Good morning. Welcome to Ares Commercial Real Estate Corporation's first quarter March 31st, 2023 earnings conference call. At this time, all participants are in a listen-only mode. As a reminder, this call is being recorded on Tuesday, May 2nd, 2023. I would now turn the call over to John Stilmar, Managing Director and Investor Relations. Thank you. You may begin.
Good morning, 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 our team. In addition to our press release in the 10-Q 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, conditions, 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. Ares Commercial Real Estate Corporation assumes no obligation to update any such forward-looking statements. During this conference call, we will refer to certain non-GAAP financial measures. We use these as measures of operating performance, these measures should not be considered an 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. I would like to turn the call over to our CEO, Bryan Donohoe. Bryan?
Thanks, John, 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 two to one 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 continued 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 accretive 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 specialists from the Ares 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 triple A-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% leased 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.
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 CECL reserve at quarter end was $92 million, or about 4% of the portfolio at quarter end. Tae-Sik 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, Tae-Sik, let's walk through some of our financial highlights and further details on our portfolio and capital position.
Great. Thank you, Bryan, and good morning, everyone. For the first quarter of 2023, we reported a GAAP 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 CECL 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 $0.37 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 31st, 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 Bryan referenced earlier from a risk rating three to a risk rating four. We also downgraded 1 hotel and 1 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 in 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 CECL reserve by a net $21 million in the first quarter of 2023, and our total CECL 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- $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 4four 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 CECL 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 Bryan 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 1.9x 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 US 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 LIBOR floors and interest rate hedges. With that, let me turn the call back over to Bryan for some closing remarks.
Thank you, Tae-Sik. 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.
We have great confidence in 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 Ares 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 one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two 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 poll for our first question. Our first question comes from Steve DeLaney with JMP 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. 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.
Yeah, thanks for the question. I think clearly the priority has been the liquidity build, but the opportunity set we see as expanding. 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. As you've heard, it is a pretty high bar given the macroeconomic environment around us.
Got it. Okay. Yeah. This is certainly not a time to reach, right? You're, you're working through, you know, the other things, the issues. Speaking of that, you know, the transfer of the office loan to held for sale, I think it was a $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. It's one that has certainly a backstory. I think the equity subordination behind us in the loan allowed for a good deal of flexibility, as did the overall footprint. 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.
Basically it had development, you know, so long-term development, potential, that kind of attracted sort of a, 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.
Got it.
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 Rahmani 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. That's, you know, hypothetical deployment. 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 gonna be making new loans until there's a little bit more clarity in the outlook.
Sure. Good morning, Jade. Thanks for your question. In terms of other would include things like self-storage, for example. You know, we just felt, you know, if something is gonna be less than 5% of the portfolio as it sits today, that, you know, we would categorize it just to make the pie chart a little bit more easily to read. Other would include, you know, other uses like non-rent residential and self-storage. In terms of mixed use, you know, as the term implies, there is 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, you know, one primary use for the building. You know, we find mixed use to be a very attractive asset class because in essence, there's more than 1 draw, you know, for the property itself. In terms of, you know, 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 JMP just asked, which is really about our, you know, investment capacity. Do we anticipate making new loans in the future? You know, while certainly the bar is high as Bryan mentioned, you know, our goal is to invest the capital over time, you know, at the right time.
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, you know, significant capacity. We're not sure exactly, you know, what asset classes they will be invested in, so we certainly aren't gonna categorize it any specific assets. That's why we kinda show it as a broken-out 18%. We do wanna highlight through this graph that we do have such significant capacity and that when we do make that investment, that it will really change the, you know, 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, you know, what you're most concerned about? There's also some mixed performance in mixed use, on the other hand, multifamily and self-storage, look to be pretty resilient at this stage. Do you think it's still early days for the other sectors and office has these secular headwinds, or, you know, this is a story that's unfolding?
I think absolutely from a fundamentals perspective that office 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. Office is where the fundamentals have degraded significantly, as 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, Jade.
The next question comes from Doug Harter with Credit Suisse. Please proceed.
