Good afternoon, and thank you for joining us on today's conference call. I'm joined by our CEO, Bryan Donohoe; and our CFO, Tae-Sik Yoon. In addition to our press release and the 10-K that we filed with the SEC, we have posted an earnings presentation under the Investor Resources section of our website at www.arescre.com.

Before we begin, I’ll 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.

Ares Commercial Real Estate Corporation assumes no obligation to update any such forward-looking statements. During this conference call, we will refer to non-GAAP financial measures.

We use these 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, Bryan Donohoe..

Thanks, John and good afternoon, everybody. This morning we reported fourth quarter results, which included the second highest level of quarterly distributable earnings in our history of $0.44 per share and capped off a strong year, where our annual distributable earnings of $1.55 per share matched our previous record in 2021.

Throughout 2022, the overall strength in our distributable earnings was driven primarily by the continued benefits of our nearly 100% floating rate interest rate sensitive asset base. In addition, we hedged or fixed approximately one-third of our liabilities.

2022 was a very successful year in which we fully covered our regular and supplemental dividends from distributable earnings at 110%. In addition, we made a conscious decision to bolster our liquidity and further strengthen our balance sheet throughout much of the year.

While our strong distributable earnings benefited from the tailwind of higher interest rates, the same higher interest rates have also led to some headwinds for the overall commercial real estate market.

Specifically, we're seeing many property owners take a pause on executing business plans as they adjust to these historic increases in market interest rates. At the same time, certain markets are experiencing weaker leasing and occupancy trends.

As has been well publicized office market in particular is facing challenges from shifting demand in a post-pandemic economy. Although, we believe our senior loan oriented portfolio has been carefully constructed, we aren't immune to the effects that these market headwinds present.

As you'll hear from Tae-Sik, these industry-wide movements have resulted in higher credit reserves, a greater number of loans in default are on non-accrual status and elevated risk ratings. We are very focused on maximizing the outcomes for these situations and we believe we are well equipped to handle them.

It's important in the context of the broader industry headwinds to take a minute to review our positioning and capabilities. At Ares, we believe we have a demonstrated playbook on navigating volatile markets and capitalizing on illiquid environments.

Our approach during these periods is first and foremost to operate with additional liquidity while keeping an eye towards opportunistic investments. The Ares Real Estate Group has over $51 billion of assets under management and more than 2,000 properties globally managed by over 240 investment professionals.

This provides significant advantages to ACRE in helping understand markets and then tapping into extensive asset level experience. These insights led us to shift into a more defensive posture in 2022 and puts us in a better position to navigate a more complex real estate market going forward.

Our overall liquidity was enhanced by $823 million in principal loan repayments during 2022, a new record for our company. In addition to these loan repayments, we realized more than $38 million of proceeds from the sale of the Westchester Marriott in the first quarter of 2022.

This was a property where we became the owner in 2019, successfully navigated operationally through COVID and executed the business plan for the property. This led to a positive return through the total life of the investment and highlights one of the many ways we can achieve successful outcomes with the property operating below plan.

In terms of our investment activity during 2022, we originated $725 million of new loan commitments with more than one-third exceptional commitment in the multifamily sector. Additionally, we invested opportunistically in AAA securities backed by a diverse pool of underlying loans.

Looking forward, there is significant uncertainty regarding the commercial real estate market and property values. Our focus will be to resolve certain situations to maximize outcomes, while prudently deploying capital into attractive new investment opportunities.

We believe our liquidity and property-level expertise position us well to successfully navigate and ultimately capitalize on the current environment. With that let me now turn the call over to Tae-Sik to walk through some of our financial highlights and further details on our portfolio and capital position..

Great. Thank you, Bryan, and good afternoon, everyone. For the fourth quarter of 2022, we reported GAAP net income of $2.9 million or $0.05 per common share and distributable earnings of $23.9 million or $0.44 per common share.

