ACRE - NYSE

Please stand by, your program is about to begin. [Operator Instructions] Good morning. Welcome to Ares's Commercial Real Estate Corporation's Fourth Quarter and Year End December 31, 2023 Earnings Conference Call. [Operator Instructions] I will now turn the call over to Mr. John Stilmar, partner of public markets, Investor Relations.

Good morning and thank you for joining us on today's conference call. I'm joined today by our CEO, Bryan Donohoe, our CFO, Tae-Sik Yoon, and other members of the management team. In addition to our press release and the 10 K that we filed with the SEC. We have posted an earnings presentation under the Investor Resources section of our website at w. w. w. dot Aries, CO.com. Before we begin, I will remind everyone that comments made during the course of this conference call and webcast as well as the accompanying documents contain forward-looking statements are subject to risks and uncertainties. Many of these forward-looking statements can be identified by the use of words such as anticipates, believes, expects, intends, will, should, may and similar such expressions. These forward-looking statements are based on management's current expectations of market conditions and management's judgment. These statements are not guarantees of future performance, condition or results and involve a number of risks and uncertainties. The Company's actual results could differ materially from those expressed in the forward-looking statements as a result of a number of factors, including those listed in its SEC filing. Various commercial real estate assumes no obligation to update any such forward-looking comments during this conference call, we'll refer to certain non-GAAP financial measures. We use these as measures of operating performance, and these measures should not be considered in isolation from or as a substitute for measures prepared in accordance with generally accepted accounting principles. These measures may not be comparable to like titled measures used by other companies. Now I'd like to turn the call over to our CEO, Bryan Donohoe. Bryan?

Thanks, John. Good morning, everyone, and thank you for joining our fourth quarter 2023 earnings call. As I'm sure you are aware we continue to see higher interest rates, higher rates of inflation as well as certain cultural shifts such as work-from-home trends adversely impacting the operating performance and economic values of commercial real estate. This is particularly evident from many office properties. In addition, many properties requiring significant capital expenditures have been impacted by higher labor and material costs. And fortunately, we are not immune to these macroeconomic challenges and our results for 2023 and the fourth quarter are partially a reflection of these conditions. For the fourth quarter, we had a GAAP loss of $0.73 per common share, driven by a $47 million or $0.87 per common share increase in our CECL reserve, most of which is related to loans collateralized by office properties or a residential condominium construction project. In addition, for the fourth quarter, we paid six additional loans on nonaccrual status, which impacted both our GAAP and distributable earnings by approximately $0.12 per common share versus what these six loans contributed in the third quarter of 2023. As a result, our distributable earnings for the fourth quarter, our $0.2 per common share. Fortunately, we are starting to see some positive trends in the macroeconomic environment that we believe are likely to benefit commercial real estate, including the potential for declining short-term interest rates, specifically declining spreads on CMBS and CRECLM.s, particularly during the past six months, reflects strength in capital markets conditions, positive leasing momentum in certain sectors, including industrial and self-storage and continued healthy demand trends for multifamily assets underscore some of the opportunities we see in today's market. These trends play out across our portfolio, particularly for loans centered risk-rated one to three, which totaled about $1.6 billion in outstanding principal balance and risk-rated one through three portfolio as focused on senior first lien positions and is diversified across 37 loans. The majority of these loans are collateralized by multifamily, industrial and self-storage properties with the largest focus on multifamily properties at 34% as a positive indication of our commitment to the properties that contributed more than $150 million of capital, representing about 10% of the $1.6 billion and principal balance of these loans, a portion of this $150 million was used to renew all interest rate caps that expired in 2023 at their prior strike rate credit, an economically equivalent amount after considering additional reserves. Let's now turn to our strategic plan to resolve the nine remaining risk rated four or five loans that comprise about $539 million in outstanding principal balance and $1 million held for sale with a carrying value of $39 million as of year-end 2023. As we mentioned the bonds are primarily collateralized by office properties and one residential condo problem. First, we will fully leverage the management capabilities of the Aries real estate group as we have discussed previously areas Real Estate Group has more than 250 investment professionals and currently manages more than 500 investments globally, totaling approximately 50 billion in assets under management we intend to use these capabilities to resolve underperforming loans held. Second, we have both significant loss reserves against these four and five risk-rated loans as of December 31, 2023, 91% of our total $163 million and CECL reserve or $149 million as related to these nine months, which is about 28% of the $539 million in outstanding principal balance these five. Finally, we have been highly purposeful in positioning our balance sheet over the past few years to provide us with greater flexibility and time to resolve these underperforming loans. For example, our net debt to equity has declined from 2.6 times at year end 2021 to 1.9 times at year end 2023, in both cases for the impact of CECL reserves on our shareholder equity. In addition, we have accumulated additional available capital and told them $185 million. All of these measures and capabilities have positioned us to work through our underperforming redeploy while balancing the goal of maximizing proceeds of accelerating the timeframe for resolution. So far, we've made some notable progress towards these goals. First, at the end of January 2024, we successfully sold a $39 million senior loan held for sale at a price equal to its year end 2023 carrying value. Second, although we did not close on the sale of the office property in Illinois that backed our $57 million senior loan before year end 2023. Our borrower was under an agreement to sell the underlying property and the coming and we are working diligently to resolve three additional loans in the next few months. One loan will likely be resolved through the sale of the underlying property. The other two may involve restriction in terms of the loan so that we can return a significant portion of the principal balance to accrual status, including having the borrower contribute additional capital to the problem. Now let me provide some additional background on our dividend of $0.25 per share that our Board of Directors has declared for the first quarter of 2024 since our initial public offering nearly 12 years ago, we have operated with a framework that considers our distributable earnings power when setting the quarterly up until this point, we have not reduced or delayed our quarterly dividend. In fact, we provided $0.02 per share in supplemental dividends for 10 quarters in this current market environment. However, we believe it is in the best interest of ACRE and its stakeholders to reduce the quarterly dividend to help preserve book value of the switch on to pay out an amount more in line with our expected near-term quarterly distributable earnings before unrealized loss. Ultimately as we get through this cycle, naturally, as we execute on our earnings opportunities, as discussed, we expect we can return to higher levels of profitability that. Now, let me turn the call over to Tae-Sik.

