Market Overview

Ares Commercial Real Estate Corporation Reports Second Quarter 2018 Results

Share:

Second quarter GAAP net income of $9.3 million or $0.33 per
diluted common share and Core Earnings
(1)
of $10.1 million or $0.35 per diluted common share

- Subsequent to end of second quarter -

Declared a further increase in the dividend to $0.29 per common
share for the third quarter 2018, representing the second dividend
increase this year

JUNE 30, 2018 FINANCIAL RESULTS

Ares Commercial Real Estate Corporation (the "Company") (NYSE:ACRE), a
specialty finance company engaged in originating and investing in
commercial real estate assets, reported generally accepted accounting
principles ("GAAP") net income of $9.3 million or $0.33 per diluted
common share and Core Earnings(1) of $10.1 million or $0.35
per diluted common share for the second quarter of 2018. In addition,
the Company announced that its Board of Directors increased the third
quarter 2018 dividend to $0.29 per common share payable on October 16,
2018 to common stockholders of record as of September 28, 2018.

"We generated another strong quarter with Core Earnings up 46% compared
to a year ago primarily due to higher level of investments, reduced
borrowing costs and benefits of rising LIBOR," said Jamie Henderson,
President and Chief Executive Officer of ACRE. "Given our higher level
of earnings, we are increasing our third quarter dividend to $0.29 per
common share, representing our second dividend increase this year."

"We believe the steps we are taking to broaden our investment scope,
expand our market coverage and increase operating efficiencies will
allow us to remain more fully deployed and enhance earnings over time,"
said Tae-Sik Yoon, Chief Financial Officer of ACRE. "We continue to
believe that we will meet our goal of fully earning our annual dividend
from Core Earnings for 2018."

_________________________________

(1) Core Earnings is a non-GAAP financial measure. Refer to Schedule I
for further details.

THREE MONTHS ENDED JUNE 30, 2018 FINANCIAL
HIGHLIGHTS

Financial Results and Activities:

  • For the three months ended June 30, 2018, GAAP net income was $9.3
    million or $0.33 per diluted common share and Core Earnings(1) was
    $10.1 million or $0.35 per diluted common share.
  • For the three months ended June 30, 2018, new originations were $215.0
    million in commitments and $173.9 million in outstanding principal
    funded at the origination date and an additional $6.2 million of
    fundings on existing commitments.
  • For the three months ended June 30, 2018, the Company exited $92.1
    million of loans held for investment as measured by outstanding
    principal.

Capital Activities:

  • In April 2018, the Company's board of directors authorized, and in
    June 2018, the Company's stockholders approved, an amendment to the
    Company's equity incentive plan to increase the total amount of shares
    of common stock the Company may grant thereunder to 1,390,000 shares.
  • In May 2018, the Company amended the $125.0 million Bridge Loan
    Warehousing Credit and Security Agreement with Bank of America, N.A.
    (the "BAML Facility") to extend the period during which the Company
    may request individual loans under the facility to May 23, 2019. In
    addition, the final maturity date of individual loans under the BAML
    Facility was extended to May 23, 2022.

PORTFOLIO DETAIL AS OF JUNE 30, 2018

As of June 30, 2018, the Company's portfolio totaled 45 loans held for
investment, totaling approximately $2.0 billion in originated
commitments at closing and $1.8 billion in outstanding principal. As of
June 30, 2018, 65 loans totaling approximately $2.2 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 June 30, 2018

Carrying
Amount (1)

   

Outstanding
Principal (1)

   

Weighted Average
Minimum Loan
Borrowing
Spread (2)

   

Weighted Average
Unleveraged
Effective
Yield (3)

   

Weighted Average
Remaining
Life (Years)

Senior mortgage loans $ 1,694.0 $ 1,703.7 5.0 % 6.7 % 1.8
Subordinated debt and preferred equity investments 52.0   52.9   9.5 % 11.1 % 2.9
Total loans held for investment portfolio $ 1,746.0   $ 1,756.6   5.1 % 6.8 % 1.8
 

______________________________________________________________________________

(1) The difference between the Carrying Amount and the Outstanding
Principal amount of the loans held for investment consists of
unamortized purchase discount, deferred loan fees and loan origination
costs.

(2) Minimum Loan Borrowing Spread is equal to (a) for floating rate
loans, the margin above the applicable index rate (e.g., LIBOR) plus
floors, if any, on such applicable index rates, and (b) for fixed rate
loans, the applicable interest rate.

(3) 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 June 30, 2018 as weighted by the
Outstanding Principal balance of each loan.

As of June 30, 2018, 99% of the portfolio of loans held for investment
consisted of floating rate loans and 97% of the portfolio of loans held
for investment consisted of senior mortgage loans (as measured by
outstanding principal).

Portfolio Diversification Summary as of
June 30, 2018 ($ in millions):

 
PROPERTY TYPE
     

Outstanding
Principal

    % of Portfolio
Multifamily $ 624.6 35 %
Office 432.8 25 %
Hotel 195.5 11 %
Self Storage 187.3 11 %
Student Housing 168.7 10 %
Industrial 78.9 4 %
Mixed-use 49.0 3 %
Retail 11.8 1 %
Residential 8.0   *
Total $ 1,756.6   100 %
 

_________________________________

* Represents less than 1% of the portfolio of loans held for investment.

