Klaus Vedfelt/DigitalVision via Getty Images In our last coverage of Ares Commercial Real Estate Corporation (NYSE:ACRE) we gave it a "Sell" rating. What was unusual about our stance is that we did it in the face of a declining stock. Generally, we tend to move our ratings in the opposite direction of the stock price. As good news gets priced in and stocks move higher, we move from "Buy" to "Hold". Conversely, when stocks tank, we recognize that bad news is possibly getting priced in and move from "Sell ...

Core Viewpoint - The macroeconomic environment is challenging for commercial real estate, particularly for Ares Commercial Real Estate Corporation (ACRE), due to high exposure to struggling sectors like offices and multifamily properties, leading to credit quality concerns and a recent dividend cut [28]. Macroeconomic Factors - The expectation is for both interest rates and inflation to remain elevated, which could pressure credit quality and force the Federal Reserve to prioritize financial stability over combating inflation [2]. - Economic growth forecasts are in the 2-3% range, but credit quality is declining, indicating stress in the economy [4]. Commercial Real Estate Market - As of December, distressed US properties totaled nearly $86 billion, with offices making up 41% of this value. Potential distress across all property types is approximately $235 billion, with apartments accounting for over $67 billion [5][7]. - ACRE's portfolio is heavily weighted towards struggling sectors, with 39% in office debt and 26% in multifamily, totaling 65% exposure to these vulnerable areas [14]. Financial Performance - ACRE reported a net loss of $39.4 million in Q4 2023, translating to a loss of $0.73 per share, primarily due to a significant increase in the Current Expected Credit Loss (CECL) provision of $47.5 million [16][18]. - The total CECL reserves reached $163 million by the end of 2023, representing 7.6% of the outstanding principal balance of loans held for investments, with 71% of this reserve allocated to office loans [18][21]. Dividend and Shareholder Value - ACRE cut its dividend by 24% to $0.25 per share per quarter, reflecting a shift towards preserving book value and liquidity amid economic challenges [24][25]. - The company generated $1.06 in distributable earnings per share in 2023, which is only slightly above the new annualized dividend, indicating a high payout ratio and potential for further cuts [25][26]. Valuation and Market Sentiment - ACRE trades at 62% of its book value, down from nearly 90% before recent debt issues, with a current consensus price target of $7.70, representing an 8% upside from the current price [26][27]. - The overall sentiment is cautious, with expectations of worsening credit quality in the coming quarters, leading to a Sell rating for ACRE [27][28].

JasonOndreicka/iStock via Getty ImagesWe recently wrote about our purchase of a 9% yield from MFAN (MFAN). Another one of those opportunities popped up recently, so we went for it again. Today’s 9% yield (about 8.95% at our purchase prices) comes from RCB (RCB). This is one of the baby bonds from Ready Capital (RC). We purchased shares twice this week. I see this as an attractive choice for risk/reward. We’re feeling a bit cautious about the overall economy. I wanted to take a defensive position, but st ...

filo/iStock via Getty Images As part of my portfolio review process last year, I sold Ares Commercial Real Estate Corporation (NYSE:ACRE) due to growing dividend risks. Ares Commercial Real Estate's payout ratio had risen substantially above 100% in the third quarter, which made a dividend cut that much more probable. The commercial trust indeed slashed its first quarter dividend by 24.2% to $0.25 per share, but this new payout is better covered by the trust's distributable earnings. I think that the safest ...

walik/E+ via Getty ImagesThe mortgage REITs have finished reporting. Well, ARMOUR Residential REIT (ARR) is in a strange spot. They haven’t filed a 10-K. They did file a form indicating that they won’t be able to file their 10-K in a timely manner. However, we have the preliminary results and those should be good enough for the assessment. Today we finally got the update from Cherry Hill Mortgage (CHMI). CHMI’s book value per share was garbage. Book value per share fell over 9%. That compares negatively ...

Richard Drury Ares Commercial Real Estate (NYSE:ACRE) announced a 24% dividend cut last week as the company suffers from the fallout in the commercial real estate market. Like other commercial mortgage lenders, the REIT has seen an increase in its reserve for expected credit losses, which impacted Ares Commercial's P&L negatively in the fourth quarter. The earnings report and associated dividend cut caused shares to drop to a new 1-year low. However, since the REIT is now going to have better dividend cover ...

Ares Commercial Real Estate Corporation (NYSE:ACRE) Q4 2023 Earnings Conference Call February 22, 2024 9:00 AM ET Company Participants John Stilmar - Managing Director, Investor Relations Bryan Donohoe - Chief Executive Officer Tae-Sik Yoon - Chief Financial Officer Conference Call Participants Sarah Barcomb - BTIG Stephen Laws - Raymond James Richard Shane - JPMorgan Donald Fandetti - Wells Fargo Steve DeLaney - JMP Securities Douglas Harter - UBS Jade Rahmani - KBW Operator Please standby your program is ...

