Ares Commercial Real Estate Corporation

Good afternoon, and welcome to Aries Commercial Real Estate Corporation's conference call to discuss the company's third quarter 2022 financial results. As a reminder, this conference call is being recorded on November 2nd, 2022. I will now turn the call over to John Stillmark from Investor Relations. Please go ahead.

Good afternoon, and thank you for joining us on today's conference call. I'm joined by our CEO, Brian Donahoe, TASICU and our CFO, 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 and the accompanying documents contain forward-looking statements and are subject to risks and uncertainties. Many of these forward-looking statements can be identified by the use of words such as anticipates, believes, expects, intends, will, should, may, and similar such expressions. These forward-looking statements are based on management's current expectations of market conditions and management's judgment. These statements are not guarantees of future performance, condition, or results and involve a number of risks and uncertainties. The company's actual results could differ materially from those expressed in the forward-looking statements as a result of a number of factors, including those listed in its SEC documents. Average Commercial Real Estate Corporation assumes no obligation to update any such forward-looking statements. During this conference call, we will likely refer to non-GAAP financial measures. We use these as a measure 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 used by other companies. Now I'd like to turn the call over to our CEO, Brian Donahoe. Thanks, John, and good afternoon, everybody.

This morning, we announced third-quarter distributable earnings of $0.39 per share, an increase of 5% from the third quarter of last year, which exceeded our quarterly regular and supplemental dividends paid of $0.35 per share. The growth in our distributable earnings was driven primarily by the benefits of rising interest rates and some modest prepayment fees received. Looking forward, we expect that rising interest rates will continue to have a positive impact on our earnings potential due to our floating rate loan portfolio and the hedges we have in place on our liabilities. Now let me touch on a few macroeconomic factors influencing our markets. The Federal Reserve is continuing to tighten monetary policy with an unexpected pace of increases in market rates to combat inflation, which we believe has increased the likelihood of a recession. These complex macro cross-currents are driving volatility across most major asset classes, including commercial real estate. Additionally, these factors are impairing capital formation as both the capital market and bank lending have meaningfully retrenched, resulting in significantly expanded risk premiums. We believe these conditions are likely to persist for the foreseeable future and will be challenges for our industry. Because of all this, the sourcing, informational benefits, and deep financing relationships that we derive as part of the ARES platform will be even more important for us in this type of environment. We have been focused on property types such as multifamily, industrial, and self-storage that have strong underlying rent growth dynamics, which have muted or outpaced the recent growth in market interest rates. This has been particularly true since we exited the COVID time period at the end of 2020. In terms of deployment during the third quarter, we were highly selective. We closed $50 million of floating rate investments across multifamily and self-storage properties and $28 million of AAA-rated, newly issued CRE liquid debt securities. Across both public and private market opportunities, we believe that our new investments are in property types and markets with strong underlying demand drivers to counteract higher rates and risk premiums, while also possessing more conservative structures and wider spreads. By way of example, during the third quarter, we originated a senior whole loan secured by a portfolio of well-located, multifamily properties in the Sunbelt with a well-regarded repeat sponsor. The all-in spread on the whole loan was 80 basis points higher than our post-pandemic average spreads for multifamily whole loans and with a greater equity subordination and enhanced structural terms further driving the attractiveness of the loan. Supported by these attributes and the breadth of Aerie's capital markets relationships, we were able to arrange highly efficient senior financing with an insurance company on this loan, with Acre retaining a $20.6 million mezzanine investment. We view this mezzanine investment as similar in concept to underwriting and holding a first lien loan on our balance sheet and financing a portion of the loan with one of our non-recourse financing sources. We also took advantage of what we believe are compelling opportunities in the CMBS markets by purchasing $28 million of newly issued AAA-rated CRE securities, backed by a pool of senior floating rate mortgages. We believe these securities are highly attractive investments, with weighted average credit spreads of 245 basis points, resulting in unlevered yields today in excess of 6% at current SOFR rates, all backed by a diversified pool of underlying commercial real estate properties, with LTVs of 30 to 40%. Despite the slower market, we had $167 million of repayments during the third quarter. This level of repayments was in line with our six-quarter average and included a $30 million hospitality loan, a risk-rated poor loan one year ago, and was repaid at par during the third quarter. For the fourth quarter, we remained selective on new investments and expect to maintain a strong liquidity position. Now, let me turn the call over to Tasek to walk through our quarterly financial highlights and further details on our portfolio and capital position.