Ares Commercial Real Estate Corporation Reports Fourth Quarter and Full Year 2023 Results
- None.
- Continuing deterioration of the commercial office property sector impacting earnings
- Increased CECL reserves in the fourth quarter due to underperforming commercial office and residential condominium loans
- Decline in GAAP net income for the fourth quarter and full year 2023
Insights
Examining the reported GAAP net income (loss) juxtaposed with Distributable Earnings provides a nuanced view of Ares Commercial Real Estate Corporation's financial health. The significant net loss on a GAAP basis suggests substantial impairments or write-downs which could be due to market downturns, particularly in the commercial office sector as mentioned by the CEO. However, the positive Distributable Earnings, which exclude certain non-cash expenses and one-time charges, may offer a more operational perspective on the company's performance. This dichotomy could indicate that while the company has faced challenges, its core business operations remain profitable.
Investors should consider the company's liquidity and debt-to-equity ratio improvements, which are indicative of financial resilience. The mention of increased CECL reserves, which are provisions for expected credit losses, suggests a proactive approach to potential loan defaults, particularly important in a deteriorating real estate market. The ability to redeploy capital efficiently after resolving underperforming loans could be a pivotal factor for future earnings enhancement, as the company's management suggests.
The commercial real estate market has been facing headwinds, particularly in the office property sector. Ares Commercial Real Estate Corporation's acknowledgment of the sector's deterioration reflects broader market trends, potentially due to shifts in work-from-home policies and changes in the commercial real estate landscape. The company's focus on managing and resolving underperforming loans is a strategic move that could mitigate risk exposure and capitalize on new lending opportunities in a recovering market.
The dividend declaration for the first quarter of 2024, despite a net GAAP loss, indicates confidence in the company's distributable earnings and liquidity. This action may also reflect a commitment to shareholder returns, which could be a positive signal to the market. However, the reduction in dividend from the previous quarter could be a point of concern for investors seeking stable income streams.
The contrast between the reported GAAP net loss and positive Distributable Earnings suggests that while Ares Commercial Real Estate Corporation faces valuation challenges, perhaps due to the current state of the commercial office sector, its underlying income-generating activities remain intact. The decision to increase CECL reserves indicates a cautious approach to risk management, particularly relevant in the real estate investment sector where loan performance can significantly impact earnings.
Investors should be aware of the potential for recovery and capital redeployment strategies that the company plans to implement. These strategies could lead to a realignment of the loan portfolio towards more resilient real estate segments or geographies, potentially improving the company's risk profile and profitability in the long term. The mention of available capital for new loans could signal growth opportunities, but it is also essential to monitor how effectively this capital is utilized to generate returns.
Fourth quarter GAAP net income (loss) of
Full year GAAP net income (loss) of
- Subsequent to year ended December 31, 2023 -
Declared first quarter 2024 dividend of
“Our fourth quarter and full-year 2023 earnings were primarily impacted by the continuing deterioration of the commercial office property sector,” said Bryan Donohoe, Chief Executive Officer of Ares Commercial Real Estate Corporation. “However, based upon our experience and capabilities across the Ares Real Estate Group, our liquidity, and our level of loss reserves, we believe that we are well positioned to resolve many of our underperforming loans and redeploy recovered capital into new loans to enhance our earnings going forward.”
“We increased our CECL reserves in the fourth quarter largely due to the performance of our commercial office and residential condominium loan portfolio, which accounted for
_________________________________
(1) Distributable Earnings is a non-GAAP financial measure. Refer to Schedule I for the definition and reconciliation of Distributable Earnings.
COMMON STOCK DIVIDEND
On November 3, 2023, the Board of Directors of the Company declared a regular cash dividend of
On February 22, 2024, the Board of Directors of the Company declared a regular cash dividend of
ADDITIONAL INFORMATION
The Company issued a presentation of its fourth quarter and full year 2023 results, which can be viewed at www.arescre.com on the Investor Resources section of our home page under Events and Presentations. The presentation is titled “Fourth Quarter and Full Year 2023 Earnings Presentation.” The Company also filed its Annual Report on Form 10-K for the year ended December 31, 2023 with the
CONFERENCE CALL AND WEBCAST INFORMATION
On Thursday, February 22, 2024, the Company invites all interested persons to attend its webcast/conference call at 9:00 a.m.(Eastern Time) to discuss its fourth quarter and full year 2023 financial results.
