Market Overview

Ares Commercial Real Estate Corporation Reports First Quarter 2017 Results

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Ares Commercial Real Estate Corporation (the "Company") (NYSE:ACRE), a
specialty finance company engaged in originating and investing in
commercial real estate assets, reported net income of $6.5 million or
$0.23 per diluted common share for the first quarter of 2017. In
addition, the Company announced that its Board of Directors declared a
second quarter 2017 dividend of $0.27 per common share payable on
July 17, 2017 to common stockholders of record on June 30, 2017.

"Our first quarter's results were in-line with our expectations and do
not reflect our full potential due to our significant amount of
undeployed capital available for future investment," said Robert L.
Rosen, Chairman of the Board and Interim Co-Chief Executive Officer of
Ares Commercial Real Estate Corporation. "Based on our capital
availability and originations expectations, we expect to grow our
current level of earnings in the second half of 2017, as we begin to
benefit from the deployment of our available capital into predominately
new floating rate loans. John and I would also like to welcome Jamie
Henderson to our executive management team as President and Chief
Investment Officer, and we look forward to his many contributions in the
months and years ahead."

"Market conditions are competitive but strong, and stable real estate
fundamentals and significant undeployed private equity capital are
supporting increased transaction activity," said John Jardine, Co-Chief
Executive Officer of Ares Commercial Real Estate Corporation. "We have
high quality assets in our pipeline and are pursuing attractive
opportunities as illustrated by over $200 million in new term sheets
executed for the month of April 2017 alone."

"So far in 2017, we have increased our sources of financing by
approximately $450 million in the aggregate, including a new $273
million securitization and an amended facility with Wells Fargo, which
expands our borrowing capacity from $325 million to $500 million," said
Tae-Sik Yoon, Chief Financial Officer of Ares Commercial Real Estate
Corporation. "Due to our strong balance sheet with modest leverage and
diverse sources of liquidity, we believe we are well positioned to reach
our earnings objectives as we further increase our investment portfolio
and potentially benefit from higher interest rates."

THREE MONTHS ENDED MARCH 31, 2017 FINANCIAL
HIGHLIGHTS

Financial Results and Activities:

  • For the three months ended March 31, 2017, net income was $6.5 million
    or $0.23 per diluted common share.
  • For the three months ended March 31, 2017, new originations were
    $133.7 million in commitments and $130.0 million in outstanding
    principal and an additional $3.4 million of fundings on existing
    commitments. For the three months ended March 31, 2017, loan
    repayments totaled $65.0 million in outstanding principal, excluding
    non-controlling interests held by third parties.

Capital Activities:

  • On March 2, 2017, ACRC Lender LLC ("ACRC Lender"), a subsidiary of the
    Company, amended its $50.0 million secured revolving funding facility
    with City National Bank (the "March 2014 CNB Facility") to extend the
    initial maturity date to March 11, 2018. The initial maturity date of
    the March 2014 CNB Facility has two one-year extensions, each of which
    may be exercised at ACRC Lender's option, subject to the satisfaction
    of certain conditions, including payment of an extension fee, which,
    if both were exercised, would extend the maturity date of the March
    2014 CNB Facility to March 10, 2020.
  • On March 2, 2017, ACRE Commercial Mortgage 2017-FL3 Ltd. (the
    "Issuer") and ACRE Commercial Mortgage 2017-FL3 LLC, both wholly owned
    indirect subsidiaries of the Company, issued approximately $272.9
    million principal balance secured floating rate notes (the "Offered
    Notes") to a third party. The Company is retaining (through one of its
    wholly owned subsidiaries) approximately $68.2 million of the
    non-investment grade notes (together with the Offered Notes, the
    "Notes") and the preferred equity of the Issuer, which notes and
    preferred equity were not offered to investors. The Notes are
    collateralized by interests in a pool of twelve mortgage assets having
    a total principal balance of approximately $341.2 million.

PORTFOLIO DETAIL AS OF MARCH 31, 2017

At March 31, 2017, the Company's portfolio totaled 32 loans held for
investment totaling approximately $1.5 billion in originated commitments
at closing and $1.4 billion in outstanding principal. At March 31, 2017,
50 loans totaling approximately $1.5 billion in outstanding principal
were repaid or sold since inception of the Company.

