Earnings call transcript: Ares Commercial Real Estate Q4 2024 sees stock dip despite revenue beat

Ares Commercial Real Estate (ACRE) reported a net loss for Q4 2024, with earnings per share (EPS) falling short of expectations. The company posted an EPS of -$0.20, missing the forecasted $0.06. Despite exceeding revenue expectations, reporting $17.51 million against a forecast of $16.36 million, the company’s stock declined by 13.14% in pre-market trading, reflecting investor concerns over the earnings miss and broader financial performance. According to InvestingPro analysis, ACRE is currently trading below its Fair Value, suggesting potential upside opportunity despite recent challenges.

Key Takeaways

• Ares Commercial Real Estate reported a Q4 2024 net loss of $10.7 million.
• Revenue surpassed expectations at $17.51 million, but EPS missed forecasts.
• Stock price fell by 13.14% in pre-market trading following the earnings report.
• The company reduced its net debt to equity ratio by 16% year-over-year.
• Positive trends in the commercial real estate market were noted.

Company Performance

Ares Commercial Real Estate experienced a challenging Q4 2024, reporting a significant net loss. Despite these challenges, the company made strides in reducing its debt and exposure to high-risk loans. The broader commercial real estate market showed signs of recovery, which could benefit Ares in the future.

Financial Highlights

• Revenue: $17.51 million, exceeding the forecast of $16.36 million.
• Q4 2024 net loss: $10.7 million, translating to an EPS of -$0.20.
• Full Year 2024 net loss: $35 million, or $0.64 per share.
• Distributable earnings loss for Q4: $8.3 million, or $0.15 per share.
• Reduced outstanding borrowings by $444 million in 2024.

Earnings vs. Forecast

The company reported an EPS of -$0.20, missing the forecasted $0.06 by a significant margin, marking a notable earnings miss. Revenue, however, came in at $17.51 million, surpassing the forecast of $16.36 million, indicating stronger-than-expected sales performance.

Market Reaction

Following the earnings announcement, Ares Commercial Real Estate’s stock price dropped by 13.14% in pre-market trading. The stock’s decline suggests investor concerns over the earnings miss, despite the revenue beat. The current trading price places the stock near its 52-week low of $5.14, significantly below its high of $8.59. With a beta of 1.55, ACRE shows higher volatility than the broader market, presenting both risks and opportunities for investors. InvestingPro data reveals the stock has maintained dividend payments for 13 consecutive years, demonstrating consistent shareholder returns despite market fluctuations.

Outlook & Guidance

Looking ahead, Ares Commercial Real Estate aims to further reduce risk-rated loans and improve its balance sheet. The company anticipates potential CLO issuances between $500 million to $1 billion in 2025, which could provide additional liquidity. The focus remains on accelerating loan repayments and enhancing book value.

Executive Commentary

CEO Brian Donahoe highlighted the company’s improved balance sheet, stating, "We have a stronger and healthier balance sheet." CFO Jeff Gonzales noted competitive pricing from warehouse lenders, which could benefit Ares’s financing costs. Donahoe also emphasized positive leasing fundamentals, which may support future growth.

Risks and Challenges

• Continued net losses could affect investor confidence and stock performance.
• High-risk loan exposure remains a concern despite recent reductions.
• Market volatility and economic conditions may impact the commercial real estate sector.
• Challenges in resolving underperforming assets could hinder financial recovery.

Q&A

During the earnings call, analysts inquired about the challenges in the Boston Life Science property and the potential for new lending opportunities. The company reiterated its focus on resolving problem assets before expanding its lending activities, highlighting the multifamily sector’s strength as a positive area for future growth.

Full transcript - Ares Commercial Real Estate Corp (NYSE:ACRE) Q4 2024:

Conference Call Operator: Good afternoon, ladies and gentlemen, and welcome to Ares Commercial Real Estate Corporation’s Fourth Quarter Earnings Conference Call. At this time, all participants are in a listen only mode. As a reminder, this conference call is being recorded on Wednesday, 02/12/2025. I will now turn the call over to Mr. John Stilmar, Partner of Public Markets Investor Relations.

Please go ahead, sir.

