Co-authored with Tread Softley.
I know that not everyone enjoys getting out into the great outdoors, hunting, fishing, hiking, or camping. However, even if you have no experience, you can imagine that you can catch a large amount using a net. Fish. I understand that to pull the net into the boat, I need to grab the rope and pull it toward me with one hand, then cross my fist with the other hand and pull. This technique helps you get the net in quickly and allows you to catch a large number of fish that cannot escape.
When it comes to markets, I am an active buyer in almost all market environments. I don’t play games or try to time the market.We believe that active participation in the market is the best way To create long-term, sustainable wealth for average people. I also recognize that some of the best opportunities for huge revenue in the market over the next few decades will come from sectors where other companies are rapidly exiting due to fear or misconception. Masu.
Today I’d like to take a look at the opportunities I’m buying Handover Fist. I have cast my net in this sector, attracting high quality stocks that generate double-digit yields, but this sector is completely covered as others are fleeing the sector in fear. .
Let’s dive in!
ACRE: Making lemonade
Ares Commercial Real Estate Corporation (New York Stock Exchange: Acre), yielding more than 13% and reporting third-quarter earnings similar to those seen in other commercial mortgage real estate investment trusts (mREITs). Cash flow remains strong, with distributable earnings of $0.25, including non-cash amortization of $0.09, and recurring DE of $0.34 per share. acre achieved this level of return while operating with a below-average level of leverage of just 2.0x. sauce.
On the other hand, borrowers are clearly under some pressure and some loans are in default. During the quarter, ACRE resolved two of his bad debts.
The first was a mixed-use property in Florida where the tenant voluntarily signed the deed to the property. This property is a mix of offices and retail, and has positive cash flow, and management stated in the earnings report that the cash flow from this property is “similar” to the cash flow from financing. Stated. It is owned by ACRE and operated on a non-leveraged basis. Management discussed the option of using the property as collateral for a loan as an option to increase liquidity and increase the likelihood of selling at a higher price in the future if property conditions improve.
Another defaulted property resolved during the quarter was a short sale of a hotel property in Illinois. ACRE recognized a loss of $4.9 million and decided that rather than invest the capital needed to optimize real estate sales, it would be better to extract the capital into other investments. Since he has not paid interest on this property since January 2023, the realized loss is reflected in the income statement, but the impact on cash flow has already been realized in the second quarter.
One way that mortgage REITs differ from banks is that they have a variety of options for dealing with mortgage defaults. In some cases, they may take possession of the property and run it themselves. You may also choose to sell, recognize a loss, and invest in another property.
Management telegraphed that it plans to settle several more properties in the fourth quarter, including $70 million worth of office space. Looking at the 10th quarter, we see ACRE making positive progress towards managing its lowest risk rated loans. During the third quarter, we had $380.4 million of loans with a risk rating of 4 and $82.5 million with a risk rating of 5, for a total of approximately $463 million of loans at risk. sauce.
This is down from the $574 million in loans at risk reported in the second quarter. sauce.
In the fourth quarter, management expects to settle approximately $70 million of these loans. This will go a long way in providing a more certain outlook for the future. Until these loans are resolved, there will be no hard numbers on how book value will be affected. Currently, ACRE reports a book value after allowance for CECL (Current Expected Credit Losses) of $12.62. Book value before reserves is $14.75. Realized losses may be higher or lower than the amount currently reserved in CECL. As their bad debts are resolved, we need a clearer picture.
The current market price, near $10 per share, incorporates much higher credit losses than ACRE has recorded for CECL. How much more? ACRE’s 54.8 million shares outstanding are trading $2.62 below book value, giving it exposure to credit losses of $143.5 million. This is more than double his current CECL reserves.
This is a much higher loss rate than ACRE has experienced in the past. The fourth quarter should provide more clarity and help further reduce loans at risk. This eliminates the need to guess what losses will occur. we will get to know them.
Meanwhile, management has become more bullish on new financing opportunities, noting that new financing is being executed at lower loan-to-value and higher spreads than existing financing. Last quarter, ACRE invested $69 million in loans to multifamily and self-storage properties.
ACRE has historically operated at lower leverage levels, giving it plenty of room to increase leverage should management see an opportunity to increase cash flow and rebuild book value despite any losses. be. ACRE expects to remain fairly conservative in the fourth and first quarters of 2024, with the aim of more aggressive expansion once current assets at risk levels 4 and 5 are resolved. We expect that the company will consider increasing its leverage.
ACRE currently trades at a discount of more than 20% to book value, which already mirrors CECL. I’d be happy to buy at a discount and collect the dividends while I wait for the next expansion cycle, which could start as early as next spring.
conclusion
The commercial real estate sector is one where many people are leaving in a panic. I completely understand why so many people do this. Commercial real estate loans originated by financial institutions such as banks and credit unions are more likely to simply be foreclosed and the property sold at auction in order for the bank to recoup some of its investment. ACRE is not one of those institutions. Originate completely different types of loans related to the same sector. This allows them to not only generate superior returns in sectors where other companies are failing, but also to be more agile and adapt to market prevailing winds. Douglas Adams famously said:The ship hangs in the sky like a brick.“In the commercial real estate space, ACRE exceeds expectations through operational excellence.
When it comes to retirement, the last thing you want to worry about is trying to follow the crowd. One of the biggest financial mistakes so many people make is trying to maintain the perception that everyone around them is wealthy. This is the concept of “keeping up with the Joneses.” Your retirement will be completely unique to you. Your financial needs and expectations may be similar to others, but they are unique when tailored to how you plan to spend your retirement and your personal aspirations and experiences. But often the answer is similar. Whether you need a lot of income to pay for a lavish retirement or a little bit to pay for a more modest retirement, you’ll need income to pay for everything. Financial planning doesn’t mean you have to save every penny and cut into your retirement savings. I want you to be financially successful and financially stable. That’s what my income method can provide.
That’s the beauty of my income method. That’s the beauty of income investing.