Thanks. You know, I guess two of the problem loans this quarter were kind of Chicago office. You know, I guess as you look at that, you know, kind of what similarities did they have? What differences do they have that led to the kind of the big reserve on one, but, you know, kind of a favorable outcome on the other? Then, you know, kind of along those lines, are there other loans in the portfolio that kind of look like the one that required the larger reserve?
Yeah, I'll start and I'll let, I'll let Tae-Sik weigh in as well. 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. The resolution we talked about was not necessarily to keep the building structure at all in all likelihood, but allow for total repurposement of the asset. The asset where we built the reserve is actually something where we've got it's fairly well leased north of 80% with a pretty long vault and cash along to the mortgage. Given capital markets and headwinds around that geography, we decided to take the movement that we did.
Tae-Sik, I'll let you weigh in further there.
Sure. No, Bryan, I think that's right. I mean, Doug, as we mentioned, I think every asset is fairly unique. You know, one office property is different from other office properties. The one that's had the favorable resolution, as Bryan said, you know, has significant land as part of the collateral package. 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 really all part of our, you know, 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 a five and taking the significant specific reserve. Unfortunately, the land in that site is not as significant. You know, while it is a larger parcel, it is not configured to have the kind of redevelopment potential as the other office asset that had a favorable outcome. We do think there are, you know, significant alternative uses here, you know, in addition to continue as an office. The value because of the smaller land parcels, you know, isn't gonna be as significant.
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 two properties were different.
On one where you took the reserve, any thoughts on kind of timing the path to resolution?
Sure. I mean, the reason, part of the reason the specific reserve came about this quarter, is because, you know, 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, you know, 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. We are pushing very hard. We have the full cooperation of the borrower to, you know, to start that process. We are pushing to have something done certainly by this year.
Our goal certainly for these types of assets is to, you know, resolve the assets, monetize the value that we're going to get out of it so that we can, you know, redeploy that capital. We are very, very motivated to resolve these loans quickly and efficiently, but we wanna make sure we do so to again, you know, maximize the recovery on these assets.
Great. Thank you.
Thank you, Doug.
Our next question comes from Stephen Laws with Raymond James. Please proceed.
Hi. Good morning. First wanted to start, I noticed in the 10-Q, some of the notes talked about a number of extensions and modifications that occurred in Q1. You know, can you talk about that process? Are borrowers, you know, buying new caps? I guess at this cost is sort of paying interest or are they putting in more equity? You know, are you making any changes to spreads or floors or other type characteristics in any of the modifications?
I think you outlined pretty well a lot of the things that we consider. As we sit here today, over 80% of our loans have interest rate caps in place. To the extent they don't, that is something that we've taken the position in all likelihood that that money can be more accretively used elsewhere in the overall structure. In general, we're working towards getting principal reductions, extension fees, rate changes, et cetera, all the things that you'd expect us to be doing, keeping in mind the overall landscape and how to best resolve the situation.
You know, 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. We think in certain instances, that's going to lead to the best outcome ultimately.
Great. As a follow-up to maybe a couple of earlier questions here, 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. Any kind of as follow-ups to your previous comments, you know, when we think about the Ares facility and your intention to reinvest, you know, capital that you free up later this year around resolutions, you know, there are thoughts to lending now and funding with the Ares facility and, you know, in a less competitive world with higher returns and then pulling that down later. How do you think about utilizing that, you know, to keep your capital efficiently deployed?
It's a great point, and we continue to look at that as a benefit, both in terms of origination of new loans and potentially a liquidity source as well. I guess overarching, we don't expect the opportunity set to go away anytime soon. 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.
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. 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 de-leveraging in a way that the 2017, which is frankly older, is not?
Sure. Good morning, Rick. Thanks for thanks for the question. The 2021 CLO does not have a recycling period. As loans pay off in that CLO, you will see the balance go down. 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-grade graded certificate. What we have done is we have worked very carefully and closely with the 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. 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. We'll enjoy what we think is gonna be a much wider net interest margin as existing loans roll off, and we're able to replace it with higher margin loans. You know, 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. Just so we know, have there been buyouts from the FL4 of defaulted loans?
