Ares Commercial Real Estate - Q3 2023

Transcript

Operator (participant)

Good morning. Welcome to Ares Commercial Real Estate Corporation's third quarter, September 30th, 2023 earnings conference call. At this time, all participants are on a listen-only mode. As a reminder, this conference is being recorded on Friday, November 3, 2023. I will now turn the call over to your host, Mr. John Stilmar, Managing Director of Investor Relations. Thank you. You may begin.

John Stilmar (Managing Director of Investor Relations)

Good morning, everyone, and thank you for joining us on today's conference call. I'm joined today by our CEO, Bryan Donohoe, our CFO, Tae-Sik Yoon, and other members of the management team. In addition to our press release and the 10-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 and the accompanying documents contain forward-looking statements that are subject to risks and uncertainties. Many of these forward-looking statements can be identified by the use of words such as anticipate, believe, 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, conditional 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 and as a result of a number of factors, including those listed in its SEC filings. Ares Commercial Real Estate 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 measures of operating performance, and these measures should not be considered in isolation from or as a substitute for measures prepared in accordance with generally accepted accounting principles. These measures may not be comparable to like-titled measures by other companies. Now I'd like to turn the call over to our CEO, Bryan Donohoe.

Bryan Donohoe (CEO)

Thanks, and good morning, everyone. During the third quarter, we continued to execute on three primary goals we've discussed previously. First, we intended to maintain strong levels of liquidity and moderate leverage. Secondly, we wanted to take advantage of the lending market and our liability structure to selectively originate new loans that would be accretive to our earnings. And finally, we wanted to continue to maximize the value of our underperforming assets. In general, we are pleased with the progress we've made executing against these goals. With respect to the portfolio, we experienced general stability and credit performance as our level of defaults and the universe of risk-rated 4 and 5 loans modestly declined quarter-over-quarter.

While the benefit of today's rate environment has served to enhance our net interest income, the impact of the higher for longer interest rate environment has resulted in greater economic uncertainty and further headwinds to commercial real estate values. This higher cost of capital is also leading to dramatic reductions in new construction, which we ultimately believe will result in favorable supply dynamics and drive support for commercial real estate fundamentals and values in the future. Specific to ACRE, we believe our deliberate approach of operating with moderate leverage while still generating attractive earnings is the best strategy for navigating today's market. We believe the strength of our balance sheet and capabilities of the broader Ares platform gives us a distinct advantage in addressing our underperforming investments, as well as selectively investing in today's attractive lending market.

Now, let me spend some time discussing some of the actions we took this quarter and our approach in maximizing value of our underperforming loans. This quarter, we foreclosed on the $83 million loan collateralized by a mixed-use facility located in Florida. This loan is now held as REO on our balance sheet. As a reminder, this is an office and retail mixed-use property in Tallahassee that is over 90% leased and continues to generate cash flow that is roughly equivalent to the interest income we earned as a loan. 100% of the office space is leased to a AAA-rated tenant that has approximately a 9-year weighted average lease term remaining. The retail space is also well leased, with approximately 85% occupancy and a weighted average term of about 7 years.

This is where we, at Ares, will continue to actively manage the property with the aim of pushing retail occupancy even higher. It's important to point out that we did not recognize an impairment when foreclosing on the property and currently hold the property unlevered. As one of the leading value-add and opportunistic real estate managers, the capabilities at Ares supports our ability to own and execute this business plan. Given our balance sheet position, strong operational capabilities, and the cash flow profile of the property, we are optimistic about the long-term value of this asset. We also exited a $35 million hospitality loan through a discounted loan payoff this quarter.

Given the volatile cash flow profile of this property, the capital required to complete the business plan, as well as our view of the future value, we believed it was in ACRE's best interest to exit the loan and redeploy this capital into higher-earning investments. As both of these loans illustrate, our platform capabilities and balance sheet position allow us to take unique strategies to each asset with the goal of maximizing value. Our balance sheet position also allows us to opportunistically invest in today's market. We remain focused on financing strong-performing property classes with secular demand drivers such as industrial, multifamily, and self-storage. For example, this past quarter, we originated a $58 million senior loan backed by a newly built Class A multifamily property located in Cincinnati, Ohio, that is 95% leased.

