Ares Commercial Real Estate Corp (ACRE) 2023 Q4 法說會逐字稿

(Operator Instructions)

Good morning. Welcome to Ares Commercial Real Estate Corporation's fourth quarter and year ended December 31, 2023 earnings conference call. (Operator instructions)

I will now turn the call over to Mr. John Stilmar, partner of public markets, Investor Relations.

Good morning and thank you for joining us on today's conference call. I'm joined today by our CEO, Bryan Donohoe, our CFO, Tae-Sik Yoon, and other members of the management team. In addition to our press release and the 10-K that we filed with the SEC, we have posted an earnings presentation under the Investor Resources section of our website at www.arescre.com.

Before we begin, I will remind everyone that comments made during the course of this conference call and webcast as well as the accompanying documents contain forward-looking statements are subject to risks and uncertainties. Many of these forward-looking statements can be identified by the use of words such as anticipates, believes, expects, intends, will, should, may and similar such expressions.

These forward-looking statements are based on management's current expectations of market conditions and management's judgment. These statements are not guarantees of future performance, condition or results and involve a number of risks and uncertainties.

The company's actual results could differ materially from those expressed in the forward-looking statements as a result of a number of factors, including those listed in its SEC filing. Various commercial real estate assumes no obligation to update any such forward-looking comments. During this conference call, we'll refer to certain non-GAAP financial measures. We use these as measures of operating performance. These measures should not be considered in isolation from or as a substitute for measures prepared in accordance with generally accepted accounting principles. These measures may not be comparable to like titled measures used by other companies.

Now I'd like to turn the call over to our CEO, Brian Donohoe .

Brian?

Thanks, John. Good morning, everyone, and thank you for joining our fourth quarter 2023 earnings call. As I'm sure you are aware we continue to see higher interest rates, higher rates of inflation as well as certain cultural shifts such as work-from-home trends adversely impacting the operating performance and economic values of commercial real estate. This is particularly evident from many office properties. In addition, many properties requiring significant capital expenditures have been impacted by higher labor and material costs. And fortunately, we are not immune to these macroeconomic challenges and our results for 2023 and the fourth quarter are partially a reflection of these conditions.

For the fourth quarter, we had a GAAP loss of $0.73 per common share, driven by a $47 million or $0.87 per common share increase in our CECL reserve, most of which is related to loans collateralized by office properties or a residential condominium construction project.

In addition, for the fourth quarter, we paid six additional loans on nonaccrual status, which impacted both our GAAP and distributable earnings by approximately $0.12 per common share versus what these six loans contributed in the third quarter of 2023. As a result, our distributable earnings for the fourth quarter, our $0.2 per common share.

Fortunately, we are starting to see some positive trends in the macroeconomic environment that we believe are likely to benefit commercial real estate, including the potential for declining short-term interest rates. Specifically declining spreads on CMBS and CRE CLOs particularly during the past six months, reflects strength in capital markets conditions.

Positive leasing momentum in certain sectors, including industrial and self-storage and continued healthy demand trends for multifamily assets underscore some of the opportunities we see in today's market.

These trends play out across our portfolio, particularly for loans centered risk-rated 1 to 3, which totaled about $1.6 billion in outstanding principal balance. This risk-rated 1 through 3 portfolio as focused on senior first lien positions and is diversified across 37 loans. The majority of these loans are collateralized by multifamily, industrial, and self-storage properties with the largest focus on multifamily properties at 34%.

As a positive indication of our commitment to the properties that contributed more than $150 million of capital, representing about 10% of the $1.6 billion and principal balance of these loans. A portion of this $150 million was used to renew all interest rate caps that expired in 2023 at their prior strike rate or at an economically equivalent amount after considering additional reserves.

Let's now turn to our strategic plan to resolve the 9 remaining risk rated 4 or 5 loans that comprise about $539 million in outstanding principal balance and $1 million held for sale with a carrying value of $39 million as of year-end 2023.