Portfolio Interest Rate, Yield and Remaining
Life Summary ($ in millions):

    As of March 31, 2017
     

 

 

 

 

 

Weighted

 

 

Weighted

Weighted Average

Average

Carrying

Outstanding

Average

Unleveraged

Remaining

Amount (1)

Principal (1)

Interest Rate

Effective Yield (2)

Life (Years)

Senior mortgage loans $ 1,259.9 $ 1,266.7 4.7% 5.9% 1.8

Subordinated debt and preferred equity

investments 112.2 113.4 10.7% 11.7% 3.5
Total loans held for investment portfolio $ 1,372.1 $ 1,380.1 5.2% 6.4% 1.9

_________________________________

(1)   The difference between the Carrying Amount and the Outstanding
Principal face amount of the loans held for investment consists of
unamortized purchase discount, deferred loan fees and loan
origination costs.
(2) Unleveraged Effective Yield is the compounded effective rate of
return that would be earned over the life of the investment based on
the contractual interest rate (adjusted for any deferred loan fees,
costs, premium or discount) and assumes no dispositions, early
prepayments or defaults. The Total Weighted Average Unleveraged
Effective Yield is calculated based on the average of Unleveraged
Effective Yield of all loans held by the Company as of March 31,
2017 as weighted by the Outstanding Principal balance of each loan.
 

As of March 31, 2017, 97% of the portfolio of loans held for investment
consisted of floating rate loans and 92% consisted of senior mortgage
loans (as measured by outstanding principal).

 

Portfolio Diversification Summary as of
March 31, 2017 ($ in millions):

 
PROPERTY TYPE
Outstanding  

 

Principal

% of Portfolio

Multifamily

$

437.9

32 %
Office 307.5 22 %
Self Storage 194.7 14 %
Retail 148.1 11 %
Hotel 128.1 9 %
Mixed-use 65.6 5 %
Healthcare 41.6 3 %
Industrial 32.5 2 %
Student Housing   24.1 2 %
Total

$

1,380.10

100 %
 
GEOGRAPHIC MIX
Outstanding

 

Principal

% of Portfolio

Midwest

$

315.4

23 %
Mid-Atlantic/Northeast 298.1 22 %
Southeast 291 21 %
Southwest 262.2 19 %
West   213.4 15 %
Total

$

1,380.10

100 %
 

RECENT DEVELOPMENTS, INVESTMENT CAPACITY AND LIQUIDITY

On April 25, 2017, the Company's board of directors appointed James A.
Henderson as President and Chief Investment Officer of the Company.

On April 25, 2017, John H. Bryant notified the Company that he would not
stand for reelection as a director of the Company when his current term
expires at the Company's 2017 Annual Meeting of Stockholders to be held
on June 7, 2017.

On April 27, 2017, the Company originated a $19.0 million senior
mortgage loan on an office property located in Florida. At closing, the
outstanding principal balance was approximately $18.4 million. The loan
has an interest rate of LIBOR plus 4.30% (plus fees) and an initial term
of three years.

As of April 28, 2017, the Company had approximately $128 million in
capital, either in cash or in approved but undrawn capacity under its
secured funding agreements. After holding in reserve $10 million in
liquidity requirements, the Company expects to have approximately
$118 million in capital available to fund new loans, fund outstanding
commitments on existing loans and for other working capital and general
corporate purposes. Assuming that the Company uses all such amount as
capital to make new senior loans and the Company is able to leverage
such amount under its secured funding agreements at a debt-to-equity
ratio of 2.5:1, the Company would have the capacity to fund
approximately $410 million of additional senior loans.

As of April 28, 2017, the total unfunded commitments for the Company's
existing loans held for investment were approximately $64 million. In
addition, borrowings under the Company's secured funding agreements were
approximately $582 million, borrowings under the Company's secured term
loan was approximately $155 million and debt issued in the form of a
collateralized loan obligation was approximately $273 million.

