Ares mercial Real Estate (ACRE) - 2022 Q2 - Earnings Call Transcript

Financial Data and Key Metrics Changes - The company reported second quarter distributable earnings of $0.38 per share, a 12% increase from the first quarter, exceeding the combined regular and supplemental dividends of $0.35 per share [5] - GAAP net income was $10 million or $0.20 per share, with distributable earnings of $19.2 million or $0.38 per share, supported by rising interest rates and a net increase of $200 million in the loan portfolio [9][12] - The company collected 99% of contractual interest due, with only two loans on nonaccrual status, representing less than 2% of the overall portfolio [10] Business Line Data and Key Metrics Changes - During the second quarter, the company closed $356 million of senior floating rate loan commitments across eight transactions, with approximately 80% collateralized by multifamily and self-storage properties [7] - Spreads on multifamily loans originated this quarter were approximately 90 basis points higher than the post-pandemic average spreads for multifamily transactions [7] Market Data and Key Metrics Changes - Overall property-level fundamentals remain stable, but rising interest rates and economic uncertainty have led to diverging views on property values, resulting in a cooling of commercial real estate transaction activity [6] - The company noted that the current market conditions favor institutional borrowers and different parts of the credit curve, indicating a more rapid adjustment compared to past cycles [29] Company Strategy and Development Direction - The company is well-positioned to navigate the changing economic landscape, with a strong balance sheet, low leverage, and a robust level of available capital to invest in higher-yielding opportunities [15] - The company has authorized a new $50 million share buyback plan to repurchase stock where it is accretive to earnings and book value [8] Management's Comments on Operating Environment and Future Outlook - Management expects earnings potential to benefit from further increases in interest rates due to the floating rate loan portfolio and hedges in place [5] - The company recognizes challenges posed by rising rates and economic uncertainty but remains committed to a disciplined approach in capital deployment [15] Other Important Information - The company increased its general reserve by $7.8 million to $32.4 million, reflecting changes in the outlook of select properties [10] - The company announced a third quarter 2022 regular dividend of $0.33 per common share and a continuation of the supplemental quarterly dividend of $0.02 per common share [14] Q&A Session Summary Question: Impact of asset sensitivity and hedge on duration and balance sheet capacity - Management emphasized the importance of dialogue with borrowers and the expectation of more duration on individual assets due to rising rates [19][20] Question: Sponsor behavior and liquidity concerns - Management noted that responses from sponsors vary, but many are positioning defensively to navigate rising rates [22][23] Question: Speed of market adjustment compared to past cycles - Management agreed that the current cycle is unfolding more quickly than previous downturns, with sound fundamentals in the real estate market [29] Question: Multifamily sector outlook amidst housing market turmoil - Management continues to favor industrial and multifamily sectors, noting strong rent growth but cautioning about rapid increases in certain markets [31][32] Question: Dividend structure and strength of earnings - Management discussed the rationale behind the supplemental dividend, reflecting excess earnings from interest rate hedges, while remaining cautious about market volatility [36][38]