As we mentioned the bonds are primarily collateralized by office properties and one residential condo problem. First, we will fully leverage the management capabilities of the Ares Real Estate Group. As we have discussed previously areas Real Estate Group has more than 250 investment professionals and currently manages more than 500 investments globally, totaling approximately $50 billion in assets under management. We intend to use these capabilities to resolve underperforming loans held by ACRE.

Second, we have both significant loss reserves against these four and five risk-rated loans. As of December 31, 2023, 91% of our total $163 million and CECL reserve or $149 million as related to these nine months, which is about 28% of the $539 million in outstanding principal balance for these loans.

Finally, we have been highly purposeful in positioning our balance sheet over the past few years to provide us with greater flexibility and time to resolve these underperforming loans. For example, our net debt to equity has declined from 2.6 times at year end 2021 to 1.9 times at year end 2023, in both cases for the impact of CECL reserves on our shareholder equity.

In addition, we have accumulated additional available capital which totalled $185 million. All of these measures and capabilities have positioned us to work through our underperforming redeploy while balancing the goal of maximizing proceeds and accelerating the timeframe for resolution. So far, we've made some notable progress towards these goals. First, at the end of January 2024, we successfully sold a $39 million senior loan held for sale at a price equal to its year end 2023 carrying value.

Second, although we did not close on the sale of the office property in Illinois that backed our $57 million senior loan before year end 2023, our borrower was under an agreement to sell the underlying property in the coming weeks.

Third, we are working diligently to resolve three additional loans in the next few months. One loan will likely be resolved through the sale of the underlying property. The other two may involve restruction in terms of the loan so that we can return a significant portion of the principal balance to accrual status, including having the borrower contribute additional capital to the properties.

Now let me provide some additional background on our dividend of $0.25 per share that our Board of Directors has declared for the first quarter of 2024. Since our initial public offering nearly 12 years ago, we have operated with a framework that considers our distributable earnings power when setting the quarterly dividend. Up until this point, we have not reduced or delayed our quarterly dividend.

In fact, we provided $0.02 per share in supplemental dividends for 10 quarters. In this current market environment, however, we believe it is in the best interest of ACRE and its stakeholders to reduce the quarterly dividend to help preserve book value of the switch on to pay out an amount more in line with our expected near-term quarterly distributable earnings before unrealized losses. Ultimately as we get through this cycle, naturally, as we execute on our earnings opportunities, as discussed, we expect we can return to higher levels of profitability.

With that, let me turn the call over to Tae-Sik .

Thank you, Brian, and good morning, everyone. For the fourth quarter of 2023, we reported a GAAP net loss of $39.4 million or $0.73 per common share. As Brian mentioned, our GAAP net income was adversely impacted by a $47.5 million increase in our CECL provision or about $0.87 per common share.

For full year 2023, we reported a GAAP net loss of $38.9 million, or $0.72 per common share and distributable earnings of $58.4 million or $1.6 per common share.

Our book value per common share and now stands at $11.56 for $14.57, excluding a $3.1 per share. CECL reserves. Distributable earnings for the fourth quarter of 2023 was $10.8 million, or $0.2 per common share, which was adversely impacted by the six additional loans that were placed on nonaccrual in the fourth quarter.

Our overall CECL reserve now stands at $163 million, representing 7.6% of the outstanding principal balance of our loans held for investment. 91% of our total $163 million in CECL reserve for $149 million relates to our risk rated 4 and 5 loans, including $57 million of loss reserves on our 3-risk rated 5 loans and $92 million of loss reserves on our 6 risk-rated 4 loans.

Overall, the $149 million of reserves represents 28% of the outstanding principal balance of risk rated 4 and 5 loans held for investment. We continue to further bolster our liquidity and capital position. We maintain significant liquidity at a moderate net debt to equity ratio of 1.9 times at year end 2023, including adding back our CECL reserves to shareholders' equity. Our financing sources are diverse and importantly have no spread base mark-to-market provisions.