Brian Donahoe, CEO, Ares Commercial Real Estate Corporation: Good morning, everyone, and thank you for joining us on today’s conference call. In addition to our press release and the 10 K that we filed with the SEC, we posted an earnings presentation under the Investor Resources section of our website at www.areescre.com. Before we begin, I want to remind everyone that comments made during the course of this conference call and webcast, as well as the accompanying documents, contain forward looking statements and are subject to risks and uncertainties. Many of these forward looking statements can be identified by the 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 filings. Ares Commercial Real Estate Corporation assumes no obligation to update any such forward looking statements. During this conference call today, we will refer to certain non GAAP financial measures. We use these as measures of operating performance and 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. With that, I’d like to turn the call over to our CEO, Brian Donahoe. Brian? Thank you, John. Good morning, everyone, and thank you for joining us.

I’m here with Jeff Gonzales, our Chief Financial Officer Taesik Yoon, our Chief Operating Officer as well as other members of the Management and Investor Relations team. Today, we’ll start off with some market commentary, a review of our accomplishments throughout 2024 and where we are focused going forward. Jeff will then take us through our fourth quarter and full year results in detail. In 2024, we witnessed a moderate recovery in the commercial real estate market with a particular acceleration of these positive trends in the second half of the year. The industry saw increased transaction volumes and stable to improving property values and fundamentals across almost the full spectrum of property types.

While the office market remains challenged, we are seeing some green shoots and greater signs of stabilization, including positive net absorption in The U. S. For the fourth quarter, a first since pre COVID. The stronger level of commercial real estate transaction activity and capital market stability aligns well with our continued focus on resolving our underperforming assets. As discussed throughout 2024, our primary objective was to address our underperforming four and five risk weighted loans and to reduce our overall office exposure.

We made solid progress in this area and acknowledge there is still more work to do. For the full year 2024, we reduced our risk rated four and five loans by approximately 34% or $182,000,000 As of year end, we had five loans, risk rated four and five remaining in our portfolio, totaling $357,000,000 of outstanding principal balance. During 2024, we also reduced our office exposure, including REOs, by $151,000,000 representing a decline of 18% year over year and exited one of our three REO assets. In our view, these actions improved the overall quality of our portfolio. In addition, we collected equity contributions on our risk rated one to three loans of $38,000,000 in the fourth quarter and $118,000,000 for the full year in the form of loan pay downs, funding of reserves, capital expenditures, leasing expenses, purchase of interest rate caps or other purposes.

The improving commercial real estate market transaction activity and rate dynamics also led to a more normalized pace of repayments, particularly in the second half of the year. In the fourth quarter, we collected $147,000,000 of repayments and $350,000,000 of repayments for the full year, nearly double versus 2023. Further supporting our primary objectives to address underperforming assets, we enhanced the flexibility of our balance sheet throughout 2024 with lower leverage and additional liquidity. In the fourth quarter of twenty twenty four, we reduced our outstanding borrowings by $172,000,000 which led to a $444,000,000 or 27% reduction for the full year of 2024. By year end, we had a net debt to equity ratio excluding CECL of 1.6x, which was 16% lower than at year end 2023.

We believe this is an important achievement as it positions us to maximize the resolution of our underperforming assets. For 2025, we remain focused on further reducing our risk rated four and five loans, office loans and REO properties with the specific goal of proving out book value. We continue to experience further momentum with respect to our positioning against this objective. So far in 2025, we’ve collected $166,000,000 of loan repayments, generating an additional $100,000,000 of cash. It is worth pointing out that our cash balance now represents approximately 40% of the current market value of the stock.

These repayments now position us with over $200,000,000 of available capital, which we believe provides us the opportunity to accelerate and drive positive outcomes in resolving our remaining underperforming assets. However, maintaining higher levels of liquidity and lower amounts of financial leverage does have an impact on our current earnings. In this context, our Board of Directors, together with our management team, have elected to adjust our quarterly dividend to $0.15 per share, a level that more closely aligns with our strategic objective. As we have noted before, while we continue to resolve our underperforming loans and ROE properties, our earnings may vary quarter to quarter and at times may be less than our newly adjusted dividend. Before turning the call over to Jeff, I want to acknowledge the unimaginable tragedy that unfolded in Los Angeles caused by the wildfires.

