Ares Commercial Real Estate Corporation

Good afternoon, ladies and gentlemen. Welcome to ARIES Commercial Real Estate Corporation's second quarter earnings conference call. At this time, all participants are in a listen-only mode. And as a reminder, this conference has been recorded on Tuesday, August 6th, 2024. I will now turn the call over to Mr. John Stillmar, partner of Public Markets Investor Relations. Mr. Stillmar, please go ahead.

Good afternoon, and thank you for joining us on today's conference call. In addition to our press release and the 10Q that we filed with the SEC, we've put an earnings presentation under the investor resources section of our website at www.arecere.com. Before we begin, I want to remind everyone that comments made during the course of this conference call, as well as webcasts 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 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. 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'll refer to certain non-GAAP financial measures. We use these as measures of operating performance and measures should not be considered in isolation from or to substitute for measures prepared in accordance with the 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, and good afternoon, everyone. Before we begin a review of our second quarter 2024 results, I wanted to take a moment to congratulate Tasek Yoon as our new Chief Operating Officer and Jeff Gonzalez as our new Chief Financial Officer and Treasurer. Both of these appointments will be effective as of August 30, 2024. As you know, both Tasek and Jeff have been long-term members of our management team, with Tasek having joined in 2012 and Jeff in 2013. Tasek will continue to help execute our strategic goals, partnering with our debt capital markets team to further bolster the strength of our balance sheet and working with our asset management team. During the past 11 years, Jeff has worked closely with Tasek and our senior management team to serving in various finance roles, including as our controller since 2015. Jeff's financial expertise, long tenure at Acre, and deep understanding of our company and portfolio are highly valuable and make Jeff a natural choice as our next CFO. So with that, let me give some brief comments on market conditions and how we believe these trends are impacting our financial results and positioning of our balance sheets. Commercial real estate market sentiment is modestly improving, driven by reduced interest rate expectations, future supply dynamics, and the amount of capital available to be invested from the sidelines. While these positive dynamics are pointing to increased activity levels and a potential bottoming of CRE values more broadly, sales activities and financing of properties remains dynamic. These trends are impacting the timing of exits and resolutions, which, in turn, informs our strategy and impacts our near-term earnings. As one example, during the second quarter, the anticipated sale of a multifamily property securing one of our senior loans did not move forward as anticipated. Given the uncertainty around the ultimate execution in the sales process, we put the loan on non-accrual and revised the risk rating from a 4 to a 5. However, subsequent to the end of the second quarter, the property has since gone under contract for sale with a hard deposit, increasing the likelihood of a near-term resolution. Due to this variability in the market, our strategy is to maintain significant levels of liquidity and to further reduce leverage. Our focus on strengthening our balance sheet in order to drive maximum flexibility in addressing our underperforming loans results in uneven and below potential levels of earnings. Upon resolution of these loans, we expect the company will be positioned to invest further and return to a higher level of profitability. During the second quarter, we saw no negative migration in our risk-rated one-to-three loans. These 35 loans account for about three-quarters of our total $2 billion loan portfolio. Furthermore, the underlying borrowers have committed approximately $140 million of capital over the last 12 months in support of the risk-rated three or better loans. Now turning to our risk-rated four and five loans, we ended the second quarter with seven loans totaling approximately $477 million of outstanding principal. In the second quarter, we took title to a California office property that was previously financed by a $33 million risk-rated five loan and was on non-accrual at March 31st, 2024. In conjunction with this, we recorded a realized loss of $16 million and classified the property as REO held for sale. Also, during the second quarter, three loans migrated from a risk rating of four to a risk rating of five. These loans are comprised of the multifamily loan I mentioned earlier, one $69 million office loan in North Carolina, and one $20 million senior loan in California. We are focused on addressing all three of these loans, which would significantly reduce the balance of risk-rated four and five loans. With that, I'll turn the call over to Tasik, who will provide more details on our second quarter earnings and capital position.