Richard Drury Ares Commercial Real Estate (NYSE:ACRE) is facing a challenging situation in its loan portfolio, which was reflected in a steep loss in the second fiscal quarter and rists new questions as to the RETT's dividend. Aces Commercial reported much instruments reported much more color not more popular med publice town reles new questions as t discount to book value, investors are rightfully concerned about a potential dividend reset in the near future. VAL -36.81% Ares Commercial Real Estate Corp (A ...

Core Viewpoint - Ares Commercial Real Estate Corporation (ACRE) has faced significant financial challenges, including a distribution cut and negative total returns, leading to a downgrade to a "Strong Sell" rating with expectations of further distribution cuts in the near future [1][20]. Financial Performance - ACRE's stock price at publication was $8.25, reflecting an 18.18% decline since then, with a total return of -12.06% compared to a 4.79% increase in the S&P 500 [2]. - The company reported a GAAP net income loss of $(0.70) per diluted share for Q2 2024, with distributable earnings also showing a loss of $(0.12) per share [7][10]. - The net interest margin has been declining, dropping from approximately $25 million to $16.8 million over the last four quarters, indicating a significant reduction in net interest income [16]. Debt and Leverage - ACRE has achieved a 10% year-to-date reduction in outstanding borrowings, totaling $1.5 billion, resulting in a debt-to-equity leverage ratio of 1.9x [5][6]. - The company has risk-rated loans that exceed its market capitalization of $367.43 million, raising concerns about its ability to manage its loan portfolio effectively [10][11]. Distribution and Dividend Outlook - Despite the financial losses, ACRE did not cut its distribution, which is viewed as unsustainable, with a best-case scenario for future distributions estimated at around $0.15 per share [19][18]. - The current dividend policy is likely to lead to further liquidity issues, and a more prudent approach would be to reduce the distribution to $0.10 per quarter to build a buffer against ongoing losses [19]. Market Position and Risks - ACRE's portfolio includes loans that have recently gone into non-accrual status, particularly in the multifamily sector, indicating potential further losses [9][15]. - The company has been rated poorly among mortgage REITs over the past five years, with a total price change of -55.50% [20].

Financial Data and Key Metrics Changes - For Q2 2024, the company reported a GAAP net loss of approximately $6.1 million or $0.11 per common share, with distributable earnings loss of approximately $6.6 million or $0.12 per common share, primarily due to a realized loss of $16.4 million from a California office property [13][14] - The overall CECL reserve stands at approximately $139 million, a decrease of about $2 million from the previous quarter, representing about 7% of the outstanding principal balance of loans held for investment [14] Business Line Data and Key Metrics Changes - The company ended Q2 with seven loans totaling approximately $477 million of outstanding principal rated four and five, with three loans migrating from risk rating four to five during the quarter [11][14] - The company took title to a California office property, recording a realized loss of $16 million and classifying the property as REO held for sale [11][14] Market Data and Key Metrics Changes - Market sentiment in the commercial real estate sector is modestly improving, driven by reduced interest rate expectations and increased capital availability [8] - The anticipated sale of a multifamily property securing one of the senior loans did not proceed as expected, leading to a non-accrual status for the loan [9] Company Strategy and Development Direction - The company is focused on strengthening its balance sheet to drive maximum flexibility in addressing underperforming loans, which may result in uneven earnings in the near term [10][15] - The strategy includes maintaining significant liquidity and reducing leverage to prepare for future investment opportunities [10][15] Management's Comments on Operating Environment and Future Outlook - Management noted that while the commercial real estate market is showing signs of improvement, the timing of exits and resolutions remains dynamic, impacting near-term earnings [8][9] - The company expects to return to a higher level of profitability upon resolution of underperforming loans [10][15] Other Important Information - A regular cash dividend of $0.25 per common share was declared for Q3 2024, payable on October 15, 2024 [15] Q&A Session Summary Question: How quickly are you seeing behavior from borrowers change? - Management noted that optimism is starting to crystallize with changing rates, and there has been an increase in real estate activity year-over-year [18] Question: When will distributable earnings ex losses reach a trough? - Management indicated that various factors, including resolving non-accrual loans, will influence earnings, and they expect uneven earnings as they work through their strategic plan [22][23] Question: What is the current dividend comfort level? - The Board will evaluate the dividend on a quarterly basis, considering the current financial position and market conditions [25] Question: How much interest income did the multifamily loan contribute in Q2? - No interest income was recognized from the multifamily loan during Q2 as it was on non-accrual for the entire period [27] Question: What dollar value of REO do you ultimately expect? - Management stated it is tough to predict the exact amount of REO but emphasized active dialogue with borrowers to stabilize assets [30] Question: What drives migration from risk four to five in loans? - Factors include the certainty and timing of potential losses, with shorter-term maturities increasing the likelihood of migration [33] Question: What is the confidence level in the current pace of credit migration? - Management expressed optimism about stability in underlying fundamentals and the positive sentiment in the market [35] Question: What would it take to get back on offense? - The focus remains on resolving problem loans before pursuing new investments, with a readiness to act as market conditions improve [38]

