Ares Commercial Real Estate Corporation

Good day, and welcome to the Aries Commercial Real Estate Company's first quarter 2021 earnings conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, press star, then one on a touch-tone phone. To withdraw your question, you can press star, then two. Please note, this event is being recorded. I would now like to turn the conference over to John Stillmar of Investor Relations. Please go ahead.

Good afternoon, everybody, and thank you for joining us on today's conference call. I am joined today by our CEO, Brian Donahoe, Kasich Yoon, our CFO, and Carl Drake, our head of public company investor relations. In addition to our press release in the 10Q that were filed this morning with the SEC, we have posted an earnings presentation under the investor resources section of our website at www.arescre.com. Before I begin, I want to remind everyone that comments made during the course of this conference call and webcast and the accompanying documents contain forward-looking statements and 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 these forward-looking statements, and as a result, a number of factors, including those listed in its SEC filing. ARIES Commercial Real Estate Corporation assumes no obligation to update such forward-looking statements. 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 only be considered an isolation 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. With that, I'd like to turn it over to Brian.

Thanks, and good afternoon, everybody. This morning we announced another strong quarter with distributable earnings of 40 cents per share for the first quarter of 2021, up 25% year-over-year and well in excess of our combined regular and supplemental dividends. We're pleased with our performance, which was driven by our portfolio's strong credit quality, healthy level of high-quality new investment activity, the actions we have taken to reduce our financing costs, and the benefits from our LIBOR floors. Our portfolio and our real estate platform continue to benefit from an improving economy and a more active real estate market, which is enhancing our already strong competitive position as a reliable and stable capital provider. With some legacy market participants narrowing their underwriting criteria or not yet returning to the market, we are finding an attractive competitive landscape. As a result, we continue to see new loans with all-in spreads roughly in line with or greater than pre-pandemic levels in our primary areas of focus, with more attractive attachment points in addition to more friendly lender terms. These factors have led to an improved pipeline of attractive investment opportunities that are diverse across property types and geographies. We continue to target loans to high-quality sponsors, primarily secured by multifamily, industrial, self-storage, and select office properties and markets with strong demographics and favorable real estate fundamentals. Our playbook remains consistent to originate short-term, primarily senior loans with strong covenant protections in support of value-creating business plans. Against this backdrop, we closed $205 million in new commitments across multiple property types in the first quarter of 2021. As a reflection of our increased conviction in the future investment opportunities, we expanded our access to efficient financing and capital throughout the first quarter. In January, we closed our fourth CLO, which provided us with additional match-funded non-recourse financing. As previously discussed, this $667 million securitization reduced our funding cost, enhanced our non-recourse funding to more than two-thirds of our debt capital, and enabled us to purchase loans from the ARIES warehouse. Then in February, we issued 7 million common shares to raise more than 100 million of equity capital at a slight premium to book value to invest in the future growth opportunity we see unfolding. Underscoring the strength of the opportunity set, we have closed over 270 million of new loans between our balance sheet and into the ARIES warehouse already in the second quarter. Turning to the portfolio, our portfolio is well-constructed with 97% invested in senior loans and approximately two-thirds of our loans collateralized by multifamily, office, industrial, and self-storage properties. We continue to be underweight hotels and standalone retail centers. The backdrop of an improving economy has further supported the strength of our portfolio. 100% of our loans made their contractual debt service payments for the first quarter and our weighted average internal loan risk rating modestly improved to 2.9 versus 3.0 at year-end 2020. Additionally, there were no new loans on non-accrual status during the quarter. While the COVID-19 pandemic and all the resulting uncertainty and challenges it brought are not completely behind us, we remain optimistic about the future benefits that the economic recovery will have on our portfolio. Along these lines, in the second quarter, we resolved the senior loan collateralized by a student housing property that was on non-accrual as of March 31st, above our carrying value. This resulted in a return for this investment consistent with our overall portfolio. The successful outcome here underscores the strength of our upfront underwriting, the benefits of our conservative approach, our active asset management capabilities. Before I turn the call over to Tasek, I did want to point out that we declared our second quarter dividend of 33 cents per share, plus a two cent per share supplemental dividend, which is consistent with last quarter. For the full year 2021, we continue to believe that we will fully cover or exceed our dividends with our distributable earnings, inclusive of the two cents per quarter supplemental dividend. With that, I'll now turn the call over to Tasek to provide more details on our first quarter results and healthy financial position.

