Ares Commercial: Another Big Loan Goes On Non-Accrual

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 $8.25, reflecting an 18.18$(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$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].