This property is well located in an affluent part of the city with compelling local supply and demand dynamics. We financed this property at historically lower levels of loan-to-value, modestly wider spreads, and reset property valuations. Looking forward into the fourth quarter and year-end, we expect to make further progress on reducing our exposure to office loans. Through a combination of principal paydowns and exits, we are targeting more than $70 million in outstanding principal balance of office loans to be cleared out in the fourth quarter, but that may well extend into the first quarter of next year. With that, Tae-Sik, let's walk through some of our financial highlights and further details on our portfolio and capital position.

Tae-Sik Yoon (CFO)

Thank you, Bryan, and good morning, everyone. For the third quarter of 2023, we reported GAAP net income of $9.2 million, or $0.17 per common share. Our GAAP net income was impacted by a $3.2 million net increase in our CECL provision, or about $0.06 per common share. Distributable Earnings for the third quarter of 2023 was $13.5 million, or $0.25 per common share, which was impacted by the $4.9 million or $0.09 per common share realized loss on the defaulted hospitality loan that was resolved in the third quarter. Turning to our portfolio, we ended the quarter with a diversified portfolio of 49 loans held for investment, with an outstanding principal balance of $2.2 billion, 98% of which were senior loans.

During the third quarter, we received $48 million of total loan repayments, including $25 million of proceeds from the hospitality loan, as well as loans backed by self-storage and industrial properties that were repaid at par. In terms of credit quality metrics, 78% of our loan portfolio had a risk rating of 3 or better, which improved from 74% in the second quarter. The improvement was driven by the reduction of our risk-rated 4- and 5-rated loans, as 2 such loans were either resolved or converted to REO. During the third quarter, no new loans originated from a risk rating 3 to a risk rating of 4 or 5 in the quarter. We did downgrade 1 office loan from a 4 to a 5 risk rating, with a total unpaid principal balance of $33 million, and established a specific reserve of $14.4 million.

Inclusive of this specific reserve, we increased our overall CECL reserve by a net $3.2 million in the third quarter of 2023. Our total CECL reserve now stands at $116 million, or about 5.25% of our outstanding principal balance. Let me provide some further details around the components of our $116 million CECL reserve, which equates to $2.14 per common share total reserve and impacted our book value per common share of $12.62 as of September 30, 2023. As previously mentioned, we have specific reserves of $55 million, representing 61% of the $90 million in outstanding principal balance on the two risk-rated 5 loans.

Of the remaining $61 million in reserves, $46 million is accrued against $388 million in outstanding principal balance of risk-rated 4 loans, which equates to approximately 12% of the total risk-rated 4 loan balance and compares to 10% in the quarter prior. The final $15 million of our total reserve is held against the $1.7 billion of loans rated 3 or better, for an average reserve ratio of about 86 basis points of loans held for investment with a risk rating of 3 or better. While the market remains challenged, we believe that our CECL reserve level appropriately takes into account current market conditions and the macroeconomic outlook for our loans held for investment as of September 30th, 2023.

With respect to the $57 million office loan that is risk-rated 5, we continue to be on target to resolve this property, which would result in approximately a $41 million realized loss in the fourth quarter of 2023, or possibly first quarter of 2024. As Bryan referenced earlier, we maintain significant liquidity and moderate net debt-to-equity ratio of 2.0 at quarter end. At quarter end, we had over $130 million in cash and amounts available for us to draw under our working capital facility. In addition, we are holding our REO unlevered, which we believe can be financed to further increase our liquidity. Finally, we declared our fourth quarter dividend of $0.33 per share. So with that, let me turn the call back over to Bryan for some closing remarks.

Bryan Donohoe (CEO)

... Thank you, Tae-Sik. While a higher-for-longer rate environment will extend this cycle and will likely present unforeseen challenges, we believe it will also present some highly attractive investment opportunities. Our moderate leverage and healthy level of liquidity positions us well to navigate these dynamics and ultimately deliver attractive shareholder returns. As always, we appreciate you joining our call today, and we'd be happy to open the line for questions. Operator, could you please open up the line?

Operator (participant)

Thank you. At this time, we'll be conducting a question-and-answer session. If you'd 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'd 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, please, while we poll for questions. Our first question comes from Sarah Barcomb with BTIG. Please proceed with your question.

Sarah Barcomb (VP of Equity Research)

Hey, everyone. Thanks for taking the question. So you mentioned in the prepared remarks that you're targeting about $70 million of office principal to be cleared out between Q4 and Q1, and it sounds like that includes the 5-rated Chicago office loan. Does the balance of that include a potential resolution on the California office loan, or is that mostly in the 1-3 rated book? And will those, you know, result from more asset sales or refinancings, or how should we think about that?