Great. Thank you, Brian, and good afternoon, everyone. Earlier today, we reported gap net income of $15.7 million or $0.45 per common share and distributable earnings of $13.9 million or $0.40 per common share. Our distributable earnings for the quarter more than fully covered our $0.33 per common share regular dividend as well as our supplemental quarterly dividend of 2 cents per share. Supported by our strong earnings and the slightly accretive 7 million common equity offering that Brian mentioned earlier, our book value per share increased by 9 cents per share to $14.23. This is the third consecutive quarter of improving our book value per share. Our earnings also continue to benefit from LIBOR floors. the weighted average one-month LIBOR rate on our loan portfolio at the end of the first quarter of 2021 was 1.56%, which compares favorably to the one-month LIBOR rate of approximately 11 basis points. Furthermore, during the first quarter, we executed approximately $1.1 billion of notional interest rate swaps and caps which we believe provide a significant protection against rising interest rates over the next few years. Our first quarter gap earnings also benefited from a $3.2 million reduction of our CISO reserve. This 13% decline in our CISO reserve was primarily driven by improved macroeconomic forecasts. While we have reduced this balance over the past few quarters, our CISO reserve balance as of March 31st, 2021, remained at about four times pre-pandemic levels at $22 million. Now, let me highlight some of the further enhancements that we have made to the liability side of our balance sheet during the past 12 months. As you know, heading into the pandemic last year, we were in a very good position, and certainly the past 12 months tested our liquidity levels, our financing vehicles, and our overall capital structure. Despite such success, however, we have pushed even harder to further strengthen our balance sheet. First, our debt-to-equity ratio excluding the CESA reserve is significantly lower at 2.4 times as of the first quarter of 2021 versus 3.2 times as of the first quarter of 2020. Second, as we continue to shift our funding mix towards termed-out non-recourse sources, And with the successful execution of our fourth CLO and the extension of the reinvestment period of our third CLO, our percent of non-recourse liabilities more than doubled to 71% as of the first quarter of 2021 versus 32% as of the same period last year. And finally, we increased our common capital base by more than 20% through our recent 7 million share offering in March 2021. So despite challenging capital market conditions, the liability side of our balance sheet is in a stronger position today than it was at pre-pandemic levels. So with that, let me turn the call back over to Brian for some closing remarks.

That's great. Thanks, Tasik. In summary, we're off to a very good start to 2021 with strong quarterly earnings, healthy and improving credit quality in the portfolio. With attractive sources of financing, including incremental equity, we are well positioned to more fully invest in the market opportunities we see in front of us. We expect future quarters will benefit from the resulting increased diversification of the portfolio and greater expense efficiencies that come with the deployment of this capital. Importantly, we are actively and prudently investing our available capital against this attractive market opportunity. As a result, we remain on track to deliver distributable earnings that meet or exceed dividends paid for the year. We greatly appreciate the support of our investors and your time today. With that, I will ask the operator to open the line for questions.

We will now begin the question and answer session. To ask a question, press star then one on a touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, press star, then 2. At this time, we will pause momentarily to assemble our roster. And the first question comes from Tim Hayes with BTIG. Please go ahead.

Hey, good morning, guys. Congrats on a nice quarter. First question here, you know, just, Brian, circling back on your comments about spreads on new loans, you know, can appreciate that spreads are at or maybe a little bit wider than pre-pandemic levels, but curious how all-in levered returns look relative to pre-pandemic levels. I know you got great execution on the fourth CLO, and it helps that you've extended the reinvestment period for the third one. But going forward, just based on where your funding costs are and maybe the direction they're going versus the all-in coupons on new loans, just curious how ROEs look to be relative to pre-pandemic levels.

Yeah, that's a good question. What I'd say is I think there's certainly differentiation in asset classes. Across the board, I think we see ROEs in keeping with pre-pandemic levels. However, there's certainly been compression in the industrial multifamily space and some tightening there. So how the portfolio construction comes together, we'll take into account the ROEs available on an asset-by-asset basis. Thus far, we've been very pleased with the lower leverage attachment points that have been available to us with, again, all-in yields that are satisfactory to pre-pandemic levels.

