Scott Kennedy’s mREIT Earnings Series: Assessing Ares Commercial Real Estate’s Performance For Q1 2024
Summary
This earnings assessment article reviews ACRE’s BV and core earnings/EAD performance during Q1 2024 and compares results to my expectations. Earnings remain a key driver to stock performance.
ACRE’s BV basically matched my/our expectations (well within range) while its adjusted core earnings/EAD was a notable outperformance. ACRE was busy during the quarter regarding resolving troubled/non-accrual loans.
This included both exits and a restructuring. ACRE added 0 new non-accrual loans during Q1 2024. This was a positive surprise. However, elevated credit risk will persist through 2024-2025.
Along with a restructured loan partially back on accrual status, this led to ACRE’s core earnings/EAD outperformance. No change in ACRE’s percentage recommendation ranges or risk/performance rating.
While ACRE trades at a large BV discount, this stock should only be considered by very risk tolerant subscribers with a long-term time horizon. Volatility will continue through 2024.
Formatting Change to this Article Series
We have recently changed the format of this earnings-related article series (less wording, more visual images). This process remains ongoing and future changes will likely occur.
1) ACRE:
Commentary
Quarterly BV Fluctuation: Nearly an Exact Match (0.8% Variance).
Adjusted Core Earnings/EAD: Notable Outperformance.
An “as expected” quarter regarding Ares Commercial Real Estate’s ACRE 0.00%↑ BV in my opinion. ACRE recorded a modest quarterly BV decrease which matched my expectations. However, ACRE was busy “tiding up” the company’s investment portfolio during Q1 2024. Due to a notable ($46) million realized loss recorded during the quarter, ACRE actually recorded a net decrease to the company’s CECL reserves of $22 million during Q1 2024 (decreases are good). This consisted of a $42 million reversal in CECL reserves (due to realized activity; no longer held these investments) partially offset by a ($20) increase regarding ACRE’s active investment portfolio. In comparison, I projected an increase of ($22.5) million regarding ACRE’s active investment portfolio. This directly led to a BV outperformance of $0.05 per share. The remainder of ACRE’s BV outperformance was basically within the company’s adjusted core earnings/EAD (discussed next).
ACRE’s notable adjusted core earnings/EAD outperformance (which excludes all realized losses/charge-offs; consistent sector-wide methodology) was mainly due to the fact the company added 0 new loans to non-accrual status during the quarter. In addition, ACRE restructured 1 previous non-accrual loan and the new senior portion of this loan was put back on accrual status during Q1 2024. Both events were positive. Further details on these events will be discussed in a bit. In comparison, I projected 2 new office loans would be added to ACRE’s non-accrual list during Q1 2024. This directly led to the vast majority of ACRE’s core earnings/EAD outperformance.
Even though ACRE reported a pretty good quarter in my opinion (considering it is a commercial mREIT), a risk/performance rating of 5 for ACRE remains appropriate in the “higher-for-longer” rate/yield environment. ACRE’s investment portfolio still has considerable credit risk which needs heightened monitoring during 2024 - 2025.
Change or Maintain
BV/NAV Adjustment (BV/NAV Used Interchangeably): Our projection for current BV/NAV per share was adjusted: Up $0.10 (To Account for the Actual 3/31/2024 BV/NAV Vs. Prior Projection). Price targets have already been adjusted to reflect the change in BV/NAV. The update is included in the card below and the subscriber spreadsheets.
Percentage Recommendation Range (Relative to CURRENT BV/NAV): No Change.
Risk/Performance Rating: No Change. Remains at 5.