Ares Commercial Real Estate Corporation

Good afternoon, ladies and gentlemen, and welcome to ARIES Commercial Real Estate Corporation's fourth quarter earnings conference call. At this time, all participants are in a listen-only mode. As a reminder, this conference call is being recorded on Wednesday, February the 12th, 2025. I will now turn the call over to Mr. John Stillmar, partner of Public Markets Investor Relations. Please go ahead, sir.

Good morning, everyone, and thank you for joining us on today's conference call. In addition to our press release in the 10-K that we filed with the SEC, we 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 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 today, we will refer to certain non-GAAP financial measures. We use these as measures of operating performance and 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. With that, I'd like to turn the call over to our CEO, Brian Donahoe. Brian? Brian Donahoe Thank you, John.

Good morning, everyone, and thank you for joining us. I'm here with Jeff Gonzalez, our Chief Financial Officer, Taesa Geun, our Chief Operating Officer, as well as other members of the Management and Investor Relations team. Today, we'll start off with some market commentary, a review of our accomplishments throughout 2024, and where we are focused going forward. Jeff will then take us through our fourth quarter and full year results in detail. In 2024, we witnessed a moderate recovery in the commercial real estate market with a particular acceleration of these positive trends in the second half of the year. The industry saw increased transaction volumes and stable to improving property values and fundamentals across almost the full spectrum of property types. While the office market remains challenged, we are seeing some green shoots and greater signs of stabilization, including positive net absorption in the US for the fourth quarter, a first since pre-COVID. The stronger level of commercial real estate transaction activity and capital market stability aligns well with our continued focus on resolving our underperforming assets. As discussed throughout 2024, our primary objective was to address our underperforming four and five risk-rated loans and to reduce our overall office exposure. We made solid progress in this area and acknowledge there is still more work to do. For the full year 2024, we reduced our risk-rated four and five loans by approximately 34%, or $182 million. As of year end, we had five loans risk-rated four and five remaining in our portfolio, totaling $357 million of outstanding principal balance. During 2024, we also reduced our office exposure, including REOs, by $151 million, representing a decline of 18% year-over-year, and exited one of our three REO assets. In our view, these actions improved the overall quality of our portfolio. In addition, we collected equity contributions on our risk-rated one to three loans of $38 million in the fourth quarter and $118 million for the full year in the form of loan paydowns, funding of reserves, capital expenditures, leasing expenses, purchase of interest rate caps, or other purposes. The improving commercial real estate market transaction activity and rate dynamics also led to a more normalized pace of repayments, particularly in the second half of the year. In the fourth quarter, we collected $147 million of repayments and $350 million of repayments for the full year, nearly double versus 2023. Further supporting our primary objective to address underperforming assets, we enhanced the flexibility of our balance sheet throughout 2024 with lower leverage and additional liquidity. In the fourth quarter of 2024, we reduced our outstanding borrowings by $172 million, which led to a $444 million or 27% reduction for the full year of 2024. By year-end, we had a net debt-to-equity ratio, excluding CECL, of 1.6 times, which was 16% lower than at year-end 2023. We believe this is an important achievement as it positions us to maximize the resolution of our underperforming assets. For 2025, we remain focused on further reducing our risk-rated 4 and 5 loans, office loans, and REO properties, with the specific goal of proving out book value. We continue to experience further momentum with respect to our positioning against this objective. So far in 2025, we've collected $166 million of loan repayments, generating an additional $100 million of cash. It is worth pointing out that our cash balance now represents approximately 40% of the current market value of the stock. These repayments now position us with over $200 million of available capital, which we believe provides us the opportunity to accelerate and drive positive outcomes in resolving our remaining underperforming assets. However, maintaining higher levels of liquidity and lower amounts of financial leverage does have an impact on our current earnings. In this context, our Board of Directors, together with our management team, have elected to adjust our quarterly dividend to 15 cents per share, a level that more closely aligns with our strategic objective. As we have noted before, while we continue to resolve our underperforming loans and REO properties, our earnings may vary quarter to quarter, and at times may be less than our newly adjusted dividend. Before turning the call over to Jeff, I want to acknowledge the unimaginable tragedy that unfolded in Los Angeles caused by the wildfires. While our portfolio is not directly impacted, this tragedy has unfortunately impacted the lives of many of our clients and colleagues, and our thoughts are with them and their loved ones during this challenging time. ARIES is working to diligently support them and the entire area in the recovery. And with that, I'll turn the call over to Jeff, who will provide more details on our fourth quarter and full year results. Jeff?