Ares Commercial Real Estate Corporation

Good afternoon, everyone. Welcome to ARIES Commercial Earnings Conference Call. At this time, all participants are in a listen-only mode. As a reminder, this conference is being recorded on Tuesday, August 5th, 2025. I would now like to turn the call over to Mr. John Stillmar, partner of Public Markets Investor Relations. Please go ahead, sir.

Thank you, and good afternoon, everybody. Thanks 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 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. 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 on its SEC filings. AREA's 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 measures of operating performance, 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 Donahill. Brian?

Thank you, John. Good afternoon, everyone, and thank you for joining us. I am also joined today by Jeff Gonzalez, our Chief Financial Officer, Taeseok Yoon, our Chief Operating Officer, as well as other members of the Management and Investor Relations team. During the second quarter, we continued to execute on our strategic objectives. We maintained a strong balance sheet, which has driven our progress, addressing our risk-rated four and five loans and further reducing our office loans in the quarter. Importantly, the portfolio no longer includes loans collateralized by properties that are primarily used for life sciences. Given the progress we have made in narrowing the range of potential outcomes in our portfolio and having achieved our target balance sheet objective, we have begun investing in new and attractive loans. As we look forward, we expect origination activity to increase as we collect repayments and further address our risk-rated four and five loans and reduce our office loan holdings. Let me now walk you through the details of the quarter and lay the foundation for how we see these activities unfolding in order to drive higher levels of distributable earnings and dividend coverage. During the second quarter, we reduced our office loans to $524 million, a decrease of 10% quarter over quarter, and a decrease of 30% year over year. This decrease was driven by repayments, active asset management, and the decision to accelerate resolutions. Across office loans, including our one rated five office loan, we saw improved leasing fundamentals and broadly speaking, more positive capital markets around the sector, which may also impact the rate of resolutions. During the second quarter, we exited a $51 million office life sciences loan and took a $33 million realized loss, which was in excess of the prior quarter's CECL reserve. While we don't take any loss lightly, we believe the resolution of this loan creates greater stability in our portfolio. Reductions in federal funding for life science research led to further erosions in tenant demand and further elevated the supply-demand imbalance for life science properties. By exiting this loan, we removed significant unfunded commitments in the portfolio. The exit of this loan contributed to the 50 percent decrease in future funding commitments from $73 million in 1Q 2025 to $36.5 million as of June 30, 2025. We believe utilizing the strength of our balance sheet to exit the loan created greater certainty around our portfolio and allows us to get back to growth more quickly. We see this as an important advancement for the company as there are no remaining loans in the portfolio collateralized with properties that are primarily used for life sciences. We also changed the risk rating on an $81 million senior loan collateralized by an office property in Arizona to a risk-rated four loan from a risk rating of three. While occupancy increased at this property during the quarter, and the sponsor has historically supported the asset, the lease-up business plan is taking longer than expected, and with maturity coming up in October, discussions regarding an extension or modification with the sponsor are taking place. But we now shift to our overall risk-rated four and five loans. As of June 30th, 2025, we had one risk-rated five loan and four risk-rated four loans, maintaining the same number of risk-rated four and five loans as we held last quarter. Notably, two of the five risk-rated four and five loans comprise 75 percent of the outstanding principal balance. The first of these two loans is our risk-rated five Chicago office loan with a carrying value of $146 million. Occupancy at this property is stabilized and remains above 90% with a weighted average lease term of more than eight years. Post-quarter end, the positive momentum at the property continued as a significant tenant amended and extended its lease resulting in a $3 million payment to our borrower, upon which the borrower applied these proceeds to reduce the principal balance of the loan. While we continue to see positive momentum towards the business plan, we note that challenges remain in the office sector with respect to the depth of investor demand, financing availability, and thus valuations for office properties. The second of the two largest risk-rated four and five loans is our risk-rated four Brooklyn, New York residential condominium loan with a carrying value of $113 million. This property continues to hit development milestones on budget with nearly all of the remaining necessary materials to complete construction procured, which mitigates supply chain and known tariff risks. Subsequent to quarter end, the soft marketing launch began at the property while the formal marketing and sales process is targeted to begin by 4Q 2025. Beyond these areas of focus in our loan portfolio, our risk-rated 1-3 loans, which are primarily collateralized by multifamily, industrial, and self-storage properties, continue to perform well with strong overall execution of business plans. Specifically, during the second quarter, we upgraded a risk-rated three $56 million loan collateralized by a hotel property to a risk-rated two loan based on positively trending occupancy and operating cash flow levels. Beyond this positive risk-rating upgrade, we believe the overall loan portfolio is much improved over recent quarters. Further, our balance sheet is positioned to both drive additional resolutions as well as invest our capital in new loans. To this end, following the end of the second quarter, we successfully executed our first investment commitments of the year. We closed four senior loans totaling $43 million in loan commitments, collateralized by self-storage properties. While this marks our initial deployment into new loans in 2025, the overall ARIES debt business has remained actively engaged in the real estate market with a strong and growing pipeline of opportunities. In the past 12 months, the team has originated over $6 billion of new investment commitments, primarily focused on mixed-use, industrial, and multifamily assets. Supported by the scale and reach of the broader ARIES real estate platform, We expect origination activities to build in the third quarter and in future periods. While it is hard to predict timing, over the next 12 months, we expect the portfolio to be equal to or larger than it was as of 2Q 2025. From an earnings standpoint, we recognize that 2Q 2025 distributable earnings, excluding losses, of $0.09 per share is below our dividend level of $0.15 per share. However, we remain confident that our earnings potential is in excess of the current dividend level. Our confidence in our earnings potential is derived from a number of levers that we can pull to enhance earnings, including the resolutions of our higher risk-rated assets, redeploying our additional capital, and making new loans. Looking ahead, we recognize that results may be uneven quarter to quarter, but our strategy remains clear our execution purposeful, and our outlook optimistic. Through our deliberate actions, we remain focused on accelerating resolutions on our higher risk assets while not jeopardizing the integrity and strength of our balance sheet as we seek to clarify and demonstrate book value as quickly as possible. Ultimately, these actions and our return to investing in today's attractive environment should collectively begin to methodically rebuild our earnings in future periods. And with that, I'll turn the call over to Jeff, who will provide more details on our second quarter results.