Ares Commercial Real Estate: 14% Yield Might Be Sustainable

Core Viewpoint - Ares Commercial Real Estate Corporation is experiencing significant challenges with its distributable earnings due to nonaccrual issues in its office and multi-family loan portfolio, leading to a substantial increase in credit loss provisions and a dividend cut [2][10][16]. Financial Performance - In Q1 2024, Ares Commercial Real Estate reported negative distributable earnings of $0.62 per share, failing to cover its reduced dividend payout of $0.25 per share [10][11]. - The trust's portfolio was valued at $2.0 billion, consisting of 44 loans, with 8 loans classified as high risk [4][6]. - The total credit loss reserve at the end of Q1 2024 was $141 million, with 61% related to office exposure [6]. Dividend and Stock Valuation - The company reduced its dividend payout by 24% in Q1 2024, which was anticipated by the market, resulting in a stock price that did not react significantly to the earnings drop [2][12]. - Ares Commercial Real Estate's stock is currently trading at a 38% discount to book value, which may attract passive income investors seeking high yields [12][16]. Credit Losses and Non-Accruals - The trust increased its credit loss reserve by $22.3 million in Q1 2024, primarily due to issues in its office loan portfolio, leading to a negative earnings impact of $0.41 per share [6][10]. - Non-accruals amounted to $292 million at the end of Q1 2024, reflecting a 31% decline quarter-over-quarter [8]. Investment Outlook - Despite the challenges, the current discount to book value and the realigned dividend payout may present opportunities for high-risk tolerance investors [12][16]. - The proactive measures taken by the trust to address non-accruals, including selling loans at a loss, could help mitigate future risks [8][10].