No. These are just natural maturities.
Excellent. Thank you. The second topic is this. 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 on a quarterly basis. You're running with low leverage. The thing that, the thing that I'm having a hard time connecting is the dividend policy and reiterating that today versus buying back shares. Implicitly, the market's, you know, putting a 15+% cumulative default rate implicitly in your stock price. Your reserves are conservative, and there's a huge gap between those two. Stock's yielding 18%. 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. 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, it is certainly something we evaluate, you know, at all times. You know, we're always evaluating how much cash we want to maintain on the balance sheet so that, again, we can have, you know, favorable outcomes on some of our underperforming loans. Just to give you an example there, you know, the fact that we're, you know, less leveraged than many of our peers, along with the cash, gives us 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. We find having that liquidity as well as low-leveraged balance sheet to be, you know, very, very powerful in managing, you know, 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. I think the point you make is an excellent one. The fourth use, as you mentioned, is paying out dividends.
You know, in evaluating, again, the uses of capital, you know, I think our board has, you know, made it very clear that we believe that our shareholders, you know, really do want and expect and deserve, you know, regular, predictable, recurring cash dividends. 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 low 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. To us, it's not really evaluating one versus the other so much. It's somewhat 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. Again, I'm not questioning the 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 is a great opportunity to buy back our shares. We would agree.
Okay, got it. Thank you, Tae-Sik.
Thank you, Rick.
The next question comes from Sarah Barcomb with BTIG. Please proceed.
Hi, everyone. thanks for taking the questions. I just wanna dig in on a couple specific assets on the balance sheet here. I saw that after quarter end in April, there was a default resulting from one of your sponsors paying partial interest. 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. 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. As to your referencing, the capital markets and the equity markets as well are still fairly favorable for multifamily assets. We did not take a reserve against that despite the debt service miss. Clearly the implication there is that we feel good about our basis relative to the value there.
Okay. Did they have an interest rate cap in place?
No, they did not.
Okay. Just one more for me on the... We've talked a lot about office, I'm also looking at the residential condo loans. There's two of them, they sum to about $150 million. 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, 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 given the scarcity of housing in these markets, that the valuations have held up pretty well, including gentrification probably understates it, some of the progress in the neighborhoods around these assets. So feel positively about the ultimate value, but I'd 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 execution. We're cognizant of that and watching these assets closely.
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 one on your telephone keypad. Our next question is a follow-up from Jade Rahmani with KBW. Please proceed.
Thank you very much. Just wanted to ask, transferable mortgages, do you know what % in the industry of commercial real estate mortgages are assignable or transferable? 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. 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? 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.
I'd say overarching, whether the loan documents specifically allow for it, which I, 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.
On loans with performance issues where the sponsor is out of capital or not willing to commit capital, Are you considering, you know, new sponsors taking over the project, putting in new capital, but you subsidizing that capitalization with, you know, low interest rates or PIK income or restructuring of the flow of payments in order to create, you know, current performance and protect book value? Is that yet a developing theme that you've seen?
To a degree. I think it, you know, 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. Kind of all goes into our thought process as to how we resolve an asset. 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.
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 Hewett 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? My second question is just what % 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. 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, you know, 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. We mentioned the credit tenancy of the asset as well as long duration of that lease. 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. 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 Bryan Donohoe for closing comments.
Thank you. I'd like to just thank everybody for their time today. Appreciate your continued support of Ares Commercial Real Estate, and we look forward to speaking with you again in a few months on our next earnings call. Thank you.
Ladies and gentlemen, this concludes our conference call for today. If you missed any part of today's call, an archived replay of this conference call will be available approximately one hour at the end of this call through May 30th, 2023 to domestic callers by dialing 877-660-6853 and to international callers by dialing 201-612-7415. For all replays, please reference conference number 13736870. An archived replay will also be available on a webcast link located on the homepage of the Investor Resources section on our website. Thank you. You may now disconnect.