Tae-Sik Yoon (CFO)

Yes. Good morning, Sarah. Thank you very much for your question. Yes, the $70 million does include the Chicago office loan that we mentioned we are targeting for resolution in the fourth quarter. You know, again, that may slip into the first quarter, but right now we believe it is on target for fourth quarter. And then, the other amount is made up of a office loan in California, as you said.

Sarah Barcomb (VP of Equity Research)

Okay, great. And then I was hoping you could talk about your outlook for, you know, net portfolio growth over the next few quarters. You know, we saw the portfolio contract a bit due to the foreclosure and the loan sales, but new fundings actually, it looks like, outpaced regular way repayments. So I'm just curious for any thoughts on your outlook for continuing to make new investments and how we should think about that net growth. Thank you.

Bryan Donohoe (CEO)

Yeah, it's a good question, Sarah. I think it's tough to determine exactly what the cadence will be. As we said in the prepared remarks, we do see, and I think you're seeing this across the industry, a good set of opportunities, but it's a little less rhythmic given the volatility in rates that we have surrounding us. So we'll continue to be opportunistic, and most specifically, we will continue to use the legacy liability structures that we have on the balance sheet to enhance the yields associated with those investments we do make. It's tough to determine at this point whether that leads quarter to quarter to portfolio growth, but I think we'll still, we'll continue to be opportunistic when situations arise.

Sarah Barcomb (VP of Equity Research)

Okay. Thanks so much for taking the question.

Bryan Donohoe (CEO)

Thank you.

Operator (participant)

Our next question is from Steve Delaney with JMP Securities. Please proceed with your question.

Steve DeLaney (Analyst)

Thanks. Good morning, everyone. Good to see you finding opportunities to deploy capital. I'm curious, if you look at the terms of your new loans that you're setting, how would you compare the levered returns that you're able to obtain today versus sort of an average of if we were back in a 2021, first half 2022 type of environment, which I guess I'll call a more normal environment? Thanks.

Bryan Donohoe (CEO)

Yeah, it's a good question. I'd say that clearly the bar is higher for new investments today, so you can expect to see those levered yields in excess of where they were at that point in time. One of the interesting factors right now is, across the board, we're seeing more and more appetite for warehouse lending from some of our counterparts on the banking side, and starting to see that net interest margin or the gap between the whole loan pricing and repo get back to more normalized levels, which I think is a tailwind to new investments. So there's some subtlety beyond that, though. As you'd expect, given the scarcity of capital in the space, those with capital can dictate terms to a better degree than maybe historically.

So that starts to impact covenants, leverage, and certainly, as we said in the prepared remarks, Steve, the reset valuation just makes it a more attractive basis. So certainly an attractive time to invest in those circumstances that allow for it.

Steve DeLaney (Analyst)

Interesting that those conditions with the lenders would evolve, you know, right ahead of an opportunity we may be seeing for an improved interest rate outlook over the next year or two as well. So, sounds like you're in a pretty good strategic position. One final one, and it's just... I don't need a long answer at all, but there's a lot of distress out there. I mean, you just had to take back a property, I think it was Chicago, that you were talking about in your remarks. Some deals find a workout or and some end up going back to the first lien lender and, and then the REO.

I'm curious if you guys are seeing what I would call any rescue capital opportunities, you know, higher yield opportunities where you may even like the property, the loan is out of balance, et cetera, et cetera. You could come in with a mezz, and I don't think you would do a mezz like that unless you could also get a nice slice of equity out of the deal. Is that too more merchant banking like, as you see it, for a senior bridge lender? Or do these unique times, you know, would that encourage you to open your playbook up a little bit for that type of thing, given the market?

Bryan Donohoe (CEO)

Yeah. So it's a great point, and certainly the uncertainty, the opaque nature of the market keeps us really focused on the flexibility we outlined at, on the call. And that uncertainty, I think you've heard pretty widely throughout the industry. I'd say that for the most part, thus far, that gap financing or mezzanine or pref-type structures, we haven't seen it in any volume yet, so it's been idiosyncratic. I do think that in times like this, the playbook will open up, although the charter that we consistently talk about is we want to remain a lender to the space and a high degree of conviction around being a first mortgage lender rather than focused on the mezzanine.

But across the broader Ares platform, we'll continue to see and seek out opportunities for that gap financing for those best-in-class pieces of real estate throughout our core markets.

Steve DeLaney (Analyst)

Thank you, Bryan, for the comments.

