Ares Commercial Real Estate Corporation

Good afternoon. Welcome to Aries Commercial Real Estate Corporation's second quarter, June 30, 2023 earnings conference call. At this time, all participants are on a listen-only mode. As a reminder, this conference is being recorded on Wednesday, August 2, 2023. I will now turn the call over to Mr. John Stillmar, Managing Director of Investor Relations.

Good afternoon, everybody, 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 the management 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 are 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 expectation of market conditions and management's judgment. The 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. Aries Commercial Real Estate assumes no obligation to update any such forward-looking statements. During this conference call, we'll refer to certain non-GAAP financial measures. We use these measures as a measure of operations, 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. Brian?

Thanks, John, and good afternoon, everybody. This morning, we reported another quarter of solid results as our distributable earnings have continued to benefit from rising interest rates as our unlevered effective yield is nearly 9%. For the second quarter, our distributable earnings fully covered our dividends, and we repurchased about 1% of our outstanding shares at pricing which was accretive to our book value per share. We continue to maintain strong levels of liquidity on our balance sheet, which provides us with the opportunity to drive positive outcomes on underperforming properties. Additionally, as we begin to see capital flows and some stability return to certain sectors within the real estate market, Our liquidity position and our access to accretive leverage should allow us to opportunistically invest in an increasingly attractive market for new investments. During the second quarter, we focused on proactively managing our portfolio to maximize positive outcomes on our watch list assets. We believe our team's experience across debt and equity positions us well to navigate these types of environments. Specifically beginning in 2022, utilizing the market insights we gleaned across the area's platform in corporate credit and real estate equity led us to reduce our investment activity and focus on enhancing our liquidity, further deleveraging our balance sheet and adding to the strength of our overall capital position. The result of this is a net leverage ratio below 2.0, 215 million of cash and amounts available for us to draw on our working capital facility and no spread-based mark-to-market financing. We believe our balance sheet position provides us with multiple channels to continue to drive shareholder value over the long term. We believe our capabilities and balance sheet flexibility are illustrated by how we are managing our $83 million senior loan, collateralized by a mixed-use property in Florida that we discussed on last quarter's earnings call. We expect to complete the foreclosure and take the asset as REO in the third quarter. Importantly, we do not anticipate taking a loss or impairment on the foreclosure. As a reminder, the property exhibits stable performance underpinned by a nine-plus year lease to a AAA-rated government office tenant and well-leased retail space, with the opportunity for our retail equity colleagues to enhance the tenancy and cash flow. Overall, the property is 90% leased and continues to generate cash flow that fully covers current interest payments given its unlevered cash yield to our position is in the high single digits today. The property has generated strong leasing interest and there are advanced negotiations with several significant tenants that have the potential to materially enhance the already strong cash flow profile of the property. With a healthy cash flow profile and strong leasing momentum, we are optimistic about the future prospects for this property. We believe the breadth of asset management experience available within the ARES real estate platform is a key factor in both evaluating and operating this specific opportunity. We mentioned earlier that we are starting to see some positive indications of stabilization in the commercial real estate market. With this, We believe we will begin to see opportunities for more loan originations. Our strong overall balance sheet position alongside less competition from banks should provide us with opportunities to provide capital at historically wide spreads and we believe lower than average historical risk profiles. Merger and acquisition activity in the banking sector, capital market stability, and a nascent pickup in transaction volume indicate some thawing in these markets. With more than 250 billion of unspent U.S. real estate dry powder and continued capital flow from international investors, the backdrop is there for recovery across most property types. We believe the current opportunity set will only be enhanced by the elevated level of maturity scheduled to occur in the next three years. Given these favorable market dynamics, we're selectively finding accretive investment opportunities In the second quarter, we funded $80 million of new borrowings, including a $49 million senior loan commitment for an industrial property with unique cold storage capabilities that create significant barriers to new supply formation. Our ability to provide this financing with meaningful equity behind our loan to a premier sponsor demonstrates the opportunities in today's lending environment. We are also uniquely positioned to benefit from using available borrowing capacity on our revolving FL3 CLO with the legacy cost of funds, which enhanced the levered yield associated with the opportunities we funded this quarter, including the industrial loan we closed. We also continue to believe that our own stock is a compelling investment opportunity. We repurchased 536,000 shares, or about 1% of our outstanding stock, for an aggregate purchase price of $4.6 million, or $8.58 per share on average. With a renewed $50 million stock repurchase authorization from our board in July, we are positioned to opportunistically invest further in what we believe is a compelling value in our stock. With that, Teysik, let's walk through some of our financial highlights and further details on our portfolio and capital position.