Good afternoon. Welcome to Ares Commercial Real Estate Corporation's second quarter, June 30, 2023 earnings conference call. At this time, all participants are on a listen-only mode. As a reminder, this conference is being recorded on Wednesday, August 2, 2023. I will now turn the call over to Mr. John Stillman, Managing Director of Investor Relations. Good afternoon, everybody, and thank you for joining us on today's conference call. I'm joined today by our CEO, Bryan Donohoe, our CFO, Tae-Sik Yoon, and other members of the management team. In addition to our press release and the 10-Q 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 expectation of market conditions and management's judgment. The statements are not guarantees of future performance, conditions, 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 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 as a measure of operations, 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. Bryan? Thanks, John, and good afternoon, everybody. This morning, we reported another quarter of solid results as our distributable earnings have continued to benefit from rising interest rates, as our unlevered effective yield is nearly 9%. For the second quarter, our distributable earnings fully covered our dividend, and we repurchased about 1% of our outstanding shares at pricing, which was accretive to our book value per share. We continue to maintain strong levels of liquidity on our balance sheet, which provides us with the opportunity to drive positive outcomes on underperforming properties. Additionally, as we begin to see capital flows and some stability return to certain sectors within the real estate market, our liquidity position and our access to accretive leverage should allow us to opportunistically invest in an increasingly attractive market for new investments. During the Q2, we focused on proactively managing our portfolio to maximize positive outcomes on our watch list assets. We believe our team's experience across debt and equity positions us well to navigate these types of environments. Specifically, beginning in 2022, utilizing the market insights we gleaned across the Ares platform in corporate credit and real estate equity, led us to reduce our investment activity and focus on enhancing our liquidity, further deleveraging our balance sheet and adding to the strength of our overall capital position. The result of this is a net leverage ratio of below 2.0x, $215 million of cash and amounts available for us to draw on our working capital facility and no spread-based mark-to-market financing. We believe our balance sheet position provides us with multiple channels to continue to drive shareholder value over the long term. We believe our capabilities and balance sheet flexibility are illustrated by how we are managing our $83 million senior loan, collateralized by a mixed-use property in Florida that we discussed on last quarter's earnings call. We expect to complete the foreclosure and take the asset as REO in the Q3. Importantly, we do not anticipate taking a loss or impairment on the foreclosure. As a reminder, the property exhibits stable performance underpinned by a +9 AAA-rated government office tenant and well-leased retail space, with the opportunity for our retail equity colleagues to enhance the tenancy and cash flow. Overall, the property is 90% leased and continues to generate cash flow that fully covers current interest payments, given its unlevered cash yield to our position is in the high single digits today. The property has generated strong leasing interest, and there are advanced negotiations with several significant tenants that have the potential to materially enhance the already strong cash flow profile of the property. With a healthy cash flow profile and strong leasing momentum, we are optimistic about the future prospects for this property. We believe the breadth of asset management experience available within the Ares Real Estate platform is a key factor in both evaluating and operating this specific opportunity. We mentioned earlier that we are starting to see some positive indications of stabilization in the commercial real estate market. With this, we believe we will begin to see opportunities for more loan originations. Our strong overall balance sheet position, alongside less competition from banks, should provide us with opportunities to provide capital at historically wide spreads and we believe lower than average historical risk profiles. Merger and acquisition activity in the banking sector, capital market stability, and a nascent pickup in transaction volume indicate some thawing in these markets. With more than $250 billion of unspent US real estate dry powder and continued capital flow from international investors, the backdrop is there for a recovery across most property types.... we believe the current opportunity set will only be enhanced by the elevated level of maturities scheduled to occur in the next three years. Given these favorable market dynamics, we're selectively finding accretive investment opportunities. In the Q2, we funded $80 million of new borrowings, including a $49 million senior loan commitment for