Got it. That's helpful. Um, and then just on liquidity, you know, the update you provided as of May 3rd, um, you know, it sounds like you've been busy, uh, originating some new loans in the second quarter as well, which is great to see, but you know, your available liquidity has also come down quite a bit as well. And I think there was a 40 million of, of, you know, of additional liquidity expected. I don't know if that's just a loan repayment that, you know, you guys expect, or maybe a couple, but, um, Curious how you feel about your current liquidity position versus the pipeline today and what you believe you can support at this time.

Absolutely. I think I'll let Tasek get into more detail. I think it is difficult to take just a snapshot moment in time, given how dynamic the portfolio is from a financing and origination standpoint. But Tasek, why don't you take it away?

Sure, Tim, that's a great question. I mean, obviously, at quarter end, you know, we had significantly more liquidity, you know, over 140 million, at least the way we define liquidity, you know, versus the smaller amount that we announced as of yesterday, the 36 million. But as Brian mentioned, you know, these are very specific moments in time. And, you know, we're always dynamically moving our capital position forward. So, you know, we felt it was important to note that, you know, we are expecting about 40 million of financing proceeds to be available to us very shortly. You know, we're moving some loans around into various financing vehicles, you know, particularly our FL3 securitization vehicle, which, you know, you noted that we extended the reinvestment period. So that gives us tremendous flexibility there. But basically, you know, we have been very active in originating new loans. So as we mentioned, you know, we've closed a number of loans since quarter end. And certainly, you know, a significant portion of the capital that we had available, you know, as of March 31st, you know, including the $100 million that we had raised through our common equity offering, you know, a significant portion of that has been invested and will continue to be deployed, you know, particularly against the loans that we had initially closed in the Aries warehouse line, which we will then work very hard over the next couple of weeks to bring onto Acres balance sheets. you know, with the, with the liquidity that we have, the 36 plus the 40.

Okay. But with, so do you believe that given, you know, I guess the 36 plus the 40 76 versus, you know, I think it was about 180 million or so of loans in the pipeline. Do you believe that you'll be able to kind of take those all on given your available liquidity or, you know, are you going to need to, hopefully have some loan repayments or some other sources of capital come in to close those loans?

No. In fact, I would say with respect to the 36 plus 40, we will use approximately half of that to bring on the loans that are currently closed in the Aries Warehouse Line. So again, the Aries Warehouse Line, we showed the commitment amount, but really the funded amount in the Aries Warehouse Line is just over $130 million. And together with leverage that we'll obtain, you know, we'll have sufficient liquidity in the 36 plus 40 to bring that $130 million of, you know, of outstanding principal balance from the Aries Warehouse line onto Acres balance sheet.

Okay. Got it. That's helpful. I'm going to hop back into queue. Thanks for taking my questions.

Absolutely. Thank you, Tim.

The next question comes from Doug Harter with Credit Suisse. Please go ahead.

Thanks. I was wondering if you could give us an update on the three non-accrual loans and kind of how they're progressing.

Absolutely, Doug. First and foremost, I think what we're seeing throughout the lodging landscape is continued uptick in occupancy, not necessarily echoing pre-pandemic levels or even regularity in terms of weekdays versus weekends, but out and out positive trend lines there. And then as we did mention, we did resolve one of the student housing properties that was on non-accrual last quarter, post-quarter end, where the asset was sold above our carrying value. We were also able to secure the financing at a lower basis than where we were previously. And we expect continued progress on the remaining two assets over the next quarter as we work through that with very constructive borrower dialogue.

Got it. I guess on the property that was sold, I guess was there a reserve against that that gets released given the favorable outcome?

Tasek, do you want to walk through the mechanics there?

Sure. Absolutely. So, Doug, I think There's not a so-called reserve, but because we put that loan on not accrual status, as I recall, at the beginning of the pandemic, we have been basically amortizing down, reducing effectively the actual interest that we've received against the principal balance so that, as Ryan mentioned, that carrying value that we had as of March 31st was actually lower than the amount that we got repaid on that loan. So that what you'll see for the second quarter is, you know, we'll show a slight gain on the disposition of that loan since we got repaid more than our carrying value because of the fact that we have been amortizing it down, you know, with respect to interest payments because of the non-agreable status. So it's not effectively a release of a reserve, but the carrying value was lower than the repayment amount.

I guess just on that is, I guess, how would the repayment amount that you got compared to kind of the initial principle of the loan?

