Ares Commercial Real Estate Corporation (ACRE) is a specialty finance company primarily engaged in directly originating and investing in commercial real estate (CRE) loans and related investments. The company has navigated a challenging market environment in recent years, but has made significant progress in strengthening its balance sheet and positioning itself for future growth.
Business Overview Ares Commercial Real Estate Corporation (ACRE) was formed and commenced operations in late 2011. The company completed its initial public offering in May 2012, marking a significant milestone in its early development. ACRE is externally managed by Ares Commercial Real Estate Management LLC (ACREM), a subsidiary of Ares Management Corporation (ARES), a publicly traded global alternative investment manager.
Since its inception, ACRE has focused on directly originating and managing a diversified portfolio of commercial real estate debt-related investments for its own account. In its early years, the company concentrated on growing its portfolio and expanding its financing capabilities. ACRE utilized various funding sources, including secured funding agreements, notes payable, and securitization transactions, to support its investment activities and portfolio growth.
The company's target investments include senior mortgage loans, subordinated debt, preferred equity, mezzanine loans, and other CRE investments, including commercial mortgage-backed securities. These investments are generally held for investment and are secured, directly or indirectly, by office, multifamily, retail, industrial, lodging, self-storage, student housing, residential, and other commercial real estate properties, or by ownership interests therein.
ACRE has elected and qualified to be taxed as a real estate investment trust (REIT) for U.S. federal income tax purposes commencing with its taxable year ended December 31, 2012. This allows the company to generally avoid U.S. federal income taxes on its REIT taxable income as long as it annually distributes at least 90% of its REIT taxable income to shareholders and complies with various other REIT requirements.
Navigating Challenges and Strengthening the Balance Sheet In recent years, ACRE has faced headwinds from the COVID-19 pandemic, rising interest rates, and challenges in the office sector, which has impacted the performance of its loan portfolio. The company has been proactive in addressing these issues, with a primary focus on reducing its exposure to higher-risk loans and office properties.
During 2024, ACRE reduced its risk-rated 4 and 5 loans by approximately 34%, or $182 million. As of the end of 2024, the company had five loans risk-rated 4 and 5 remaining in its portfolio, totaling $357 million in outstanding principal balance. Additionally, ACRE reduced its office exposure, including real estate owned (REO) properties, by $151 million, representing a decline of 18% year-over-year, and exited one of its three REO assets.
These actions, coupled with a more normalized pace of repayments, particularly in the second half of 2024, have strengthened ACRE's balance sheet. The company reduced its outstanding borrowings by $444 million, or 27%, in 2024, leading to a net debt-to-equity ratio, excluding the current expected credit loss (CECL) reserve, of 1.6 times at the end of the year, down from 1.9 times at the end of 2023.
Financials ACRE's cash balance now represents approximately 40% of the current market value of the stock, providing the company with significant financial flexibility to address its remaining higher-risk loans and REO properties. The company has collected $166 million in repayments so far in 2025, generating an additional $100 million in cash and positioning it with over $200 million of available capital.
For the fiscal year 2024, ACRE reported revenue of $157.7 million and a net loss of $35.0 million. In the most recent quarter (Q4 2024), the company reported revenue of $33.49 million, a decrease of 24.5% compared to the prior year quarter, and a net loss of $10.7 million, down from a net income of $9.2 million in the same period last year. The decreases were primarily due to higher realized losses on loans.
As of September 30, 2024, ACRE's loans held for investment portfolio totaled $1.81 billion in carrying value, consisting of $1.77 billion in senior mortgage loans and $43.79 million in subordinated debt and preferred equity investments. The weighted average unleveraged effective yield on the total loans held for investment portfolio was 7.5%.
Liquidity Given the company's strategic focus on resolving its underperforming assets and maintaining higher levels of liquidity, ACRE's Board of Directors has elected to adjust the quarterly dividend to $0.15 per share, a level that more closely aligns with the company's current earnings and future objectives.
As of the end of 2024, ACRE's debt-to-equity ratio stood at 2.17. The company's cash balance was $68.9 million as of Q4 2024. Additionally, ACRE had $134 million of available capital as of November 2024, representing an 11% increase from the prior quarter.
ACRE also holds a portfolio of CRE debt securities designated as available-for-sale. As of September 30, 2024, the amortized cost of these securities was $26.82 million, with a fair value of $27.0 million and an unrealized gain of $0.19 million.
Dividend Adjustment and Future Outlook Looking ahead, ACRE remains focused on further reducing its risk-weighted 4 and 5 loans, office loans, and REO properties, with the goal of proving out its book value and enhancing shareholder returns. The company believes it is well-positioned to capitalize on the improving commercial real estate market conditions and accelerate the resolution of its remaining underperforming assets.
For 2025, ACRE has already collected $166 million of loan repayments, generating an additional $100 million of cash. This positions the company with over $200 million of available capital to accelerate and drive positive outcomes in resolving their remaining underperforming assets.
Risks and Challenges While ACRE has made significant progress in strengthening its balance sheet, the company still faces certain risks and challenges, including:
1. Continued weakness or volatility in the commercial real estate and mortgage markets, which could adversely affect the performance of its loan portfolio. 2. Potential challenges in the office sector, which remains an area of focus for the company. 3. Uncertainty around the timing and pace of its asset resolution efforts, which could impact its earnings and cash flow. 4. Potential changes in interest rates and their effect on the company's cost of borrowing and the value of its investments.
Industry Trends The commercial real estate market saw a moderate recovery in 2024, with increased transaction volumes and stabilizing property fundamentals, although the office sector remained challenged. ACRE focused on reducing its exposure to higher risk loans and office properties during the year, in line with these industry trends.
Real Estate Owned Portfolio ACRE acquired legal title to three real estate properties through foreclosure or deed-in-lieu processes during the reporting period. This included an office property in North Carolina, an office property in California, and a mixed-use property in Florida. The properties are carried at their fair values at the time of acquisition, net of accumulated depreciation and amortization. For the three and nine months ended September 30, 2024, ACRE generated $4.71 million and $11.62 million, respectively, in revenue from these real estate owned properties.
Overall, Ares Commercial Real Estate has navigated a challenging period by proactively addressing its higher-risk assets and strengthening its balance sheet. The company's focus on resolving underperforming loans and REO properties, combined with its increased financial flexibility, positions it well to capitalize on future opportunities in the commercial real estate market. The performance of ACRE's loans held for investment portfolio, particularly the credit quality and yield generation, remains the primary driver of the company's financial results, while the real estate owned properties and available-for-sale debt securities provide supplementary sources of revenue.