an industrial property with unique cold storage capabilities that create significant barriers to new supply formation. Our ability to provide this financing with meaningful equity behind our loan to a premier sponsor, demonstrates the opportunities in today's lending environment. We are also uniquely positioned to benefit from using available borrowing capacity on our revolving FL3 CLO with a legacy cost of funds, which enhanced the levered yield associated with the opportunities we funded this quarter, including the industrial loan we closed. We also continue to believe that our own stock is a compelling investment opportunity. We repurchased 536,000 shares, or about 1% of our outstanding stock, for an aggregate purchase price of $4.6 million, or $8.58 per share on average. With a renewed $50 million stock repurchase authorization from our board in July, we are positioned to opportunistically invest further in what we believe is a compelling value in our stock. With that, Tae-Sik, let's walk through some of our financial highlights and further details on our portfolio and capital position. Great. Thank you, Bryan. Good afternoon, everyone. For the Q2 of 2023, we reported a GAAP net loss of $2.2 million, or $0.04 per common share. This loss was primarily due to a $20.1 million net increase in our CECL provision, or about $0.37 per common share. Distributable earnings for the second quarter of 2023 were $19 million, or $0.35 per common share, which fully covered both our regular and supplemental dividends. Turning to our portfolio, we ended the quarter with 53 loans held for investment, consisting of 98% senior loans and an outstanding principal balance of $2.3 billion. In terms of our credit metrics, our non-accrual levels were stable quarter-over-quarter. We collected 96% of our contractual interest. 74% of our loan portfolio had a risk rating of three or better, which declined slightly from 78% as of the first quarter of 2023. This change primarily reflects the negative migration of two loans from a risk rating of two to a risk rating of four. The first of these two loans is an $18.7 million senior loan backed by a multifamily property. On our last call, we discussed that this property experienced a payment default early in the second quarter. The property is currently being marketed for sale by the borrower, and based on preliminary indications of value, we expect that the proceeds from this sale will be sufficient to fully cover our loan balance. The second loan that is now risk-rated four is a $68.9 million senior loan backed by an office property in North Carolina. The property continues to pay interest, and we are currently working through a potential loan modification with the borrower. Our total CECL reserve at June 30, 2023, is at $112 million, or about 5% of our outstanding principal balance. Of the $112 million in reserves, 43%, or $48 million, relates to specific reserves for our two loans that are risk-rated five, which together have an outstanding principal balance of $92 million. The $4 million increase in the specific reserve this quarter on these two risk-rated five loans was driven by further clarity around the specific outcomes of each ongoing sales process. The specific reserves for these two assets includes a $5.9 million reserve on a $35 million senior loan backed by a hospitality property in the Chicago metro area, and $42.1 million reserve on a $56.9 million senior loan backed by an office property also located in the Chicago metro area. Let me provide some further details on how our reserves align with our risk ratings. As previously mentioned, we have specific reserves of $48 million on our two loans that are risk-rated five, representing 52% of the $92 million in outstanding principal balance. Of the remaining $64 million of general reserves, another $47 million relates to $498 million in outstanding principal balance of our eight loans that are risk-rated four, which equates to approximately 9.5% of the total risk-rated four loan outstanding principal balance. The remaining $17 million of our total CECL reserve relates to the $1.7 billion of loans that are rated three or better, equal to about 1% of the outstanding principal balance. As Bryan referenced, we remain in a strong liquidity position with more than $215 million of available capital as of June 30, 2023, including $143 million in cash and further amounts available for us to draw on our working capital facility. Our net debt-to-equity ratio was stable at 1.9x as of June 30, 2023, providing us additional balance sheet strength and flexibility. We also extended our $250 million Morgan Stanley credit facility to July 2025, with no material changes to terms and pricing. As a result, none of our secured financing facilities that we currently have drawn upon have initial maturities before 2025, and none of our financing is from spread-based mark-to-market sources. Before turning the call back over to Bryan, let me discuss our recent dividend announcement. We are very pleased to have been able to distribute to our shareholders a portion of the earnings benefit we derived from LIBOR floors on our loans and interest rate swaps on our liabilities by