Attached files
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| EX-99.1 - EXHIBIT 99.1 - Ares Commercial Real Estate Corp | acreq3-20exhibit991.htm |
| 8-K - 8-K - Ares Commercial Real Estate Corp | acreq3-208k.htm |
Exhibit 99.2 Third Quarter 2020 Earnings Presentation
Important Notice Statements included herein may constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 and Section 21E of the Securities Exchange Act of 1934, as amended, which may relate to future events or the future performance or financial condition of Ares Commercial Real Estate Corporation ("ACRE" or the "Company"), its external manager, Ares Commercial Real Estate Management LLC ("ACREM"), a subsidiary of Ares Management Corporation ("Ares Corp."), Ares Corp., certain of their respective subsidiaries and certain funds and accounts managed by ACREM and/or their subsidiaries. These statements are not guarantees of future results or financial condition and involve a number of risks and uncertainties. Actual results and conditions may differ materially from those in the forward-looking statements as a result of a number of factors, including those described from time to time in ACRE’s and/or Ares Corp.’s filings with the Securities and Exchange Commission ("SEC"). Any such forward-looking statements are made pursuant to the safe harbor provisions available under applicable securities laws. For a discussion regarding the potential risks and impact of the COVID-19 pandemic on ACRE, see Part I., Item 2. "Management's Discussion and Analysis of Financial Condition and Results of Operation" and Part II., Item 1A. "Risk Factors" in ACRE's Quarterly Report on Form 10-Q. Ares Corp. is the parent to several registered investment advisers, including Ares Management LLC ("Ares Management") and ACREM. Collectively, Ares Corp., its affiliated entities, and all underlying subsidiary entities shall be referred to as “Ares” unless specifically noted otherwise. The information contained in this presentation is summary information that is intended to be considered in the context of ACRE’s SEC filings and other public announcements that ACRE or Ares may make, by press release or otherwise, from time to time. ACRE and Ares undertake no duty or obligation to publicly update or revise the forward-looking statements or other information contained in this presentation. These materials contain information about ACRE and Ares, and certain of their respective personnel and affiliates, information about their respective historical performance and general information about the market. You should not view information related to the past performance of ACRE or Ares or information about the market, as indicative of future results, the achievement of which cannot be assured. Nothing in these materials should be construed as a recommendation to invest in any securities that may be issued by ACRE or any other fund or account managed by Ares, or as legal, accounting or tax advice. None of ACRE or Ares makes any representation or warranty, express or implied, as to the accuracy or completeness of the information contained herein and nothing contained herein shall be relied upon as a promise or representation whether as to the past or future performance. Certain information set forth herein includes estimates and projections and involves significant elements of subjective judgment and analysis. Further, such information, unless otherwise stated, is before giving effect to management and incentive fees and deductions for taxes. No representations are made as to the accuracy of such estimates or projections or that all assumptions relating to such estimates or projections have been considered or stated or that such estimates or projections will be realized. These materials may contain confidential and proprietary information, and their distribution or the divulgence of any of their contents to any person, other than the person to whom they were originally delivered and such person’s advisers, without the prior consent of ACRE or Ares, as applicable, is prohibited. You are advised that United States securities laws restrict any person who has material, non-public information about a company from purchasing or selling securities of such company (and options, warrants and rights relating thereto) and from communicating such information to any other person under circumstances in which it is reasonably foreseeable that such person is likely to purchase or sell such securities. You agree not to purchase or sell such securities in violation of any such laws. These materials are not intended as an offer to sell, or