Bryan Donohoe (CEO)

Of course. Thank you.

Operator (participant)

Our next question comes from Don Fandetti with Wells Fargo. Please proceed with your question.

Don Fandetti (Managing Director)

Yes, when you do go to sell a loan, how is the bid, and what's the profile of the buyer? Is it, you know, offshore-type investors?

Bryan Donohoe (CEO)

Yeah, Don, probably not enough of a data set to say that there's a trend one way or the other. Clearly, the investor base that's going to participate in this market is going to have some level of conviction on the sector or that location. So we don't have enough to point to, to say it's coming from one part of the world or another. In general, it's unique parties that are familiar with an asset and see the long-term trends of supply and demand, especially as we touched on with this reduction in supply that we expect to see kind of fast-forwarding 12, 18 months. And that buyer is trying to take advantage of a reset basis going into that dynamic. But no consistency in terms of where the capital is coming from as of yet.

Don Fandetti (Managing Director)

Got it. And then, you know, if the Fed is done and the ten-year yield eases a bit, like, how do you-- how does that impact your business over the next, you know, 6-12 months?

Bryan Donohoe (CEO)

What I'd say is I think if we can get that consistency with respect to rates, I think that, you know, clearly values are resetting based, at least in part, on, on the impact of rates. If we can get stability, I think that assets become more underwritable across the, across the sector, and I think we'll free up some capital and, allow people to move forward. So I think you'd, first and foremost, you'd be able to digest rates if they remain, kind of range-bound, and I think you'll see transaction volume pick up.

Don Fandetti (Managing Director)

Thank you.

Operator (participant)

Our next question comes from Jade Rahmani with KBW. Please proceed with your question.

Jade Rahmani (Managing Director)

Thank you very much. You know, for me, one of the important pieces is cash flow from operations, and, you know, it's been running a little bit below the dividend. So what would be your thoughts as to dividend sustainability at this point?

Tae-Sik Yoon (CFO)

Thank you for your question, Jade. Now, that is an extremely important question, and you know, obviously, we are monitoring our actual cash flow from operating activities, you know, very carefully. Jade, you probably are referring to, you know, our cash flow statement in our financials versus our dividend. Maybe I'll just point out a few things that may help reconcile maybe some of the differences that you're seeing. So if you look at third quarter 2023, for example, you know, I think our net cash provided by operating activities is around $13.5 million.

And we think in addition to that $13.5 million, you know, you would add, for example, $1.5 million of fees that we have already received, you know, for example, as origination fees upfront, but we don't amortize it, under the cash flow statement, obviously, because it's cash flow. But, but that is, you know, actual cash that we have already received, you know, as part of making a loan. And again, that adds about a million five. So you're up to about $15 million from there.

And then the second thing, just to, again, point out, is if you kind of look at our dividends, for the third quarter, I think what you'll see is in cash flow, again, you'll see that, dividends paid in the third quarter, which really the dividends declared for the second quarter, which included the $0.02 supplemental, which obviously was not declared and payable for the third quarter dividend. So I think the difference that you might be seeing is a little bit smaller than, you know, maybe where you started out with.

... But we do think that, you know, our Distributable Earnings is a very good measure of our actual cash flow. I think probably the biggest difference you'll see between those two measures, again, take into account some of the timing differences of when you pay payables, receive receivables, there's probably some, you know, payment-in-kind loans. We think we have a, you know, fairly limited amount of that, but that would probably be the biggest difference between, you know, actual operating cash flow, you know, versus our Distributable Earnings.

Jade Rahmani (Managing Director)

Okay, that's a great answer. And so when the board's thinking about the dividend, is it going to be based on the distributable earnings? And, do they give any consideration to the cash flow from operations performance? And I do realize the accrual, nature of the income statement, which also triggers REIT-taxable earnings. So, I appreciate your commentary around the origination piece.

Tae-Sik Yoon (CFO)

Yeah, that's a great question. Again, we present all this information to the board. We discuss, you know, cash flow from operations, we discuss credit, we discuss outlook, we discuss balance sheet, we discuss liquidity. So there are, you know, a whole host of factors that are taken into account by the board in setting and declaring dividend. You know, one thing to just note about our PIK income is that, you know, for the quarter, I think it totals around $2.2 million. And if you compared that against our total interest income for the quarter of around $53 million, you know, it's around 4%. So we do think that is a manageable number. But again, all of those considerations are, we believe, taken into account by the board in setting the dividend.