On December 31, 2023, we had over $185 million in cash and undrawn availability under our working capital facility. This amount does not include other potential sources of additional capital, including unlevered loans and properties.

During the year, our liquidity was further supported by $280 million of repayments and loan sales. Our net realized losses for 2023 was $10.5 million. Since our IPO in 2012, we have closed over $8 billion in commercial real estate loans and through December 31, 2023, have recognized a total of $14.5 million and realized losses.

And finally, as Brian mentioned, we declared a regular cash dividend of $0.25 per common share for the first quarter of 2024. This first quarter dividend will be payable on April 16, 2024 for a common stockholders of record as of March 28, 2024.

So with that, I will turn the call back over to Brian for some closing remarks.

Thank you Tae-Sik. We recognize the challenges that we face with these new nonaccrual loans and the impact that they had on our financial results for the fourth quarter. Based on the progress that we are making with respect to these new problem loans, we do expect to improve our run rate distributable earnings in the near term as we seek to recapture a portion of the lost earnings that we experienced in our fourth quarter.

Our new quarterly dividend of $0.25 per share reflects our go-forward view of our near term quarterly run rate distributable earnings, excluding losses, assuming we achieve the earnings enhancements from our contemplated restorations.

Longer-term, we believe the real estate capabilities we possess at Ares, coupled with our capital, liquidity and reserves will enable us to maximize credit outcomes and enhance our earnings from these situations. We are cautiously optimistic that the increasing level of transaction activity and improving market liquidity concerns to gradually provide more confidence for market participants over time.

In turn, this can serve to position us to return to a higher level of earnings in the future. As always, we appreciate you joining our call today, and we'd be happy to open the line for questions. Operator ?

(Operator instructions)

Sarah Barcomb, BTIG.

Hi good morning everyone. Thank you for taking the question. I'm hoping you could walk us through your go forward earnings power relative to this new $0.25 dividend just with the Q4 DE coming in closer to $0.20. I'm hoping you can help us bridge that gap for coverage in the coming quarters.

Sure. Good morning. Thank you very much for your question, Sarah. As we mentioned on our prepared remarks, that the impact of putting 6 new loans on nonaccrual, you had about a $0.12 impact from what those same loans affirmed in prior quarter, the third quarter.

As Brian also mentioned, we are working very hard to resolve a number of those loans, a number of those 6 new nonaccrual loans as well as loans that as you have been previously placed on nonaccrual. As we mentioned, one of those loans that $39 million loan out in California that has been successfully resolved. And as we continue to resolve additional loans, I think we're making good progress on resolving a number of those nonaccrual loans.

And really in -- as we mentioned, kind of setting our dividend at the $0.25 level for the first quarter of 2024, we did take into account what we believe we can achieve in terms of the server earnings once we were able to successfully resolve some of these loans. So without getting too specific, I think we are targeting to resolve some of these loans as soon as we can.

And we do believe that once we are able to resolve these loans and as Bryan mentioned, the resolution will come in a couple of different forms, in some cases, a sale of the loan, in some cases of the underlying collateral, in some cases restructuring of the loans with existing borrowers. So the resolutions are going to come in different forms.

We do believe that our earnings power that will go up from the $0.20 that we recognized in the fourth quarter of 2020, largely because that was impacted by, again, the significant increase in noncore loans. So that is really our goal is to resolve these loans and increase our earnings power, so that we can continue to cover the dividend that we have set.

Thank you. And I appreciate you walking us through properties loan by loan, your expected resolutions there. So thanks for that. This one's a bit more backwards looking, but I'm hoping you could walk us through what happened on the ground with those new nonaccrual loans, whether it was an issue at the sponsor level with buying a new rate cap or something else maybe leasing related? Any color for us there ?