Ares Commercial Real Estate (ACRE) came out with quarterly earnings of $0.20 per share, beating the Zacks Consensus Estimate of a loss of $0.40 per share. This compares to earnings of $0.44 per share a year ago. These figures are adjusted for non-recurring items.This quarterly report represents an earnings surprise of 150%. A quarter ago, it was expected that this real estate investment trust would post earnings of $0.23 per share when it actually produced earnings of $0.25, delivering a surprise of 8.70%.O ...

Financial Position - As of December 31, 2023, the outstanding balance under the Financing Agreements was $894.8 million[33]. - The outstanding balance of CLO Securitizations as of December 31, 2023, was $723.9 million[34]. - The company had $150.0 million outstanding under its Secured Term Loan as of December 31, 2023[33]. - The company had $105.0 million outstanding under one recourse note agreement as of December 31, 2023[33]. - As of December 31, 2023, the company had approximately $894.8 million of outstanding borrowings under Financing Agreements and $723.9 million under CLO Securitizations[92]. Debt and Leverage Strategy - The company expects to maintain a debt-to-equity ratio not exceeding 4.5:1 to 10:1 for its leverage strategy[30]. - The company may incur significant additional debt through various financing arrangements, including bank credit facilities and public/private debt issuances, subject to market conditions[100]. - The company faces risks related to its leverage strategy, including the inability to refinance maturing debt on favorable terms and potential losses as a holder of subordinated classes of securitizations[93]. - The company may incur significant debt, increasing the risk of loss and reducing cash available for distributions to stockholders[91]. Investment Strategy and Market Conditions - The current market conditions are expected to provide attractive investment opportunities for floating rate loans on well-located commercial real estate properties[29]. - The company competes with various entities including public and private REITs, banks, and institutional investors, which may limit its ability to originate or acquire target investments on attractive terms[37]. - The company relies on Ares Management for investment advisory services, which includes a disciplined investment philosophy focused on strong risk-adjusted returns[25]. - The macroeconomic environment is characterized by persistent inflation, labor shortages, and high interest rates, which could adversely impact financial results[47]. - The Federal Reserve increased the target federal funds rate from the first quarter of 2022 through July 2023, with potential future increases indicated to combat inflation[60]. Credit and Economic Risks - The current expected credit loss reserve increased from $71.3 million on December 31, 2022, to $163.1 million on December 31, 2023, primarily due to macroeconomic pressures[56]. - Approximately 71% of the CECL Reserve is related to loans collateralized by office space, which constitutes 39% of the total loan portfolio based on outstanding principal balance[56]. - The company may face increased risks of loss due to prolonged economic downturns or recessions, particularly affecting real estate values[49]. - Fluctuations in interest rates and credit spreads could significantly impact financing costs and investment income, leading to potential operating losses[83]. Regulatory and Compliance Issues - The company has elected to be taxed as a REIT, which allows it to avoid federal income taxes if it distributes all REIT taxable income to stockholders[35]. - The company is required to maintain certain financial covenants, including tangible net worth and asset coverage ratios, which, if not met, could lead to defaults and restrictions on operations[96]. - Regulatory changes, including those from the Dodd-Frank Act, may affect the company's securitization practices and increase operational costs[107]. - The company is organized to avoid registration as an investment company under the 1940 Act, limiting its operational flexibility[199]. Risks Related to Investments - The company’s investments are subject to various risks, including economic downturns, changes in laws, and natural disasters, which may reduce returns and affect dividend payments[132]. - The company may invest in non-performing real estate loans, which involve a high degree of credit and market risk, especially during economic downturns[166]. - The company may incur losses from B-Notes due to their subordinated nature and the risks associated with borrower defaults[151]. - Investments in non-investment grade rated CRE loans involve a higher risk of default and loss, which could reduce distributions to stockholders and adversely affect stock value[149]. Shareholder and Stock Performance - The company has not established a minimum distribution payment level to shareholders, raising concerns about future cash flows for distributions[56]. - The market price of the company's common stock may fluctuate significantly due to various factors, including operating results and changes in business strategy[179]. - Future offerings of securities may dilute the value of existing stockholders' shares and adversely affect the market price of common stock[191]. - The company is required to distribute at least 90% of its REIT taxable income annually to maintain its REIT qualification[185]. Operational Risks - The company is highly dependent on Ares Management's information systems, and any failures could disrupt business operations and negatively impact stock price[72]. - Cybersecurity risks are increasing, with potential disruptions to operations and financial data integrity due to cyber-attacks[77]. - The company may face challenges in liquidating investments due to their illiquidity, which could adversely affect financial results if quick liquidation is required[125]. - The company may need to foreclose on loans in default, which could result in lengthy and expensive processes, potentially leading to losses[178].

Exhibit 99.1 ARES COMMERCIAL REAL ESTATE CORPORATION REPORTS FOURTH QUARTER AND FULL YEAR 2023 RESULTS Fourth quarter GAAP net income (loss) of $(39.4) million or $(0.73) per diluted common share and Distributable Earnings(1) of $10.8 million or $0.20 per diluted common share Full year GAAP net income (loss) of $(38.9) million or $(0.72) per diluted common share and Distributable Earnings(1) of $58.4 million or $1.06 per diluted common share - Subsequent to year ended December 31, 2023 - Declared first quar ...