan Donohoe: Each of these will advance our collective goal of demonstrating book value further supported by him proved underlying fundamentals of our portfolio.
Bryan Donohoe: Importantly, our current balance sheet positions us to evaluate a number of opportunities for investing our additional capital, including into new loans.
Bryan Donohoe: Let me start right by underscoring some of our recent accomplishments that led to our strong, unbounded chief positionate.
Bryan Donohoe: First, we collect the $307 million of repayments across nine loans, double the amount of repayments we received in the prior quarter, and the highest amount of repayments for a quarter as a percentage of outstanding principal balance in the company's history.
2nd, with the acceleration of repayments and additional liquidity
Bryan Donohoe: We reduced our outstanding borrowings by $228 million to $946 million and lowered the net debt equity ratio, excluding Cecil, to 1.2 times compared to 1.9 times at the end of the first quarter of 2024.
Third, as Jeff will touch on in more detail
Jeff Gonzales: Through the redemption of our FL3 securitization and the renewal of our $450 million Wells Fargo Secured Funding Facility.
Bryan Donohoe: We reduced our borrowing costs, locked in attractive terms on the underlying assets moved from our FL3 securitization, and extended the term of our secured funding facilities.
Bryan Donohoe: While we still have more to do, we made solid progress against the subjective in the quarter.
Bryan Donohoe: We continue to make strides in reducing our office loan portfolio.
Bryan Donohoe: We reduced our office loans by 25% since March 31, 2024, decreasing the total outstanding balance to $585 million.
Bryan Donohoe: We also had no new migrations to risk rated four or five loans in the first quarter and witnessed improved fundamentals in each asset class across our portfolio.
Bryan Donohoe: As of March 31, 2025, we had one risk-created five loan and four risk-created four loans for which we believe we are properly reserved.
Bryan Donohoe: Evidence in these trends, our largest office loan saw a positive leasing momentum.
Bryan Donohoe: This is a risk rated five on with the carrying value of approximately $148 million as collateralized by an office property in downtown Chicago. This property now has a weighted damage increase term of eight years and occupancy in excess of 90%.
Bryan Donohoe: We also saw positive momentum in our second largest risk-created 405 loan, which is an unlevered risk-created 401 with the carrying value of approximately $106 million, and is collateralized by a 71-unit residential condominium development in Brooklyn, New York.
During the quarter.
Bryan Donohoe: The bar were largely completed the exterior work, and procured nearly all of the remaining necessary materials to complete construction, which mitigates supply chain and known
Bryan Donohoe: We expect marketing of the property to begin in the second half of this year and expect to begin sales by year in 2025 and into 2026.
Bryan Donohoe: Collectively, these two loans did the largest risk rated 4 and 5 loans, an account for approximately 80% of our risk rated 4 and 5 loans based on outstanding principal balance.
Bryan Donohoe: Given the state of our portfolio and acre's balance sheet strength, the company is now in a position to accelerate the timing of our remaining underperforming assets.
and evaluate the best use of our additional liquidity.
Bryan Donohoe: Specifically, this additional liquidity offers opportunities to selectively originate new loans, operates finistically by the common shares. Further, repay debt.
Distribute a common dividend and or fund other strategic initiatives.
Bryan Donohoe: Our book value of $988 per share includes $140 million of Cecil Reserve, but our current stock price implies an additional $300 million discount that is currently trading at 40% of this book value.
Bryan Donohoe: Given this, our strategic goal remains to better demonstrate our book value.
Bryan Donohoe: In closing, we believe the capabilities of our Ares Real Estate team coupled with our healthier, more flexible balance sheet.
Bryan Donohoe: will allow us to better mitigate risk, navigate through uncertain markets, take advantage of future opportunities, and drive greater shareholder value in the long run.
Jeff Gonzales: And with that, I'll turn the call over to Jeff who will provide more details on our first quarter results.
Jeff Gonzales: Thank you, Bryan. From the first quarter of 0.25, we reported gap net income of approximately 9.3 million or 17 cents per common share.
Jeff Gonzales: Our distributable earnings for the first quarter of 2025 was approximately $7.2 million or $0.13 per common share, and there were no realized losses incurred in the first quarter.
