Ares Commercial Real Estate Corporation

Good morning. Welcome to ARIES Commercial Real Estate Corporation's first quarter, March 31st, 2023 earnings conference call. At this time, our participants are in a listen-only mode. As a reminder, this conference is being recorded on Tuesday, May 2nd, 2023. I would now turn the call over to John Stillmore, Managing Director and Investor Relations. Thank you. You may begin.

Good morning, and thank you for joining us on today's conference call. I'm joined today by our CEO, Brian Donahoe, our CFO, Tasek Yoon, and other members of our team. In addition to our press release and the 10Q that we filed with the SEC, we've posted an earnings presentation under the investor resources section of our website at www.arescre.com. Before we begin, I want to remind everyone that comments made during the course of this conference call and webcast, as well as 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 the forward-looking statements as a result of a number of factors, including those listed in its SEC filings. ARIES Commercial Real Estate Corporation assumes no obligation to update any such forward-looking statements. During this conference call, we referred 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 substitute for any 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 would like to turn the call over to our CEO, Brian Donahoe. Brian?

Thanks, John, and good morning, everyone. Despite a challenging commercial real estate market, we continued to make constructive progress towards many of our goals and objectives during the first quarter. As we'll detail further, we resolved a number of underperforming loans with positive outcomes, reduced our exposure to the office sector, delevered our balance sheet, and continued to build our cash and liquidity. In addition, we have set appropriate CECL reserve amounts, taking into account current market conditions and the macroeconomic outlook. During the first quarter, we further strengthened our balance sheet, lowering our net debt-to-equity ratio to less than 2 to 1, and building our cash level to more than $150 million at quarter end, which represents about 20% of our shareholder equity. Even with carrying this strong level of capital, we continue to generate ample cash flow to support our dividend as our loan portfolio benefited from rising short-term interest rates with a weighted average unlevered effective yield of 8.5%, a 300 basis point year-over-year increase. Let's start with our progress to date resolving certain underperforming loans. During the first quarter, we entered into an agreement to sell two loans at attractive levels. First, we successfully sold our only five rated loan as of year end 2022 to resolve this residential asset we discussed last quarter. This loan was sold at a small $200,000 discount to our funded balance and in line with the specific reserve we held against the loan. We also entered into an agreement to sell a defaulted loan secured by an office property in the Chicago metropolitan area. In this instance, we began foreclosure proceedings on the asset following a maturity default in January. Ultimately, we executed the sale of the note in April above our loan amount on a gross basis, and after fees and expenses, fully recovered our loan at par and reduced our office exposure. We believe this outcome demonstrates the platform expertise that ARES maintains. The substantial equity cushion subordinate to our loan as well as our active asset management, enabled us to fully recover our investment, despite the office headwinds. Similarly, we are actively managing our remaining four and five rated loans to seek positive outcomes. While each loan and circumstance is unique, we will explore all alternatives, including loan modifications, loan sales, foreclosures, and other strategies to maximize outcomes and monetize these loans in order to redeploy our capital and capture more creative opportunities for our investors. As many of you know, with respect to the Westchester Marriott investment, we foreclosed and took over management of the asset in 2019, ultimately resulting in a positive outcome for our shareholders. To this end, we have started the foreclosure process on one of our risk-rated four loans, a defaulted $83 million multi-use senior loan collateralized by a mixed-use property in Florida where there is a likelihood that we will be taking the asset as real estate owned as early as the second quarter. In this situation, we continue to have discussions with the borrower regarding our options under the loan documents and have brought in our retail specialist from the ARIES team to evaluate the future opportunity available to the property. Given our view of the property and our strong capital position, we believe a compelling option to protect value is to exercise our right to take the property. Let me walk you through a few specifics of this situation. Despite experiencing a maturity default, the property continues to exhibit stable performance, underpinned by strong office occupancy from a AAA-rated state government tenant with over nine years of lease term remaining. The retail space is also well occupied, with some opportunity to enhance the tenancy and cash flow. Importantly, the property overall is 93% lease, and continues to generate sufficient cash flows to fully cover interest payments, and we feel good about the basis. Our plans with respect to the other four and five risk-rated assets will be case by case, but we are very focused on maximizing the outcome of these assets, and we believe we've taken appropriate levels of reserves against them to reflect the risk. For example, our total CISO reserve at quarter end was $92 million, or about 4% of the portfolio at quarter end. TASIC will provide more detail later in the call. Historically, on our first quarter calls, we've provided a dividend outlook for the remainder of the year. Based on what we see today, and despite the near-term industry headwinds and credit challenges, we expect to be in a position with our run rate earnings power to continue our current level of regular and supplemental quarterly cash dividends for the remainder of the year. With that, Tasik, let's walk through some of our financial highlights and further details on our portfolio and capital position.

