15.3% Yield, Strong Quarter: Ares Commercial

Core Insights - The article draws a parallel between the Oakland Athletics' innovative approach to team building under Billy Beane and the investment strategy of focusing on consistent income generation rather than chasing high-profile investments [2][9] Company Overview - Ares Commercial Real Estate Corporation (NYSE: ACRE) is a REIT that focuses on originating loans tied to commercial real estate and maintaining a diversified portfolio of such loans [3] - ACRE is currently yielding 15.3% [3] Recent Performance - Q4 2023 was challenging for ACRE, marked by numerous defaults, a significant reduction in cash flow, and capital tied up in non-performing assets, leading to a dividend cut and a decline in book value [4] - In contrast, Q1 2024 showed improvement, with distributable earnings rising to $0.22 from $0.20 in Q4 2023, and a dividend of $0.25 declared for Q2 [5] Financial Metrics - ACRE's leverage remains stable at 1.9x debt/equity, indicating that the negative impacts are more of a short-term earnings issue rather than a long-term threat to the balance sheet [4] - The company reduced non-accrual loans from $425 million to $292 million, a 32% reduction in one quarter [6] Credit Loss Reserves - ACRE has eight loans rated 4 or 5, which contribute significantly to its Current Expected Credit Loss (CECL) reserve [7] - Specific CECL declined by $42 million in Q1 due to realized losses, while general CECL increased by $20 million due to economic conditions [8] Future Outlook - ACRE's book value before CECL is expected to decline in Q2 due to anticipated losses, while the outlook for book value after CECL will depend on macroeconomic conditions [8] - Management aims to leverage up and negotiate with lenders to access capital for expansion while managing distressed loans [8] - By year-end, ACRE is expected to stabilize its book value and exceed current dividend levels in distributable earnings [8]