the solicitation of an offer to purchase, any security, the offer and/or sale of which can only be made by definitive offering documentation. Any offer or solicitation with respect to any securities that may be issued by ACRE will be made only by means of definitive offering memoranda or prospectus, which will be provided to prospective investors and will contain material information that is not set forth herein, including risk factors relating to any such investment. This may contain information obtained from third parties, including ratings from credit ratings agencies such as Standard & Poor’s. Such information has not been independently verified and, accordingly, ACRE makes no representation or warranty in respect of this information. Reproduction and distribution of third party content in any form is prohibited except with the prior written permission of the related third party. Third party content providers do not guarantee the accuracy, completeness, timeliness or availability of any information, including ratings, and are not responsible for any errors or omissions (negligent or otherwise), regardless of the cause, or for the results obtained from the use of such content. THIRD PARTY CONTENT PROVIDERS GIVE NO EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE. THIRD PARTY CONTENT PROVIDERS SHALL NOT BE LIABLE FOR ANY DIRECT, INDIRECT, INCIDENTAL, EXEMPLARY, COMPENSATORY, PUNITIVE, SPECIAL OR CONSEQUENTIAL DAMAGES, COSTS, EXPENSES, LEGAL FEES, OR LOSSES (INCLUDING LOST INCOME OR PROFITS AND OPPORTUNITY COSTS OR LOSSES CAUSED BY NEGLIGENCE) IN CONNECTION WITH ANY USE OF THEIR CONTENT, INCLUDING RATINGS. Credit ratings are statements of opinions and are not statements of fact or recommendations to purchase, hold or sell securities. They do not address the suitability of securities or the suitability of securities for investment purposes, and should not be relied on as investment advice. 1
Third Quarter 2020 Results • GAAP net income of $14.9 million or $0.44 per diluted common share(1) Financial • Core Earnings of $10.5 million or $0.31 per diluted common share (inclusive of $4.0 million or $0.12 per share realized loss on previously announced sale of loans)(2) Results • Book value per diluted common share of $14.03 (or $14.85 excluding CECL reserve), up from prior quarter's $13.91 (or $14.75 excluding CECL reserve) Portfolio • $38.0 million in outstanding principal funded on previously originated commitments Activity • $55.1 million in full or partial loan repayments • 49 loans held for investment Total Loan • $2.0 billion in originated commitments at closing and $1.8 billion in outstanding principal • Weighted average unleveraged effective yield of 6.6%(3) Portfolio • 98% of loans benefit from LIBOR floors or fixed rate(4) ◦ For floating rates loans with LIBOR floors (95%), the weighted average LIBOR floor is 1.74% Capital and • Extended the initial maturity date on the MetLife Facility to August 13, 2022 • Unrestricted cash of $91 million(5) Liquidity • 2.8x Debt to Equity (including 1.8x Recourse Debt to Equity)(6)(7) Dividends • Common stock dividend of $0.33 per common share for Q3-20 paid in cash on October 15, 2020(8) Note: As of September 30, 2020, unless otherwise noted. See footnotes on page 13. 2
Total Loans Held for Investment Portfolio Key Statistics Loan Portfolio Characteristics (11) ($ in millions) Mid-Atlantic/Northeast Total loan commitments $2,001.6 10% Outstanding principal balance $1,789.1 Southwest Weighted average unpaid principal balance of loan portfolio(9) $1,808.1 13% Southeast Total number of loans held for investment 49 38% Percentage of floating rate loans based on outstanding principal balance 98% Percentage of senior loans based on outstanding principal Minimal balance 94% Exposure to Weighted average remaining life of loan portfolio 1.3 years Midwest Gateway 18% Cities(12) Weighted average remaining life of senior loans 1.3 years Weighted average remaining life of subordinated debt and preferred equity investments 2.1 years West 21% Unleveraged Effective Yield(10) and LIBOR (3) (3) 8% 6.9% 6.8% 6.6% (3) 6.7% 6.6% Industrial 7% 6% Self Storage 1% Residential/Condominium 4% Office 29% 2% 2% Student 61% Office, 0% Housing 10% Multifamily Q3-19 Q4-19 Q1-20 Q2-20 Q3-20 and Industrial Senior loans 6.5% 6.5% 6.2%(3) 6.3%(3) 6.2%(3) Sub. debt and pref. equity investments 15.0% 15.1% 13.5% 13.6% 13.4% Mixed-use 13% Avg. 1-month LIBOR 2.2% 1.8% 1.4% 0.4% 0.2% Wtd. avg. LIBOR floor 1.7% 1.8% 1.8% 1.8% 1.7% Multifamily 25% Hotel 13% Note: As of September 30, 2020, unless otherwise noted. 3 See footnotes on page 13.
