Ares mercial Real Estate (ACRE) - 2023 Q2 - Earnings Call Transcript

Financial Data and Key Metrics Changes - For Q2 2023, the company reported a GAAP net loss of $2.2 million or $0.04 per common share, primarily due to a $2.1 million net increase in CECL provision [12] - Distributable earnings for the same period were $19 million or $0.35 per common share, fully covering both regular and supplemental dividends [12] - The company maintained a net leverage ratio below 2.0 and had $215 million in cash and available amounts from its working capital facility [6][16] Business Line Data and Key Metrics Changes - The portfolio consisted of 53 loans held for investment, with 98% being senior loans and an outstanding principal balance of $2.3 billion [12] - Non-accrual levels remained stable, with 96% of contractual interest collected [13] - 74% of the loan portfolio had a risk rating of three or better, a slight decline from 78% in Q1 2023 [13] Market Data and Key Metrics Changes - The company noted signs of stabilization in the commercial real estate market, with expectations for increased loan originations [8][9] - There is over $250 billion of unspent U.S. real estate capital and continued capital flow from international investors, indicating a potential recovery across property types [9] Company Strategy and Development Direction - The company is focusing on enhancing liquidity, deleveraging the balance sheet, and selectively finding accretive investment opportunities [5][10] - The management emphasized the importance of their balance sheet flexibility and experience in navigating underperforming assets [6][20] - The company plans to preserve capital for share repurchases and new loan investments rather than continuing supplemental dividends [18][19] Management's Comments on Operating Environment and Future Outlook - Management acknowledged challenges ahead but expressed confidence in their ability to maximize outcomes and deliver shareholder returns [20] - They anticipate a resolution of credit cycle issues within 12 to 18 months, with a focus on strong fundamentals outside the office sector [25][26] Other Important Information - The company repurchased approximately 1% of its outstanding shares for $4.6 million at an average price of $8.58 per share [11] - The Morgan Stanley credit facility was extended to July 2025 with no material changes to terms [17][60] Q&A Session Summary Question: Credit cycle duration and realized losses - Management indicated that the current cycle has unique attributes and expects a resolution of issues within 12 to 18 months [25][26] Question: Office portfolio leasing momentum - Management noted increased traffic and leasing activity but acknowledged rising leasing costs as a headwind [30] Question: Timing of charge-offs for specific reserves - The hotel loan is expected to resolve in Q3, while the office loan may take until year-end or early 2024 [32] Question: New loan activity and balance sheet growth - Management indicated potential for incremental growth in the balance sheet, estimating capacity for $300 million to $400 million in senior loans [46] Question: Financing for REO and sub-performing loans - Management plans to seek bespoke financing for REO assets while leveraging existing relationships with lenders [50] Question: Changes in risk tolerance from counterparties - No material changes were reported in the terms of the Morgan Stanley facility, and the company maintains strong relationships with lenders [60]