Ares Commercial Real Estate Corporation

Good morning and welcome to the Aries Commercial Real Estate Corporation's first quarter earnings conference call. At this time, all participants are in a listen-only mode. As a reminder, this conference is being recorded on Thursday, May 9th, 2024. I would now turn the call over to Mr. John Stillmar, partner of Public Markets Investor Relations. Please go ahead.

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 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, as well as 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 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 if future performance, condition, or results 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 filing. ARIES Commercial Real Estate assumes no obligation to update any such forward-looking statements. During this call, we will refer to certain non-GAAP financial measures. We use these as a measure of operating performance. These measures should not be considered in isolation from or to 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? Thank you, John.

During the first quarter, we made meaningful progress towards our goal of resolving underperforming loans, reducing the outstanding principal balance of non-accrual loans by $133 million, as well as reducing our exposure to the commercial office property sector by $70 million, or 8% of our total loans backed by office properties. By addressing a total of four non-accrual loans during the first quarter, we increased our distributable earnings, excluding losses, compared to the prior quarter by approximately two cents per common share and further delevered our balance sheet by $138 million to an outstanding balance of less than $1.5 billion at the end of the first quarter. Our focus remains on returning Acre to its core business of originating loans and managing a portfolio of loans backed by commercial real estate properties in order to earn consistent income to support an attractive level of dividends for our shareholders. Let me now provide more details on the loans that were resolved during the first quarter. First, we sold a $38 million loan that we held for sale at year-end 2023 that was backed by a mixed-use property located in California that was on non-accrual. Second, we agreed to a discounted loan payoff of a $19 million loan backed by a multifamily property located in the state of Washington that was on non-accrual at the end of 2023. As a result of these initiatives, We realized a loss consistent with the fair value mark and lost reserves held on our balance sheet at year-end 2023 and paid down $54 million of debt in our FL-4 securitization. Third, we exited a $57 million Chicago risk-rated five loan collateralized by a commercial office property that was also on non-accrual at year-end 2023. As a result of this disposition, we realized a loss that was $3 million higher than the loss reserve held against this loan at year-end 2023. And finally, we restructured a $74 million loan backed by a Class A newly rebuilt office building located in New York City. At closing of this restructure, the borrower paid down $5 million of principal, reducing the balance to $69 million. which was split between a $59 million A note and a $10 million B note. In addition, it is anticipated that the borrower will contribute additional capital into the building for additional new leasing costs, including tenant improvement allowances. To incentivize the contribution of additional capital, including the initial $5 million repayment of the loan, we have agreed to subordinate our $10 million B note to new equity contributed by the sponsor. This restructuring resulted in returning the $59 million A note to interest earning status, while the B note remains on non-accrual. As a result of addressing these four loans, the outstanding principal balance of loans on non-accrual was reduced by 31%, and our distributable earnings losses increased by two cents per common share for the first quarter of 2024. Shifting now to our overall portfolio, we ended the quarter with $2 billion of outstanding principal balance across 44 loans. Thirty-six loans, totaling $1.5 billion, or 75% of our loan portfolio, had a risk rating of three or better. The majority of these loans are collateralized by multifamily, industrial, self-storage, and hospitality properties. As a reflection of the quality of our risk-rated three or better loans, borrowers continue to be committed to these underlying properties. Over the past 12 months, borrowers have contributed more than $130 million in additional capital relating to loans risk-rated three or better And during the same time period, all interest rate caps have been renewed at their prior strike or economically equivalent amounts have been deposited into reserves. Going forward, we will continue to focus on resolving our remaining four and five risk-rated loans and to reduce our office exposure. During the second quarter, we expect to take a $33 million risk-rated five loan backed by an office building in California as REO that is currently on non-accrual. At this time, we believe that our loss reserve on this loan is substantially in line with our current estimate of a potential realized loss. Additionally, despite ongoing negotiations with the borrower, a $69 million loan to an office property located in North Carolina, currently on non-accrual, defaulted after quarter end. We've begun the process of taking title of the office property, and importantly, this property is cash flowing such that if and when the property becomes REO, property level earnings will be recognized. With that, let me turn the call over to Tasek to provide more details on our financial results and balance sheet positioning.