paying out $0.02 per quarter in supplemental dividends. Since Q1 of 2021, and for 10 consecutive quarters, we have paid out more than $10 million to our shareholders in the form of supplemental dividends, all on top of our $0.33 per quarter regular base dividend, which during the same period totaled $165 million. In comparison, again, since Q1 of 2021, our aggregate distributable earnings were $181 million, meaning that we fully covered both our regular and supplemental dividends. As we forecasted, and in accordance with the business plan, the LIBOR floors on our loans are no longer in the money, and our interest rate swaps have mostly wound down. After careful consideration, going forward, we believe that it is in the best interest of ACRE and our shareholders that rather than continuing to pay the supplemental $0.02 per quarter dividend, that we instead focus on preserving capital to provide us with the opportunity to make further common share repurchases and originate new loan investments. In fact, as you heard from Bryan, during this past quarter, we already repurchased $4.6 million of our common shares, which in dollar terms represents more than 4 quarters of paying out the $0.02 per quarter in supplemental dividends. With that, let me turn the call back over to Bryan for some closing remarks. Thanks so much, Tae-Sik. We believe we're making steady progress on resolving our underperforming assets, and our liquidity and balance sheet provide us with great optionality. We believe we can leverage the significant experience of the Ares platform to support underperforming assets and be more proactive in investing in the growing market opportunity. We continue to believe it will take time for this cycle to play out and recognize there will be challenges ahead. Because of these many advantages, we believe we are well positioned to maximize outcomes and continue to deliver attractive shareholder returns on the other side of this cycle. Let me close by saying that we are deeply grateful to our investors for the trust and confidence they've demonstrated in Ares and their support of the company. I'd also like to thank our entire team for their hard work and dedication. With that, I'll ask the operator to open the line for questions. At this time, if you would like to ask a question, please press star then one on your touchtone phone. If you would like to withdraw your question, please press star then two. Our first question comes from the line of Rick Shane with JP Morgan. Please proceed with your question. Thanks for taking my questions this morning. Look, I, I think we're all trying to get a sense of where we are in the credit cycle. It feels early. We're starting to see this quarter a higher frequency of realized losses within portfolios. Based upon your experience in previous cycles, how long... And, and again, trying to gauge this on a quarter-by-quarter basis is, is almost impossible, but how long do you think this will persist? Is it a one year headwind? Is it a two year headwind in terms of realized losses? Appreciate the question. I think it is, there are some unique attributes to this cycle. I think we've mentioned this in prior quarters. Normally, what we'd see at the onset of credit cycles would be, issues in the corporate market lead and then kind of the commercial real estate market follow. Given the rapid rise in rates, I think you're seeing a little bit of assimilation there, where you've seen corporate deterioration to some degree, but also a more rapid increase in some commercial real estate assets having some of those issues in real time. Fairly unique in that regard. I'd say overarching, though, you know, despite the rise in rates, which has that gravitational effect on all assets that are levered, outside of the office sector, you're continuing to see strong fundamentals, underlying or underpinning asset performance. To your specific question on timing, our hope and what we're seeing is an acceptance of this rise in rates just being part and parcel with the market landscape, and hopefully a quicker resolution on certain assets as you really pick through the winners and losers in the office sector, and continued performance of other asset classes that weren't overleveraged. I wish I could be more specific in predicting it, but I think 12 to 18 months would be a good assumption from here. Great. I appreciate that. Thank you. Our next question comes from the line of Sarah Barcomb with BTIG. Please proceed with your question. Hey, everyone. I was just hoping we could touch on the office portfolio for a minute. Do you think you could speak to the leasing momentum that you're seeing at those properties? Are, are there any specific properties worth highlighting that have had good news leasing? On the other side, maybe where there's significant upcoming expirations or move-outs. Anything specific you can give us there? The specifics will be tough, but I appreciate the question. I think we have seen generally increased traffic for, again, I mentioned in my, my prior answer, the, the, the winners in the, the broad landscape of office. You're seeing some of the equity office REITs reporting with, with some similar