Yes, I can have a bit more color, Sarah. So I would say that interest is somewhat idiosyncratic, but certainly borrower behavior, shifting sentiment around an asset and support for that asset as well as just really crystallizing some of the valuations that we've seen a bit more activity through Q4. There was more data to point to, as well as certain events within each of the specific assets where the borrower's approach to continuing those payments runs ore in doubt. So nothing overarching, just a few events that made us revisit some of the approach.

Great. Thank you.

Thanks Srah.

Stephen Laws, Raymond James.

Hi. Good morning. Just to follow up a little bit on Sarah's question, when you think about the potential earnings benefit as some of the non-accruals are resolved, is that really solely related to paying off the financing associated with these loans? Or is it also includes some assumptions around redeploying capital in new investments?

Sure. Great question, Stephen. And the answer really is it's a combination of number of things, including the two examples that you mentioned. So yes, in some cases the benefit that we will see in earnings comes from being able to pay down either in part or in full associated liability, some of the nonaccrual loans.

So clearly, the loans are already on nonaccrual. And so -- but unfortunately, we are still paying interest on the associated liability. So to the extent that we can resolve these loans and get a full or partial repayment of the associated liabilities that would obviously result in higher net income.

The other, as you mentioned, is that some of the resolutions we believe will result in some net cash coming to us. Again, we haven't really built in redeployment of that cash to necessarily increase earnings going forward. But we obviously you can utilize that cash for a number of different purposes. I would say another example along the same lines is that again, as I mentioned, some of the resolutions were working on is restructuring of the loan with the existing borrowers.

In some of these situations, we believe we can restructure the loan, which would potentially include some new cash from the borrower coming into the property, adding to the loan. That would then allow us to then begin to recognize interest on some or all of the existing loan itself. I think those are just three examples of how earnings should be increased going forward upon resolving some of these nonaccrual loans. That's (inaudible) . I think those are three good examples of how resolving the loans can increase earnings going forward.

Appreciate the color on that basic Te Sik. To continue with interest income, were these 6 new nonaccrual loans on nonaccrual for the entire fourth quarter? Or did they contribute some interest income in the early part of the quarter?

Sure. Good question, and I appreciate the distinction there. So our policy is that we put a loan on nonaccrual for the entire quarter. So we talk about the $0.12 impact. That meant that from for the fourth quarter overall for the entire fourth quarter that these 6 loans did not recognize any interest revenue and interest income for the entirety of the fourth quarter.

Okay. Thank you for clarifying that. And then as we think about the interest coverage test, I think it's a 12-month look-back, but can you update us and apologies. I haven't had a chance to get through the whole filing this morning, but can you update us on where you stand on that, whether you'll need waivers for lower interest coverage test metrics or how counterparty discussions are going around the developments with these loans?

Sure, Stephen, I just wanted to clarify your question and say interest coverage tests are you talking about these specific loans ? Or are you talking about the company's overall interest coverage ?

With yoi financing -- your counterparties. I believe it's typically somewhere between a 1.3 and 1.5 interest coverage test with your bank lines or your other financing facilities and any debt covenants that need to be considered or discussed around these nonaccrual developments?

Sure. As you can imagine, we are obviously -- we have always closely monitored all of the covenants that we have on our own debt facilities as well as those of the (inaudible) as well as those where we hold as an asset. In terms of interest coverage, we are clearly leading indicators, leverage test in all of our debt facilities. I think one of the very proactive steps that we have taken now for the past several years is delivering our balance sheet, right ?

So we have about $1.6 billion of financing that is materially down but a couple of years ago. And so we've been very mindful of making sure that we have the right balance sheet in these more challenging market conditions. We have increased our liquidity. We have done a number of measures and all of that has obviously helped not only in terms of maintaining the flexibility and the balance sheet we need to work through some of the underperforming loans.

But overall, it has put a less stress on meeting our covenants. So for example, if we were levered 3 to 1, I think those coverages would be on the tighter. But as we mentioned, we have worked very hard to deliver our balance sheet significantly over the past several years, and that has helped significantly on our loan covenants themselves.