On May 1, 2017, the Company entered into a $500 million Second Amended
and Restated Master Repurchase and Securities Contract (the "Wells Fargo
Facility") with Wells Fargo Bank, National Association ("Wells Fargo").
The Wells Fargo Facility amends and restates, and replaces in its
entirety, the existing $325 million repurchase facility with Wells
Fargo. The terms and conditions of the Wells Fargo Facility remain the
same as the existing Wells Fargo Facility in all material respects,
except that: (1) the total commitment amount of the facility was
increased to $500 million from $325 million; and (2) the initial
maturity date of the facility was extended to December 14, 2018. The
initial maturity date of the facility is subject to two one-year
extensions, each of which may be exercised at the Company's option,
subject to the satisfaction of certain conditions, including payment of
an extension fee, which, if both were exercised, would extend the
maturity date of the Wells Fargo Facility to December 14, 2020. The
Wells Fargo Facility continues to be guaranteed by the Company on the
same terms and conditions as the existing Wells Fargo Facility.

On May 2, 2017, the Company declared a cash dividend of $0.27 per common
share for the second quarter of 2017. The second quarter 2017 dividend
is payable on July 17, 2017 to common stockholders of record as of
June 30, 2017.

FIRST QUARTER 2017 DIVIDEND

On March 7, 2017, the Company declared a cash dividend of $0.27 per
common share for the first quarter of 2017. The first quarter 2017
dividend was paid on April 17, 2017 to common stockholders of record as
of March 31, 2017.

CONFERENCE CALL AND WEBCAST INFORMATION

On Tuesday, May 2, 2017, the Company invites all interested persons to
attend its webcast/conference call at 12:00 p.m. (Eastern Time) to
discuss its first quarter 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 http://www.arescre.com.
Please visit the website to test your connection before the webcast.
Domestic callers can access the conference call by dialing
(888)-317-6003. International callers can access the conference call by
dialing +1(412)-317-6061. All callers will need to enter the Participant
Elite Entry Number 3412287 followed by the # sign and reference "Ares
Commercial Real Estate Corporation" once connected with the operator.
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 May 15, 2017 at
5:00 p.m. (Eastern Time) to domestic callers by dialing (877)-344-7529
and to international callers by dialing +1(412)-317-0088. For all
replays, please reference conference number 10105461. An archived replay
will also be available through May 15, 2017 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 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 the United States. Ares Commercial Real Estate
Corporation elected and qualified to be taxed as a real estate
investment trust and is externally managed by a subsidiary of Ares
Management, L.P. (NYSE:ARES), a publicly traded, leading global
alternative asset manager with approximately $99 billion of assets under
management ("AUM") as of December 31, 2016, including approximately $3.6
billion of AUM pro forma for Ares Capital Corporation's acquisition of
American Capital, Ltd., which closed on January 3, 2017. For more
information, please visit www.arescre.com.
The contents of such website are not, and should not be deemed to be,
incorporated by reference herein.

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 returns on current and
future investments, rates of repayments and prepayments on the Company's
mortgage loans, availability of investment opportunities, the Company's
ability to originate additional investments and completion of pending
investments, the availability of capital, the availability and cost of
financing, market trends and conditions in the Company's industry and
the general economy, the level of lending and borrowing spreads,
commercial real estate loan volumes, the Company's ability to reinvest
the net proceeds of the sale of ACRE Capital Holdings LLC and the risks
described from time to time in the Company's filings with the Securities
and Exchange Commission. Any forward-looking statement, including any
contained herein, speaks only as of the time of this press release and
Ares Commercial Real Estate Corporation undertakes no duty to update any
forward-looking statements made herein or on the webcast/conference
call. Projections and forward-looking statements are based on
management's good faith and reasonable assumptions, including the
assumptions described herein.