All interested parties are invited to participate via telephone or the live webcast, which will be hosted on a webcast link located on the Home page of the Investor Resources section of the Company’s website at www.arescre.com. Please visit the website to test your connection before the webcast. Domestic callers can access the conference call by dialing +1 (800) 343-4136. International callers can access the conference call by dialing +1 (203) 518-9814. Please provide passcode ACREQ423. All callers are asked to dial in 10-15 minutes prior to the call so that name and company information can be collected. For interested parties, an archived replay of the call will be available through March 21, 2024 at 5:00 p.m. (Eastern Time) to domestic callers by dialing +1 (800) 723-0544 and to international callers by dialing +1 (402) 220-2656. An archived replay will also be available through March 21, 2024 on a webcast link located on the Home page of the Investor Resources section of the Company’s website.
ABOUT ARES COMMERCIAL REAL ESTATE CORPORATION
Ares Commercial Real Estate Corporation (the “Company”) is a specialty finance company primarily engaged in originating and investing in commercial real estate loans and related investments. Through its national direct origination platform, the Company provides a broad offering of flexible and reliable financing solutions for commercial real estate owners and operators. The Company originates senior mortgage loans, as well as subordinate financings, mezzanine debt and preferred equity, with an emphasis on providing value added financing on a variety of properties located in liquid markets across
FORWARD-LOOKING STATEMENTS
Statements included herein or on the webcast / conference call may constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities and Exchange Act of 1934, as amended, which relate to future events or the Company’s future performance or financial condition. These statements are not guarantees of future performance, condition or results and involve a number of risks and uncertainties. Actual results may differ materially from those in the forward-looking statements as a result of a number of factors, including the return or impact of current and future investments, rates of prepayments on the Company’s mortgage loans and the effect on the Company’s business of such prepayments, availability of investment opportunities in mortgage-related and real estate-related investments and securities, ACREM’s ability to locate suitable investments for the Company, monitor, service and administer the Company’s investments and execute its investment strategy, the Company’s ability to obtain, maintain, repay or refinance financing arrangements, including securitizations, global economic trends and economic conditions, including high inflation, slower growth or recession, changes to fiscal and monetary policy, higher interest rates and currency fluctuations, as well as geopolitical instability, including conflicts between
ARES COMMERCIAL REAL ESTATE CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands, except share and per share data) |
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|
As of December 31, |
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|
|
|
2023 |
|
|
|
2022 |
|
ASSETS |
|
|
|
|
||||
Cash and cash equivalents |
|
$ |
110,459 |
|
|
$ |
141,278 |
|
Loans held for investment ( |
|
|
2,126,524 |
|
|
|
2,264,008 |
|
Current expected credit loss reserve |
|
|
(159,885 |
) |
|
|
(65,969 |
) |
Loans held for investment, net of current expected credit loss reserve |
|
|
1,966,639 |
|
|
|
2,198,039 |
|
Loans held for sale, at fair value ( |
|
|
38,981 |
|
|
|
— |
|
Investment in available-for-sale debt securities, at fair value |
|
|
28,060 |
|
|
|
27,936 |
|
Real estate owned, net |
|
|
83,284 |
|
|
|
— |
|
Other assets ( |
|
|
52,354 |
|
|
|
155,749 |
|
Total assets |
|
$ |
2,279,777 |
|
|
$ |
2,523,002 |
|
LIABILITIES AND STOCKHOLDERS' EQUITY |
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|
|
|
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LIABILITIES |
|
|
|
|
||||
Secured funding agreements |
|
$ |
639,817 |
|
|
$ |
705,231 |
|
Notes payable |
|
|
104,662 |
|
|
|
104,460 |
|
Secured term loan |
|
|
149,393 |
|
|
|
149,200 |
|
Collateralized loan obligation securitization debt (consolidated VIEs) |
|
|
723,117 |
|
|
|
777,675 |
|
Due to affiliate |
|
|
4,135 |
|
|
|
5,580 |
|
Dividends payable |
|
|
18,220 |
|
|
|
19,347 |
|
Other liabilities ( |
|
|
14,584 |
|
|
|
13,969 |
|
Total liabilities |
|
|
1,653,928 |
|
|
|
1,775,462 |
|
Commitments and contingencies |
|
|
|
|
||||