Great. Appreciate the comments this morning, and we look forward to hearing about some of these resolutions in the next couple of quarters.

Rick Shane, JPMorgan.

Thanks everybody for taking my questions this morning. Most have really been asked answered, but I just want to make sure the loan that was held for sale sold at your carrying value. So no hit to book value by our calculations that represents about a $2.6 million realized loss. Is that correct ?

Yes. Good morning. So we sold the loan, as we mentioned, at $39 million and that is really a net proceeds we received on the sale and that was the stated fair value. So one thing just to maybe distinguish here is that, because we were under contract to sell this loan at year-end, we put this loan under available for sale.

It was not held for investment. So it is not part of our held-for-investment portfolio. We did hold this at fair value, that fair value being the $39 million carrying value. And so there is no impact on book value, as you said. I forget the [inaudible] quite at the moment, the $2.6 million you mentioned.

I was just at the wrong one. Tae Sik. I apologize. You're going to give you a better number. I figured that out.

But no, I think the important point you're making is that again, it was sold at its stated fair value at year end, correct, that $39 million.

Got it. And when we look at the -- call it, $150 million specific CECL reserve, should the assumption be, particularly because I think at this point you guys have incentive to resolve this quickly and be able to redeploy the capital in order to achieve the distributable earnings run rate that you're targeting that you will realize that losses will largely come through in the first half. The cadence of realized losses is going to be front-loaded in '24.

Yes. So maybe I can begin Bryan, please weigh in. Again, we go through our process to determine the appropriate amount of the CECL reserve. I don't think it's necessarily reflective of what will ultimately be realized because in almost all situations, these are very dynamic markets. And so the realized losses could be more or it could be less.

In terms of timing, again, as we mentioned, we're working very hard on all of these loans. I think some are more near-term opportunities. Some are more opportunities that will come out in later quarters, late periods. I would not expect all of these to be realized in the first half. For example, I do think we are always balancing, as we say, maximizing proceeds as well as accelerating timeframe, but there is a balance between those two.

There are some situations where we feel holding on, if you want to call it, or maintaining our position for a little bit longer position results in greater value that we think it's worth doing. In some situations, we are pushing very hard to something realize immediately because we don't think future value will be materially greater.

So it's lot of different situations, but I would not say all of these would be realized in the first half. And again, I would not I would not equate what we what will be realized losses with the reserve. I think the reserve contemplates a different analysis unless again it's a very near-term resolution where, for example, in assets already under contract for a specific price, then obviously those two numbers come together.

But for longer-term resolutions assets, again, there can be tailored to the variance between what the actual realized value is or the losses versus the CECL reserve.

Yes. And I'll just add to that. I think that the leverage ratio that Tae-Sik touched on earlier gives us that flexibility. So I certainly hear your point and I think velocity is something, it's certainly part of the equation but we're balancing that with ultimate resolution. We absolutely look forward to getting back on offense when available and I think the resolution of some of these assets will be indicative of that. But I think the ultimate resolution is a balance of price plus timeline.

Hi, and a question on it -- I think we see the logic here in terms of where the dividend has been struck. If we think about where book value is today and looking at book, excluding reserves, because I think realistically that will be reasonably close to the amount of book value you have on a go forward basis. The dividend equates to a yield and a book of just over 8.5%. I think that's pretty consistent with mid-cycle returns for your company on a scale basis over long term over the long term. Is that the right way to be thinking of these things?

Yes, it's an excellent observation. I certainly think that is one way to -- I want to say, triangulate to sort of a yield that makes sense. Again, I would just caution, however, that we are in, as I mentioned, dynamic market times. For example, in one sense, we're enjoying very high interest rates, with SOFR being at the 5.3, 5.4 level.