 
ARES COMMERCIAL REAL ESTATE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
 
 
As of

March 31, 2017

 

December 31, 2016

(unaudited)
ASSETS
Cash and cash equivalents ($8 related to consolidated VIEs as of
December 31, 2016)
$ 44,400 $ 47,270
Restricted cash 380 375
Loans held for investment ($341,158 and $21,514 related to
consolidated VIEs, respectively)
1,372,078 1,313,937
Other assets ($865 and $203 of interest receivable related to
consolidated VIEs, respectively)
12,142   12,121  
Total assets $ 1,429,000   $ 1,373,703  
LIABILITIES AND EQUITY
LIABILITIES
Secured funding agreements $ 576,506 $ 780,713
Secured term loan 150,486 149,878
Collateralized loan obligation securitization debt (consolidated VIE) 270,242
Due to affiliate 2,855 2,699
Dividends payable 7,690 7,406
Other liabilities ($339 of interest payable related to consolidated
VIEs as of March 31, 2017)
3,331   3,334  
Total liabilities 1,011,110   944,030  
 
EQUITY

 

Common stock, par value $0.01 per share, 450,000,000 shares
authorized at

March 31, 2017 and December 31, 2016, 28,482,756 shares issued and
outstanding at

March 31, 2017 and December 31, 2016

283 283
Additional paid-in capital 420,154 420,056
Accumulated deficit (2,547 ) (1,310 )
Total stockholders' equity 417,890 419,029
Non-controlling interests in consolidated VIEs   10,644  
Total equity 417,890   429,673  
Total liabilities and equity $ 1,429,000   $ 1,373,703  
 
 
ARES COMMERCIAL REAL ESTATE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)
 
 

 

For the three months ended March 31,
2017   2016
(unaudited) (unaudited)
Net interest margin:
Interest income from loans held for investment $ 21,127 $ 18,750
Interest expense (10,788 ) (8,525 )
Net interest margin 10,339   10,225  
Expenses:
Management and incentive fees to affiliate 1,812 1,352
Professional fees 391 490
General and administrative expenses 642 723
General and administrative expenses reimbursed to affiliate 948   897  
Total expenses 3,793   3,462  
Income from continuing operations before income taxes 6,546 6,763
Income tax expense, including excise tax 68   4  
Net income from continuing operations 6,478 6,759
Net loss from operations of discontinued operations, net of income
taxes
  (334 )
Net income attributable to ACRE 6,478 6,425
Less: Net income attributable to non-controlling interests (25 ) (1,289 )
Net income attributable to common stockholders $ 6,453   $ 5,136  
Basic earnings per common share:
Continuing operations $ 0.23 $ 0.19
Discontinued operations   (0.01 )
Net income $ 0.23   $ 0.18  
Diluted earnings per common share:
Continuing operations $ 0.23 $ 0.19
Discontinued operations   (0.01 )
Net income $ 0.23   $ 0.18  
Weighted average number of common shares outstanding:
Basic weighted average shares of common stock outstanding 28,468,819 28,529,328
Diluted weighted average shares of common stock outstanding 28,482,756 28,602,054
Dividends declared per share of common stock $ 0.27 $ 0.26
 

SCHEDULE I

March 31, 2017 Reconciliation of Net Income to Non-GAAP Core Earnings

The Company believes the disclosure of Core Earnings provides useful
information to investors regarding the calculation of incentive fees the
Company pays to its manager, Ares Commercial Real Estate Management LLC.
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. Core Earnings is a non-GAAP measure
and is defined as net income (loss) computed in accordance with GAAP,
excluding non-cash equity compensation expense, the incentive fee,
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 external manager and the Company's independent directors
and after approval by a majority of the Company's independent directors.

Reconciliation of net income attributable to common stockholders, the
most directly comparable GAAP financial measure, to Core Earnings is set
forth in the table below for the three and twelve months ended March 31,
2017 ($ in thousands):

   

For the three months

For the twelve months

ended

 

ended

March 31, 2017
Amount Amount
Net income attributable to common stockholders $ 6,453 $ 41,653
Stock-based compensation(1) 98 249
Adjustments relating to ACRE activities:
Incentive fees to affiliate 268 616
Adjustments relating to ACRE Capital LLC activities:
Change in fair value of mortgage servicing rights 4,609
Deferred income tax expense 2,525
Provision for loss sharing 82
Originated mortgage servicing rights   (11,758 )
Core Earnings $ 6,819   $ 37,976  
  (1)   Includes both ACRE and ACRE Capital LLC, stock-based compensation.

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