Ares mercial Real Estate (ACRE) - 2021 Q1 - Quarterly Report

Part I. Financial Information Consolidated Financial Statements This section presents the unaudited consolidated financial statements for the quarter ended March 31, 2021, including balance sheets, statements of operations, comprehensive income, stockholders' equity, and cash flows, with notes detailing accounting policies and financial data Consolidated Balance Sheet Summary (unaudited) | Account | March 31, 2021 ($ in thousands) | December 31, 2020 ($ in thousands) | | :--- | :--- | :--- | | Total Assets | 2,090,803 | 1,929,497 | | Loans held for investment, net | 1,887,106 | 1,791,615 | | Cash and cash equivalents | 97,944 | 74,776 | | Total Liabilities | 1,514,830 | 1,456,482 | | Collateralized loan obligation securitization debt | 979,257 | 443,871 | | Secured funding agreements | 349,582 | 755,552 | Consolidated Statement of Operations Summary (unaudited) | Account | Three Months Ended March 31, 2021 ($ in thousands) | Three Months Ended March 31, 2020 ($ in thousands) | | :--- | :--- | :--- | | Total Revenue | 21,223 | 21,134 | | Net Interest Margin | 18,565 | 15,914 | | Provision for current expected credit losses | (3,240) | 27,117 | | Net Income (Loss) | 15,740 | (17,263) | | Diluted EPS | $0.45 | ($0.54) | Notes to Consolidated Financial Statements Notes detail the company's organization, accounting policies, and financial accounts, including its $1.9 billion loan portfolio, $22.0 million CECL reserve, debt, related-party transactions, and subsequent events - The company is a specialty finance company primarily engaged in originating and investing in commercial real estate (CRE) loans, externally managed by Ares Commercial Real Estate Management LLC (ACREM), a subsidiary of Ares Management Corporation[28] - The company has elected to be taxed as a real estate investment trust (REIT) for U.S. federal income tax purposes, commencing with its taxable year ended December 31, 2012[30] Loans Held for Investment Portfolio (as of March 31, 2021) | Loan Type | Carrying Amount ($ in thousands) | Outstanding Principal ($ in thousands) | Weighted Avg. Unleveraged Effective Yield | | :--- | :--- | :--- | :--- | | Senior mortgage loans | 1,842,782 | 1,853,141 | 5.7% | | Subordinated debt and preferred equity | 65,219 | 65,866 | 15.1% | | Total | 1,908,001 | 1,919,007 | 6.0% | Current Expected Credit Loss (CECL) Reserve (as of March 31, 2021) | CECL Reserve Component | Amount ($ in thousands) | | :--- | :--- | | Reserve for Funded Loan Commitments | 20,895 | | Reserve for Unfunded Loan Commitments | 1,101 | | Total CECL Reserve | 21,996 | - Subsequent to the quarter end, the company originated a $19.5 million loan, purchased two loans totaling $68.3 million in commitment, and declared a Q2 2021 dividend of $0.33 per share plus a $0.02 supplemental dividend[179][180] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses Q1 2021 performance, including $667.3 million CLO securitization, $100.7 million equity offering, increased net interest margin to $18.6 million, and $36 million liquidity - Key developments in Q1 2021 include the issuance of the $667.3 million FL4 CLO Securitization, an equity offering generating $100.7 million in net proceeds, and the origination and purchase of several new loans[185] Results of Operations Comparison (Q1 2021 vs Q1 2020) | Metric ($ in thousands) | Q1 2021 | Q1 2020 | | :--- | :--- | :--- | | Net Interest Margin | 18,565 | 15,914 | | Total Revenue | 21,223 | 21,134 | | Provision for CECL | (3,240) | 27,117 | | Net Income (Loss) | 15,740 | (17,263) | - The increase in net interest margin was primarily due to the benefit from LIBOR floors on the loan portfolio, as 97.0% of loans have floors while only 13.8% of borrowings do[199] - As of May 3, 2021, the company had approximately $36 million in liquidity, comprising $4 million of unrestricted cash and $32 million of availability under secured funding agreements[215] Quantitative and Qualitative Disclosures About Market Risk This section outlines the company's exposure to various market risks and its management strategies, including credit risk, interest rate risk mitigated by derivatives, and financing risk from margin calls - The company is subject to credit risk from its CRE loan portfolio, managed via thorough due diligence and ongoing review, with the COVID-19 pandemic increasing this risk due to potential borrower payment challenges[234][235] - Interest rate risk is managed by primarily originating floating-rate assets financed with index-matched floating-rate liabilities and using derivatives like swaps and caps to hedge exposure[236][238] Hypothetical Impact of Interest Rate Changes on Net Income (12-Month Period) | Change in 30-Day LIBOR | Increase/(Decrease) in Net Income ($ in millions) | | :--- | :--- | | Up 100 basis points | (1.9) | | Up 50 basis points | (2.2) | | LIBOR at 0 basis points | (0.4) | - Financing risk is significant due to margin call provisions in secured funding agreements, where market volatility can depress asset valuations and trigger these calls, posing a liquidity risk[247] Controls and Procedures Management concluded the company's disclosure controls and procedures were effective as of March 31, 2021, with no material changes in internal control over financial reporting during the quarter - The Principal Executive Officer and Principal Financial Officer concluded that the company's disclosure controls and procedures were effective as of March 31, 2021[252] - No changes in internal control over financial reporting occurred during the quarter ended March 31, 2021, that have materially affected, or are reasonably likely to materially affect, internal controls[253] Part II. Other Information Legal Proceedings The company was not subject to any material pending legal proceedings as of March 31, 2021, but acknowledges potential litigation for defaulted loans - As of March 31, 2021, the company was not subject to any material pending legal proceedings[254] Risk Factors The COVID-19 pandemic continues to pose significant risks, including adverse impacts on borrower payments, collateral values, liquidity, and increased CECL reserves - The COVID-19 pandemic continues to cause severe disruptions, adversely impacting global commercial activity and contributing to significant volatility in equity and debt markets, which negatively affects the company's business and operations[256][257] - The pandemic particularly affects industries whose properties serve as collateral for the company's loans (e.g., hospitality), increasing the risk of borrower defaults and potential losses on insufficient collateral[259] - Financing agreements contain margin call provisions that could be triggered by credit events or declining collateral values, potentially forcing the company to post additional collateral or face default if unable to meet these calls[261] Unregistered Sales of Equity Securities and Use of Proceeds The company reported no unregistered sales of equity securities during the period - None[264] Defaults Upon Senior Securities The company reported no defaults upon senior securities during the period - None[264] Mine Safety Disclosures This section is not applicable to the company - Not applicable[264] Other Information This section discloses an affiliate's (Ares Management) investment in Daisy Group Limited, which terminated contracts with sanctioned banks - A disclosure was made regarding an affiliate's (Ares Management) investment in Daisy Group Limited. Daisy had customer contracts with Melli Bank Plc and Persia International Bank Plc, which have been designated under U.S. sanctions. Daisy has since terminated these contracts and does not intend to engage in further dealings with these entities[266][267][268] Exhibits This section provides an index of exhibits filed with the Form 10-Q, including corporate governance documents, key agreements, and officer certifications - The Exhibit Index lists key documents filed with the report, including the Indenture for the ACRE Commercial Mortgage 2021-FL4 CLO, CEO and CFO certifications pursuant to Sarbanes-Oxley Sections 302 and 906, and XBRL interactive data files[271]