Good afternoon. Welcome to Ares Commercial Real Estate Corporation's First Quarter Earnings Conference Call. As a reminder, this conference is being recorded on Wednesday, May 7, 2025. I will now turn the call over to Mr. John Stilmar, 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 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 and 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. Ares 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 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 the like titled measures used by other companies. Now I'd like to turn the call over to our CEO, Bryan Donohoe. Brian? Thank you, John.

Good afternoon, everyone, and thank you for joining us. I'm also joined today by Jeff Gonzales, our Chief Financial Officer, Tae-Sik Yoon, our Chief Operating Officer as well as other members of the management and Investor Relations teams. I'm pleased to report that we had a very successful quarter. We achieved one of our primary objectives by building liquidity to a level which we believe will allow us to accelerate resolutions of our risk rated four and five loans, reduce our office loan concentration, and maximize our REO investments. Each of these will advance our collective goal of demonstrating book value, further supported by the improved underlying fundamentals of our portfolio. Importantly, our current balance sheet positions us to evaluate a number of opportunities for investing our additional capital, including into new loans. Let me start by underscoring some of our recent accomplishments that led to our strong balance sheet positioning. First, we collected $307 million of repayments across nine loans, double the amount of repayments we received in the prior quarter and the highest amount of repayments for a quarter as a percentage of outstanding principal balance in the company's history. Second, with the acceleration of repayments and additional liquidity, we reduced our outstanding borrowings by $228 million to $946 million and lowered the net debt to equity ratio, excluding CECL, to 1.2 times compared to 1.9 times at the end of the first quarter of 2024. Third, as Jeff will touch on in more detail, through the redemption of our FL3 securitization and the renewal of our $450 million Wells Fargo secured funding facility, we reduced our borrowing costs, locked in attractive terms on the underlying assets moved from our FL3 securitization and extended the term of our secured funding facilities. Collectively, these steps increased our available capital…

Thank you, Bryan. For the first quarter of 2025, we reported GAAP net income of approximately $9.3 million or $0.17 per common share. Our distributable earnings for the first quarter of 2025 was approximately $7.2 million or $0.13 per common share, and there were no realized losses incurred in the first quarter. We also collected $2.9 million or $0.05 per common share of cash interest on loans that were on nonaccrual during the quarter and was accounted for as a reduction in our loan basis. Our portfolio also exhibited stable credit quality as compared to the prior quarter with no new risk rated four or five loans and book value per share of $9.88 which was consistent with the $9.90 book value per share at December 31, 2024. The acceleration of repayments that began in the second half of 2024 continued into the first quarter with $307 million in repayments, which is more than double the amount of repayments received last quarter. While these repayments will have an impact on our near term earnings until we are able to reinvest our available capital, they further our objective of proving out book value. Reinforced by the strong repayments in the first quarter, we continued to drive further financial flexibility by reducing our outstanding borrowings even further to $946 million at the end of the quarter, a decrease of 19% quarter-over-quarter and 36% year-over-year. Our net debt to equity ratio, excluding CECL, declined to 1.2 times at the end of the first quarter, down from 1.6 times at the end of the fourth quarter and 1.9 times at the end of the first quarter of 2024. As Bryan mentioned, during the first quarter, we took proactive steps to further enhance the financing of our loan portfolio. First, we opportunistically redeemed our FL3…

Thank you, Jeff. We've made meaningful progress on many of our previously stated goals and continue to build upon our solid foundation at ACRE. Our platform is supported by the experience and capabilities of the greater Ares Real Estate team, which more than doubled in size with Ares acquisition of GCP in March. This added scale further enhances our ability to execute on our strategy on shareholder returns in the long run. We are proud of the progress we have made. However, our near term earnings may vary quarter to quarter as we continue to execute our strategy in an uncertain economic environment. In the long term, we believe the capabilities of our team and the strength of our balance sheet positions us to build shareholder value. As always, we appreciate you joining our call today, and we'd be happy to open the line for questions.

We'll go first today to Rick Shane of JPMorgan. Please go ahead.

Look, it sounds like there's been some progress on the Chicago office loan. It's still held as a rated five loan. I guess what I'm really trying to understand is you've got a building that's 90% occupied. It's got a weighted average lease term of eight years. On the face value that sounds pretty compelling. Is the issue here the implied cap rate suggests that you guys are underwater in the loan? Is it that the lease rates are so far below what was intended that the cash flow is not covering or is it an interest rate issue? And given the progress, is there any potential that either the reserve is overly conservative or we could see this loan migrate to a four over time?

Yes, it's a good question. And obviously, we did try to give the facts around this with transparency. I think if you think about the vintage of origination here, you've clearly seen a couple of things go and well publicized in that against office assets and against Chicago and rates being one of them. So I think it's reflective of an overall shift in risk premium associated with office generally and more specifically around Chicago. So we've, as always, tried to be forthcoming with our views and it is of a culmination, I would say, of all of those factors that have impacted office values even when the headline fundamentals are positive. So this is a good asset, but one in which a market and different dynamics have gone against it. So we maintain a reserve that's reflective of the asset.