Jade Rahmani (Managing Director)

Okay. Thanks very much. If I could ask another one, it would just be-

Tae-Sik Yoon (CFO)

Sure.

Jade Rahmani (Managing Director)

The decision on loan sales at this point, specifically on office. TRTX said something similar, so I'm just wondering if it's related to liability management. Are your repo lenders or the CLO, you know, potential buyouts out of CLO prompting those decisions, or is it just your asset management and deciding to be proactive?

Bryan Donohoe (CEO)

I think it starts from a fundamental perspective on, kind of, future values and certainly kinda out-earning any issues by redeploying that potential cash inbound with new investments going forward. But certainly, there's an overlay of whatever liability structure that asset may have resided in. So Jade, it really comes down to a fundamental view of office valuations or that specific asset valuations alongside the specifics around the liability structure. So it really remains a case-by-case basis.

Jade Rahmani (Managing Director)

Thank you.

Bryan Donohoe (CEO)

Thanks, Jade.

Operator (participant)

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

Stephen Laws (Managing Director)

Hi, good morning. You know, I think it was mentioned in the prepared remarks by Tae-Sik no new downgrades, I think 3-4. You know, I just wanted to confirm that. Also, you know, at a higher level, when you think about your portfolio and the 1-3-rated loans, you know, how comfortable are you in those ratings that, you know, the concerning stress points are in the past, and you're not concerned about, you know, kind of more negative rating migration? You know, kind of what percentage of those threes do you still think have, you know, maybe a material stress point in the next 6-12 months that that you're really focused on? Kind of any color on that would be great.

Tae-Sik Yoon (CFO)

Sure. Good morning, Steven. Thanks for the question. I'll start, and would love to have Bryan, you know, add to my comments. So correct, we did not have any negative migration from, you know, loans that were rated one, two, or three from second quarter to the third quarter. You know, we did mention the negative migration for one loan from a four to a five. In terms of outlook, I mean, I'll just start very briefly and really turn it over to Bryan. You know, I think again, we are assessing our loans, you know, very carefully each quarter. Obviously, the future forecast is taken into account.

You know, with the volatile markets that we're all in today, you know, it's hard to set an exact macroeconomic environment in which we would be assessing the loans. But I would tell you that, you know, we take into account what we do know, and we do this every quarter. Bryan, did you want to add to that?

Bryan Donohoe (CEO)

Yeah, I'll just kind of echo that, but I think it is clearly a good bit of uncertainty out there. We're spending the vast majority of our time on the asset management side of the business in dialogue with sponsors and really taking in all the outside factors in real time that we're all collectively sharing. So when we see rate movements one way or the other, clearly that impacts values. And to some of the earlier discussions, some of that stability will be seen as a positive for the commercial real estate industry. But we remain cognizant of risks in terms of supply dynamics in certain markets and really the impact of rates still being felt on the income statement and balance sheet of a lot of the borrower community.

So I'd say risk-aware and focused on each individual asset situation and resolving it as best we can throughout the next few quarters.

Stephen Laws (Managing Director)

Great. Appreciate the comments. Thank you.

Operator (participant)

As a reminder, if you'd like to ask a question, please press star one on your telephone keypad. One moment while we poll for questions... Our next question comes from Rick Shane with JPMorgan. Please proceed with your question.

Rick Shane (Analyst)

Thanks, everybody. Good morning. Hey, I do want to say I appreciate the transparency, both in terms of, highlighting or quantifying the, potential loss in the fourth quarter, and also, being clear about what the specific reserves are against, individual 5-graded loans. It's very helpful and creates a much greater degree of transparency for analysts and investors. So thank you for that. I wanted to talk a little bit about the REO. There were a couple comments that this is an investment that is now unlevered. There's potential liquidity that can be unlocked there. You know, I guess there are really three paths here. You can continue to run this unlevered, and it sounds like the cash flows are roughly comparable to the yield, but that's somewhat inefficient.

You could go out and lever this, own the property, that's not really your core business. And I'm curious, in this environment where banks prefer to be lenders to lenders rather than be lenders on first lien, whether you would actually wind up going to a peer company in order to get that leverage? Or third, why not really kind of do what you guys do, sell the property, finance it, and, generate income in the way that you, you know, sort of more core to the ACRE business model?