For full year 2022, GAAP net income was $29.8 million or $0.57 per common share and distributable earnings were $80.7 million or $1.55 per common share.

For full year 2022, similar to 2021, we more than fully covered our dividends through distributable earnings at 110%, as we continued to build on our long-term track record of having distributable earnings per share in excess of both the regular and supplemental dividends.

Most notably, we have delivered a consistent and growing dividend throughout the life of our company with no history of dividend reductions or delays. Turning to our asset base, we ended the quarter with a loan portfolio consisting of 98% senior loans and an outstanding principal balance of $2.3 billion diversified across 60 loans.

During the fourth quarter, we collected 99% of our contractual interest rate. In terms of our other credit quality metrics, 80% of our loan portfolio had a risk rating of three or better, which declined from 90% in the third quarter of 2022.

This change primarily reflects the negative migration of one office property loan and one mixed-used proper loan, which were downgraded from three to four due to our outlook on their respective business plans and our macroeconomic view of their respective submarkets.

As it relates to CECL, we increased our total reserve by $19.4 million during the fourth quarter of 2022 and our total CECL reserve stands at $71.3 million or about 3% of our total loan commitments at year-end 2022.

Shifting to post quarter end activity in January 2023, we successfully resolved a senior loan backed by a residential property located in California. Through our structuring capabilities and the experience of our asset management team, we were able to recover approximately 98% of our cumulative cash investment in this loan.

On a GAAP basis, we expect to take a $5.6 million realized loss in the first quarter of 2023. However, as we held a specific reserve on this loan as of year-end 2022 in the same amount, we do not expect any material net GAAP loss in the first quarter of 2023 in connection with the resolution of this loan.

This loan was our only risk-weighted five asset at year-end 2022. Since year-end 2022 driven by some of the broader market dynamics that Bryan mentioned earlier, three additional senior loans experienced maturity defaults including two loans backed by mixed-use properties and one loan collateralized by an office property.

While we have different paths to pursue for each of these three loans, our asset management team is highly engaged with a goal of maximizing the financial outcomes of each situation.

Our confidence stems from our experience and capabilities in managing underperforming situations and the strength of our balance sheet, which should provide us flexibility and liquidity as we seek to maximize outcomes.

We remain in a very strong liquidity position with more than $200 million of available capital as of year-end 2022, including cash and amounts available for us to draw on our revolving debt facility. And our debt-to-equity ratio of 2.1 times amongst the lows of our peer group provides us additional balance sheet strength and stability.

Finally, this morning, we announced a first quarter 2023 regular dividend of $0.33 per common share, as well as a continuation of our supplemental quarterly dividend of $0.02 per common share. And with that, let me turn the call back over to Bryan for some closing remarks. .

That's great. Thanks Tae-Sik. Despite rapid changes in interest rates and significant volatility across credit markets in 2022, ACRE delivered compelling distributable earnings and strong dividend coverage. We believe there are three key factors that helped us successfully navigate this environment and position us positively for 2023.

The first is the strong operating capability of our platform and property level expertise. The second is our low levered balance sheet and a strong liquidity position. And the third is our use of non-mark-to-market financing.

Let me close by saying that we are deeply grateful to our investors for the trust and confidence they have demonstrated in Ares and their support of the company. I'd also like to thank our entire team for their hard work and dedication in 2022. And with that, I'll ask the operator to open the line for questions. Thank you..

Thank you. [Operator Instructions] Our first question today comes from the line of Steve Delaney from JMP Securities. Please go ahead. Your line is now open..

Thanks. Hello everyone. Appreciated your comments. To start off with, we noted that the portfolio did actually shrink fairly meaningfully in the first quarter. I think you had $56 million of originations and a little over $300 million of repays, so a net of about 200 -- shrinkage of $263 million. So that was 11% of the portfolio.

So as we think about that I know things can be chunky and it can be anomalies, but looking out to mid-2023 or even the end of 2023 we're in this more cautious period. Should we from a modeling standpoint expect some continued shrinkage, or is it your goal to try to maintain the portfolio at relatively close to the current size? Thank you..