Financial Performance - The company reported a GAAP net loss of $(0.11) per diluted common share for the second quarter of 2024[5] - Distributable Earnings (Loss) for 2Q 2024 was $(0.12) per diluted common share[6] - Excluding realized losses of $0.30 per diluted common share, the Distributable Earnings for 2Q 2024 was $0.18 per diluted common share[7] - A cash dividend of $0.25 per common share was declared for 3Q 2024[14] Portfolio & Balance Sheet - The loan portfolio has an outstanding principal balance of $2 billion, with 99% in senior loans[4] - Outstanding borrowings were reduced by 10% YTD, totaling $1.5 billion[4] - The net debt to equity ratio, excluding CECL reserves, is 1.9x[4, 12] - Available capital stands at $121 million[4, 13] - CECL reserves are $139 million, representing 7% of the outstanding principal balance for loans held for investment[11, 31] Real Estate Owned (REO) - The company holds real estate owned with a carrying value of $82 million for a mixed-use property in Florida and $15 million for an office property in California[40]

Ares Commercial Real Estate (ACRE) reported $40.85 million in revenue for the quarter ended June 2024, representing a year-over-year decline of 21.4%. EPS of -$0.12 for the same period compares to $0.35 a year ago. The reported revenue represents a surprise of -2.34% over the Zacks Consensus Estimate of $41.83 million. With the consensus EPS estimate being $0.19, the EPS surprise was -163.16%. While investors scrutinize revenue and earnings changes year-over-year and how they compare with Wall Street expect ...

Ares Commercial Real Estate (ACRE) came out with a quarterly loss of $0.12 per share versus the Zacks Consensus Estimate of $0.19. This compares to earnings of $0.35 per share a year ago. These figures are adjusted for non-recurring items.This quarterly report represents an earnings surprise of -163.16%. A quarter ago, it was expected that this real estate investment trust would post a loss of $0.30 per share when it actually produced a loss of $0.62, delivering a surprise of -106.67%.Over the last four qua ...