Got it. And look, obviously the objective is and you guys have been clear in terms of resolving non-recurring loans and REO. What should we anticipate as a potential cadence as we move through the year? We took a pretty conservative view into the first quarter and there were less realized losses in the quarter than we necessarily anticipated and that may just be you guys continuing to work through and potentially enhance value as you resolve outcomes. But how should we think about the migration of those non-performing loans over the next call it three or four quarters?

Yes, it's a great question and one in which with everything going on in the market, the average does not necessarily tell the full story, right? So we've seen a relatively regular cadence of resolutions and repayments throughout the first quarter, but we've also seen a good bit of volatility uptick that we've all collectively shared in the industry and beyond since the end of the quarter. So predicting the cadence is difficult. You can have transparency in line of sight to certain events, but as has occurred over the last couple of years, you can clearly still find some surprises out there. I think that it will be measured and given the scale of our portfolio and the individual assets performing as such, it'll be a little bit more difficult to predict, which is why we've maintained this balance sheet positioning to be able to accelerate those resolutions when it makes sense and withstand those that don't necessarily come in as expected.

We go next now to Steve Delaney of Citizens JMP.

The loan portfolio shrunk about $300 million so you're down to 1.35. Your comments, Bryan, that you certainly have the balance sheet it sits today allows for new lending. But I'm getting a sense as you were talking that well one you're going to be very selective which we would certainly understand and appreciate. But it sounds a little bit like you're not in a hurry. And I'm curious whether you're waiting for the market to settle down a little bit, whether that's the tariff thing or just trying to run with a more conservative balance sheet? Just trying to kind of understand the mix there of your focus and if we can expect at some point by the middle of the year that you would begin to regrow the loan portfolio?

Yes, Steve, it's a great question. I think the word you chose on the mix is spot on, right? I think we flexibility such that we can evaluate all of the opportunities that we mentioned in the prepared remarks, including being selectively opportunistic around new investments when they arise. The tariff announcement has clearly interrupted at least the acquisition side of our industry over the past few weeks growing to a month, but we also see the refinancing opportunities that are out there as a credit provider. So I think we're going to balance all of those things and the flexibility that we've created with these repayments and the expectation for further will allow us to do so. I think especially in the second half of the year as the world is able to digest the tariffs and get rid of some of this volatility and get to whatever that new normal is, will provide us a more stable operating background to make those decisions more firmly. So we're going to continue to watch and evaluate the opportunities, from a lending standpoint as well as the world.

That's helpful color and helps for modeling purposes that you are being patient. My assumption looking at the balance sheet and the changes in your comments led me to that, but I appreciate you for emphasizing it. Look, the stock is up today. I leveraged that up in the stock, but I had planned even before that I was thinking you last night we had it at about 42% of book or something in that ballpark. Rohami [ph], do you have a buyback authorization and is that one of the capital allocation choices that you and the Board will have here over the next several months?

We do have a $50 million authorization in place through July of this year. Is absolutely one of the items that we are evaluating whether to use our additional capital to buy back stock. It is important for to maintain a certain capital base that we feel that's important for our company going forward, but it is something that we'll continue to evaluate.

We'll go next now to Jade Rahmani of KBW.

Can you give an update on the Life Science Boston project?

I think clearly that market has struggled. We're in discussions with that sponsor. I think we've got a little over a year left on that term. We've seen some migration or negative supply growth in life sciences as some assets in that overall market have been considered or thought about or converted back to traditional office use, which a few years ago would have been fairly contrarian. So I think there's still a story to be told there, but I'd say the reserve approach that we've taken across the portfolio we feel has been appropriate, but more to come on that asset certainly.

You mentioned strategic initiatives in your remarks. Was wondering what that refers to?

I wouldn't take it as much more than we are constantly evaluating strategy. Jeff talked about share buybacks and deployment into new investments, and I really wouldn't consider it much beyond that.

There's been a number of things going on at Ares, including the GCP acquisition that you mentioned and real estate growing the real estate footprint there, whether it be on the equity or the debt side, remains a priority. So that's why I asked.

Absolutely. I think the GCP acquisition, obviously, we're still in the digestion phase there, but it's been great to welcome those colleagues to the team. And I think one of the key takeaways from that, Jade, has been expanding our areas of vertical integration similar to what we got with the Black Creek acquisition two, three years ago with the logistics sector. We've expanded some of those expertise globally, added data center, self-storage, a few other asset classes where that expertise is, I think I mentioned at the tail end of the prepared remarks, we think will inert to the benefit of certainly the Ares shareholders and ACRE as well.

And Mr. Donohoe, it appears we have no further questions this afternoon. I'd like to turn the conference back to you for any closing comments. That's great. I just want to thank everybody for the time today. I appreciate the continued support of Ares Commercial Real Estate. And as always, we look forward to speaking with you on our next earning call in about 90 days.

Thank you. Ladies and gentlemen, this concludes our conference call for today. If you missed any part of today's call, an archived replay of this conference call will be available approximately one hour after the end of this call through June 7, 2025 to domestic callers by dialing 1800-695-0715 and to international callers by dialing (402) 220-1423. An archived replay will also be available on a webcast link located on the homepage of the Investor Resources section of our website. Again, thanks so much for joining us, everyone. We wish you all a great day. Goodbye.