Yeah. Thanks for the question Steve.

I'll get started and then Tae-Sik can obviously jump Well, I think I don't -- I wouldn't point to that as enough of a data set to identify, I think over arch we sit here today in what we believe is a pretty enviable position of having liquidity both to be defensively positioned for assets that will need some capital, as well as to attack an environment that is candidly one of the best relative values or highest relative values that we've seen in the past couple of cycles.

So I don't think it's something to point to that we expect the portfolio to continue to shrink, but rather we're positioned to take advantage of idiosyncratic risk positions in a very fruitful market..

That might be a great lead into my next question. We noticed that you made just on new loan of $56 million. But given the backdrop and all the chatter about office, maybe we were a bit surprised to see that the one loan that you chose to make in the quarter was an office property in the upper Midwest.

Does this tie into your comments about being opportunistic, what caused you guys to think that's an attractive investment for your loan portfolio? Thanks Bryan..

Yeah, absolutely. I think look we noted the headwinds in office and I think we could -- we spent plenty of time debating that really as an industry group, right? I think there's – certainly assets and the cash flow profile of this building continued cash infusion by the borrower made an attractive risk return for us.

But as we touched on in prior quarters, I don't think you're going to see generally our office footprint increase over time, but there are one-off asset situations that are attractive as you continue to see industry-wide. I think the headwinds are not insignificant, but that doesn't mean there aren't assets that will be successful. .

Got it. Thanks for the comments. .

Thank you. Appreciate it..

Thank you. Your next question today comes from the line of Jade Rahmani from KBW. Please go ahead. Your line is now open. .

Thank you very much. In terms of the credit trends that we're seeing the mortgage REITs consistently have been taking an uptick in credit reserves and experiencing an increasing number of one-off maturity loan defaults.

But how would you characterize the overall environment? Are you seeing sort of a broader and widespread downturn in commercial real estate credit? Do you believe that this is focused within the debt fund and mortgage REIT space, or do you think banks and life insurance companies as well as CMBS are experiencing the same?.

It's a good question, Jade. I appreciate it.

What I'd say first and foremost is the factor that is uniform throughout all types of real estate lending is the precipitous increase in base rates, right? I think certainly we saw assets benefit from lower LIBOR so for going back two, three years and the stress in the system when you have a 400 basis point increase in rates obviously hurts from a coverage perspective, but also eventually cap rates as well.

I think the advantage if I could point to one with respect to the mortgage REIT or private lending space if you will is the more active asset management that is available to us without some of the fee loads that you might see in the CMBS sector as you work through some of these issues. And I think the capitalization obviously is a bit different.

But Tae-Sik let me see -- turn over to you for anything you might want to add as well. .

Yes, Bryan just to maybe add to some of your points. Jade, I think, what we're seeing is borrowers who are most impacted by the movements in interest rates are the ones that are being obviously the most impacted given the dramatic volatility for on the drop in rates and now the sharp increase in rates.

We're also seeing maybe a second category of borrowers who have what we define as maybe a little bit more challenging business plans that are harder to execute again in a market where not just interest rate volatility, but different trends happening in terms of for example office utilization more supply coming on into certain markets.

So really those are I would say the two general trends or buckets of challenges we're seeing those that are really impacted directly and I don't say just by changes in interest rates but primarily by changes in interest rates.

And then those that have a bit more challenged or difficult business plans that are just more difficult to execute again in a more macro challenge environment. .

Thank you very much.

The risk four and five rated loans I believe those would be considered the watch list? And can you talk to the percentage of those that are funded on credit facilities and that are funded within CLOs and what the liquidity requirements there in would be from ACREs available capital?.

Yes Tae-Sik do you want to... .

Sure. Yes. No absolutely. Thank you, Bryan. Jade it's a great question.