STOCKHOLDERS' EQUITY |
|
|
|
|
||||
Common stock, par value |
|
|
532 |
|
|
|
537 |
|
Additional paid-in capital |
|
|
812,184 |
|
|
|
812,788 |
|
Accumulated other comprehensive income |
|
|
153 |
|
|
|
7,541 |
|
Accumulated earnings (deficit) |
|
|
(187,020 |
) |
|
|
(73,326 |
) |
Total stockholders' equity |
|
|
625,849 |
|
|
|
747,540 |
|
Total liabilities and stockholders' equity |
|
$ |
2,279,777 |
|
|
$ |
2,523,002 |
|
ARES COMMERCIAL REAL ESTATE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except share and per share data) |
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For The Three Months Ended December 31, 2023 |
|
For the Year Ended December 31, 2023 |
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Revenue: |
|
|
|
|
||||
Interest income |
|
$ |
44,348 |
|
|
$ |
198,608 |
|
Interest expense |
|
|
(29,957 |
) |
|
|
(109,652 |
) |
Net interest margin |
|
|
14,391 |
|
|
|
88,956 |
|
Revenue from real estate owned |
|
|
3,161 |
|
|
|
3,970 |
|
Total revenue |
|
|
17,552 |
|
|
|
92,926 |
|
Expenses: |
|
|
|
|
||||
Management and incentive fees to affiliate |
|
|
2,946 |
|
|
|
12,263 |
|
Professional fees |
|
|
974 |
|
|
|
3,054 |
|
General and administrative expenses |
|
|
1,830 |
|
|
|
7,244 |
|
General and administrative expenses reimbursed to affiliate |
|
|
818 |
|
|
|
3,434 |
|
Expenses from real estate owned |
|
|
2,038 |
|
|
|
2,518 |
|
Total expenses |
|
|
8,606 |
|
|
|
28,513 |
|
Provision for current expected credit losses |
|
|
47,452 |
|
|
|
91,825 |
|
Realized losses on loans |
|
|
— |
|
|
|
10,499 |
|
Unrealized losses on loans held for sale |
|
|
995 |
|
|
|
995 |
|
Income (loss) before income taxes |
|
|
(39,501 |
) |
|
|
(38,906 |
) |
Income tax expense (benefit), including excise tax |
|
|
(87 |
) |
|
|
(39 |
) |
Net income (loss) attributable to common stockholders |
|
$ |
(39,414 |
) |
|
$ |
(38,867 |
) |
Earnings per common share: |
|
|
|
|
||||
Basic earnings (loss) per common share |
|
$ |
(0.73 |
) |
|
$ |
(0.72 |
) |
Diluted earnings (loss) per common share |
|
$ |
(0.73 |
) |
|
$ |
(0.72 |
) |
Weighted average number of common shares outstanding: |
|
|
|
|
||||
Basic weighted average shares of common stock outstanding |
|
|
54,111,544 |
|
|
|
54,281,998 |
|
Diluted weighted average shares of common stock outstanding |
|
|
54,111,544 |
|
|
|
54,281,998 |
|
Dividends declared per share of common stock(1) |
|
$ |
0.33 |
|
|
$ |
1.36 |
|
(1) There is no assurance dividends will continue at these levels or at all. |
SCHEDULE I
Reconciliation of Net Income to Non-GAAP Distributable Earnings
Distributable Earnings is a non-GAAP financial measure that helps the Company evaluate its financial performance excluding the effects of certain transactions and GAAP adjustments that it believes are not necessarily indicative of its current loan origination portfolio and operations. To maintain the Company’s REIT status, the Company is generally required to annually distribute to its stockholders substantially all of its taxable income. The Company believes the disclosure of Distributable Earnings provides useful information to investors regarding the Company’s ability to pay dividends, which is one of the principal reasons the Company believes investors invest in the Company. The presentation of this additional information is not meant to be considered in isolation or as a substitute for financial results prepared in accordance with GAAP. Distributable Earnings is defined as net income (loss) attributable to common stockholders computed in accordance with GAAP, excluding non-cash equity compensation expense, the incentive fees the Company pays to its Manager (Ares Commercial Real Estate Management LLC), depreciation and amortization (to the extent that any of the Company’s target investments are structured as debt and the Company forecloses on any properties underlying such debt), any unrealized gains, losses or other non-cash items recorded in net income (loss) for the period, regardless of whether such items are included in other comprehensive income or loss, or in net income (loss), one-time events pursuant to changes in GAAP and certain non-cash charges after discussions between the Company’s Manager and the Company’s independent directors and after approval by a majority of the Company’s independent directors. Loan balances that are deemed to be uncollectible are written off as a realized loss and are included in Distributable Earnings. Distributable Earnings is aligned with the calculation of “Core Earnings,” which is defined in the Management Agreement and is used to calculate the incentive fees the Company pays to its Manager.