Financing Sources Overview Financing Sources Composition(13) Financing Sources Detail ($ in millions) Total (14) Outstanding Financing Sources Commitments Interest Rate Balance Notes Payable 4% 2017-FL3 Securitization Secured Funding 32% Agreements Wells Fargo Facility $ 500.0 LIBOR+1.45 to 2.25% $ 375.3 Citibank Facility 325.0 LIBOR+1.50 to 2.25% 120.5 36% Non- Term Loan CNB Facility 50.0 LIBOR+2.65% 50.0 recourse 64% Recourse Morgan Stanley Facility 150.0 LIBOR+1.75 to 2.85% 141.2 2017-FL3 Securitization MetLife Facility 180.0 LIBOR+2.10 to 2.50% 104.1 Subtotal $ 1,205.0 $ 791.1 Secured Term Loan 8% Asset Level Financing Secured Funding Notes Payable $ 84.2 LIBOR+2.50 to 3.75% $ 59.2 Agreements 56% Capital Markets Secured Term Loan $ 110.0 LIBOR+5.00% $ 110.0 2017-FL3 Securitization 445.6 LIBOR + 1.70% 445.6 Subtotal $ 555.6 $ 555.6 Reducing Leverage Total Debt $ 1,844.8 $ 1,405.9 Debt to equity ratio excluding CECL reserve(7) 2.8x 3.5x Recourse debt to equity ratio excluding CECL reserve(7) 1.8x 3.0x Longer excess wtd. average remaining term of financing agreements vs. loans(15) 1.9 years 2.5x LIBOR floor on outstanding financing 18% 2.0x Weighted average LIBOR floor on outstanding financing 0.95% (9) 1.5x Q3-20 weighted average borrowings $1,455.1 million (6) (6) (6)(7) Q4-19 Q1-20 Q2-20 Q3-20 None of ACRE’s financings contain margin call provisions based on changes in market spreads D/E (6) D/E (recourse) (6) Note: As of September 30, 2020, unless otherwise noted. See footnotes on page 13. 4
Current Expected Credit Losses Current Expected Credit Loss Reserve by Current Expected Credit Loss Reserve Property Type ($ in thousands) Office 25% Balance at 6/30/20 $ 28,161 Provision for CECL (1,048) Balance at 9/30/20 $ 27,113 Self Storage 1% Industrial 3% Hotel 25% Student Housing 9% Current Expected Credit Loss Reserve by Loan Type Mixed-use 10% Residential/Condominium Multifamily 9% Senior Loans 18% 72% • No specific loan impairments on loan portfolio • Weighted average loan risk rating of 3.0 with 91% of unpaid principal balance rated 3 or higher(16) • Consistent macro-economic forecast utilized quarter over quarter given the degree of uncertainty in economic outlook • Reduction in provision for CECL of $1.0 million (bifurcated Sub.Debt & Pref. Equity between funded commitments of $0.6 million and unfunded Investments commitments of $0.4 million) primarily attributable to changes 28% to loan portfolio Note: As of September 30, 2020, unless otherwise noted. See footnotes on page 13. 5
Appendix 6
Loans Held for Investment Portfolio Details ($ in millions) Origination Current Loan Outstanding LIBOR Unleveraged (10) Payment # Loan Type Location Date Commitment Principal Carrying Value Interest Rate Floor Effective Yield Maturity Date Terms (17) Office Loans: 1 Senior Diversified Jan 2020 $132.6 $108.6 $108.2 L+3.65% 1.6% 5.7% Jan 2023 I/O 2 Senior IL Nov 2017 82.0 69.6 69.6 L+3.75% 1.3% 5.6% Dec 2020 I/O 3 Senior NC Mar 2019 84.0 61.0 60.8 L+4.25% 2.4% 8.4% Mar 2021 I/O 4 Senior IL May 2018 59.6 57.3 57.2 L+3.95% 2.0% 6.3% Jun 2021 I/O 5 Senior GA Nov 2019 56.2 40.2 39.7 L+3.05% 2.0% 5.7% Dec 2022 I/O 6 Subordinated IL Mar 2020 37.5 