Jeff Gonzales: We also collected 2.9 million or 5 cents per common share of cash interest on loans that were on non-accruals during the quarter and was accounted for as a reduction in our loan basis.
Jeff Gonzales: Our portfolio also exhibited stable credit quality as compared to the prior quarter with no new risk-graded four or five loans and book value per share of 988, which was consistent with the 990 book value per share at December 31, 2024.
Jeff Gonzales: The acceleration of repayments that began in the second half of 2024 continued into the first quarter with 307 million in repayments, which is more than double the amount of repayments received last quarter.
Jeff Gonzales: While these repayments will have an impact on our near-term earnings until we are able to reinvest our available capital, they further our objective of proving out book value.
Jeff Gonzales: Re-enforced by the strong repayments in the first quarter, we continue to drive further financial flexibility by reducing our outstanding borrowing even further to $946 million at the end of the quarter, a decrease of 19% quarter of a quarter and 36% year over year.
Jeff Gonzales: Our net debt equity ratio, excluding Cecil, declined to 1.2 times at the end of the first quarter, down from 1.6 times at the end of the fourth quarter, and 1.9 times at the end of the first quarter of 2024.
Jeff Gonzales: As Bryan mentioned, during the first quarter, we took proactive steps to further enhance the financing of our loan portfolio.
Jeff Gonzales: First, we opportunistically redeemed our F all three securitization, replacing it with more efficient financing provided by our existing secured funding facilities.
Jeff Gonzales: As is the case when a securitization exits its reinvestant period, all proceeds from loan repayments are directed to first repay the lowest cost senior notes, resulting in a reduction of the advance rate and an increase in the overall borrowing cost as loan repayments occur.
Jeff Gonzales: Driven by the acceleration of repayment activity starting in the back after 2024, the securitization had amortized down over time.
Jeff Gonzales: This transaction allowed us to set both a higher advanced rate and pricing that was 86 basis points lower at the outset for the back leverage on the remaining loans and the skirmish.
Jeff Gonzales: Additionally, during the first quarter, we extended the maturity date of our $450 million Lowes Fargo Funding Facility by three years, pushing out the initial maturity to February of 2028.
Jeff Gonzales: and the final maturity to February of 2030, further bolstering our financing structure.
Jeff Gonzales: Given these discrete steps, we are proud to have achieved our balance sheet goals.
Jeff Gonzales: Our liquidity position, as measured by available capital, was 147 million as of May 2nd, 2025. This includes 113 million of cash, which equates to more than $2 per share, or nearly 50% of our market capitalization on May 5th.
Jeff Gonzales: Collectively, these actions have supported us achieving a level of liquidity that we believe will allow us to enhance and improve the outcomes of the risk-graded four-on-five loans, Office Sloan's and Aureo Investments.
Jeff Gonzales: Turning to our Cecil Reserve, the total Cecil Reserve declined to 140 million as of March 31st, 2025, a decrease of approximately 5 million from the Cecil Reserve as of December 31st, 2024.
Jeff Gonzales: This reduction was mainly driven by the reversal of Cecil reserves on repaid loans and a decrease in reserves on existing loans in our portfolio.
Jeff Gonzales: The total Cecil Reserve at the end of the first quarter of 140 million represents approximately 9.9% of the total outstanding principal balance of our loan's health investment.
Jeff Gonzales: To conclude, the board declared a regular cash dividend of $0.15 per common share for the second quarter of 2025.
Jeff Gonzales: The second quarter dividend will be payable on July 15, 2025 to common stockholders of record as of June 30, 2025.
Jeff Gonzales: At our current stock price on May 5th, the annualized dividend yield on our second quarter dividend is over 14%.
Bryan Donohoe: With that, I will turn the call back over to Bryan for some closing remarks.
Thank you, John [inaudible]
Bryan Donohoe: He's made meaningful progress on many of our previously stated goals and continue to build upon our solid foundation at Acre
Bryan Donohoe: Our platform is supported by the experience and capabilities of the greater Ares Real State team, which more than doubled in size with Ares acquisition of GCP and March.
Bryan Donohoe: This added scale further enhances our ability to execute on our strategy with the goal of delivering strong shareholder returns in the long run.