Great. Thank you, Brian, and good morning, everyone. For the first quarter of 2023, we reported a gap net loss of $6.4 million, or $0.12 per common share. This loss was primarily due to a $21 million net increase in our CISO provision, or about $0.38 per common share. Distributable earnings for the first quarter of 2023 was $15.1 million or $0.27 per common share, which included a $5.6 million or $0.10 per common share realized loss on the resolution of a previously defaulted residential loan. This loan was sold and the loss realized in the first quarter of 2023 impacting distributable earnings. Without this $5.6 million realized loss, our distributable earnings would have been 37 cents per common share. Turning to our portfolio, we ended the quarter with a portfolio of loans held for investment consisting of 98% senior loans and an outstanding principal balance of $2.2 billion, which is diversified across 53 loans. During the first quarter, we collected 99% of our contractual interest, despite having five loans on non-accrual status as of March 31, 2023. Our loan portfolio also continued to exhibit healthy trends in terms of repayments. During the first quarter, five loans fully repaid principal amounts due, which supported total repayments of $73 million, including a full repayment of a $40 million loan backed by a hotel. In terms of our other credit quality metrics, 78% of our loan portfolio had a risk rating of three or better, which declined from 80% as of the fourth quarter of 2022. This change primarily reflects the negative migration and maturity default of the $83 million mixed-use property loan that Brian referenced earlier from a risk rating three to a risk rating of four. We also downgraded one hotel and one office loan with a total unpaid principal balance of $92 million to a risk rating five. These two loans are our only risk-rated five investments. Since the sponsors for each of these properties have initiated sales processes for these assets, we have established specific reserves totaling approximately $44 million across both loans, and we are sweeping property level cash flows on both assets as potential reductions of principal. The specific reserves for these two assets include a $5.6 million reserve on a $35 million senior loan backed by a hospitality property in the Chicago metro area, and a $38.3 million reserve on a $56.9 million senior loan backed by an office property also located in the Chicago metro area. Inclusive of these specific reserves, we increased our overall CESA reserve by a net $21 million in the first quarter of 2023 and our total CISO reserve now stands at 92 million or about 4.2% of our outstanding principal balance. Let me provide some further details around the components of our total reserve, which importantly reduces our book value per common share by about $1.69 to 13.15 as of March 31st, 2023. As previously mentioned, we have specific reserves of $44 million on our two five-rated loans, representing 48% of the $92 million in outstanding principal balance. Of the remaining $48 million of reserves, $30 million is accrued against $404 million in outstanding principal balance of risk-rated four loans, which equates to approximately 7.4% of the total risk rated for loan balance. The final 18 million of our total reserves is held against the 1.7 billion of loans rated three or better for an average reserve ratio of about 1.1% of the loans held for investment with a risk rating of three or better. While it's hard to look into the future, we believe our CESA reserve levels appropriately takes into account current market conditions, and future macroeconomic outlook for our loans held for investment portfolio as of March 31st, 2023. As Brian referenced, we remain in a strong liquidity position with more than 225 million of available capital as of quarter end 2023, including 154 million in cash and further amounts available for us to draw on our working capital facility. Our net debt to equity ratio was 1.9 times at quarter end and is amongst the lowest of our peer group, providing us additional balance sheet strength and stability. All of ACRE's funding sources are with leading U.S. banks and insurance companies. ACRE has no direct funding relationships with any regional banks. None of our financing is from spread-based mark-to-market sources. We declared our second quarter dividend of $0.33 per share, plus a continuation of our $0.02 per share supplemental dividend that we put in place more than two years ago to share the earnings benefit of our library floors and interest rate hedges. So with that, let me turn the call back over to Brian for some closing remarks.