narratives. Certainly, you've seen capital flows return in, in some elements of scale to, to Class A institutional assets. On the leasing side, I'd say a couple of things. We, we are seeing increased foot traffic, things like that, around certain assets. That's coupled with a bit of a headwind in terms of leasing costs that have also increased. We're balancing those two factors. Certainly, it feels like, and I, I don't have empirical data to point to here, but from a utilization standpoint, it feels like we may have troughed in terms of people going to work. It feels like, especially post-Labor Day, the momentum is there for more utilization. While the right sizing of some of these structures and leases will take some time, it feels like we're finding some direction and footing broadly in the office market. Okay. And then apologies if I missed this, if you already spoke to it, but just trying to gauge, the timing, and I, I know this is a bit difficult to do, but, on the, the $42 million specific reserve on the office asset and the $6 million reserve on the hotel, when do you think those could manifest into charge-offs? You know, maybe even just relative to each other, roughly. Could you give any detail there? Sure. Good question, Sarah. This is, this is Tae-Sik. In terms of the hotel loan, again, I think we're further along in that process, and we're hopeful to resolve that really in the third quarter. Again, just a note of caution, of course, that, you know, during these times, transactions are, you know, a little less predictable in terms of timing, but we believe we're on track for Q3. With respect to the office loan, that's also risk rated five in Chicago, again, I think we're in a little bit of an earlier stage on that process. Again, we are working very, very diligently to resolve that. It's probably gonna be towards year-end, if not heading into early 2024. We're probably, you know, call it six months out, plus or minus. It's very unlikely to be a third quarter event, for, for that office property, if that's helpful. Okay, great. Thank you. Our next question comes from the line of Doug Harter with Credit Suisse. Please proceed with your question. Thanks. You talked about the, you know, potential to see some, some new loan activity. You know, can you potentially size that? You know, would you expect to grow the balance sheet, or is this more maintain the size? You know, how are you thinking about, you know, where leverage levels can go if those opportunities come to fruition? Yeah, absolutely. I'll start. I'll let Tae-Sik chime in as well. I think you saw in our prepared remarks the single origination that we did see this quarter, and the commentary that it does feel like there's starting to be more of an opportunity set for us and more stability around valuation, and each of those things should be contributing factors. I think the fact that we've got additional leverage available to us, both through potentially increasing from our sub 2.0, but also the FL3 legacy CLO that we work with, which is extremely accretive leverage, especially given the rise in spreads that we've seen over the past 18 or so months. I wouldn't say that the market is in equilibrium yet, so it will be more sporadic in nature. I think you can assume a further increase throughout the following couple quarters as buyers and sellers of real estate come to agreement on price, and also just that maturity wall that has been well advertised, I think, as kind of a headline risk, but we really see it as an opportunity. You know, the spread associated with the loan that we made this quarter was probably a significant increase from where it would have been 18, 24 months ago, but south of what's available in the market, just given the credit metrics associated with it. When combined with the legacy liability structure, it produces a really interesting yield premium to, to historical norms. I wouldn't say it's a normalized market, but I think you can expect more of the same moving forward from here. Great. Thanks, Bryan. Our next question comes from the line of Steve Delaney with JMP Securities. Please proceed with your question. Hi, everyone. Thanks for taking the question. I wanted to talk a little more about the Florida mixed-use property that you anticipate foreclosing on. Just to be clear, you indicated no impairment. So does that imply there's no specific reserve on, on this particular property at this time? Steve, thank you very much for your question. That is correct. You know, again, this is a loan that we have been working very, very closely on, of course. As we mentioned, you know, this property is performing, we believe, very well with strong tenancy and cash flow. We do not have any material specific reserve against this asset. We believe that when we do take it REO, that we will not recognize any fair value loss, you know, upon it converting to an REO asset. That is correct. Great. It sounds like this is not going to be a take back and flip situation, though, from Bryan's comments, I gathered that your equity people, you know, asset management people, have some thoughts about how to enhance the value. If that's correct, should we think of this more like