Financial Reporting - The unaudited consolidated interim financial statements are prepared in accordance with GAAP and reflect all necessary adjustments for fair presentation[28]. - The Company is required to reflect current expected credit losses (CECL) on outstanding balances and unfunded commitments on loans held for investment[40]. - Available-for-sale debt securities are evaluated quarterly for other than temporary impairment (OTTI) at the individual security level[47]. - The Company did not recognize any impairment charges for real estate owned held for investment as of June 30, 2024[94]. - The Company recognized no unrecognized tax benefits as of June 30, 2024, and does not expect this to change in the next 12 months[136]. Loan Portfolio Management - The Company monitors its loans held for investment portfolio through borrower review, economic review, property review, and market review[37]. - Loans are placed on non-accrual status when principal or interest payments are past due 30 days or more, impacting interest income recognition[38]. - As of June 30, 2024, the Company has a portfolio of 42 loans held for investment with an outstanding principal of approximately $2.0 billion, down from $2.2 billion in aggregate originated commitments[60]. - The Company had seven loans on non-accrual status with a carrying value of $331.9 million as of June 30, 2024, a decrease from nine loans valued at $399.3 million as of December 31, 2023[73]. - The Company recognized a realized loss of $43.1 million on a senior mortgage loan with an outstanding principal of $56.9 million during the six months ended June 30, 2024, due to a discounted payoff[71]. - The CECL Reserve related to outstanding balances on loans held for investment decreased from $139.8 million on March 31, 2024, to $137.4 million on June 30, 2024, reflecting a provision for current expected credit losses of $2.36 million[79]. Revenue and Expenses - The net interest margin for the three months ended June 30, 2024, was $27.5 million, compared to $26.9 million for the same period in 2023, reflecting an increase of 2.2%[58]. - Interest expense for the three months ended June 30, 2024, totaled $27.5 million, slightly up from $26.9 million in the prior year[58]. - Total revenue for the three months ended June 30, 2024, was $16.8 million, compared to $25.0 million for the same period in 2023[211]. - Interest income for the six months ended June 30, 2024 was $84.9 million, down from $101.4 million in 2023, representing a decrease of 16.2%[213]. - Total expenses for the six months ended June 30, 2024 increased to $17.5 million from $13.3 million in 2023, marking a rise of 31.5%[215]. Real Estate Assets - Real estate assets held for investment are evaluated for impairment quarterly, considering factors like significant underperformance and economic trends[44]. - Real estate assets classified as held for sale are carried at the lower of carrying amount or fair value less costs to sell[45]. - Revenue from real estate owned includes operations from mixed-use and office properties acquired in September 2023 and June 2024[54]. - The Company expects to complete a sale of the office property acquired through foreclosure within the next twelve months, classifying it as real estate owned held for sale[91]. - Revenue from real estate owned related to a mixed-use property in Florida was $6.7 million for the six months ended June 30, 2024, with no revenue reported in the same period of 2023[217]. Debt and Financing - The outstanding balance of the Financing Agreements as of June 30, 2024, was $625.9 million, with total commitments of $1.1 billion[102]. - The Company has total commitments of $2,094,034 thousand as of June 30, 2024, down from $2,274,584 thousand as of December 31, 2023, indicating a decrease of approximately 7.9%[122]. - The Secured Term Loan has a commitment amount of $140.0 million, with an effective interest rate of 5.1% for the three months ended June 30, 2024, compared to 4.6% for the same period in 2023[117]. - The Company terminated the MetLife Facility in May 2024, which had a commitment of $180.0 million, prior to its scheduled maturity with no outstanding balance[111]. - The Company amended the Secured Term Loan, changing interest rates to 4.50% per annum until May 1, 2025, with subsequent increases of 0.25% every three months[189]. Stockholder Information - The Company renewed its stock repurchase program for up to $50.0 million, effective until July 31, 2025, with no shares repurchased during the three and six months ended June 30, 2024[123]. - The company declared a total cash dividend of $0.50 per share for the six months ended June 30, 2024, totaling $27,614[166]. - For the six months ended June 30, 2023, the total cash dividends declared were $0.70 per share, amounting to $38,525[166]. - The basic earnings per common share for the three months ended June 30, 2024, was $(0.11), compared to $(0.04) for the same period in 2023, indicating a decline of 175%[132]. - For the three months ended June 30, 2024, the net loss attributable to common stockholders was $6.125 million, compared to a net loss of $2.198 million for the same period in 2023, representing an increase in loss of approximately 178.5%[131]. Management and Operations - The Company incurred management fees of $2,692 thousand for the three months ended June 30, 2024, compared to $3,000 thousand for the same period in 2023[161]. - The Company’s management agreement includes a base management fee of 1.5% of stockholders' equity, calculated quarterly[154]. - The term of the Management Agreement ends on April 25, 2025, with automatic one-year renewal terms thereafter[159]. - The Company’s total related party costs for the six months ended June 30, 2024, were $7,984 thousand, compared to $8,226 thousand for the same period in 2023[161]. - The company appointed Tae-Sik Yoon as COO and Jeffrey Gonzales as CFO effective August 30, 2024[181]. Economic Environment - The U.S. macroeconomic environment shows signs of a moderate slowdown, with inflationary pressures easing and a stable banking system supporting improved investor demand[192]. - The Federal Reserve has indicated a potential decrease in interest rates in 2024, although uncertainty remains regarding the timing and magnitude of such changes[195].