While our portfolio is not directly impacted, this tragedy has unfortunately impacted the lives of many of our clients and colleagues, and our thoughts are with them and their loved ones during this challenging time. Ares is working to diligently support them and the entire area in the recovery. And with that, I’ll turn the call over to Jeff, who will provide more details on our fourth quarter and full year results. Jeff?

Jeff Gonzales, Chief Financial Officer, Ares Commercial Real Estate Corporation: Thank you, Brian. For the fourth quarter of twenty twenty four, we reported a GAAP net loss of $10,700,000 or $0.2 per common share. Our distributable earnings for the fourth quarter of twenty twenty four was a net loss of $8,300,000 or $0.15 per common share, which includes realized losses of $18,000,000 or $0.33 per common share. This includes both the full write off of the subordinated loan on the New Jersey office property, as well as the loss on the sale of our California REO office property. For full year 2024, we reported a GAAP net loss of $35,000,000 or $0.64 per common share and a distributable earnings loss of $44,600,000 or $0.82 per common share.

Focusing on the fourth quarter results, distributable earnings, excluding the realized losses of $18,000,000 was $9,700,000 or $0.18 per common share. We also collected $3,000,000 or $0.06 per common share of interest in cash on loans that were on non accrual during the fourth quarter and thus was not recognized as income during the quarter and instead was applied to reduce our cost basis in the loans. As Brian mentioned, we had strong repayments in the back half of twenty twenty four, particularly in the fourth quarter. Throughout 2024, we collected $350,000,000 in repayments, nearly double what we collected as compared to 2023. Importantly, reflecting the pace of recovery in commercial real estate activity, we collected $147,000,000 of repayments in the fourth quarter of twenty twenty four, resulting in over 75% of the annual repayments for 2024 being collected after 06/30/2024.

In terms of our loan risk ratings, the outstanding principal balance of loans with a risk rating of four or five increased 12% or $37,000,000 in the fourth quarter. This was largely due to a $51,000,000 senior loan collateralized by a life science office property in Massachusetts migrating from a risk rated three loan to a risk rated four loan. The increase in total risk rated four and five loans was partly offset by the restructuring of a previous risk rated $520,000,000 senior loan collateralized by an industrial property in California. The loan was split into a $7,000,000 senior note with a risk rating of three and a $13,000,000 subordinate note with a risk rating of four. In addition, we fully wrote off an $18,000,000 subordinated loan collateralized by an office property in New Jersey, which was previously risk weighted to five and was fully reserved for through our SUSO reserve.

We also further reduced our office exposure and the number of properties held at REO in the fourth quarter as we sold a $15,000,000 California REO office property, which was previously held for sale. We now have two REO properties remaining totaling $139,000,000 in carrying value. It is worth pointing out the cash yield on the carrying value of these underlying REO properties is over 8%. Continuing with our portfolio, our overall CECL reserve remained relatively stable at $145,000,000 a decrease of approximately $1,000,000 from the CECL reserve as of 09/30/2024. The decrease was due to the write off of the $18,000,000 New Jersey office loan mentioned earlier, partially offset by a net increase in CECL reserves for existing loans, particularly the Massachusetts office life science loan.

The overall CECL reserve of approximately $145,000,000 at the end of the fourth quarter represents approximately 8.5% of the total outstanding principal balance of our loans held for investment. Our CECL reserve is lower on a dollar basis, but higher as a percentage of the portfolio basis driven by the purposeful de risking actions we took in the quarter leading to a smaller portfolio size in the near term. It should be noted that 91 of our total CECL reserve or approximately $132,000,000 relates to our risk rated four or five loans. With strong repayments and purposeful execution, we continued to drive additional financial flexibility by reducing our leverage even further in the fourth quarter. We reduced our leverage at the end of the fourth quarter to $1,200,000,000 down 13% from the prior quarter and down 27% from the prior year.