the, the hotel in Westchester that you took back a few years ago and managed that back to a profitable outcome? I, I think that was a matter of two or three years. This sounds like maybe this won't take that long. Just a little color around that would be helpful. Yeah, I think there's a little bit of subjectivity to it, but I think your general approach is correct. Our hope would be to resolve it more quickly than the Westchester Marriott situation, but as we indicated in my remarks, we are seeing some potential to improve on the cash flow and ultimate value resolution here. The retail team that sits more generally with our equity investment vehicles, but to bring them to bear on this asset, we think can be accretive. So we think there's some value creation out there. That said, we remember our charter, as we've touched on in previous quarters. We want to get back to a core lending vehicle and let our equity colleagues own assets. I think you'll see us resolve this as expeditiously as possible, especially if we can increase that, that revenue side and see some normalization of, of capital markets treatment of high cash flowing assets like this. That's helpful, Bryan. Thank you. Just flipping back, you mentioned core lending activities. How would you characterize your, your current appetite for new loans, you know, taking advantage of some of the higher yields that are likely available? Are you thinking just lend sufficiently to cover your repayments that are coming in, or is there room to slightly grow the portfolio on a net basis here over the next couple quarters? I, I think the approach we're going to take philosophically is, is selectively opportunistic. Okay. - we are starting to see more opportunities come across the transom, and when they fit, the narrative and the risk profile we want to achieve, then you'll see us, seek out those types of opportunities. Hopefully, the result of that will be portfolio growth, owing to, again, the equity position we sit with, as well as the leverage available to us. Tough to predict. This has been some ebbs and flows in our market generally, but as we've said, the optionality that we feel we've created by positioning the balance sheet as we have, should allow us to, to take advantage of, of what we see coming over the coming months. Great. Maybe just put some numbers to what Brian said. Yes, please. Yeah, I'm sorry. Just to put some numbers to what Brian said, we do believe that we have balance sheet room to incrementally grow the balance sheet and not just redeploy repayments. You know, given the liquidity levels that we have today, you know, we're, we probably have capacity, call it in the $300 million to $400 million senior loan capacity. We do have room in the balance sheet to grow incrementally from here. Excellent point. Thank you. We'll keep that in mind when we model going forward. Just lastly, I just want to say, applaud the buyback. I think at, at this point in the market where stocks are trading, yeah, I think it's just way more effective use of that capital for the benefit of the shareholders and more so than the $0.02 supplemental. Thank you for for the buyback activity. That's all for me. Appreciate it. Thank you. Thanks for that, Steve. Our next question comes from the line of Jade Rahmani with KBW. Please proceed with your question. Thank you very much. Just wanted to ask about liability management. When you think about REO, you know, the property you're going to take into REO and anything else, subperforming loans or REO, do you anticipate financing those? Do your current facilities accommodate financing those, or are you going to pursue a separate facility to fund those kinds of assets? Yeah, thanks, Jade. I appreciate the question. I think the general approach would be that we will seek out bespoke financing for assets like that with the overlay that, that our lending partners have been very accommodating and flexible as we work through and put the, the proper structure in place. The knowledge transfer that, as you'd expect, occurs as you get closer to taking some of your REO, is significant and can lead to more efficient financing as you map out that business plan. The good part is we're not necessarily in a rush, owing to our existing financing counterparties pushing us in one direction. We do think there's going to be some leverage pickup available to us as we work through and bring our own expertise to bear on some of these assets. A bit of a hybrid, but I think you could expect us ultimately, to the extent that we think we're going to hold something for, a longer period of time, think outside of 12 months, then we will, seek out specific financing for that asset. If you were funding a performing loan at, say, 70% on a credit facility, you know, what proportionately would change? Clearly, you have the fair value of the collateral, but let's just say there isn't a, a hit to the value of the collateral. Are you still able to fund at 70%? I think there's a cost-benefit analysis associated with it. I think there certainly is leverage available for certain assets in that range. When we think about what we're trying to achieve here, which is ultimately sound balance sheet