And obviously when we look through our portfolio as you know we are very, very careful about making sure that when we finance an asset that we know that if something goes wrong with that asset or there's a challenge with that asset that we have the liquidity and the capability to resolve that.

So one of the things that we mentioned is obviously the amount of liquidity that we have available to us today more than $200 million in our opening remarks. And certainly one of the potential uses of that is to potentially deal with any loans that we have in either CLOs or on one of our warehouse lines.

So the loans that have been status four or status five, the one loan that we had in status five, the ones that we have had on for a while, those are either unlevered in some situations or we are clearly working with the warehouse lender on those situations. And again, we have the liquidity to handle those situations.

The more recent ones that have had some maturity default issues, the three that we mentioned since year-end. Again, it's a mixture of loans that are either in warehouse lines or in our CLOs. But, again, given our liquidity situation, as well as the diversification of financing vehicles that we utilize. As you know, we have two different CLOs.

We have five different line lenders and we make sure that we have diversification by those financing vehicles. So we're in a pretty good spot to be able to deal with the leverage of our senior loans that are risk-weighted 4s at this point. .

Yes. Maybe, I'll just add one thing to Jade's question, just some specificity around it. You can assume roughly half of those risk-weighted four or five loans are unlevered. And I think that speaks to the approach we've consistently taken as Tae-Sik was outlining..

Unlevered including both CLO and credit facility?.

That's correct..

Thank you very much..

Thanks..

Thank you, Jade..

Thank you. The next question today comes from the line of Rick Shane from JPMorgan. Please, go ahead. Your line is now open..

Thanks, everybody, for taking my question and hope everybody is well. So when we look at the K, what you disclosed is that, at the end of the fourth quarter there were $45 million on non-accrual. As you also discussed on this call and in the K, there's an incremental $150 million of maturity defaults at the beginning of this quarter.

I'm curious, if that the $150 million is additive to the $45 million of non-accruals, or is some of the -- that $150 million already on non-accrual..

Hi, there. So I will take the -- yes. Thanks, Byran. Yes. Rick. So the loans that are on non-accrual as of 12/31 2022 does not include any loans that we mentioned the three loans that went into default in the first quarter of 2023. So we will, obviously, continue to evaluate those loans. We certainly evaluated them as of 12/31 2022.

Obviously we've now had a subsequent event to that. So we will evaluate it. But to answer your question, so none of the non-accrual loans as of 12/31 2022 included the three loans that subsequently went into default..

Got it. And not to be too cute here, but when I read the accounting policy, it doesn't sound like there's any discretion on defaulted loans for non-accrual.

But those -- unless there's a resolution by quarter end, that $150 million will be on non-accrual correct?.

Yes. Again, I think, we will look at each situation. Basically, we have historically put loans that have -- some of the loans that are on non-accrual have not been in default and we're still paying interest. And so I think going forward we will certainly evaluate these three loans that are now in maturity defaults, as well as any other loans.

And, again, there is time between now and end of the quarter to work with each of the situations. Again, each situation is quite unique. But we will continue to work with each of the three situations.

So I do think it's too early to maybe make a forecast or some sort of estimate of the non-accrual status potentially of those three loans that are in maturity default today. But, again, we will certainly work through very carefully all three situations and make the proper assessment at quarter end -- at the end of first quarter..

Got it. Okay. That's -- obviously there's -- there are a lot of moving parts there. There's discussion with the accountants. There's potential resolutions potential visibility to outcome that impacts all that. That said, if we were to assume that they were placed on nonaccrual $150 million, assuming roughly an 8% yield.

That works out to about $3 million, a quarter in contribution from an interest income perspective.

Is that the right way to think about it?.

Yes. I mean, each loan, I think you can tell on our sheet, we'll have its own interest rate. But, yes, that sounds roughly about the right calculation. And again, as you mentioned, I think we will be scrutinizing and certainly, paying a lot of attention to all four rated loans, right? And certainly, those three included.