On the other hand, 5.3, 5.4 SOFR is causing significant an adverse impact on real estate operating performance and values. And so there's a lot of components that go into our overall returns. So certainly, credit, certainly interest rates, certainly leverage, certainly deployment. There's a lot of factors I go into it.

But I do agree with your observation that the $0.25 dividend for the first quarter of 2024, if you were to annualize that to $1, $1 be divided by the $11.50 to book value equates to that, I think you brought up 8.7% yield. I do think that's a great way to triangulate maybe the sensibility of it.

But I would also caution that the story isn't fully told yet, right? As we mentioned, we have set our dividend level based upon what we believe we can earn by resolving some of the nonaccrual loans, not all of the nonaccrual loans. So we do have potential for adding in more earnings.

At the same time, without going to the full list, I mean, there are lots of other factors that can and that are likely to impact our earnings going forward, as well. So that is part of the equation but certainly not the only part of the equation.

Got it. But -- look, it's an interesting observation that you make in terms of sort of the long term. I would agree with you on average over time, but that's probably 6 years out of 10 in that 8% range, two years out of 10 above it and two years out of 10 below. And we're probably in the thick of those two or three years that are below that 8.5% target.

Yes.

Thank you, guys.

Thank you.

Don Fandetti, Wells Fargo.

Tae-Sik, I guess I'm trying to just get a sense of your confidence as you think about the shorter-term. How are you feeling about the ability for just a replay of this in Q1 where you have kind of nonaccrual migration and other big reserve build? I know there's uncertainty kind of intermediate, longer-term but how are you thinking about it in the short term?

Sure. Again, our short-term objectives is part of a longer-term plan, of course. But our short-term objective, as we mentioned, is to remain very, very focused on the nonperforming loans. It's to remain very, very focused on continuing to digitally monitor all of our loans overall. We are in a state as of the fourth quarter, as of year-end, where we have a significant portion of our capital in nonaccrual loans and so that is clearly impacting our current income.

Having said that, as we've mentioned, a number of our loans, even though they're on nonaccrual, continue to pay interest and that interest is not being recognized. I think that interest is being used to reduce the carrying value of the loan itself.

So we think all of that helps to further improve the balance sheet overall. But again, to answer your question short-term, we remain very focused on growing our income base and our overall distributable earnings. We want to continue to vigilantly work out any of the problem assets so that we can either monetize the capital that we have in the asset, we can pay down the debt associated with those assets but [inaudible] the liabilities associated with the nonperforming loans and then redeploy some capital. We have a significant amount of liquidity.

We will hopefully generate more capital from the resolution of some of these loans. One of the things we've mentioned is we are working very closely with many of our borrowers to continue to inject more equity into the loans themselves.

But short-term, I would tell you also that we continue to see some volatility in the markets and in our portfolio. I think one of the subsequent events that we had mentioned in our filing this morning is that we had 2 loans go into default at year-end, after year-end.

One loan is a $57 million loan back-line office property that matured. Obviously, that loan has been rated to 5. That's the one that Bryan had mentioned we were pushing to sell before the year-end. We continue to push to sell that loan. So the resolution of that loan will be a material part of the business plan, going forward.

The other one that we mentioned is the $18.5 million New Jersey loan. That loan also went into default as a result of the borrower not meeting its January interest payment. Unfortunately, that loan remains in default end of January and now February payment has not been made.

But that loan, as we mentioned, has been on nonaccrual for the past couple of quarters. So that loan going into default, while it's very disappointing, obviously, has already been on nonaccrual, has been rated a 4; so there continues to be movement in the portfolio.

Okay. Got it. Thank you.

Steve DeLaney, Citizens JMP.

Thank you. Good morning, Brian and Tae-Sik. For starting to see something interesting this quarter and hearing anecdotes that there are a number of debt funds or even hedge funds that are starting to look around for opportunities to kind of opportunistically buy loans from -- I'm sure they're talking to the banks, but we've seen evidence that they've been talking to the commercial mortgage rates as well.