34.5 34.2 L+8.00% 1.5% 10.0% Mar 2023 I/O 7 Senior CA Oct 2019 37.2 31.1 30.8 L+3.35% 2.0% 6.0% Nov 2022 I/O 8 Senior IL Dec 2019 41.9 28.0 27.7 L+3.80% 1.8% 6.2% Jan 2023 I/O 9 Senior CA Nov 2018 22.8 22.8 22.8 L+3.40% 2.3% 6.2% Nov 2021 I/O 10 Senior NC Apr 2019 30.5 22.1 21.5 L+3.52% 2.3% 6.8% May 2023 I/O 11 Subordinated NJ Mar 2016 17.0 17.0 16.5 12.00% —% 12.8% Jan 2026 I/O 12 Senior TX Apr 2019 28.2 15.8 15.6 L+4.05% 2.5% 7.6% Nov 2021 I/O 13 Senior NC Oct 2018 13.5 8.6 8.5 L+4.00% 2.1% 6.7% Nov 2022 I/O 14 Subordinated CA Nov 2017 3.1 2.9 2.9 L+8.25% 1.3% 9.7% Nov 2021 I/O Total Office $646.1 $519.5 $516.0 Multifamily Loans: 15 Senior FL Jun 2020 $91.8 $91.3 $90.7 L+5.00% 0.8% 6.7% Jun 2022 I/O 16 Senior TX Sep 2019 75.0 75.0 74.7 L+2.85% 2.0% 5.0% Oct 2022 I/O 17 Senior FL Jun 2020 46.7 46.2 46.0 L+5.00% 0.8% 6.6% Jun 2022 I/O 18 Senior FL Dec 2018 43.5 43.3 43.1 L+2.60% 2.4% 5.5% Jan 2022 I/O 19 Senior NJ Mar 2020 41.0 41.0 40.8 L+3.05% 1.5% 4.9% Mar 2022 I/O 20 Senior KS Oct 2019 35.8 35.8 35.5 L+3.25% 1.9% 5.5% Nov 2022 I/O 21 Senior NY Dec 2017 30.1 30.1 30.1 L+3.20% 1.4% 4.9% Dec 2020 I/O 22 Senior PA Dec 2018 30.3 29.4 29.2 L+3.00% 2.4% 5.9% Dec 2021 I/O 23 Senior TX Sep 2017 27.5 27.5 27.5 L+3.20% 1.2% 4.9% Oct 2021 I/O 24 Senior WA Feb 2020 19.0 18.6 18.5 L+3.00% 1.7% 5.1% Mar 2023 I/O 25 Senior SC Aug 2019 34.6 9.1 8.8 L+6.50% 2.2% 10.1% Sep 2022 I/O Total Multifamily $475.3 $447.3 $444.9 See footnotes on page 13. 7
Loans Held for Investment Portfolio Details ($ in millions) Origination Current Loan Outstanding LIBOR Unleveraged Payment # Loan Type Location Date Commitment Principal Carrying Value Interest Rate Floor Effective Yield(10) Maturity Date Terms(17) Hotel Loans: 26 Senior OR/WA May 2018 $68.1 $68.1 $67.6 L+3.45% 1.9% 4.6% (18) May 2021 I/O 27 Senior Diversified Sep 2018 64.3 60.8 60.6 L+3.60% 2.1% 6.2% Sep 2021 I/O 28 Senior CA Dec 2017 40.0 40.0 40.0 L+4.12% 1.4% 5.9% Jan 2021 I/O 29 Senior MI Nov 2015 34.2 34.2 34.1 L+3.95% 0.3% 4.3% Jul 2022 I/O 30 Senior IL Apr 2018 32.9 32.9 32.4 L+4.40% 1.9% —%(19) May 2021 I/O Total Hotel $239.5 $236.0 $234.7 Mixed-Use Loans: 31 Senior FL Feb 2019 $99.0 $99.0 $98.7 L+4.25% 2.5% 7.8% Feb 2021 I/O 32 Senior CA Mar 2018 56.1 51.2 51.0 L+4.00% 1.9% 6.2% Apr 2022 I/O 33 Senior TX Sep 2019 42.2 35.2 34.9 L+3.75% 2.3% 6.7% Sep 2022 I/O 34 Senior CA Feb 2020 39.6 22.5 22.2 L+4.10% 1.7% 6.5% Mar 2023 I/O 35 Subordinated IL May 2018 15.9 15.9 15.8 L+12.25% 1.5% 14.5% Nov 2021 I/O Total Mixed-Use $252.8 $223.8 $222.6 Student Housing Loans: 36 Senior TX Dec 2017 $41.0 $41.0 $40.9 L+4.75% —% 5.4% Jan 2021 I/O 37 Senior CA Jun 2017 41.0 39.7 39.7 L+3.95% 1.2% 5.2% Jul 2021 I/O 38 Senior NC Feb 2019 30.0 30.0 29.9 L+3.15% 2.3% 5.9% Feb 2022 I/O 39 Senior TX Dec 2017 25.1 24.6 24.3 L+3.45% 1.6% 5.5% Feb 2023 I/O 40 Senior AL Feb 2017 24.1 24.1 23.0 L+4.45% 0.8% —%(19) Dec 2020 I/O 41 Senior FL Jul 2019 22.0 22.0 21.9 L+3.25% 2.3% 5.9% Aug 2022 I/O Total Student Housing $183.2 $181.4 $179.7 See footnotes on page 13. 8