And I think you outlined the considerations that we will take into account particularly, what we believe is the ultimate outcome of these loans. I think, one thing that Bryan mentioned in his opening remarks, is that each one of these particularly four rated loans, is a very sort of individual situation.

A four rating doesn't indicate a loss, doesn't indicate nonaccrual, but it does indicate a loan that deserves and warrants higher scrutiny and attention. So, I think we should leave it up there at this moment, just given that it's sort of mid-quarter.

But suffice to say that, these loans are getting very, very strong attention from our asset management team, very strong attention from our finance and accounting team, and we believe we will make the appropriate decision closer to quarter end about, what is the appropriate classification of these loans going forward. .

Fair enough. I appreciate the fact that with all of the different interests involved negotiating with the sell-side analysts, on the resolution out of call probably not your intent. .

Thank you, Rick. .

Thanks, guys.

Thanks, Rick. .

Thank you. My next question today comes from the line of Stephen Laws from Raymond James. Please go ahead, your line is now open. .

Hi, good morning, uh its afternoon. Good. To follow up quickly, on Rick's comments.

How much -- are we going to -- is this already reserved for as far as the Q1 events in general, that will move to be reallocated as a specific reserve in Q1, or do you expect material increases in the reserve? How should we see that flow through in Q1?.

Yes. Tae-Sik, why don't you get started here, if that's all right. .

Sure. Absolutely. Great question, Stephen. I think one thing that is important to recognize is that when we look at our CECL reserve, close to $50 million of that $71 million balance that we carry at year-end, is related to four or five level four or five rated loans.

We did resolve the five rate alone as we mentioned, the residential loan out in California, that was resolved and that it was $5.6 million of the total reserve. But overall, at year-end, just under $50 million or about 70% of the reserve was tied to the four or five rated loans.

It doesn't mean obviously, that that reserve isn't going to change up or down. But we do believe that certainly, a strong majority of our reserve is focused on and is allocated to derive from the four or five-rated loans. And so, there is clearly a connection between the risk ratings and the reserve amounts.

But again, that doesn't mean there won't be any change. In terms of migrating from general to specific, thus far in our companies like, we've only had one specific reserve, which again was the residential loan in California. That was rated a 5. We carried a specific $5.6 million reserve against that asset.

Obviously, once it was resolved the realized loss came very close to the specific reserve amount. So, we believe we have classified that appropriately through its life.

Again, I think it's too early to really forecast or give you any further insight certainly as of year-end 2022, we do not believe that there was any other basis for specific reserves on any of the four-rated loans or otherwise.

But again, we will continue to evaluate all the loans, particularly those that are rated four to see if any migration from four to five from general to specific is warranted. But I still think it's again too early in the quarter to make any general forecast or assessment. .

Thanks for those comments, Tae-Sik. To touch base on the office exposure, I know one of the three loans I believe was office there two mixed use of the loans that went into non-accrual in Q1. It looks like three of your four largest office loans have a maturity date in Q1.

Can you talk about those loans or those discussions? Do you expect repayments or extensions or modifications? Kind of how do you expect those -- I guess, it's loans one, two and four in office exposure?.

Yes. Good question, Stephen. I think we're working through and we're in dialogue with those folks. I think similar to what we said at the outset there's not enough of a data set necessarily to point to with those three loans.

They each have different profiles in terms of where they're at in their business plan and some of the normal discussions you'd expect to occur are ongoing. And I think it will be a bit dynamic, but things that we're working through in normal course at this point..

Okay, great. Thanks Bryan..

Thank you..

Thank you. The next question today comes from the line of Eric Hagen from BTIG. Please go ahead. Your line is now open..

Hey. Thanks. Good afternoon. I hope you guys are well. In the downgraded loans, where you're seeing, I think you noted a deterioration in the business plan.

Can you get more specific on what you're seeing there? Like how much of an additional funding component is associated with those loans and how the weaker business plan in general just kind of affects the debt yield or the value of the asset in general? And then how are you guys thinking about hedging interest rate risk from this point forward? Like what are some of the variables that you're looking at to either maybe put on some more hedges or potentially widen up in that department? Thanks..