Financial Performance - Second quarter 2024 GAAP net loss of $6.1 million, or $(0.11) per diluted common share, with Distributable Earnings loss of $6.6 million, or $(0.12) per diluted common share[1] - Total revenue for the second quarter 2024 was $16.8 million, a decrease from $24.9 million in the same quarter of 2023[14] - Net interest margin for the second quarter 2024 was $13.4 million, down from $24.9 million year-over-year[14] - The company reported realized losses on loans of $16.4 million for the second quarter 2024, compared to no realized losses in the same quarter of 2023[14] - Net income attributable to common stockholders for the three months ended June 30, 2024, was $(6,125) thousand, compared to $(48,678) thousand for the twelve months ended June 30, 2024[18] - Distributable Earnings (Loss) for the three months ended June 30, 2024, was $(6,577) thousand, while for the twelve months it was $(15,806) thousand[18] Credit Losses - Provision for current expected credit losses was $(2.4) million, compared to a provision of $20.1 million in the second quarter of 2023[14] - Provision for current expected credit losses was $(2,374) thousand for the three months ended June 30, 2024, and $26,036 thousand for the twelve months ended June 30, 2024[18] - Loan balances deemed uncollectible are written off as a realized loss and included in Distributable Earnings (Loss)[17] Asset Management - Total assets as of June 30, 2024, were $2.07 billion, down from $2.28 billion at the end of 2023[12] - Loans held for investment, net of current expected credit loss reserve, decreased to $1.84 billion from $1.97 billion at the end of 2023[12] Leadership Changes - Appointments of Tae-Sik Yoon as Chief Operating Officer and Jeff Gonzales as Chief Financial Officer effective August 30, 2024, aimed at enhancing strategic execution[1] Dividends - Declared a third quarter 2024 dividend of $0.25 per common share, consistent with the second quarter 2024 dividend[3] Non-GAAP Measures - Distributable Earnings (Loss) is a non-GAAP financial measure that excludes certain transactions and GAAP adjustments[17] - The company believes that Distributable Earnings (Loss) provides useful information regarding its ability to pay dividends[17] - The company aims to maintain its REIT status by distributing substantially all of its taxable income to stockholders annually[17] Depreciation and Amortization - Depreciation and amortization of real estate owned amounted to $770 thousand for the three months ended June 30, 2024, and $2,571 thousand for the twelve months ended June 30, 2024[18] Derivative Gains - The company reported a realized gain on termination of interest rate cap derivative of $(198) thousand for the twelve months ended June 30, 2024[18] Future Strategy - The company aims to resolve risk-rated 4 and 5 loans to position for future portfolio growth and earnings[1]

Core Viewpoint - Orchid Island Capital (ORC) is highlighted as an agency mortgage REIT with a history of poor performance and declining dividend yields, raising concerns about its investment viability [2][8]. Group 1: Historical Performance - ORC initially traded at a premium to book value but faced significant declines after critical analysis revealed its unusual hedging strategies and poor management performance [3][4]. - The REIT has produced negative total returns since inception, indicating a failure to generate sufficient cash flow to meet dividend obligations and management costs [9][10]. Group 2: Investment Strategy - Investors are advised to consider preferred shares and baby bonds as alternatives to common shares, as they typically offer better total returns with lower volatility [7][14]. - The focus on dividends alone has proven to be a losing strategy, as evidenced by ORC's performance, which suggests that a more comprehensive evaluation of the underlying asset value is necessary [5][6]. Group 3: Market Dynamics - The price-to-book ratio serves as a critical indicator for assessing REIT investments; a high ratio often precedes declines in share price, while a low ratio may signal a good entry point [5][12]. - ORC's attempts to maintain a high dividend yield require unsustainable returns on equity, which historically have not been achieved due to management's inadequate trading of mortgage-backed securities (MBS) [8][9].

Core Insights - The article emphasizes the importance of understanding accounting practices in evaluating investment opportunities, particularly in the context of mortgage REITs like Dynex Capital (DX) and AGNC Investment (AGNC) [1][2] - It highlights the differences between Total Economic Returns (TER) and Total Shareholder Returns (TSR) as critical metrics for investors [2][3] Dividend Analysis - DX and AGNC have different dividend payout levels, which must be factored into the analysis of their returns [3] - The article provides a detailed comparison of dividends and returns for both companies, indicating that while the differences are not dramatic, they are significant enough to impact investor decisions [3][4] Financial Metrics Comparison - The financial metrics for DX and AGNC show that as of July 25, 2024, DX's new price is $12.08 with a TSR of $4.75 (22.72%), while AGNC's new price is $10.91 with a TSR of $4.67 (22.72%) [4] - The TER for DX is $4.71 (21.87%), while AGNC's is $2.42 (11.24%), indicating a significant difference in management effectiveness [4] Valuation Discrepancies - There is a noted disconnect in the market valuation of AGNC despite its reported earnings, which are projected at $2.16 for 2024, leading to a low price-to-earnings ratio [5] - The article argues that this focus on earnings without considering the underlying financial statements can lead to misleading conclusions about a company's value [5][6] Hedging Strategies - DX employs Treasury futures for hedging, which allows for greater liquidity and lower margin requirements compared to AGNC's use of LIBOR swaps [8][9] - The article explains that both hedging strategies can yield similar total returns, but the accounting treatment differs, leading to market misconceptions about their performance [11][12] Correlation in Performance - The changes in book value for AGNC and DX are highly correlated, suggesting that both companies are affected similarly by market conditions despite their different accounting practices [13] - The article concludes that the market's perception of AGNC as a superior investment is largely based on accounting differences rather than actual performance metrics [14] Investment Strategy Recommendations - The article advocates for a focus on preferred shares in the mortgage REIT sector, as they typically offer better total shareholder returns with less volatility [16] - It encourages investors to consider trading strategies that capitalize on inefficiencies in share prices relative to book value [28]