Bryan Donohoe (CEO)

Yeah, it's a great question, and all of those avenues are available to us, and hopefully, that came through in the remarks. Just the balance sheet allows us that flexibility. I think with respect to this asset, there's some unique attributes, right? It has a fixed income, like, cash flow stream in terms of the credit quality of the tenants and the duration of the leases. But there is some upside that we think may be available through property management and leasing, as we touched on. I think what we would if we think we're getting fair value, then absolutely, a sale would be part and parcel with what we have looked to do historically, and whether we participate in that from a mezzanine perspective, allowing longer duration senior debt to go in front of us, right?

Because it does fit better into a fixed rate takeout rather than floating, which would be our core competency. So the point being, all these channels are available to us, but first and foremost, was getting our arms around the asset, hopefully enhancing the cash flow profile and resolving it in one of the ways that you put forth. Sorry, I don't have a more specific path. I think what we like about it is that it is all available to us right now, and we'll do what's best for the company.

Rick Shane (Analyst)

Got it. No, actually, there, there's something interesting in there that I did not fully appreciate, which is that this is an asset that, in fact, may qualify or may fit better for a different type of financing. And in some ways, that makes more sense because, probably if you guys see value there, locking in long-term, uncallable financing right now is probably not the way to maximize long-term value.

Bryan Donohoe (CEO)

Certainly, that's a key consideration. Absolutely.

Rick Shane (Analyst)

Okay. That's it for me. Thank you, everybody.

Bryan Donohoe (CEO)

Thanks.

Operator (participant)

Our next question is from Jade Rahmani with KBW. Please proceed with your question.

Jade Rahmani (Managing Director)

Thank you very much. I know, Ares does a lot on the equity side, so I wanted to ask your thoughts on multifamily, if you can give an update. Quite a few of the multifamily REITs have been citing, a significant change in the market in September and October with respect to the Sun Belt, citing new lease rent growth, you know, negative 8%-9%, attributing some of that behavior to so-called merchant developers who are making price concessions in order to lease up their projects. Maybe they're under pressure, from floating rate loans, increasing or something else. But how are you viewing the overall multifamily markets? Are you nervous about credit there, or do you view this more as an opportunity?

Bryan Donohoe (CEO)

It's a great question. I think certainly a dynamic landscape out there, and the more acute reduction in rents that you're seeing in markets that were oversupplied, right? Like a Phoenix, for instance. We are seeing that. We don't have a lot of exposure to those. They're assets that enjoyed outsized rent growth beyond what a lender would have underwritten for the past couple of years. And so we're a little bit in the digestion phase of the multifamily market, where you're seeing rents normalize, maybe dip, where you've had that pausing of supply. I think long term, though, we sit here with a patient approach to assets and valuations resetting.

And if you look and you fast-forward a little bit into the reduction in supply that you're going to see based on the capital markets interruption that we're seeing, right? If you're borrowing against a construction loan today, that's a low double-digit cost of funds. As you see that supply shift and really go back to lower than historical levels based on that capital markets interruption, and we remain at a housing deficit throughout the country, the long-term fundamentals are supportive. But certainly over the next 12-18 months, we're cognizant of the digestion phase of the supply that we are seeing in certain markets. So I think it's a little bit TBD, but we expect to participate in the relevering and the re-equitization of this market for the foreseeable future.

Jade Rahmani (Managing Director)

Thank you.

Bryan Donohoe (CEO)

Thanks, Jay.

Tae-Sik Yoon (CFO)

And just while we have the mic, I just want to go back to a question that was first asked by Sarah Barcomb. This relates to the question about $70 million of office repayments that we expect in the fourth quarter. Just to clarify that a bit. So the $70 million of office that we expect to be repaid in the fourth quarter consists of our Chicago loan, the $57 million Chicago loan, as well as a partial repayment of a larger loan on a different office complex. I think the $33 million dollar office loan that Sarah was referring to in California, that loan we don't expect to resolve until 2024. So just want to clarify that comment in connection with Sarah's question.

Operator (participant)

We have reached the end of the question and answer session. I would now like to turn the call back to Bryan Donohoe for closing comments.

Bryan Donohoe (CEO)

Great, thank you. I just want to thank everybody for the time today. We certainly appreciate your continued support of Ares Commercial Real Estate, and look forward to speaking with you again on our next earnings call. Thanks, everybody.

Operator (participant)

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 after the end of this call through December 1, 2023. To domestic callers by dialing 1-877-660-6853, and to international callers by dialing 1-201-612-7415. For all replays, please reference conference ID number 13740719. An archive replay will also be available on a webcast link located on the homepage of the Investor Relations section of our website. Thank you for your participation today.