Ares mercial Real Estate (ACRE)2022-11-02 20:51Financial Data and Key Metrics Changes - The company reported third quarter distributable earnings of $0.39 per share, a 5% increase from the same quarter last year, exceeding the quarterly dividends paid of $0.35 per share [5] - GAAP net income for the third quarter was $644,000 or $0.01 per share, with a significant difference attributed to a CECL provision of approximately $19.5 million [11] - The total CECL reserve increased to $51.9 million, representing about 1.9% of total loan commitments [13] Business Line Data and Key Metrics Changes - The loan portfolio consisted of 98% senior loans with an outstanding principal balance of $2.5 billion across 70 loans, with 99% of contractual interest collected [12] - Three loans were on non-accrual status, representing about 4% of the overall portfolio, with a decline in loans rated three or better from 94% to 90% [12] Market Data and Key Metrics Changes - The company noted that rising interest rates and tightening monetary policy by the Federal Reserve are creating volatility in commercial real estate markets, impacting capital formation and increasing risk premiums [6][7] - The company closed $50 million of floating rate investments in multifamily and self-storage properties during the third quarter [8] Company Strategy and Development Direction - The company is focusing on property types such as multifamily, industrial, and self-storage that exhibit strong rent growth dynamics, which have outpaced recent market interest rate increases [7] - The company plans to remain selective in new investments while maintaining a strong liquidity position amid uncertain market conditions [10][14] Management's Comments on Operating Environment and Future Outlook - Management expressed concerns about the likelihood of a recession due to the Federal Reserve's aggressive rate hikes and the resulting volatility in asset classes [6] - The company believes it is well-positioned to navigate the changing economic landscape, with a strong balance sheet and moderate leverage [17] Other Important Information - The company announced a fourth quarter 2022 regular dividend of $0.33 per common share and a supplemental quarterly dividend of $0.02 per common share [16] - The company has approximately $156 million of available capital as of November 1, which includes cash and amounts available for draw under various debt facilities [14] Q&A Session Summary Question: Inquiry about securities purchases and CLOs - Management indicated that they see compelling structural features in both CMBS and CLO markets, but have not sought to leverage these investments due to market volatility [21] Question: Discussion on office space and CECL reserves - Management acknowledged that there are cross currents in the office space, with some assets experiencing less demand while others maintain high cash flow [26] Question: Clarification on CECL reserve composition - Management confirmed that the majority of the $19.5 million increase in CECL reserves was general, with only a small portion being loan-specific [28] Question: Concerns about upcoming loan maturities - Management stated that they are actively managing loans with near-term maturities and are in close dialogue with borrowers to ensure business plans are met [31] Question: Discussion on capital allocation to AAA CMBS - Management explained that the decision to allocate capital to AAA CMBS was based on balancing risk and liquidity, given the slowdown in transaction activity [45]