Loans Held for Investment Portfolio Details ($ in millions) Origination Current Loan Outstanding LIBOR Unleveraged Payment # Loan Type Location Date Commitment Principal Carrying Value Interest Rate Floor Effective Yield(10) Maturity Date Terms(17) Industrial Loans: 42 Senior NY Jan 2020 $56.5 $49.8 $49.6 L+5.00% 1.6% 8.3% Feb 2021 I/O 43 Senior NC May 2019 40.5 34.8 34.6 L+4.05% 1.6% 5.9% Mar 2024 I/O 44 Senior CA Nov 2019 26.6 21.5 21.4 L+4.50% 1.9% 7.3% Dec 2021 I/O 45 Senior CA Aug 2019 19.6 13.5 13.3 L+3.75% 2.0% 6.3% Mar 2023 I/O Total Industrial $143.2 $119.6 $118.9 Residential/Condominium Loans: 46 Senior CA Jan 2018 $13.7 $13.7 $13.7 13.00% —% 13.0% Feb 2021 I/O 47 Subordinated NY Oct 2018 16.8 16.8 16.8 L+14.00% 2.3% 18.0% May 2021 I/O 48 Subordinated HI Aug 2018 11.5 11.5 11.5 14.00% —% 17.0% Oct 2020 I/O Total Residential/Condominium $42.0 $42.0 $42.0 Self Storage Loans: 49 Senior FL Feb 2019 $19.5 $19.5 $19.4 L+3.50% 2.0% 6.0% Mar 2022 I/O Total Self Storage $19.5 $19.5 $19.4 Loan Portfolio Total/Weighted Average $2,001.6 $1,789.1 $1,778.2 1.7%(20) 6.3% See footnotes on page 13. 9
Consolidated Balance Sheets As of September 30, 2020 December 31, 2019 (unaudited) ASSETS Cash and cash equivalents $ 81,295 $ 5,256 Restricted cash — 379 Loans held for investment ($495,167 and $515,896 related to consolidated VIEs, respectively) 1,778,199 1,682,498 Current expected credit loss reserve (25,454) — Loans held for investment, net of current expected credit loss reserve 1,752,745 1,682,498 Real estate owned, net 37,476 37,901 Other assets ($896 and $1,309 of interest receivable related to consolidated VIEs, respectively; $61,833 and $41,104 of other receivables related to consolidated VIEs, respectively) 77,542 58,100 Total assets $ 1,949,058 $ 1,784,134 LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES Secured funding agreements $ 791,136 $ 728,589 Notes payable 57,848 54,708 Secured term loan 109,803 109,149 Collateralized loan obligation securitization debt (consolidated VIE) 443,860 443,177 Secured borrowings 54,617 — Due to affiliate 2,670 2,761 Dividends payable 11,072 9,546 Other liabilities ($368 and $718 of interest payable related to consolidated VIEs, respectively) 8,703 9,865 Total liabilities 1,479,709 1,357,795 Commitments and contingencies STOCKHOLDERS' EQUITY Common stock, par value $0.01 per share, 450,000,000 shares authorized at September 30, 2020 and December 31, 2019 and 33,441,937 and 28,865,610 shares issued and outstanding at September 30, 2020 and December 31, 2019, respectively 329 283 Additional paid-in capital 497,421 423,619 Accumulated earnings (deficit) (28,401) 2,437 Total stockholders' equity 469,349 426,339 Total liabilities and stockholders' equity $ 1,949,058 $ 1,784,134 10
Consolidated Statements of Operations For the Three Months Ended ($ in thousands, except share and per share data) 9/30/2020 6/30/2020 3/31/2020 12/31/2019 9/30/2019 Revenue: Interest income $ 30,626 $ 29,835 $ 31,448 $ 28,536 $ 28,269 Interest expense (11,875) (13,042) (15,534) (15,044) (15,124) Net interest margin 18,751 16,793 15,914 13,492 13,145 Revenue from real estate owned 3,623 1,189 5,220 8,088 6,702 Total revenue 22,374 17,982 21,134 21,580 19,847 Expenses: Management and incentive fees to affiliate 1,847 2,152 1,773 1,959 1,578 Professional fees 639 660 903 641 542 