Thank you, Bryan, and good morning, everyone. For the fourth quarter of 2023, we reported a GAAP net loss of $39.4 million or $0.73 per common share. As Bryan mentioned, our GAAP net income was adversely impacted by a $47.5 million increase in our CECL provision or about $0.87 per common share. On full year 2023, we reported a GAAP net loss of $38.9 million. Our $0.72 per common share and distributable earnings of $58.4 million or $1.6 per common share. Our book value per common share and now stands at $11.56 for $14.57, excluding a $3.1 per share. CECL reserve distributable earnings for the fourth quarter of 2023 was $10.8 million or $0.2 per common share which was adversely impacted by the six additional loans that were placed on nonaccrual in the fourth quarter. Our overall CECL reserve now stands at $163 million, representing 7.6% of the outstanding principal balance of our loans held for interest, 91% of our total $163 million in CECL reserve for $149 million relates to our risk rated four and five loans, including $57 million of loss reserves on our three risk rated five loans and $92 million of loss reserves on our six risk-rated four loans. Overall, the $149 million of reserves represents 28% of the outstanding principal balance of risk rated four and five loans held for investment. We continue to further bolster our liquidity and capital position. We maintain significant liquidity at a moderate net debt to equity ratio of 1.9 times at year end 2023, including adding back our CECL reserves to shareholders' equity, our financing sources are diverse and importantly have no spread base mark-to-market provisions. At December 31, 2023, we had over $185 million in cash and undrawn availability under our working capital facility. This amount does not include other potentials potential sources of additional capital, including on one hand loans and properties. During the year, our liquidity was further supported by $280 million of repayments and loan sales. Our net realized losses for 2023 was $10.5 million since our IPO in 2012 we have closed over $8 billion in commercial real estate loans and through December 31, 2023. And we recognized a total of $14.5 million and realized loss. And finally, as Bryan mentioned, we declared a regular cash dividend of $0.25 per common share for the first quarter of 2024. For this first quarter, dividend will be payable on April 16, 2024 for a common stockholders of record as of March 28, 2024. So with that, I will turn the call back over to Bryan for some closing remarks.

You will recognize the challenges that we face with these new nonaccrual loans and the impact that they had on our financial results for the fourth quarter based on the progress that we are making. With respect to these new problem loans, we do expect to improve our run rate distributable earnings in the near term as we seek to recapture a portion of the lost earnings that we experienced in our fourth quarter. Our new quarterly dividend of $0.25 per share reflects our go-forward view of our near term quarterly run rate Distributable Earnings, excluding losses, assuming we achieve the earnings enhancements from our contemplated restorations, longer-term, we believe the real estate capabilities we possess at Aries, coupled with our capital liquidity and reserves will enable us to maximize credit outcomes and enhance our earnings from these situations. We are cautiously optimistic that the increasing level of transaction activity and improving market liquidity concerns to gradually provide more confidence for market participants over time in time as concerns position us to return to a higher level of earnings in the future. As always, we appreciate you joining our call today, and we'd be happy to open the line for questions.