Our net debt to equity ratio excluding CECL declined to 1.6 times at the end of the fourth quarter down from 1.8 times in the third quarter and 1.9 times at the end of twenty twenty three. Before turning the call back over to Brian, and as we have discussed, we declared a regular cash dividend of $0.15 per common share for the first quarter of twenty twenty five. The first quarter dividend will be payable on 04/15/2025 to common stockholders of record as of 03/31/2025. At our current stock price on 02/10/2025, the annualized dividend yield on our new first quarter dividend is above 10%. With that, I will turn the call back over to Brian for some closing remarks.

Brian Donahoe, CEO, Ares Commercial Real Estate Corporation: Thanks, Jeff. We’ve made meaningful progress on many of our goals. We believe we’ve positioned our company strategically for a successful 2025. We have a stronger and healthier balance sheet, which will allow us to be in an even stronger position to address and resolve our remaining higher risk rated loans in an improving real estate market environment. We remain committed to being responsible stewards of shareholder capital, and we will seek to bring crystallization to our book value in order to enhance shareholder returns.

As always, we appreciate you joining our call today, and we’d be happy to open the line for questions.

Conference Call Operator: We’ll hear first today from the line of Rick Shane, JPMorgan.

Jeff Gonzales, Chief Financial Officer, Ares Commercial Real Estate Corporation: Hey guys, thanks for taking my questions this morning. Look, 2025 is going to be a year of transition, some acceleration of repayments, increase in deal activity, realized losses. Those seem to be the three big things to consider. I realize you can’t give us specificity in terms of what each of those is going to look like. But if you can help us think about the contours in terms of timing, front half, back half of the year for each of those three, that would be really helpful.

Brian Donahoe, CEO, Ares Commercial Real Estate Corporation: Yes, Rick, I’ll start and appreciate the question. I’ll certainly share the mic with Tae Sik and Jeff a little bit. I think in our opening remarks, we talked about the pace of market recovery, how that accelerated into year end, obviously, rate rise towards the back half and beginning of this year, a little bit of headwind, but really going in the face of capital flows that I think are positive, not just the amount of capital coming into real estate, but the type. So you’ve got more rational buyers entering versus kind of the vulture structure that we would typically see in down cycles. In terms of timeline, I mean, I think we touched on the 34% reduction in our four and five throughout last year.

And I think with the capital flows we’re seeing, we would expect to maintain that pace in the first half of the year to move to a more tenable allocation towards those risk rated four and five. And all of that kind of comes together with neutral or more neutral rate environment and those capital flows I mentioned. So when we think about more active participation on the deployment side, I think we will like to see first that continued pace of reduction in the four and five that we were successful in accomplishing throughout the last twelve odd months.

Conference Call Operator: Our next question comes from Doug Harter at UBS. Mr. Harder, your line is open, sir. You may have us on mute.

Doug Harter, Analyst, UBS: Hello. Can you talk about what type of environment would be needed to pick up the pace of originations, stabilize the leverage level and possibly increase the size of the portfolio?

Brian Donahoe, CEO, Ares Commercial Real Estate Corporation: Yes, certainly. Appreciate the question. I think as I mentioned in response to your question, I think the continued reduction of those four and five will be catalytic to that deployment. As a platform, we were fairly active with almost $5,000,000,000 of originations last year in other non acre vehicles. So I think the takeaway there, the engine is running and we see a market opportunity that we can and will participate in.

And as we bring further clarity to some of the asset management issues we touched on, I think we’ll look to begin growing the portfolio again. Given the scale of the portfolio though, we’re not talking about a huge number of assets that will perform or behave like an index. It’s really as we’ve experienced some idiosyncratic events with assets and there’s fewer and fewer of them to asset manage actively. But the goals that we set forth at the beginning of last year to create a larger cash position, reduce those allocations or those assets that are higher on the risk spectrum. I think we’ve accomplished those goals with a good degree of success and we see a trend line that’s positive that will certainly allow us to have the company of Acre participate in the market opportunity that we’re seeing in real time.

Jeff Gonzales, Chief Financial Officer, Ares Commercial Real Estate Corporation: And I’ll just add to that. We’ve been very purposeful with our balance sheet positioning to give us that flexibility to resolve our four and five rated loans. So that’s continuing to be our main focus. And as Brian mentioned, once that bucket of underperforming loans is resolved, we are going to be in a position to find accretive opportunities for us.