So basically, you know, net, it was slightly lower than if you want to call it the, you know, the legal outstanding amount only because of some expenses that were incurred as part of that transaction. But importantly, the amount that we were repaid, you know, was above the carrying value.

Right. Thank you. And the one thing I'd add to that, too, is, and we mentioned this on the call, but from an ROE perspective, taking this from beginning to end, it was still a very positive return in keeping with the overall portfolio.

Makes sense. Thanks, Brian. Thanks, Isaac.

Thank you, Doug.

The next question comes from Steve Delaney with J&P Securities. Please go ahead.

Hello, everyone, and happy springtime. Just wondered if you could talk a little bit about prepays. The first quarter was pretty light, about $130 million. We normally think about somewhere in the area of maybe 33-some percent of the portfolio repaying each year, and I guess that would put you near $600 million, so... any comments or color you could give us about what the second quarter, what you're seeing near term, I assume you have some visibility there, and then what a good expectation might be for the full year. Thank you.

I think what we expect, and it's a good question, I think what we expect is a return to that equilibrium you mentioned towards the latter half of this year. Candidly, we're spending a lot of time with our borrowers to understand where they sit in their business plan and get out in front of any potential repayments. But we do expect to get back to that normal course operations of loans coming in and out in that normal 25 to 30-month tenor towards the latter half of this year, which is why, you know, obviously we're really pleased with the origination pipeline that we see in front of us to manage those in concert with one another. Tasik, I don't know if you have anything to add specifically to that.

Yeah, no, I think that's very, very consistent with, you know, with our views. So, Steve, that's exactly right. I think, you know, pre-pandemic, what you saw was about, you know, about a third to 40% of our portfolio basically repay each year. So call that on average, you know, six to 700 million per year. Obviously, the past 12 to 15 months was significantly less than that. But what we are seeing is, you know, we're starting to see our borrowers start to achieve their business plans. And certainly the markets for them to be able to either realize the value that they create in their asset and or seek more permanent financing is starting to open more and more. So I think that's right. I think what we're forecasting is really second half of the year that we would start to see a more normal, if you want to call it that, pre-pandemic level of repayments.

Got it. Got it. Okay. Thanks. That's helpful. And the Cecil Reserve, you know, you talk about 22 million and four times pre-COVID. In the 22 million today, are there specific reserves that are in there or is that just reflecting sort of the general macro outlook?

Yeah, it's all general macro outlook if you want to talk in terms of, you know, what really caused the change, you know, quarter to quarter from year end 2020 to first quarter 2020. 2021, you know, we didn't really have any meaningful change in the credit profile of our loans. And so some change, right, but not as material to change as the general economic outlook. I think what we're finding from, you know, the economic forecast, a third-party economic forecast that we rely upon to really determine our CECL reserve is that, you know, they have certainly pointed to a much more positive direction in than the situation 12 months ago, nine months ago, six months ago. And so we wanted to show that really the, you know, the change in the CISO portfolio this quarter was primarily due to the economic outlook going forward, you know, as opposed to the data metrics or credit metrics of the loan portfolio itself.

Got it. So going forward, obviously a plus to cap book value, but no impact on distributable EPS, I would assume, so. as you recover more of that over time.

I think that's right, yeah. Just like we saw, that's exactly what we've seen the last two quarters or so, and certainly for the first 30, 35 days of the quarter, I think that's what we continue to see so far in the quarter.

Thank you both for the comments.

Thank you, Steve.

As a reminder, if you have a question, press star then one to be joined into the queue. The next question comes from Jade Ramani with KDW. Please go ahead.

Thank you very much. Are there any M&A opportunities that are top of mind for management at this point?

You know, Jade, Nothing specifically. Obviously, as we touched on last quarter and in prior quarters, we clearly see the benefits of scaling the business, hence the raise a few months ago. So we certainly have our eyes and ears open to opportunities, but there's nothing specific that we have a target on right now.

Thank you. One of your peers, I guess they probably don't qualify as a peer anymore, but they, they used to be a mortgage REIT. Now they're, now they're a ground lease REIT and their stock is trading at a really large premium to book value. Um, in terms of cash flow, they're probably cash neutral because Brown leases, as I'm sure you're completely aware, um, you know, the upfront yields are very low, but they grow over time. So this stock is called safe. It's one of the best performing reach over the last two years. And I did see that Aries launched a strategy in the groundless space with a company called Regis, which created invitation homes. I happen to know the management team. So I'm just curious if that is an area of the capital in which, areas or eight acre commercial real estate may participate in and overall what your thoughts are on that sector, that growing sector.