[Operator Instructions] We’ll take a question from Sarah Barcomb of BTIG.

Good morning, everyone. Thank you for taking the question. I'm hoping you could walk us through your go forward on earnings power relative to this new $0.25 dividend on just with the Q4 DE [ph] coming in closer to $0.20. I'm hoping you can help us bridge that gap and for coverage in the coming quarters?

Sure. Good morning. Thank you very much for your question, Sarah. And as we mentioned on our prepared remarks, that the impact of putting six new loans on nonaccrual, you had about a $0.12 impact from what those same loans net earned in prior quarters, the third quarter. But as Bryan also mentioned, we are working very hard to resolve a number of those loans, a number of those six new nonaccrual loans as well as loans that as you have been previously placed on nonaccrual status, you mentioned one of those loans that $39 million loan out in California that has been successfully resolved. And as we continue to resolve additional loans, I think we're making good progress on resolving a number of those nonaccrual loans and really in Yes, as we mentioned, kind of setting our dividend at the 25% level for the first quarter of 2024, we did take into account what we believe we can achieve in terms of the server earnings once we were able to successfully resolve some of these loans without getting too specific, I think we are we are targeting to resolve these loans on some of these loans as soon as we can. So we do believe that once we are able to resolve these loans and as Mike mentioned, the resolution will come in a couple of different forms, in some cases, a sale of a loan, in some cases, sale of the underlying collateral. In some cases, restructuring of the loans with existing borrowers; so the resolutions are going to come in different forms. And we do believe that our earnings power that will go up from the $0.2 that we recognized in 20 in the fourth quarter of 2020, largely because that was impacted by, again the significant increase in nonaccrual loans. And so that is really our goal is to resolve these loans and increase our earnings power and so that we can continue to cover the dividend that we have set.

Thank you. And I appreciate you walking us through on property loan by loan, your expected resolution there. So thanks for that. On the comps a bit more backwards looking, but I'm hoping you could walk us through what happened on the ground with those new nonaccrual loans, whether it was an issue at the sponsor level with buying a new rate, half or something else needing leasing related; any color for us?

Yes, yes. I can have a bit more color. So I would say that each feature somebody Synchronics, but certainly borrower behavior, shifting sentiment around an asset and support for that asset as well as just really crystallizing some of the valuations that we've seen a bit more activity through Q4 fabless. So there was more data point to as well as certain events within each of the specific assets where the borrowers approach to continuing of those payments was more handouts and that nothing on the margin just had a few events that made us revisit some of the approach [ph].

Great. Thank you.

We’ll take our next question from Stephen Laws of Raymond James.

Hi, good morning. Follow-up a little bit on Sarah’s question. When you think about the potential earnings benefit as some of the non-accruals are resolved, is that really solely related to paying off the financing associated with these loans? Or is it also includes some assumptions around redeploying capital in new investments?

Sure. Great question, Stephen. And the answer really is it's a combination of number of things, including the two examples that you mentioned. So yes, in some cases are the, you know, the arm and the benefit that we will see in earnings comes from being able to pay down either in part or full associated liability, some of the nonaccrual loans. So clearly alone, they're already on nonaccrual. And so but unfortunately, we are still paying interest on the associated liability. So to the extent that we can resolve these loans and get a full or partial repayment of the associated liabilities that would obviously result in higher net income. And the other, as you mentioned, is that some of the resolutions have we believe will result in some net cash coming to us. Again, we haven't really built ahead and redeployment of that cash to, you know, to necessarily increase earnings going forward. But we obviously you can utilize that cash for a number of different purposes. I would say another example along the same lines is that on again, as I mentioned, some of the resolutions were working on Q2, restructuring of the loan with the existing borrower. We believe in some of the situation we've seen and we believe we can restructure the loan, which would potentially include some new cash from the borrower coming into the property, adding to the loan. That would then allow us to then begin to recognize interest on some or all of the existing loan itself. I think those are just three examples of how earnings should be increased going forward upon resolving some of these nonaccrual loans; that's Omni's also blends. I think those are three good examples of how resolving the loans can increase earnings going forward.

