Ares Commercial Real Estate Corporation

Please stand by. We're about to begin. Good afternoon, everyone. Welcome to the ARIES Commercial Real Estate Corporation's third quarter earnings conference call. At this time, all participants are in a listen-only mode. Later, you will have the opportunity to ask questions during the question-and-answer session. You may register to ask a question anytime by pressing star 1 on your telephone keypad. As a reminder, this conference is being recorded on Thursday, November 7, 2024. I will now turn the call over to Mr. John Stillmar, Partner of Public Markets Investor Relations. Please go ahead, sir.

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 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. Average 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 measures of operating performance, and these measures should not be considered in isolation from or 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 Brian Donahill. Brian? Thank you, John.

Good afternoon, everyone, and thank you for joining our third quarter 2024 earnings call. I'm joined today by Jeff Gondalas, our Chief Financial Officer, Taesik Yoon, our Chief Operating Officer, as well as other members of the management and investor relations team. As we began discussing approximately two years ago at the beginning of the Fed's tightening cycle and entering the period of distress and uncertainty in the commercial real estate market, we set forth two primary goals. The first was to further improve our balance sheet flexibility and liquidity in order to address our higher risk-rated assets. The second goal was to prudently and expeditiously resolve those same assets and reinvest the resulting available capital to reshape our portfolio into more stable assets. With the more positive backdrop for commercial real estate and the progress we have made in positioning our balance sheet, We expect to accomplish our first goal by year end and accelerate our second goal. Supporting this plan are the encouraging signs of improvement in the commercial real estate market, evidenced by increasing transaction activity and stabilizing to slightly increasing property values. We see strengthening fundamentals such as leasing velocity and future supply reductions as support for these values. While the office market remains challenged, we are beginning to see some signs of stabilization and we are hopeful that we will see further progress moving forward alongside potential future rate cuts. For us, this overall more constructive market environment is supporting both our goals for the company. During the quarter, we reduced our risk-rated four and five loans by approximately 33% or $157 million compared to last quarter. Our risk-rated 4 and 5 loans now account for 17% of our total loan portfolio at the end of the third quarter. The progress in reducing our risk-rated 4 and 5 loans during the third quarter was driven primarily by the resolution of two risk-rated 5 loans. The first was a full repayment of a $98 million risk-rated 5 Texas multifamily loan, where net proceeds were $6.5 million greater than our carrying value, net of the CECL Reserve held against this loan. The second was a completed deed in lieu of foreclosure of a $69 million risk-rated five North Carolina office loan, for which we incurred a realized loss that was in line with our prior quarter CECL Reserve. It is worth noting that the North Carolina office loan was previously on non-accrual. By owning the property, we expect to earn a relatively attractive cash return on the asset at our carrying value. Our risk-rated four and five assets are down more than 40% since the year end 2023. During the third quarter, there were no new migrations into the risk-rated four and five loans. However, the $163 million Illinois office loan was downgraded from a risk-rated four to a risk-rated five. Despite the property being well-leased and the borrower supporting the asset to date, recent indications are that the borrower may not support the asset beyond the economy maturity in March of 2025. This revised view, alongside overall weak conditions for the office market, led us to change the rating of this loan. Shifting to the loans with a risk rating of three or lower, borrowers are continuing to support these underlying business plans by contributing $37 million in the third quarter, or $138 million in the past 12 months of capital as paydowns of loans, funding and reserves, capital expenditures, leasing expenses, purchase of interest rate caps, or other purposes. The improvement in CRE sentiment and overall rate dynamics are also driving greater liquidity in the sector and stronger repayments in our portfolio. To date, we received $340 million of repayments, with more than 75% of repayment volume received since the beginning of the third quarter. We expect further repayments to continue in fourth quarter and into the first quarter of next year. These repayment trends, the positive shift in market sentiment, and the progress we made in the positioning of the balance sheet should allow us to accomplish our goal of de-levering the balance sheet and bolstering liquidity by year-end 2024. As we look into 2025, we believe our progress this year will position us to accelerate the resolution of our risk-rated four and five loans, enabling us to prove out book value and opportunistically reinvest repayments to reshape our portfolio. And with that, I'll turn the call over to Jeff, who will provide more details on our third quarter earnings and capital positions. This is Jeff's first call since being named CFO in September. So over to you, Jeff.