General and administrative expenses 969 959 868 1,035 1,005 General and administrative expenses reimbursed to affiliate 802 1,038 1,051 764 831 Expenses from real estate owned 4,046 3,254 6,676 7,338 6,838 Total expenses 8,303 8,063 11,271 11,737 10,794 Provision for current expected credit losses (1,048) (4,007) 27,117 — — Realized losses on loans sold 4,008 — — — — Change in unrealized losses on loans held for sale (3,998) 3,998 — — — Income (loss) before income taxes 15,109 9,928 (17,254) 9,843 9,053 Income tax expense, including excise tax 181 160 9 183 19 Net income (loss) attributable to common stockholders $ 14,928 $ 9,768 $ (17,263) $ 9,660 $ 9,034 Earnings (loss) per common share: Basic earnings (loss) per common share $ 0.45 $ 0.29 $ (0.54) $ 0.34 $ 0.32 Diluted earnings (loss) per common share $ 0.44 $ 0.29 $ (0.54) $ 0.33 $ 0.31 Weighted average number of common shares outstanding: Basic weighted average shares of common stock outstanding 33,337,445 33,316,933 31,897,952 28,640,363 28,634,514 Diluted weighted average shares of common stock outstanding 33,550,444 33,539,580 31,897,952 28,872,975 28,867,603 Dividends declared per share of common stock(8) $ 0.33 $ 0.33 $ 0.33 $ 0.33 $ 0.33 See footnotes on page 13. 11
Reconciliation of Net Income to Non-GAAP Core Earnings(2) For the Three Months Ended ($ in thousands, except per share data) 9/30/2020 6/30/2020 3/31/2020 12/31/2019 9/30/2019 Net income (loss) attributable to common stockholders $ 14,928 $ 9,768 $ (17,263) $ 9,660 $ 9,034 Stock-based compensation 367 365 225 482 479 Incentive fees to affiliate — 303 — 378 — Depreciation of real estate owned 224 224 221 219 207 Provision for current expected credit losses (1,048) (4,007) 27,117 — — Change in unrealized losses on loans held for sale (3,998) 3,998 — — — Core Earnings $ 10,473 $ 10,651 $ 10,300 $ 10,739 $ 9,720 Net income (loss) attributable to common stockholders $ 0.45 $ 0.29 $ (0.54) $ 0.34 $ 0.32 Stock-based compensation 0.01 0.01 0.01 0.02 0.02 Incentive fees to affiliate — 0.01 — 0.01 — Depreciation of real estate owned 0.01 0.01 0.01 0.01 0.01 Provision for current expected credit losses (0.03) (0.12) 0.85 — — Change in unrealized losses on loans held for sale (0.12) 0.12 — — — Basic Core Earnings per common share $ 0.31 $ 0.32 $ 0.32 $ 0.38 $ 0.34 Net income (loss) attributable to common stockholders $ 0.44 $ 0.29 $ (0.54) $ 0.33 $ 0.31 Stock-based compensation 0.01 0.01 0.01 0.02 0.02 Incentive fees to affiliate — 0.01 — 0.01 — Depreciation of real estate owned 0.01 0.01 0.01 0.01 0.01 Provision for current expected credit losses (0.03) (0.12) 0.84 — — Change in unrealized losses on loans held for sale (0.12) 0.12 — — — Diluted Core Earnings per common share $ 0.31 $ 0.32 $ 0.32 $ 0.37 $ 0.34 See footnotes on page 13. 12