I think the technology that they've put in place is really interesting. I think the, um, you know, the CPI adjustments you mentioned and the duration and stability of the assets that they've invested in do make it a very attractive place to invest in. Hence, um, The investment you mentioned made by our opportunity fund, real estate opportunity fund team alongside the Regis folks and our alternative credit team, I think it's a great, continues to be a very good relative value in the space, specifically because of the duration of those assets that they're investing in. I think that would be a fairly significant pivot for Acre and not something that we envision, but agree with you that it's an interesting place to be investing today.

And they do have a program in which I-Star provides construction loans alongside ground lease takeout financing. Is that something you think ACRE might participate in?

We certainly talk to them a good bit. David Roth, who led the investment for us, and I sit next to one another and talk frequently about the ways we could work together. So candidly, Jade, we think the bar will be pretty high just because we could potentially be in the same capital structure and want to be mindful of any potential conflicts. But I can tell you we certainly benefit from a good bit of deal flow that may or may not fit in either one of our investment vehicles, and the crossover there is pretty significant. So whether or not there's a direct way to work together I think is TBD, but certainly there are benefits of being on the same platform.

Thank you. And then just lastly, an issue that's come up in the real estate space is 231 exchanges. I wanted to find out, given Acres' middle market focus, what you think either the impact on origination volumes or on the underlying asset valuations might be if there were a curtailment of the tax benefits that 1031 exchanges afford real estate investors?

I don't think it'll be that impactful to Acre. Candidly, the way we've traditionally looked at it is with a negative view. The 1031 exchange market, while it certainly has some value, I think it also induces some investors to potentially overpay. So we would always discount the value ascribed to a 1031 investor and underwrite it more conservatively because it's kind of a little bit of found money for that investor, right? And definitionally, you're paying more than market in order to secure that ongoing tax benefit. How it affects us, though, I think minimal with it all.

Thank you for the questions.

Thank you.

The next question comes from Steven Laws with Raymond James. Please go ahead.

Hi. Good morning. It's good afternoon to you guys on the East Coast. You know, two questions. A lot's been covered. I appreciate the commentary. It looks like office was about half of originations in the quarter. Not that atypical, I think, from a typical portfolio mix. But can you talk about what type of office assets you're doing on the new originations and you know, any type you're staying away from or kind of, you know, how have your underwriting standards changed in the office segment versus 18 months ago? Thanks.

Yeah, great question. And I think we've always been fairly provincial in our outlook and underwriting of office opportunities, and that remains so today. What's changed probably for the most market participants, ourselves included, is I think we're going to look to see a flight to quality of tenants. And so, Therefore, the outdated business models or offices that are not in premier locations are going to be shunned by tenants and ultimately by the capital markets. So we're certainly taking that into account as we look to make somewhat contrarian investments there. And I think there are some really interesting attributes, right? If you think about being able to invest in an office asset with long-term strong credit tenancy, in these core locations that have access to mass transit and the things that have always been attractive to tenants and to do so on a reset basis. So, you know, think 20, 25% decline in value for office properties in some of the core markets and be able to then write a 65% loan against that asset. We think that overall attachment point, that decline in attachment point presents a really interesting opportunity set. Um, we will still manage the portfolio and still have a high concentration in the industrial and multifamily world as, as I said prior. Um, but, but office will present some opportunities and we'll continue to be provincial with, with the manner in which we invest in them.

Great. Appreciate the on that, uh, Brian, um, you know, I thought the extended reinvestment period, I think it was on steel of three is, is interesting, you know, certainly gives you guys a lot more runway and, and, uh, You know, you know, you know, your financing costs, I guess, going in and it helps you from that standpoint, not to mention just the non-recourse term financing. So, you know, can you talk about that? Is that something that that's, you know, could could continue to occur with with other deals or extending further? Kind of how does how does that process play out? I'm not not that familiar with the extension on the reinvest period here.