Bryan Donohoe: We are proud of the progress we have made. However, our near-term earnings may vary quarter to quarter, as we continue to execute our strategy in an uncertain economic environment.
Bryan Donohoe: In the long term, we believe the capabilities of our team and the strength of our balance sheet positions us to build shareholder value.
Bryan Donohoe: As always, we appreciate you joining our call today, and we'd be happy to open the line for questions.
Speaker Change: Thank you, Mr. Donohoe. Ladies and gentlemen, at this time, if you would like to ask a question, please press star than one on your touchstone phone. If you would like to withdraw your question, please press star than two. We'll go first today to Rick Shane of JP Morgan. Please go ahead.
Hey guys, thanks for taking my questions this morning.
Speaker Change: Look, you know, sounds like there's been some progress on the Chicago Office loan.
It's still held as a rated five loan.
Speaker Change: I guess what I'm really trying to understand is you've got a building that's 90% occupied. It's got a weighted average lease term of eight years. On face value, that sounds pretty compelling.
Speaker Change: and given the progress, is there any potential that either the reserve is overly conservative or we could see this loan migrate to it for over time?
Speaker Change: That's a good question. And obviously, we did try to give the facts around this with transparency. I think if you think about the vintage of
Speaker Change: Office Assets and against Chicago and rates being one of them. So I think it's reflective of an overall shift in risk premium associated with office generally and more specifically around Chicago. So we've as always trying to be. Thank you very much.
Speaker Change: Fourth coming with our views, and it is a kind of a culmination, I would say, of all of those factors that...
Speaker Change: have impacted office values even when the headline fundamentals are positive. So this is a good asset, but one in which a market and different dynamics have gone against it. So we maintain a reserve that's reflective of the asset.
Speaker Change: Got it. And, um, look, obviously the objective is, and you guys have been clear in terms of resolving non-accroing loans and, and, are you out?
Speaker Change: What should we anticipate as a potential cadence as we move through the year? We took a pretty conservative view into...
Speaker Change: The first quarter, and there were less realized losses than the quarter than we necessarily anticipated, and that may just be you guys continuing to...
Speaker Change: work through and potentially enhance value as you resolve outcomes. But how should we think about the migration of those non-performing loans over the next call it three or four quarters?
Speaker Change: Yeah, it's a great question and one of which with everything going on in the market.
Speaker Change: The average does not necessarily tell the full story, right? So we've seen a relatively regular cadence of resolutions and repayments throughout the first quarter [inaudible]
Speaker Change: But we've also seen a good bit of volatility uptick that we've all collectively shared in the industry and beyond since the end of the quarter so predicting the cadence is difficult.
Speaker Change: You know, you can have transparency in line of sight to certain events, but as has occurred over the last couple of years some you can clearly still find some surprises out there. I think that it will be measured and given the scale of our portfolio and the individual assets. Next.
Speaker Change: performing as such. It'll be a little bit more difficult to predict, which is why we've maintained this balance sheet positioning, to be able to accelerate those resolutions when it makes sense and withstand those that don't necessarily come in as expected. It's a little bit more difficult to predict.
Got it. Okay. I appreciate the time. Thank you guys.
Appreciate it.
Speaker Change: Thank you. We go next now to Steve DeLaney of Citizens' JMP.
Speaker Change: Hello everyone, thanks for taking the question. The lung portfolio shrunk, about 300 million, so you're down to 1.35, you're comments Brian that you certainly have the balance sheet is fit today allows for new lending.
Speaker Change: Waiting for the market to settle down a little bit, whether that, you know, the tariff thing, or just...
Speaker Change: It's just trying to run with a more conservative balance sheet, just trying to kind of understand.
Speaker Change: The mix there of your focus and we can expect at some point made by the middle of the year that you would begin to regrow the lung portfolio. Thanks.
Speaker Change: Yeah, Steve, it's a great question. I think you're the word you chose on the mix is spot on, right? I think
Speaker Change: We've positioned ourselves with this balance sheet flexibility such that we can evaluate all of the opportunities that we mentioned in the prepared remarks.
Speaker Change: including being selectively opportunistic around new investments when they arise. The tariff announcement has clearly interrupted at least the acquisition side of our industry over the past.