Appreciate the color. On that basic -- you know -- them to continue eventually come up with these six new nonaccrual loans on nonaccrual for the entire fourth quarter? Or did they contribute some interest income in the early part of the quarter?

Sure, good question. And I appreciate the detail behind the distinction there. So our policy is that we put a loan on nonaccrual for the entire quarter. So when we talk about the $0.12 impact. That meant that from for the fourth quarter overall for the entire fourth quarter that these six loans did not recognize any interest revenue and interest income for the entirety of the fourth quarter.

Okay, thank you for clarifying that. And then as we think about the interest coverage test, I think it's a 12 month look-back, but can you update us and apologies. I haven't had a chance to get through the whole filing this morning. And can you update us on where you stand on that, whether you'll need waivers for lower interest coverage test metrics or how counterparty discussions are going around the developments with these loans?

Sure, Stephen. I just wanted to clarify your question and say interest coverage tests are you talking about these specific loans or the time line? We know that we have in the main role.

I can just cover your -- your counterparties. I believe it's typically somewhere between one three and 1.5 interest coverage test with your bank clients, your other financing facilities and any sense debt covenants that need to be considered are discussed around these nonaccrual developments?

Sure. You can imagine we are obviously, we have always closely monitored all of the covenants that we have on our own debt facilities as well as those of the food as well as you know, this where we hold as an asset on in terms of interest coverage, you know, we are we are clearly leading indicators, leverage test in all of our all of our debt facilities now. And I think one of the very proactive steps that we have taken now for the past several years is delevering our balance sheet. And so we have about $1 billion, $6 billion of financing that is materially down but a couple of years ago. And so we've been very mindful of making sure that we have the right balance sheet behaving in these more challenging market conditions. We have increased our liquidity and we have done a number of measures. And all of that has obviously helped not only in terms of maintaining the flexibility and the balance sheet, and we need to work through some of the underperforming loans. And overall, it has put on neuroma stress on meeting our covenants. So for example, we were levered three to one. No, I think does coverage that would be on the tighter side. You guys that as we mentioned, we have worked very hard to delever our balance sheet significantly over the past several years, and that has helped significantly on our on our loan covenants themselves.

Great. Appreciate the comments this morning. And we look forward to hearing about some of these resolutions in the next couple of quarters.

We’ll take our next question from Rick Shane of JPMorgan.

Thanks everybody for taking my questions this morning. Most have really been asked answered but I just want to make sure on the loan that was held for sale on sold at your carrying value; so no hit to book value by our calculations. That represents about a $2.6 million realized loss; is that correct?

Yes, good morning. So we sold the business at the moment as we mentioned at $39 million of that; and that is really the net proceeds received from the sale. And that was the stated fair value. So one thing just to maybe distinguish here is that because we were under contract to sell this loan at year end, we put this loan under available for sale. It was not held for investment. So it is not part of our held for investment portfolio. We didn't hold us at fair value that fair value gain of $39 million carrying value and so there is no impact on book value. As you said, I forget the actual I'm not I wasn't quite the movement of $2.6 million you mentioned.

I thought I would do online and they say I apologize, you're going to give you a better number. I just did that.

I'm going to. Yes, but I think the important point you're making is that again, it was sold at its stated fair value that you're at $39 million.

Got it. And when we look at the call it, $150 million specific CECL reserve, should the assumption be, particularly because I think at this point you guys have incentive to resolve this quickly and be able to redeploy the capital in order to achieve the distributable earnings run rate that you're targeting that you will. We like that those losses will largely come through in the first half that the cadence of realized losses is going to be very front-loaded and 2024?

Yes. So maybe I can try and Bryan, please weigh in. Again, we go through our hard process to determine the appropriate amount of the CECL reserve, it will be necessarily reflective of what will ultimately be realized because in almost all situations idea, these are these are very dynamic markets. And so the realized losses could be more or less in terms of timing. Again, as we mentioned, we're working very hard on all of the funds. I mean some are more near term opportunities. So, more and more opportunities that will come out in later quarters later periods. I would not expect all of these to be realized in the first half. For example, on a new base; we are always balancing, as we say, maximizing proceeds as well as accelerating timeframe. But there is a balance between those two. There are some situations where we feel holding on to oncology or maintaining our position for a little bit longer position resolved soon and of greater value that we think it's worth doing. In some situations, we are pushing very hard to get suddenly realized immediately because we don't think future value will be it will be materially greater. So it's a positive situation but I would not say all of these will be realized in the first half. And again, I would not I would not equate what we what will be realized losses with the reserve. The reserve developed contemplates a different analysis. And unless they get it's a very near term resolution where, for example, in assets already under contract for a specific price, then obviously those two numbers on come together but for longer-term resolutions assets, again, there can be tailored to the variance between what the actual realized value is for the losses versus their CECL reserve on the others to add to that.