Sure. I'll start, and then I'll let Tasek walk into some of the details. But one of the things that we've always talked about is the value of being the incumbent lender or participant. We benefit so much from the opportunities that we see from borrowers that we've lent to previously. And I think there's also the least amount of friction for our liability side is to continue to work with our counterparties who have been great partners to us in the past. And I think this extension was a prime example of that. Tasik, maybe you can walk through some of the benefits from a quantitative standpoint.

Sure. Steven, that's an excellent question. You know, one of the big benefits of doing a securitization, of course, is that, you know, you enjoy, you know, very strong leverage, non-mark-to-market, non-recourse, match-funded strategy. And, you know, when you compare CLO financing versus warehouse or note-on-note type of financing, there are clearly advantages. One of the big disadvantages of CLO, particularly a so-called static CLO, where you don't get to reinvest proceeds that are paid off when a loan within the securitization pays down, is that it can de-lever itself relatively quickly. That's the first big disadvantage, right? And then the second big disadvantage is the cost associated legal work and all of the placement work that is done. So those are really the two biggest disadvantages of the securitization. I think we know we feel very fortunate with FL3 in particular that we've been able to really manage, you know, both of those disadvantages quite well by having, you know, now the second extension of the reinvestment period. So, you know, this securitization was actually done, you And so we've had this thing outstanding already for four years. So we had an initial two-year investment period, extended that in 2019 to 2021, and now we've extended it three years to 2024. So effectively, we will have, if you want to call it, the full leverage. It won't amortize down, but as long as we can continue to find you know, appropriate and applicable replacement assets, we will be able to continue to enjoy the benefits of this securitization for, you know, nearly a seven-year period in which we will be fully levered, as well as, you know, amortize down the cost of initially setting this up over a much, much longer period than a typical static pool CLO. So, you know, we think this is, you know, a significant advantage. We were able to do this because, as you'll recall, The 2017 FL3 securitization was done with one single purchaser of all of the investment grade notes. And so we have been able to go back to that single investor and negotiate the terms of the reinvestment period extensions. And as you also recall, one of the big things we were able to save even back in 2017 is because that placement was done directly through relationships that we had here at Ares, you know, we did not have to pay a significant placement fee to, you know, to the typical placement agent for that securitization. So in both ways, you know, I think we have significantly extended the useful life of this securitization as well as, you know, significantly lower the cost of typically doing a securitization.

Great. Those are helpful comments. Thanks, Tasek. Appreciate the time today.

Absolutely. Thank you, Stephen.

The next question comes from Charlie Aristia with J.P. Morgan. Please go ahead.

Hey, guys. Thanks for taking the questions today. We've covered most of them, but just a few small items for me. Looking at the new originations, I see the office property in Illinois and the self-storage in Florida. I'm just curious on the California mixed use, what are the actual components of that property? And I'm curious if there's any retail component there.

Taysen, do you want to take this?

Sure. I think, you know, the mixed use does have a, you know, a retail component of it. It's really office and retail components. You know, we find that, you know, we have, as we mentioned, not, you know, very purposely not lent against standalone retail centers. But we do believe that, you know, when you do mix, when you have a mixed use situation, that retail can actually enhance, you know, the desirability of the other commercial users, you know, in that facility. So it does have a retail component to it. It's really a mixture of office and retail.

Okay, got it. No, I appreciate the color there. And then lastly, just housekeeping item, basically, but wondering how we should think about The run rate going forward for the Westchester Marriott, you know, it seems like both revenues and expenses dip this quarter. Again, I realize this isn't probably going to be a long-term asset for you guys, and I'm sure there's some seasonality combined with everything else that's going on with the broader reopening, but I just wanted to make sure that I am, you know, really capturing what's happening there.

Yeah, I think it sounds like you're on the right track, certainly, I think. Seasonality for the first quarter is an issue for that geography of hotels. So January was a lower month. Continue to benefit from all the things we've talked about in prior quarters, specifically the closing of a good part of the competitive set. So if you looked at the trend lines, it's very similar to prior years, but we are also continuing to harvest more of the demand that does exist in the market due to the closures. Trend lines are positive. It remains a relatively small part of our balance sheet, obviously, and we continue to monitor to find the best time to exit the investment.

Thanks very much for taking the question.

As we have no further questions, this concludes our question and answer session. I'll now turn the conference back over to Brian Donahoe for any closing remarks.

Thank you. And thanks to everyone for their time today. We appreciate your continued support of ACRE and we look forward to talking to you again on our next quarterly earnings call. Thank you and be well.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.