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.