Thank you, Tasik. The road ahead will present challenges and opportunities, and we believe we are well equipped to navigate this cycle. Our liquidity and capital position, coupled with our experience across the sector, give us confidence that we can continue to deliver strong risk-adjusted returns for our shareholders at attractive levels on the other side of this cycle. Against the backdrop of deposit instability and questions around commercial real estate concentrations in the banking system, we expect future opportunities from loan sales and maturing bank loans to provide a long runway of accretive investment opportunities. Furthermore, tighter bank lending conditions should ultimately drive a wider opportunity set for lenders like us, a phenomenon we are seeing play out in other asset classes as well. It will undoubtedly take some time for this to play out in the cycle, and we know there will be challenges ahead. Yet we have great confidence on our experienced asset management team, and our capital and liquidity provides us the opportunity to achieve better outcomes and to play both defense and offense when the time is right. Once we are on the other side of navigating these challenges and opportunities, we expect we will continue to be in a strong capital and financial position to generate attractive levels of returns and dividends for our shareholders. Let me close by saying we are deeply grateful to our investors for the trust and confidence they have demonstrated in Aries and their support of the company. I'd also like to thank our entire team for their hard work and dedication. With that, I'll ask the operator to open the line for questions.

Thank you. At this time, if you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment while we pull for our first question. Our first question comes from Steve Delaney with J&P Securities. Please proceed.

Good morning, everyone. Thanks for taking the question. We noticed you had no new loan commitments in the first quarter despite having capacity of $475 million. And I'm sure you look at that as having an opportunity cost. I'm just curious. Do you expect the sort of pause in new lending to continue or are you selectively but actively looking to make new loans? Thank you.

Thanks for the question. I think clearly the priority has been the liquidity build, but the opportunities that we see as expanding. And so I think while being selective, I do expect over the course of the year for us to be more active given the liquidity position that we've created. But as you've heard, it is a pretty high bar given the macroeconomic environment around us.

Got it. Okay. Yeah. There's certainly not a time to reach, right? You're working through the other things, the issues. And speaking of that, the transfer of the office loan to held for sale, I think it was $27 million loan, and then subsequently sold in 2Q. I'm just curious, the ability to

sell a troubled asset like that can you just generally describe what type of buyer you know that you found for that property and how that transaction came about thanks absolutely so it's one that has uh certainly a back story i think the the the equity subordination behind us in the loan allowed for a good deal of flexibility as did the overall footprint so um While the CBD assets we all hear about for conversion to residential and the like, this was an asset with more flexibility given the land that surrounded it. And we'd expect it to lend itself to an alternative use. And the result for us was one, the correct one in terms of timing, but also successful in terms of the dollar amount.

Right. So basically it had development, you know, sort of long-term development potential that kind of attracted sort of an investor with a longer view? Is that the way I should think about it?

I think so. I think the takeaway from our perspective was just that the highest and best use for this property was not going to be office moving forward, and we expect that the buyer will initiate some movement towards that end. Got it.

Well, thank you for the comments. Thank you.

Our next question comes from Jade Romani with KBW. Please proceed. Thank you very much.

I wanted to start off by asking about your portfolio mix. On slide four, you show other as 10%, mixed use as 9%, and then I think 18% is just the cash with leverage. So that's hypothetical deployment. So could you just please provide some color on what the other and mixed use includes and also why include that senior loan investment capacity in that slide? I'm sure you're probably not going to be making new loans until there's a little bit more clarity in the outlook.

Sure. Good morning, Jay. Thanks for your question. In terms of other, other would include things like self-storage, for example. T. You know, we just felt, you know, something is going to be less than 5% of portfolio as it sits today that, you know, we would categorize it just to T. Just to make the pie chart a little bit more easily to to read, but other would include, you know, other uses like like non rent residential and self storage. T. In terms of mixed use, you know, as the term implies there's more than one primary use generally it will include a mixture of For example, retail on the ground floor, potentially residential office on the upper floors. There may be more experiential retail involved as well. There really isn't a neat way to categorize it just because, again, there is more than one primary use for the building. We find mixed use to be a very attractive asset class because, in essence, there's more than one draw for the property itself. In terms of why we're including the 475 of senior loan capacity, the 18%, I think it's really to address the question that I think Steve Delaney from J&P just asked, which is really about our investment capacity. Do we anticipate making new loans in the future? And while certainly the bar is high, as Brian mentioned, our goal is to invest the capital over time at the right time. But just given the significant amount of cash buildup that we have, the $154 million, which represents, again, more than 20% of our shareholder equity, we wanted to really highlight in these graphs that we do have, number one, significant capacity. We're not sure exactly what asset classes they will be invested in, so we certainly aren't going to categorize it in any specific assets. That's why we kind of show it as a broken out 18%. But we do want to highlight to this graph that we do have such significant capacity and that when we do make that investment, that it will really change the asset type, geographic, and other diversification characteristics of our portfolio.