Conference Call Operator: Our next question will come from Jade Rahmani at KBW.

Jade Rahmani, Analyst, KBW: Could you please discuss the Boston Life Science deal, the dynamics that are going on there? Is it a vacant project? Is it completed? And what would be the outlook there? I know Life Science is challenged and there’s still quite a lot of supply.

Brian Donahoe, CEO, Ares Commercial Real Estate Corporation: Yes, it’s a good question, Jade. We appreciate it. I think what we’ve seen is a pivoting of some business plans and you could apply that to this asset where given the supply glut that you’ve seen accelerate over the past, call it, thirty six months in that Boston Life Science market, and you can trace it obviously back all the way to VC funding. But the change in that dynamic and the business plan from a full life science use to a more traditional office use obviously is impactful. On the one hand with respect to the tenant improvement allowance in the spend, but also ultimately on rents and valuation.

So that was the catalyst for the change in discourse around that loan. The good part is with the supply of life science being issued, some of the you see negative supply to some degree in traditional office utilization. So we’re working with that borrower to effectuate the best outcome. But certainly, the macro environment around that sector is much less positive than it was as our industry group sat here three odd years ago.

Jade Rahmani, Analyst, KBW: And in terms of the basis that the loan is, since it’s risk for us and there’s not a meaningful reserve, but the current carrying value, does it work with this change in business plan or is that a discussion that’s currently underway? And is there any additional life science exposure?

Brian Donahoe, CEO, Ares Commercial Real Estate Corporation: That’s the, I mean, we’ve got some mixed use assets. That’s really the life science exposure in the portfolio, Jade. I’d say that the situation remains fairly fluid with the sponsorship group. I think what you’re seeing is that while there’s long term opportunity and enterprise value in this sector, it’s a matter of what can get accomplished in the face of that supply that you mentioned. So I think the answer is more to come on this asset, but we’re in active dialogue.

Jeff Gonzales, Chief Financial Officer, Ares Commercial Real Estate Corporation: And Jay, just to add on to that, as far as the reserve you mentioned, we did increase the reserve on that asset this quarter. So we do feel we’re absolutely reserved as is.

Jade Rahmani, Analyst, KBW: Okay. And then if I could ask another question just on multifamily, broader trends. I mean, the performance of multifamily this cycle has been pretty phenomenal with a few exceptions, but generally it’s held in really well. Do you think that the changes in interest rates and the outlook have any implications for multifamily credit or do you expect pretty resilient credit there? Yes.

Brian Donahoe, CEO, Ares Commercial Real Estate Corporation: I’d say, Jade, we touched on this. I think in your Q and A last quarter to some degree, the fundamentals from a leasing perspective have been extremely positive absorption rent growth across all the major markets in The U. S. Last quarter were pretty remarkable as you state. I think the rate rise had two impacts transaction volume, right, where you had given those fundamental sellers that were less willing to part with assets given the change in valuations just on a direct cap basis owing to rates.

And also that fundamentals with that fall off in supply, I think the statistic of the ratio between apartment deliveries and new starts has never been wider. So you’ve positively absorbed a huge amount of supply and supply falls off a cliff from here. So positive fundamentals really have no signs of abating going forward. But the impact of rates was certainly to mute transaction volume and the immediate term pause the valuation growth in the sector. But I think we still feel as a lender very well protected in the capital structure today.

Conference Call Operator: Our next question will come from Chris Mueller at Citizens JMP.

Doug Harter, Analyst, UBS: Hey guys, thanks for taking the question. So we saw in our recent commercial mortgage alert that you as an Ares expect to issue somewhere in the range of $500,000,000 to $1,000,000,000 of CLOs in 2025, and most of that would come through the REIT here. So I’m curious, do you guys have any thoughts on the timing there? And if it is that more $1,000,000,000 number or I guess on the $500,000,000 is that something that would be split into two or more transactions or would you be able to get enough collateral for a larger CLO?