Reconciliation of net income (loss) attributable to common stockholders, the most directly comparable GAAP financial measure, to Distributable Earnings is set forth in the table below for the three months and year ended December 31, 2023 ($ in thousands):
|
For the Three Months Ended December 31, 2023 |
|
For the Year Ended December 31, 2023 |
||||
Net income (loss) attributable to common stockholders |
$ |
(39,414 |
) |
|
$ |
(38,867 |
) |
Stock-based compensation |
|
1,041 |
|
|
|
3,991 |
|
Incentive fees to affiliate |
|
— |
|
|
|
334 |
|
Depreciation and amortization of real estate owned |
|
809 |
|
|
|
1,015 |
|
Provision for current expected credit losses |
|
47,452 |
|
|
|
91,825 |
|
Realized gain on termination of interest rate cap derivative(1) |
|
(105 |
) |
|
|
(921 |
) |
Unrealized losses on loans held for sale |
|
995 |
|
|
|
995 |
|
Distributable Earnings |
$ |
10,778 |
|
|
$ |
58,372 |
|
|
|
|
|
||||
Net income (loss) attributable to common stockholders |
$ |
(0.73 |
) |
|
$ |
(0.72 |
) |
Stock-based compensation |
|
0.02 |
|
|
|
0.07 |
|
Incentive fees to affiliate |
|
— |
|
|
|
0.01 |
|
Depreciation and amortization of real estate owned |
|
0.01 |
|
|
|
0.02 |
|
Provision for current expected credit losses |
|
0.88 |
|
|
|
1.69 |
|
Realized gain on termination of interest rate cap derivative(1) |
|
— |
|
|
|
(0.02 |
) |
Unrealized losses on loans held for sale |
|
0.02 |
|
|
|
0.02 |
|
Basic Distributable Earnings per common share |
$ |
0.20 |
|
|
$ |
1.08 |
|
|
|
|
|
||||
Net income (loss) attributable to common stockholders |
$ |
(0.72 |
) |
|
$ |
(0.71 |
) |
Stock-based compensation |
|
0.02 |
|
|
|
0.07 |
|
Incentive fees to affiliate |
|
— |
|
|
|
0.01 |
|
Depreciation and amortization of real estate owned |
|
0.01 |
|
|
|
0.02 |
|
Provision for current expected credit losses |
|
0.87 |
|
|
|
1.67 |
|
Realized gain on termination of interest rate cap derivative(1) |
|
— |
|
|
|
(0.02 |
) |
Unrealized losses on loans held for sale |
|
0.02 |
|
|
|
0.02 |
|
Diluted Distributable Earnings per common share |
$ |
0.20 |
|
|
$ |
1.06 |
|
| (1) |
For the three months and year ended December 31, 2023, Distributable Earnings includes a |
View source version on businesswire.com: https://www.businesswire.com/news/home/20240221369754/en/
INVESTOR RELATIONS
Ares Commercial Real Estate Corporation
Carl Drake or John Stilmar
(888) 818-5298
iracre@aresmgmt.com
Source: Ares Commercial Real Estate
FAQ
What was Ares Commercial Real Estate Corporation's (ACRE) fourth-quarter GAAP net loss?
What were Ares Commercial Real Estate Corporation's (ACRE) Distributable Earnings for the fourth quarter of 2023?
What was Ares Commercial Real Estate Corporation's (ACRE) full-year GAAP net loss for 2023?
What was Ares Commercial Real Estate Corporation's (ACRE) Distributable Earnings for the full year of 2023?
What dividend did Ares Commercial Real Estate Corporation (ACRE) declare for the first quarter of 2024?