Jeff Stilmar, Jeffrey Gonzales, Bryan Donohoe
Speaker Change: with these repayments and the expectation for further will allow us to do so. I think especially in the second half of the year.
Speaker Change: As the world is able to digest and digest the tariffs and get rid of some of this volatility and get to whatever that new normal is will provide us a more stable operating background to make those decisions more firmly. So we're going to continue to watch and evaluate the opportunities both from a lending standpoint as well as the world.
Speaker Change: That's helpful color and helps for modeling purposes that you are being patient. My assumption, looking at the balance sheet and the changes in your comments would, you know, led me to that but I appreciate you for emphasizing it.
Speaker Change: 11 times go ahead and stop in the stock, but I had planned even before that I was thinking your last night we had it at about 42% of book or something in that ballpark. Rahmani, do you have a flyback authorization and is that one of the
Speaker Change: Capital Allocation Voices that you and the board will have here over the next several months.
Speaker Change: Yes, we do have a $50 million authorization in place through July of this year.
Speaker Change: It is absolutely one of the items that we are evaluating whether for to use our additional capital to buy back stock. It is important for us to maintain a certain capital base that we feel that's important for our company going forward, but it is something that will continue to evaluate.
Thank you for the comments.
Speaker Change: Thank you, and just a quick reminder ladies and gentlemen, any further questions today? Please press star one. We'll go next now to Jade Rahmani of KVW.
Jade Rahmani: Thank you very much. Can you give an update on the Life Science Boston project?
Steven DeLaney, Jason Sabshon, Jason Sabshon, Jason Sabshon, Jason
Yeah, Jade, thanks for the question. I think-
Jade Rahmani: Clearly that market has struggled. We're in discussions with that sponsor. I think we've got a little over a year left on that term. We've seen some migration or negative supply growth in life sciences as some assets in that overall market have been considered or thought about or converted back to traditional office use, which a few years ago would have been a few years ago.
Jade Rahmani: Fairly Contrarian, so I think there's still a story to be told there, but I'd say the reserve approach that we've taken across the portfolio, we feel has been appropriate, but more to come on that asset certainly.
Okay.
You mentioned strategic initiatives in your remarks.
was wondering what that refers to?
Bryan Donohoe: I wouldn't take it as much more than we are constantly evaluating strategy. Jeff talked about share buybacks and deployment into new investments and I really wouldn't consider it much beyond that.
Speaker Change: Okay, there's been a number of things going on at Ares, including the GP acquisition that you mentioned, and real estate growing, the real estate footprint there, whether it be on the equity or the debt side remains a priority, so that's why I asked.
Speaker Change: Digestion phase there, but it's been great to welcome those colleagues to the team and I think
Jade Rahmani: One of the key takeaways from that, Jade, has been expanding our areas of vertical integration, similar to what we got with the Black Creek acquisition two, three years ago with
Jade Rahmani: The Logistics Sector. We've expanded some of those expertise globally, added data center self-storage, a few other asset classes where that expertise, as I think I mentioned at the tail end of the prepared remarks, we think we'll inert to the benefit of certainly the Aries Shareholders and Acres as well.
Sounds good, thanks a lot.
Thanks, Jade. Appreciate the questions.
Jade Rahmani: Thank you and just one final reminder ladies and gentlemen, Star One, please for any further questions today and we'll pause for just one moment.
Speaker Change: Mr. Donohoe, it appears we have no further questions this afternoon. I'd like to turn the conference back to you for any closing comments.
Bryan Donohoe: That's great. I just want to thank everybody for the time today. I appreciate the continued support of Ares Commercial Real Estate. And as always, we look forward to speaking with you on our next starting call in about 90 days. Thanks everybody.
Bryan Donohoe: Thank you, ladies and gentlemen. This concludes our conference call for today. If you missed any part of today's call, an archive replay of this conference call will be available approximately one hour after the end of this call.
Speaker Change: through June 7, 2025 to domestic callers by dialing 1-800-695-0715 and to international callers by dialing 402-220-1423.
Speaker Change: In Archive Replay, we'll also be available on a webcast link located on the homepage of the Investories Resources section of our website. Again, thanks so much for joining us everyone. We wish you all a great day. Goodbye.
Goodbye.
Patrick Crombie. Gianni Tessaro. Camila Caballo.