I think that the leverage ratio that Pason touched on earlier gives us that flexibility. Sorry, and certainly I hear your point, and I think velocity is something it's certainly part of the equation, but we're balancing that with ultimate resolution. We certainly can we absolutely look forward to getting back on offense when available. And I think the resolution of some of these assets will be indicative of that. But I think the ultimate resolution is the balance of price plus.

Hi, and a question on it, and I think we see the logic here in terms of where the dividend has been struck. If we think about where book value is today on and looking at book, excluding reserves, because I think realistically that will be reasonably close to the amount of book value you have on a go forward basis, the dividend equates to a yield and a book of just over 8.5%. And I think that's pretty consistent with mid-cycle returns for your company on a scale basis over long term over the long-term. Is that the right way to be thinking of these things?

Yes, it's an excellent observation. And I certainly think that is one way to try and sort of triangulate to a sort of a yield that makes sense again, I would just caution you, however, that we are in, as I mentioned, very dynamic market times, for example, in one sense, we are enjoying very high interest rates. And I know, with sulfur being at five, three, five four level. On the other hand, it's five 35 for silver is causing significant and adverse impact on real estate operating performance at values. And so there's a lot of components that go into them in our overall returns. So certainly credit is certainly interest rates certainly leveraged. Certainly to pointed out, there's a lot of factors that go into it. But I do agree with your observation of that. You know, the $0.25 dividend for the fourth quarter, I'm sorry, for the first quarter of 2024. If you were to annualize that to $1 dollars divided by the 1152 book value equates to that data, I think about 8.7% yield. I do think that's a great way to triangulate that sensibility of it. And but I will also caution that the story isn't fully told you guys. We mentioned we have set our dividend level based upon what we believe we can earn by resolving some of the nonaccrual loans, not all of the non-accrual loans. So we do have potential for adding in more earnings at the same time without going through the fullness. I mean, there are lots of other factors that can and they're likely to impact our earnings going forward as well. So that is that is part of the part of the equation, but certainly not the only part of the equation.

Got it. But I think it's an interesting observation from you make. And in terms of sort of the long term, I would agree with you on average over time, but that's probably six years at a 10 in that eight range, two years at a 10 above it and two years out of 10 below. And we're probably in the midst of are in the thick of those two or three years that are below that 8.5% target?

Yes.

Thank you, guys.

Thank you.

We’ll take our next question from Don Fandetti of Wells Fargo. Your line is open.

I guess I'm trying to just get a sense of your confidence, like as you think about the shorter term, how are you feeling about the ability for just to a replay of this in Q. one where you have kind of nonaccrual migration, another big reserve build. I know there's uncertainty kind of intermediate and longer term, like how are you thinking about it in the short term?

Yes. Sure, Don. Again, our short-term objectives is part of a longer term plan, of course. And our short-term objective, as we mentioned, is to remain very, very focused on the nonperforming loans. It's to remain very, very focused on continuing to vigilantly monitor all of our loans overall, and we are in a state as of the fourth quarter as of year-end, where we have a significant portion of our capital on no came nonaccrual loans. And so that is clearly the impact of our current to our current income having said that on it, as we mentioned, a number of our loans, even though they're on nonaccrual, continue to pay interest and that interest is not being recognized as income that interest is being used to reduce the carrying value of the loan itself. And so we think all of that helps to further not further improve the balance sheet overall, Tom, but again, to answer your question short term can be made. We remain very focused on growing our on our income base and our overall the shareable earnings. And we want to continue that digitally worked out any of the problem assets so that we can either monetize the capital that we have and the asset we can pay down the debt associated with those with those assets with the liabilities associated with the nonperforming loans and then redeploy some capital. We have a significant amount of liquidity and we will hopefully generate more capital from another presentation and some of the phones gone. One things we have mentioned is that we are working very closely with many of our borrowers significant to continue to inject more equity into the loans themselves. But short term, I would tell you also that we continue to see some volatility in the markets and in our portfolio. I think Canada is one of the subsequent events that we had mentioned on our in our public filings this morning is that we had two loans go into default at year end after year end at one boom is at $57 million loan backed by office property that matured. Obviously, that loan had been rated a five. That's the loan that Bryan had mentioned. We are pushing to sell before year-end we continue to push to sell that loan. So the resolution of that loan will be there will be a utility, a material part of this by going forward, the element that we mentioned is that $18.5 million mezzanine immature as a loan. And that loan also went into default as a result of the borrower not meeting its January interest payments. And unfortunately, that loan remains in default and the January and now February payment has not been made, but that low retention has been on nonaccrual for the past couple of quarters. So your backlog going into the fall, while rates are very disappointing, obviously ITO has already been on. Nonaccrual has been rated a four. And so there continues to be movement in the portfolio.