In terms of credit outlook at this point, would you say that office is really the crux of what you're most concerned about? Um, there's also some mixed performance in mixed use, but on the other hand, multifamily and self storage, uh, look to be pretty resilient at this stage. Do you think it's still early days for the other sectors and office has the secular headwinds or, you know, this is, this is a story that's unfolding.

I think absolutely from a fundamentals perspective that offices is the focus point and the tip of the spear Jade. I think the capital markets and the rise in rates is causing some macro changes in behaviors as it relates to repayments and otherwise. But offices where the fundamentals have degraded significantly has been well published. The asset classes with lower capex schedules, as you mentioned, in self-storage, in apartments, in industrial, are holding up better from an expense as well as a revenue perspective.

Thanks for taking the questions.

Appreciate it, Jed.

The next question comes from Doug Harder with Credit Suisse. Please proceed.

Thanks. I guess two of the problem loans this quarter were Chicago office. I guess as you look at that, what similarities do they have? What differences do they have that led to the big reserve on one but a favorable outcome on the other? You know, kind of along those lines, are there other loans in the portfolio that kind of looked like the one that required the larger reserve?

Yeah, I'll start and I'll let Tasek weigh in as well. But I touched on the flexibility that we had with respect to the asset that was resolved, Doug. And I think, you know, that flexibility and the ability to really repurpose. Obviously, we're hearing so much about this conversion to residential within the confines of the building. Paul Cecala, The resolution we talked about what it was not necessarily to keep the building structure at all, in all likelihood, but but allow for total repurposement of the asset. Paul Cecala, The asset where we built the reserve is actually something where we've got it's fairly well least least north of 80% with a pretty long Walt and cash flowing to the mortgage but given capital markets and headwinds around that geography. we decided to take the movement that we did. But, Teysik, I'll let you weigh in further there.

Sure. No, Brian, I think that's right. I mean, Doug, as we mentioned, I think every asset is fairly unique. One office property is different from other office properties. The one that had the favorable resolution, as Brian said, had significant land as part of the collateral package. And It was really the land and the redevelopment of that land that we believe led to the, you know, the very favorable outcome and resolution. And it's certainly all part of our original underwriting of the assets. You know, when we do look at collateral, you know, we are certainly looking to underwrite its current highest and best use. But we're always looking for that alternative potential value, alternative redevelopment of the site itself. The other office properties that you mentioned that is, you know, also in the Chicago metro area, you know, where we have now rated it a five and took in the significant specific reserve, unfortunately the land in that site is not as significant. You know, so while it is a larger parcel, it is not configured to have the kind of redevelopment potential as the other office assets that have favorable outcome. We do think there are significant alternative uses here in addition to continuing as an office, but the value because of the smaller land parcels isn't going to be as significant. And so we think that really led to, I would say, different outcomes, even though the base use today as office is similar, the alternative use potential between the two properties were different.

And on the one where you took the reserve, thoughts on kind of timing or path to resolution?

Sure. I mean, the reason, part of the reason the specific reserve came about this quarter is because we think we do have a little bit better visibility on the plans for the asset and that the borrower and we are working together towards that resolution. You know, we're hopeful that it's something in the next hopefully six to nine months that we can resolve. It's difficult to give particular timing just because these kind of situations, you know, lend itself to taking your time to finding the best qualified buyer who can maximize the value of the asset. But we are pushing very hard. We have the full cooperation of the borrower to, you know, to start that process. So we are pushing to have something done certainly by this year. Our goal certainly for these types of assets is to resolve the assets, monetize the value that we're going to get out of it so that we can redeploy that capital. So we are very, very motivated to resolve these loans quickly and efficiently, but we want to make sure we do so to, again, maximize the recovery on these assets.