Good question. I'll start on the business plan and then share the mic with Tae-Sik a little bit with respect to your latter question. Eric, thank you. Yes, I think as I said in the opening remarks, right, we're in the just the headwinds in certain sectors office, obviously, being the point of the spirit to a degree.

And so what that means is either renovation or value-add component of the business plan is taking longer and then in certain instances throughout our broad industry function of supply chain issues and increased costs associated with those renovations.

As you know, in general, our industry would have completion guarantees things like that associated with those business plans. But they are at times taking longer.

And I think while the benefit I noted earlier of lower SOFR, lower LIBOR for a period of time benefited these capital structures were versus where the cost of carry is simply higher than what some projected by underwriting their assets.

So, when you combine that element of stress at the capital structure level with some slower leasing intervals in certain assets, that's really what I was speaking towards.

But Tae-Sik, do you want to talk through on the interest rate side, what our thoughts are and some of the impacts that we've seen from what we did proactively a couple of years ago?.

Sure. No absolutely. Eric, great question about our thoughts on interest rate hedging. Just a little bit of context in history, and I'll just keep this very, very brief.

But our thoughts on liability management, has always been focused on match funding, right? So when we have 98% floating rate assets, we want to match that with floating rate liabilities. And really the reason, we did a very, very large hedge about two years ago, was not really to forecast which direction interest rates would move.

But again, consistent with our policy and consistent with our goal of match funding, we have a fortunate situation where we have significant in the money, interest rate floors on our assets such that even though technically they were floating rate loans, they were economically behaving like fixed rate loans, because we were so deeply in the money with LIBOR floors that were 150 to 250 basis points when LIBOR was 10 to 20 basis points.

So they were behaving like fixed rate loans. And so we felt it very consistent and very appropriate to therefore match fund are now economically behaving fixed rate assets with some fixed rate liabilities. So that's when we enter into a very large interest rate hedge about $1.3 billion, if I recall about two years ago.

And obviously we are very fortunate to have done that not knowing of course which direction interest rates would move. Of that, we still have around third of that about $410 million of notional no hedges in place today. In addition, we were I think take advantage of the interest rate curve.

And when we refinanced our $150 million -- I am sorry about my voice here -- $150 million secured term loan, we did decide to take that on a fixed rate basis. And we're able to lock in a very low interest rate there as well.

I would say going forward I think we'll continue to be guided not by our prediction of where interest rates are headed, but really our policy of match funding our assets and liabilities. And right now, again, we have a 98% floating rate asset base. And so I think we will focus in the future on a floating rate liability base..

Got it. That's helpful. Thank you guys very much..

Thank you..

Thank you. [Operator Instructions] Our next question today is a follow-up question from Jade Rahmani from KBW. Please go ahead. Your line is now open..

Thanks. Just a quick clarification, I think, Rick Shane said, there's $45 million of loans on non-accrual as of year-end. I thought the value was around -- the carrying value was around $99 million. I just wanted to check that number..

Jade, I think it's a good point. So we had one loan that's $57 million, a second loan that is $35 million. And then, the one loan that has been subsequently resolved again the LA residential the Los Angeles California residential asset of about $14 million. I think those are the three loans that were on non-accrual at year-end.

Obviously, the California loan has been resolved, but the other two are remaining..

Okay. Thank you very much..

Yeah. I think the $45 million was as of year-end 2021. And so maybe there was some thought, but it is $99 million as of year-end 2022..

Thanks..

Thank you. There are no additional questions waiting at this time. So I'd like to pass the conference over to Bryan Donohoe, for any closing remarks. Please go ahead [ph]..

Appreciate it. I just want to thank everybody for their time today. We appreciate your continued support of Ares Commercial Real Estate. And we look forward to speaking to you again on our next earnings call. Thanks everybody..