I'm curious if you're receiving any ? If you could just say generally, are you receiving these types of inquiries by third parties looking to kind of step in so that you can avoid foreclosure and all that mess and actually just lay off the loan to somebody who works more not in a public company environment and can operate a little differently. Just curious if you're seeing this secondary market in distressed loans picking up at all?

Yes. It's a great question, Steve. I think the loan held for sale at year end was a good example of executing on just that strategy. I think there's two major narratives in commercial real estate. Well, probably more but one of which is this wall of maturities and the other is this wall of capital and I think certainly you touched on a little bit of the macro environment shifting and part of that is that the capital on the offensive side being dislodged and becoming more pro-business, I would say.

So, I think that you're seeing a good reflection throughout the space of deal activity. And in general, the first market opportunity in commercial real estate will come in the form of credit, whether that's in new loans that are attractive on a relative value basis for purchasing loans, either for control or for yield.

So I think you're spot on. The activity is here, and I think it will continue to progress. But the amount of capital that's out there that needs to be spent in this space is significant. So the trend that you've seen or you're hearing about, I would expect it to continue.

Okay, I appreciate that. And I would have to think the Fed is kind of you've given us a head fake here. But I'd have to think as we start getting into the middle of this year and there is more of an expectation for cuts in the second half of the year that may make those potential buyers more aggressive because you're creating a more positive sentiment for the market generally and people are going to be less willing to sell at large discounts. I could see that this interested this opportunistic money really picking up as the year goes along.

And then the second thought I have is I've been hearing this about the banks. We all know what the capital issues are with the banks, but that we're hearing that construction loans at the banks that the banks are going to manage through those, but probably will be less likely to move into a bridge lending phase and that would be maybe when we get to late '24, early '25, we could find a new wave of lending opportunities for the commercial mortgage rates with paper coming off the banks' balance sheet. Do you see that type of opportunity as well? Or am I getting ahead of myself there,?

I think, if you think about the concentration of commercial real estate debt within the banks and certainly when we think through the real estate capital treatment for the bank's balance sheet of CRE and if you overlay that regulator or Fed focused on the banking sector, it doesn't take a large shift of the allocation of real estate debt from banks going into the private markets to create a pretty substantial opportunity set to invest into.

So that's certainly what I think Ares and our peer set is playing for, is that continued shift. I think it's going to be a great opportunity to partner with the banks in this next evolution of the real estate debt market. So I would certainly look towards that.

I think I'd echo your sentiments. Congratulations on the progress you're making. It's I know it's a slog, but and I think we have better days ahead for ACRE and for the group as a whole. So thank you for your time this morning.

Appreciate as always do. Thank you.

Doug Harter, UBS.

Thanks. I was just hoping you'd give a little more update on the multifamily portfolio and kind of how given the move in rates, how are you think that that portfolio is going to be able to handle refinancing?

Yes. So this is typically -- I mean one of the benefits of the multifamily market is for continued capital markets participation of Fannie and Fannie and Freddie as well as it being a more friendly bank asset as well. I'd say that we've seen supply uptick nationally. I think market to market that's being received differently, largely speaking within our portfolio, we've seen positive progress on the leasing side. So I think it will be an opportunity set for the foreseeable future.

I think when we think about it structurally, you're still going to be short despite the supply headwinds that have been fairly well publicized. We're still going to be short over the next five years, four or five, six million residents in the United States, especially if you look at the macro level of immigration returning rate.

So in terms of liquidity, the buyers, the owners of multifamily real estate assets are seeing the short-term supply issues are dwarfed by the long-term fundamental shortage and you're starting to see the performance of the underlying assets reflect that. So short answer is relatively stable performance within our portfolio. I think that the capital markets functionality will continue to support these assets and the equity markets, private equity markets for multifamily will continue to expand.

Great. Thank you.

(Operator instructions)

Jade Joseph Rahmani, KBW.