Okay. Got it. Thank you.

We’ll take our next question from Steve Delaney of Citizens JMP. Your line is open.

Thank you. Good morning, Bryan and Tae-Sik. We’re starting to see something interesting this quarter and hearing anecdotes that there are a number of debt funds or even hedge funds that are starting. We look around for opportunities to kind of opportunistically buy loans from I'm sure they're talking to the banks, but we've seen evidence that they've been talking to the commercial mortgage rates as well. I'm curious if you're receiving any if you could just say generally, are you receiving these types of inquiries on back third parties looking to kind of step in so that you can avoid foreclosure and all that mess and actually just lay off the loan to somebody who works more not in a public company environment and can operate a little differently. Just curious if you're seeing this secondary market in distressed loans picking up at all?

It's a great question, Steve. And I think the loan held for sale at year end was a good example of executing on Ireland, just that strategy, I think there's two major narratives in commercial real estate book, probably more of that, one of which is this wall of maturities and the others this wall of capital and I think certainly been touched on a little bit if the macro environment is shifting. And part of that is that the capital on the offense side being dislodged and becoming more pro-business, I would say. So, I think that you're seeing a good reflection throughout this space of deal activity. And in general, the first market opportunity in commercial real estate will come in the form of credit, whether that's in new loans that are attractive on a relative value basis for purchasing loans, either for control or for yields. So I think you're spot on the activity is here, and I think it will continue to progress. But the amount of capital that's out there that needs to be spent in this space is significant. So the trend that we’ve seen or you're hearing about, I would expect that to continue.

Okay, I appreciate that. And I would have to think -- you know, the Fed has kind of -- given us a head fake here. But I'd have to think as we start getting into the middle of this year and there is more of an expectation for cuts in the second half of the year that may make those potential buyers more aggressive because you're creating a more positive sentiment, you know, for the market generally and people are going to be less willing to sell at large discounts. I could see that this interested this opportunistic money really picking up as the year goes along. And then the second thought I have is I've been hearing this about the banks on We all know what the capital issues are with the banks, but that we're hearing that in know, construction loans at the banks that the banks are going to manage through those, but probably will be less likely to move into a bridge lending phase on that, that would be you know, maybe when we get to late 24, early 25, we could find a new wave of lending opportunities for the commercial mortgage rates with paper coming off the banks' balance sheet, do you see that type of opportunity as well or am I getting ahead of myself there?

I think as you think about the concentration of commercial real estate debt within the banks. And certainly when you think through the real estate capital treatment for the bank's balance sheet of CRE and essentially the overlay that regulators have focused on the banking sector. It doesn't take a large shift of the allocation of real estate debt from banks still against the private markets to create a pretty substantial opportunity set to invest into. So that's certainly what I think areas in our peer set is playing for us that continue to show that it's going to be a great opportunity to partner with the banks and this next evolution of the real estate debt market. So I would certainly look towards that.

I think I'd echo your sentiments. Well, congratulations on the progress you're making. It's I know it's a slog, but and I think we have better days ahead for ACRE and for the Group as a whole. So, thank you for your time this morning.

Appreciate as always do. Thank you.

We’ll take our next question from Doug Harter of UBS.

Thanks. I was just hoping you'd give a little more update on the multifamily portfolio and kind of how given the move in rates, how are you think that that portfolio is going to be able to handle refinancing?