Footnotes 1. Inclusive of $1.0 million or $0.03 per diluted common share benefit for CECL. 2. 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 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 manager and the Company’s independent directors and after approval by a majority of the Company’s independent directors. 3. Excludes impact of loans on non-accrual status as of September 30, 2020, June 30, 2020 and March 31, 2020, respectively. Including non-accrual loans, total weighted average Unleveraged Effective Yield for total loans held for investment and senior loans would be 6.3% and 5.9% for September 30, 2020, 6.4% and 6.0% for June 30, 2020 and 6.2% and 5.9% for March 31, 2020, respectively. 4. Based on September 30, 2020 ending spot one month LIBOR rate of 0.14825%. 5. As of October 28, 2020. 6. Excluding the current expected credit losses ("CECL"). 7. Debt to equity ratio of 3.0x and 1.9x (recourse) including CECL reserve. 8. There is no assurance dividends will continue at these levels or at all. 9. During the quarter ended September 30, 2020. 10. 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, premiums or discounts) 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 for investment by the Company as weighted by the outstanding principal balance of each loan. 11. Based on outstanding principal balance of loans held for investment. 12. Gateway cities represent the following metro areas: San Francisco, Los Angeles, Boston-Cambridge, New York, Chicago and Washington DC. 13. Based on outstanding principal balance. 14. Represents total commitments. Ability to draw on available capacity is subject to available collateral and lender approvals. 15. Assumes exercise of extension options on financing agreements. 16. Percentage calculated based on the unpaid principal balance, excluding the CECL Reserve, of the Company’s loans held for investment within each risk rating. The portfolio assessment and risk levels have been classified according to the Company's proprietary methodology on a scale of 1.0 (very low risk) to 5.0 (impaired/loss likely). Risk factors include property type, geographic and local market dynamics, physical condition, leasing and tenant profile, projected cash flow, loan structure and exit plan, loan-to-value ratio, debt service coverage ratio, project sponsorship, and other factors deemed necessary. The assumptions underlying this proprietary methodology are subject to change, may not prove to be true and actual risks may be different than the classifications presented herein. Accordingly, no representation or warranty is made in respect of this information. For more information on risk ratings, see Part I., Item 1. "Notes to Consolidated Financial Statements (unaudited)," "Note 4 - Current Expected Credit Losses" in ACRE's Quarterly Report on Form 10-Q. 17. I/O = interest only, P/I = principal and interest. 18. At origination, the Oregon/Washington loan was structured as both a senior and mezzanine loan with the Company holding both positions. The mezzanine position of this loan, which had an outstanding principal balance of $13.1 million as of September 30, 2020, was on non-accrual status as of September 30, 2020 and therefore, the Unleveraged Effective Yield presented is for the senior position only as the mezzanine position is non-interest accruing. 19. Loan was on non-accrual status as of September 30, 2020 and therefore, there is no Unleveraged Effective Yield as the loan is non-interest accruing. 20. The weighted average floor is calculated based on loans with LIBOR floors. 13