 
GEOGRAPHIC MIX
     

Outstanding
Principal

    % of Portfolio
West $ 409.2 23 %
Southwest 359.9 21 %
Midwest 359.2 20 %
Southeast 354.5 20 %
Mid-Atlantic/Northeast 273.8   16 %
Total $ 1,756.6   100 %
 

RECENT DEVELOPMENTS

On July 26, 2018, the Company declared a cash dividend of $0.29 per
common share for the third quarter of 2018. The third quarter 2018
dividend is payable on October 16, 2018 to common stockholders of record
as of September 28, 2018.

SECOND QUARTER 2018 DIVIDEND

On May 1, 2018, the Company declared a cash dividend of $0.28 per common
share for the second quarter of 2018. The second quarter 2018 dividend
was paid on July 17, 2018 to common stockholders of record as of June
29, 2018.

CONFERENCE CALL AND WEBCAST INFORMATION

On Thursday, July 26, 2018, the Company invites all interested persons
to attend its webcast/conference call at 11:00 a.m. (Eastern Time) to
discuss its second 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 5858241 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 August 09, 2018
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 10121856. An
archived replay will also be available through August 09, 2018 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 $112.5 billion of assets
under management as of March 31, 2018. 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 and
interest rates, commercial real estate loan volumes 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
June 30, 2018     December 31, 2017
(unaudited)
ASSETS
Cash and cash equivalents $ 5,045 $ 28,343
Restricted cash 379 379
Loans held for investment ($289,599 and $341,158 related to
consolidated VIEs, respectively)
1,746,017 1,726,283

Other assets ($765 and $945 of interest receivable related to
consolidated VIEs, respectively;
$51,559 of other receivables
related to consolidated VIEs as of June 30, 2018)

66,075   15,214  
Total assets $ 1,817,516   $ 1,770,219  
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Secured funding agreements $ 1,000,622 $ 957,960
Secured term loan 107,980 107,595
Collateralized loan obligation securitization debt (consolidated VIE) 271,392 271,211
Due to affiliate 3,089 2,628
Dividends payable 8,036 7,722
Other liabilities ($465 and $414 of interest payable related to
consolidated VIEs, respectively)
4,201   3,933  
Total liabilities 1,395,320   1,351,049  
STOCKHOLDERS' EQUITY

Common stock, par value $0.01 per share, 450,000,000 shares
authorized at June 30, 2018
and December 31, 2017, and
28,698,600 and 28,598,916 shares issued and outstanding
at
June 30, 2018 and December 31, 2017, respectively

283 283
Additional paid-in capital 421,086 420,637
Accumulated earnings (deficit) 827   (1,750 )
Total stockholders' equity 422,196   419,170  
Total liabilities and stockholders' equity $ 1,817,516   $ 1,770,219  
 

ARES COMMERCIAL REAL ESTATE CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS

(in thousands, except share and per
share data)

           
For the three months ended June 30, For the six months ended June 30,
2018     2017 2018     2017
(unaudited) (unaudited) (unaudited) (unaudited)
Net interest margin:
Interest income from loans held for investment $ 29,604 $ 22,643 $ 57,040 $ 43,770
Interest expense (15,968 ) (12,232 ) (30,267 ) (23,020 )
Net interest margin 13,636   10,411   26,773   20,750  
Expenses:
Management and incentive fees to affiliate 2,173 1,654 3,731 3,466
Professional fees 455 428 936 819
General and administrative expenses 789 640 1,563 1,282

General and administrative expenses reimbursed to affiliate

830   949   1,754   1,897  
Total expenses 4,247   3,671   7,984   7,464  
Income before income taxes 9,389 6,740 18,789 13,286
Income tax expense, including excise tax 86   27   168   95  
Net income attributable to ACRE 9,303 6,713 18,621 13,191
Less: Net income attributable to non-controlling interests       (25 )
Net income attributable to common stockholders $ 9,303   $ 6,713   $ 18,621   $ 13,166  
Earnings per common share:
Basic and diluted earnings per common share $ 0.33   $ 0.24   $ 0.65   $ 0.46  
Weighted average number of common shares outstanding:
Basic weighted average shares of common stock outstanding 28,524,775 28,475,853 28,510,384 28,472,356
Diluted weighted average shares of common stock outstanding 28,618,308 28,546,624 28,608,666 28,514,867
Dividends declared per share of common stock $ 0.28 $ 0.27 $ 0.56 $ 0.54
 

SCHEDULE I

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,
and the Company's financial performance. Core Earnings is an adjusted
non-GAAP 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. 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 June 30,
2018 ($ in thousands):

         

For the three
months ended

 

   

For the twelve
months ended

 

June 30, 2018
Amount Amount
Net income attributable to common stockholders $ 9,303 $ 35,862
Stock-based compensation 215 835
Incentive fees to affiliate 610 610
Early extinguishment of debt costs(1) 768
Core Earnings $ 10,128 $ 38,075
   

_________________________________

(1) Represents a one-time, non-cash charge in connection with the
Company's $45.0 million repayment of outstanding principal on the
Secured Term Loan in December 2017.

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