Brian Donahoe, CEO, Ares Commercial Real Estate Corporation: Yes, I’m not sure that we were as specific around which vehicles would participate necessarily. That said, we’ve traditionally thought about the CLO market as an opportunistic way to term out the leverage. I think as an industry group, we’ve seen a lot of constructive movement in terms of repo providers and really narrowing the gap between the leverage advance rate structures that you might find in a CLO execution versus traditional bank repo. And our partnership with those banks is a huge part of what we do across areas and certainly within real estate and real estate credit. I think in terms of things we would like to see should we pursue a CLO execution, clearly the market wants to see some degree of scale and diversification, both in terms of asset types, vintages and things like that.

And in order to pay the freight associated with the CLO, you’re going to want to have that scale to defray those costs a little bit. So clearly, the capital markets movement has been positive for our sector. And if, as and when the CLO market becomes attractive to us in our portfolios, we’ll judiciously use it. But it is a I think that mechanism is a nice to have, not a must have for us and the majority of our peers.

Jeff Gonzales, Chief Financial Officer, Ares Commercial Real Estate Corporation: Yes, I’ll just add, we are seeing very competitive pricing from our warehouse lenders. That is a market that they’re really purchasing in as opposed to directly originating. So we are that and we do see that right now as the most attractive financing option for us.

Doug Harter, Analyst, UBS: Got it. That’s very helpful. And then I think I probably know the answer to this one, but given the pickup in repays in the fourth quarter and then into the first quarter, Does the magnitude of those coming in impact the timing of any new lending? And I guess what I’m trying to get at is, will you guys look to replace any of that runoff with new lending? Or is it purely just waiting to get through some of those problem assets?

Brian Donahoe, CEO, Ares Commercial Real Estate Corporation: It certainly works in tandem. I think the cash position that we’ve generated, candidly, we think it’s an enviable place to be, especially given what we mentioned in the opening remarks regarding that discount to book and the amount of cash that kind of comprises our market value today. But as we work through the remaining smaller number of risk weighted four and five assets alongside that very strong cash position and more moderate leverage than the industry as a whole. I think those two things together will be the prompt for further deployment and getting back to portfolio growth.

Doug Harter, Analyst, UBS: Got it. That’s very helpful. Thanks for taking the questions.

Conference Call Operator: Our next question comes from John Nicodemus at BTIG.

John Nicodemus, Analyst, BTIG: Good morning, everyone, and thanks so much for taking the question. Somewhat similar to what Chris just mentioned, obviously, fourth quarter brought your highest repayment volume of last year. Brian, you mentioned during your remarks that year to date repayments have already exceeded that quarterly level as well. So just with that in mind and based on what visibility you do have, how should we think about your repayment trajectory for the rest of 2025?

Brian Donahoe, CEO, Ares Commercial Real Estate Corporation: Yes, it’s a great question. And as I mentioned earlier, each of these assets behave unto themselves to some degree. But if you think about our industry in this floating rate loan origination schematic, generally we would expect to see a three year weighted average life on each of these assets and those types of tenors are interrupted by the dynamic market environments, right. So we saw with the rate rise, with the change in office, a little bit longer duration in certain assets and I think collectively throughout our portfolio. So there’s probably some potential energy that will lead to an acceleration of those repayments.

And so I think if we were to move over time to get back to that normalized three year life of an investment, we might see as we saw in Q4 and thus far in Q1, a little bit more acceleration of that. So our discussions with borrowers and the fact that you’re seeing more capital come into the space should see a little bit of an unnatural acceleration of those repayments throughout the course of this year and a return to more normalized cadence for new originations of assets going forward.

Conference Call Operator: And that is all the questions we have for today, gentlemen.

Brian Donahoe, CEO, Ares Commercial Real Estate Corporation: Great. Well, I’ll just close with just an expression of gratitude. I appreciate everybody’s time today and your continued support of Ares Commercial Real Estate. And we look forward to speaking with you again on our next earnings call. Thanks, everybody.

Conference Call Operator: 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 the call through 03/12/2025 to domestic callers by dialing (800) 839-2382 and to international callers by dialing 402 area code 220-7201. An archived replay will also be available on a webcast link located on the homepage of the Investor Resources section of our website. Thank you

Brian Donahoe, CEO, Ares Commercial Real Estate Corporation: for joining. You may now disconnect.

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