Great. Thank you.

Thank you, Doug.

Our next question comes from Steven Laws with Raymond James. Please proceed.

Hi, good morning. First wanted to start, I noticed in the queue, some of the footnotes talked about a number of extensions and modifications that occurred in Q1. You know, can you talk about that process, your borrowers, you know, buying new caps, which I guess at this cost is sort of paying interest or are they putting in more equity? You know, can you, are you making any changes to spreads or floors or other type characteristics in any of the modifications?

Paul Cecala, I think you outline pretty well a lot of the things that we consider as we sit here today over 80% of our. Paul Cecala, loans have interest rate caps in place and to the extent they don't and that's some that is something that we've taken the position in all likelihood that that money can be more creatively used elsewhere in the overall structure. So in general, we're working towards getting principal reductions, extension fees, rate changes, et cetera, all the things that you would expect us to be doing, keeping in mind the overall landscape and how to best resolve the situation. But given the movement in capital markets, one of the sayings that is out there is kind of the existing lender is the best lender. And you sit there with the ability to restructure or rework a loan without going through a lot of the frictional costs of doing so and keeping that money in the system. And we think in certain instances that's going to lead to the best outcome ultimately.

Great. And as a follow-up to maybe a couple of earlier questions, can you maybe tie together your expectations near-term on portfolio given, you know, it doesn't sound like any new originations, but we'll have some fundings of pre-existing commitments, possibly, you know, your appetite for additional loan sales. And then kind of as follow-up to some of your previous comments, when we think about the ARIES facility and your intention to reinvest capital that you free up later this year around resolutions, there are thoughts to lending now and funding with the ARIES facility in a less competitive world with higher returns and then pulling that down later. How do you think about utilizing that to keep your capital efficiently deployed?

Mike Noce, Mgmt. it's a great point and we continue to look at that as a benefit, both in terms of origination of the new loans and potentially liquidity source as well. Mike Noce, Mgmt. I guess overarching we don't we don't expect the opportunity set to go away anytime soon, so the selectivity that we will employ in the coming quarters will be a constant certainly we think that the. Relative positioning at the closing table favors those with capital like ourselves and with the creativity to structure loans in this environment. So we look at all of the avenues of our financing facilities, legacy CLOs, et cetera, as well as what the structure you're referencing to position us to take advantage and really put out accretive dollars moving forward. But that selectivity is the focus point today.

Great. Appreciate the comments.

Thanks.

The next question comes from Rick Shane with JP Morgan. Please proceed.

Hey, guys. Thanks for taking my question. I have two questions on somewhat different topics. When we look at the funding over the last couple quarters, one of the things that I noticed was that the outstanding balance on the 2021 CLO has come down about $80 million over the last two quarters. It's about $40 million a quarter. As that's occurred, the funding spreads widened about 14 basis points. I'm curious. I'm assuming you guys are no longer in the reinvestment period on that. Are those buyouts? Why is that structure deleveraging in a way that the 2017, which is frankly older, is not?

Sure. Good morning, Rick. Thanks for the question. The 2021 CLO does not have a recycling period. So as loans pay off in that CLO, you will see the balance go down. And then one of the reasons you'll see a slightly elevated cost of funding is, again, you're amortizing certain costs over, you know, a smaller capital base. The 2017 CLO that you referred to, our FL3 CLO, That is one that does have a replenishment feature. That is one that we completed now six years ago with a single investor holding all of the investment rate graded certificates. And what we have done is we have worked very carefully and closely with a single investor to basically renew this revolving period. So it's been very, very beneficial to ACRE to have that in place and have you know, what has now turned out to be a six-year replenishment period, which is terrific. One of the other things to note in FL3 is that, you know, the pricing is at LIBOR plus 175. And so when loans roll off and we make a new loan replacement today, you know, the cost of our liability is not going to be so-called marked to today's rate. So we'll enjoy what we think is going to be a much wider net interest margin as existing loans roll off and we're able to replace it with higher margin loans. We'll be able to enjoy, therefore, a wider net interest margin on new loans that we put in there. Hope that answers your question.

It is. And just so we know, have there been buyouts from the FL4 of defaulted loans?