Thank you very much. Just to follow up on your answer to Doug's question, Green Street estimates multi-family values are down around 28% from the peak. I mean, when we hear answers like that, that's a non-event. So either we disagree with Green Street or we need to recognize that there's capital stress in a lot of the multifamily deals that was record issuance in 2021 and 2022. So just ask it another way, how do you expect this to be reconciled over the next year in multifamily?

Secondly, I would like to ask about two multi-families in which Ares was involved. I think that they are likely in the ACRE portfolio but wanted to check. One was a large Chicago multifamily and another is in Dallas and those look like based on the real deal, there are it performance issues there.

Yes, Jade, I guess that -- I don't want to misrepresent. I think that, if you go back to certain markets and you were in the spring of '22 purchasing at, I'd say, trough cap rates, there is probably value decline in excess of the 28% you're citing through Green Street.

In many instances, we've seen rent growth and I think those buyers saw the perceived rent growth in certain markets continuing unabated with expenses that didn't necessarily go in tow with that. But largely speaking as a lender, even if you subscribe to the Green Street number, moderate leverage, there's still equity to protect in those assets. I think you will see some transfer of value from equity to debt.

So it's not that there won't be distressed. I just think that, when you consider overall loss severity in the space to the lender community, I think that will be muted relative to if you look at the office sector, for instance.

So it's not to say that there won't be transfers of assets given that value decline and certainly if you got the (inaudible) if you got the expense load wrong, there will be stress. And I think the two assets we are talking about reside in different vehicles the press doesn't always get the lender correct there. So Ares is associated with those assets, but they are not ACRE assets specifically.

Thanks, appreciate that. So in terms of the transfer of assets within a portfolio such as mortgage REIT Portfolio, if you don't expect ultimately significant loss severity to the lenders, how do you expect this to play out? Do you see the mortgage REIT's being active in bringing in additional capital to recapitalize transactions ?

I think that's certainly a possibility. But I think despite the technology overlay, we see in the multifamily sector specific asset management capabilities within the borrower community has never been more important when you think about some of the issues around because otherwise, you know, in the apartment sector.

How you manage these assets it's a good bit of the value creation. And I do think, to your point, Jade, there's ample liquidity to come in on the private side alongside existing lenders, recapitalizing an asset and bringing to bear improved asset management or property management from there.

So I think you're spot on that this might take the form of partnership rather than outright sales to kind of stabilize the valuations. And I think And to the earlier point on the decline in rates, or even the stability rates, multi-family over the next five years will be fairly well correlated to the rate environment.

Thank you. And then lastly, if I could squeeze one more in, there was an industrial property. I can't recall offhand if you've previously discussed this, but it was moved to nonaccrual status. It's relatively small compared to the average at $19 million, but we haven't seen much pressure there. So could you comment on that situation ?

Yes, that's just a redeveloped asset on the West Coast. I think basically in the analysis of that property, the dialogue with the borrower is dynamic and it is a relatively small asset, however. So active discussions with that buyer with a rate cap term yet that's really the catalyst for the analysis.

So the nonaccrual was due to the rate cap, not meeting outlook or supply competition or anything of that nature ?

I think it was slower than expected leasing velocity alongside a near term event of the rate cap.

Okay. Thanks a lot.

Thank you.

And there are no further questions at this time. I'd be happy to return the call to Bryan Donohoe for closing comments.

Yes. Thank you, operator. And I just want to thank everybody for their time today. We appreciate the continued support of Ares Commercial Real Estate and we look forward to speaking to you again on our next earnings call. Thank you.

Ladies and gentlemen, this concludes our conference call for today. If you missed any part of today's call, an archived replay of this conference call will be available approximately one hour after the end of this call through March 21, 2024 to domestic callers by dialling 8007230544 and to international callers by dialling area code 4022202656.

An archived replay will also be available on a webcast link located on the homepage of the Investor Resources section of our website.