and dividend coverage, we may seek out a lower leverage option if the pricing. What we see in these interrupted or disintermediated markets like we have around us generally, is there's some gaps between an asset that might fit, for instance, in a life insurance company bucket versus CMBS versus an alternative lender. When those gaps exist, you just simply need to measure the incremental cost of capital versus the liquidity profile of the individual position. We'll balance all that, but certainly, we believe that there is ample debt market capacity for the types of assets we're talking about today. Jade, maybe just to add to Bryan's comments. Again, I think one of the advantages we have with our balance sheet is just given our liquidity profile, not that that is what we intend to do or hope to do, but certainly we would have the balance sheet strength to hold some of the assets, either unlevered for some interim period or, you know, at a lower leverage level than what we previously financed a loan for. Again, that is one of the reasons we have maintained the liquidity levels, was to provide us this maximum flexibility so that we can, again, work towards maximizing value, you know, when we have to work out an underperforming asset. Okay, thanks for that. Recently, I think there's been some chatter in various industry publications about a pickup in securitization as well as potential for CLOs to offer, you know, financing of, of non-performing loans or sub-performing collateral. I was wondering if you are viewing that as a potential way to, you know, I don't know what the right term is, but sort of ring-fence or, you know, put a circle around the downside risk in those kinds of assets, which would, you know, better allow the company to go on offense. Yeah, I think what, what you've seen us execute on historically, Jade, has been a pretty diverse set of financing structures. Certainly, we've utilized CLOs, we've utilized warehouse, A notes, et c. Absolutely aware that the preponderance of private capital in the capital markets, alongside some stability in rates, is allowing for structured resolutions. We would absolutely keep that on the menu as we seek to resolve some of these assets. I think pretty early days in terms of the resurgence of the CLO market. Alongside general transaction activity, it's tough to say that it's not at least a hint of green shoots to come with that stability. Agree it, it should be something to certainly consider and pursue. Thank you. Thanks, Jade. Our next question comes from the line of Derek Hewitt with Bank of America. Please proceed with your question. Good afternoon, everyone. The Morgan Stanley facility was recently extended to mid-2025. From a high level, are you seeing any change in the risk tolerance from your counterparties, especially since we saw the regional bank crisis earlier this year? For example, was there any change in the Morgan Stanley terms, whether it be spreads, advance rates or potentially other restrictive covenants? Derek, thanks so much for your question. Maybe on the second part of your question, no, there were no real material changes to the terms. Again, we extended it out to July 2025. In addition, we have a one-year extension option built in, even after that. Really no material change in the terms of the $250 million facility. In response to maybe your first part of your question about, you know, appetite for credit risk, appetite to accept certain types of loans. You know, I think one of the big benefits of that we, we have diversified our funding sources and really focused on, you know, what we consider to be major money center banks with whom Ares overall have excellent relationship. You know, I think we've enjoyed a very stable relationship with each of our lenders. While, you know, each of the lenders are obviously reacting, you know, to what's going on in the market, you know, we do believe that, you know, we'll continue to see very strong acceptance of the type of loans that we do, you know, as collateral for our funding facilities. Clearly, if we brought them, you know, a, a loan today that is in one of the more difficult sectors, like office, for example, I think, you know, we would all have a little bit of challenges in that context. Overall, you know, while there is a credit bucket overall, you know, we do think that our warehouse lender lending capacity is not a limiting factor, in terms of us originating new loans. Thank you. Thank you. We have reached the end of the question and answer session. I'll turn the call back over to Bryan Donohoe for closing remarks. Thank you. I'd just like to thank everybody for their time today. We certainly appreciate the continued support of Ares Commercial Real Estate, and we look forward to speaking to you again on our next earnings call. Thanks for the time. 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 September 2, 2023, to domestic callers by dialing 877-660-6853, and to international callers by dialing 201-612-7415. For all replays, please reference conference number 13738843. An archived replay will also be available on a webcast link located on the homepage of the Investor Resources section of our website.