No. These are just...

natural natural maturities excellent thank you so the second topic is this look i think you guys have on a relative basis been conservative in terms of your reserves you've been proactive in terms of managing properties transparent in what you have said to us uh on a quarterly basis you're running with low leverage the the thing that the the thing that i'm having a hard time connecting is the dividend policy and reiterating that today versus buying back shares implicitly the markets, you know, putting a 15 plus percent cumulative default rate implicitly in your stock price, your reserves are conservative and there's a huge gap between those two stocks yielding 18%. If you guys could, if, if you saw an investment where, It was yielding that much because you felt the market was mispricing the credit risk. You would make that investment all day. I just don't understand the disconnect between the dividend policy and the buyback.

Sure. Great question, Rick. And I'll start and hopefully Brian will add to my thoughts. No, it's an excellent point. As you know, we do have a buyback program in place. And it is certainly something we evaluate at all times. We're always evaluating how much cash we want to maintain on the balance sheet so that, again, we can have favorable outcomes on some of our underperforming loans. So just to give you an example there, the fact that we're less leveraged than many of our peers, along with the cash, gives us the flexibility to, if we wanted to, buy out a loan out of a CLO It gives us the ability to work with our warehouse lenders so that we can buy more time to resolve a senior loan. It gives us tremendous bargaining strength when we're talking to borrowers about what we are or aren't willing to do. And so we find having that liquidity as well as low leverage balance sheet to be very, very powerful in managing the outcomes of our underperforming assets. When you weigh that against, again, making new originations, buying back shares, those are all competing uses of capital for sure. And I think the point you make is an excellent one. The fourth use, as you mentioned, is paying out dividends. In evaluating, again, the uses of capital, I think our board has made it very clear that we believe that our shareholders really do want and expect and deserve you know, regular, predictable, recurring cash dividends. And so as long as we're able to, we believe, earn those dividends through our operations, you know, we believe it is important to maintain that dividend. Right now, the good news is that we're not trying to compete for dollars, meaning that we don't have to choose only one priority or two priority. I think we can maintain multiple priorities. And that's why we'll continue to, you know, use cash and the leverage to make sure that Again, we have tremendous flexibility in working through our underperforming assets that we will continue to pay our regular and supplemental dividends in cash on time. We will continue to look for new origination opportunities, and we believe we have sufficient capital to consider share buybacks. So to us, it's not really evaluating one versus the other so much. It's somewhat a matter of timing. The good news is just given how much cash and low leverage we have, I think we can we can accommodate more than one priority.

Got it. Okay. I hear what you're saying. I guess just empirically, it seems to me that the surety of return from the buyback and the magnitude of that return in the context of the others, and again, I'm not questioning the appropriate appropriateness of the reserve. And I know you guys believe in that. When you sort of connect all that, it just feels like that investment seems to really stand out versus the other options.

We couldn't agree with you more, and we're hoping that others hear you as well. We do think that we do think that is a great opportunity to buy back our shares. We would agree.

Got it. Thank you. Thank you, Rick.

The next question comes from Sarah Bacone with BTIG. Please proceed.

Hi, everyone. Thanks for taking the questions. I just want to dig in on a couple specific assets on the balance sheet here. So I saw that after quarter end in April, there was a default resulting from one of your sponsors paying partial interest. And because that's on, you know, that was on a multifamily property in Washington, I believe, and given that sector is typically more defensive, not that we haven't seen issues there, could you talk about what was happening on the ground there that led to what I'm assuming was lower debt service or what resulted in that default?

Yeah, absolutely. Thanks for the question, Sarah. really a situation in which the increase in rates has caused some debt service stress on what's otherwise a performing asset. So as we get to the latter innings with that asset, I would think about the situation there. It's just a bridge to a sale. And as you're referencing, the capital markets and the equity markets as well are still fairly favorable for multifamily assets so we did not take a reserve against that despite the debt service miss so clearly the implication there is we feel good about our basis relative to the value there okay and did they have an interest rate cap in place no they did not okay

And then just one more for me on the, we've talked a lot about office, but I'm also looking at the residential condo loans. There's two of them and they sum to about $150 million. I was hoping to get a little more detail there given they both mature later this year, particularly the loan that's in default. was hoping for an update on their construction milestones or the lease up process. Can you give any detail on those two loans?

