Ares CRE Announces Just $9.4M in Distributable Earnings, $124M Loan Repayments in Q3

Ares Commercial Real Estate reported a $5.9 million net income loss to shareholders in the third quarter of 2024 and distributable earnings of only $9.4 million, a nearly 50 percent decline from the $18.3 million the CRE investment firm distributed to shareholders in the third quarter of 2023. 

Ares Commercial Real Estate, which is a subsidiary of Ares Management — a global investment management firm with $464 billion assets under management —  currently holds $54 billion of real estate assets under management. 

Ares CRE’s stock price currently sits at $7.24 per share. The firm’s stock price reached a 12-month high of $11.27 in December 2023 and saw its stock fall as low as $6.35 last month. 

On Thursday’s earnings call, Bryan Donohoe, co-head of U.S. real estate at Ares CRE, said the improved interest rate environment will help Ares accomplish its two main goals: improve balance sheet liquidity to resolve “higher risk-rated assets” and reinvest the resulting capital into more stable assets to “reshape the firm’s portfolio.”

“With the more positive backdrop for commercial real estate, and the progress we have made in positioning our balance sheet, we expect to accomplish our goal by year-end and accelerate our second goal,” said Donohoe. “For us, this overall more-constructive market environment is supporting both our goals for the company.”

Chief among Donohoe’s priorities is reducing, and resolving, the risk connected to the firm’s risk-rated 4 and 5 loans, essentially its riskiest debt investments. In the third quarter of 2024, Ares CRE reduced its total outstanding principal balance of risk-rated 4 and risk-rated 5 loans by $157 million, or 33 percent, from the previous quarter, according to Donohoe. 

The firm achieved a full repayment of a $98 million multifamily loan in Texas and a completed deed in lieu in foreclosure of a $69 million office loan in North Carolina. However, the firm had a $163 million office loan in Illinois downgraded from a risk-rated 4 to a risk-rated 5, and Donohoe said the asset’s borrower has indicated it won’t be able to support the loan upon its March 2025 maturity.  

Risk-rated 4 and 5 loans account for 17 percent of Ares CRE total loan portfolio, according to the firm’s quarterly presentation. 

The firm has received $203 million in repayments from borrowers year-to-date with more than 75 percent ($124 million) of repayment volume in the third quarter in 2024. Ares CRE’s total loan portfolio exceeds $1.8 billion across 40 loans, with total available capital of $134 million, and $146 million in current expected credit losses reserves, up from $138 million in the previous quarter. The reserves are funds lenders set aside to cover a portion of loan losses.

“The improving CRE sentiment and overall rate dynamics are also driving greater liquidity in the sector and stronger repayment in our portfolio” said Donohoe. “These repayment trends, the positive shift in market sentiment, and progress we made in the repositioning of our balance sheet should allow us to accomplish the goal of delivering the balance sheet and bolstering liquidity by year end 2024.” 

Moreover, the firm reduced its leverage from $1.5 billion to $1.3 billion, a decline of 8 percent over the last quarter. 

All told, Ares CRE delivered more than $3 billion of originations in the third quarter, more than twice the volume of originations it completed in the third quarter of 2023.  

“We’ve been very active throughout our broader real estate lending book — the engine’s been running,” said Donohoe. “The instability of the rate market over the past couple of years, and the lack of liquidity in the sector, has made us take a more patient approach to this to make sure we’re maximizing value, but that we’re getting paid along the way here.”

Brian Pascus can be reached at bpascus@commercialobserver.com