Yes. So this is typically one of the benefits of the multifamily market is for continued capital markets, participation of Fannie and Freddie, as well as it being a more friendly bank asset as well. I'd say that we've seen supply uptick nationally, I think markets market that's being received differently, largely speaking within our portfolio, we've seen positive progress on the leasing side. So kind of it's I think it will be an opportunity set for the foreseeable future. I think when we think about it structurally, are you still going to be short despite the supply headwinds that have been fairly well publicized? We're still going to be short over the next five years, four or five, 6 million residents in the United States, especially if you look at the macro level of immigration returning right so it was worse in terms of liquidity, be the buyers, the owners of multifamily real estate assets are seeing that short, the short term supply issues are dwarfed by the long-term fundamental shortage, and you're starting to see the performance of the underlying assets reflect that. So a short answer is relatively stable performance within our portfolio. I think that the capital markets functionality will continue to support these assets and the equity markets private equity markets for multifamily, we'll continue to expand.

Great. Thank you.

[Operator Instructions] We’ll move next to Jade Rahmani of KBW.

Thank you very much. Just to follow up on your answer to Doug's question, Green Street estimates, multi-family values are down around 28% from the peak. I mean, when we hear answers like that, that's a non-event. So either we disagree with Green Street or we need to recognize that there's capital stress in a lot of the multifamily deals that was record issuance in 2021 and 2022. So just ask it another way, how do you expect that to be reconciled over the next year in multifamily? Secondly, I would like to ask about two multi-families in which areas was involved. I think that they are likely an acre portfolio, but wanted to check one was a large Chicago multifamily and another is in Dallas. And those look like based on the real deal they are it outperformed ambition there?

Yes, Jim, I guess phenomena in the U.S. represent I think that if you go back to certain markets and you were in the spring of 22 purchasing at, I'd say, trough cap rates, yes, there's probably value decline in excess of the 28% you're citing with Green Street. And in many instances, you're seeing rent growth. And I think those buyers saw the perceived rent growth in certain markets continuing unabated, which with expenses that didn't necessarily go in towers that. So but largely speaking, as a lender, even if you subscribe to the Green Street number, moderate leverage, there's still equity to protect in those assets. I think you will see some transfer of value from equity to debt. So it's not that there won't be distressed. I just think that when you consider the overall loss severity in this space to the lending to the lender community, I think that will be muted relative to if you look at the office sector, for instance. So it's not to say that there won't be transfers of assets given that value decline and certainly if you guys have been drawn, if you got the expense load wrong, there will be stress. And I think the two assets you're talking about reside in different vehicles the press doesn't always get the lender correct there. So it carries is associated with those assets, but they are not BAKER assets specifically.

Thanks, appreciate that. So, in terms of the transfer of assets within a portfolio such as mortgage Re portfolio. If you don't expect ultimately significant loss of barely to the lenders, how do you expect that to play out? You see the mortgage rate being active in bringing in additional capital to recapitalize transactions.

I think that's certainly a possibility. But I think despite the technology overlay, we see in the multifamily sector specific asset management capabilities within the borrower community has never been more important when you think about some of the issues around because otherwise, you know, in the apartment sector, how you manage these assets is a good bit of the value creation. And I do think to your point, Jamie, there's ample liquidity to comment on the private side alongside existing lenders recapitalizing an asset and bringing to bear improved asset management or property management from there. So I think you're spot on that this might take the form of partnership rather than outright sales to kind of stabilize the valuations. And I think -- and to the earlier point on the decline in rates, even the stability around rates of multi-family over the next five years will be fairly well correlated to the rate environment.

Thank you. And then lastly, if I could squeeze one more in if there was an industrial property. I can't recall offhand if you've previously discussed this, but it was moved to nonaccrual status. It's relatively small compared to the average at $19 million, but we haven't seen much pressure there. So could you comment on that duration?

Yes, that's just a redeveloped asset on the West Coast. I think Japan, we've basically, as you know, in the analysis of that of that property, the dialogue with the borrowers dynamic and it is a relatively small asset, however, be so active discussions with that buyer with a rate cap term yet that's really the catalyst for well.

The analysis so the deep the nonaccrual is due to the rate cap, not meeting outlook or supply competition or anything advantage.

I think it was slower than expected leasing velocity alongside a near term event of the rig count.

Okay. Thanks a lot.

Thank you.

And there are no further questions at this time. I'd be happy to return the call to Bryan Donohoe for closing comments.

Yes. Thank you, operator. And I just want to thank everybody for their time today. We appreciate the continued support of Ares's commercial real estate, and we look forward to speaking with you again on our next earnings call. Thank you.