Yeah, they're two different geographies, but both in some of the more liquid markets throughout the country. I'd say at different stages in terms of their pre or redevelopment there. I think what we've seen generally is that TAB, Given the scarcity of housing in these markets that the evaluations have held up pretty well, including. TAB, gentrification probably understates it, but some of the progress in the neighborhoods around these assets so so feel positively about the ultimate value, but I. TAB, be remiss not to mention that I think some of the construction related issues that you've seen over the past three years are causing. delays in certain executions, so we're cognizant of that and watching these assets closely. But at a high level, I think both very liquid markets that should provide for ultimate resolution, the timing of which can vary a little bit.

Okay. Thank you.

Once again, to ask a question, that's star 1 on your telephone keypad. Our next question is a follow-up from Jade Romani with KBW. Please proceed.

Thank you very much. Just wanted to ask transferable mortgages. Do you know what percentage in the industry of commercial real estate mortgages are assignable or transferable? Because that could definitely be an area, or would you agree that that's an area that could cushion some of the adverse potential credit outcomes?

I think that's fair. I'd say it's probably more incumbent in the CMBS realm than private lending, but certainly if the flexibility does exist for lenders like ourselves to allow for the assumption of a loan subject to the discretion of the lender, right? So, Jade, if we said that someone's going to come in and pay us down and can assume the loan and we have the flexibility to bridge that financing gap given the illiquidity in our space today, then that's certainly something we would consider. So I'd say overarching, whether the loan documents specifically allow for it, which as I said is more something that you'd see in CMBS, or that we have the discretion to work with a borrower or buyer of that asset to create the most accretive outcome for ourselves and our constituents, then that's flexibility we would be able to bring.

And on loans with performance issues where the sponsor is out of capital or not willing to commit capital, would you consider, are you considering new sponsors taking over the project, putting in new capital, but you subsidizing that capitalization with low interest rates or pick income, a restructuring of the flow of payments? in order to create current performance and protect book value? Is that yet a developing theme that you've seen?

To a degree. I think we touched on, with respect to the stock buyback question, the flexibility that we value, and the value of that is to be able to approach situations and maximize the ultimate return. And the first thought is obviously whether that underlying borrower that we're starting with is going to be accretive or otherwise, the ultimate resolution. So kind of all goes into our thought process as to how we resolve an asset. And when we juxtapose the asset we resolved outside of Chicago last quarter, that was one that it was appropriate to move on from. With respect to the mixed-use asset we mentioned in our prepared remarks in Florida, It's our belief that there's some value to create there either on our own potentially or with another operator. So all of those things are available to us given the liquidity position that we maintain.

Thank you for taking the follow-up questions.

No problem. Thanks, Jay.

Our next question comes from Derek Hewitt with Bank of America. Please proceed. Good morning, everyone.

Could you talk about the funding strategy for the potential $83 million mixed use property in Florida? And then my second question is just what percentage of the overall portfolio has interest rate caps?

Absolutely. Let me, I'll get started just on the interest rate cap side. A little over 80% of the portfolio has interest rate cap coverage. And as I mentioned a bit earlier, To the extent it doesn't, it's for specific situations, either where the capital that would have gone there is better used elsewhere, or it's a short duration hold like the situation with the short interest payment on the asset that Sarah brought up. So less than 20% does not have it, and there's usually some specific reason around what we're working through on that. In terms of funding strategy for that asset. There is liquidity in the space for situations like this. We have a fairly advantageous position that the yield to us as lender on that asset, given the cash flow profile, is accretive to us and would allow for various financing structures. And we mentioned the the credit tenancy of the asset as well as long duration of that lease. So the type of cash flow profile that we're talking about there would allow for a good bit of flexibility as we go out to relever that asset should we decide that's the best path. But we've got a few different financing sources that could provide liquidity directly or indirectly to asset situations like that.

Great. Thank you.

Thank you. There are no further questions in queue at this time. I would like to turn the call back over to Brian Donahoe for closing comments.

Thank you. And I'd like to just thank everybody for their time today. Appreciate your continued support of Aries Commercial Real Estate. And we look forward to speaking with you again in a few months on our next earnings call. Thank you.