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 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, the 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 or 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 toward 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 the 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 the 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-use property 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. 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. Appreciate 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 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 in. Well, I don't think I would point to that as enough of a data set to identify. I think overall 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 one 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.

Absolutely. We acknowledged the challenges in the office sector and have spent considerable time discussing them as an industry. There are definitely assets and the cash flow profile of this building that make it an appealing risk-return scenario for us, especially with the ongoing cash support from the borrower. However, as mentioned in previous quarters, I do not expect our overall office footprint to grow over time. Nonetheless, there are unique asset opportunities that remain attractive within the industry. While the headwinds are notable, it doesn't imply that there aren’t successful assets to be found.

Got it. Thanks for the comments.

Thank you. I 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. First and foremost, the uniform factor across all types of real estate lending is the significant increase in base rates. We've certainly seen assets benefit from lower LIBOR over the past two to three years, and a 400 basis point increase in rates obviously impacts coverage and eventually cap rates. One advantage in the mortgage REIT or private lending space is the more active asset management available to us without the fee loads common in the CMBS sector as we navigate these challenges. The capitalization is also somewhat different. Tae-Sik, let me turn it over to you for any additional comments you might have.

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 and more supply coming 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-challenged 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 ACRE's 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 that $150 million already on non-accrual.

Hi, thanks, Bryan. Regarding the loans that were on non-accrual as of December 31, 2022, they do not include the three loans that defaulted in the first quarter of 2023. We will continue to assess those loans and have already evaluated them as of December 31, 2022. Given that a subsequent event has occurred, we will reassess the situation. To clarify, none of the non-accrual loans as of December 31, 2022, included the three loans that later 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 unless there's a resolution by quarter end, that $150 million will be on non-accrual, correct?

Yes. We will assess each situation individually. Historically, some loans that are non-accrual have not been in default, and we are still receiving interest payments on them. Moving forward, we will evaluate the three loans currently in maturity defaults, along with any other loans. There is time between now and the end of the quarter to address these situations, and each case is quite different. We will thoroughly examine all three cases and make a proper assessment at the end of the first quarter, but it is too early to provide a forecast or estimate regarding the non-accrual status of those loans.

Got it. Okay. There are many factors to consider. We're in discussions with the accountants and looking at potential resolutions and outcomes that could affect everything. If we assume that they were placed on non-accrual at $150 million, with roughly an 8% yield, that would result in about $3 million a quarter in interest income contribution. Is that the correct way to approach it?

Yes. I mean, each loan, I think you can tell on our sheet, will 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 non-accrual, 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 is 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 afternoon. I'd like to quickly follow up on Rick's comments. How much is already reserved for the Q1 events in general? Will this amount be reallocated as a specific reserve in Q1, or do you expect significant increases in the reserve? How should we expect that to 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 rated loan 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, 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 your comments, Tae-Sik. Regarding the office exposure, I understand that one of the three loans is classified as office, while two mixed-use loans have entered non-accrual status in Q1. It seems that three of your four largest office loans are set to mature in Q1. Can you provide an update on those loans or any discussions surrounding them? Are you anticipating repayments, extensions, or modifications? Specifically, how do you foresee the situation with loans one, two, and four in your 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 components 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 and 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 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?

Certainly. Eric, you raised a great question regarding our views on interest rate hedging. To provide a bit of background, our approach to liability management has always aimed for match funding. With 98% of our assets being floating rate, we strive to align that with floating rate liabilities. Two years ago, we implemented a substantial hedge, not to predict interest rate trends but to adhere to our policy of match funding. We were in a fortunate position with significant in-the-money interest rate floors on our assets, which, despite being classified as floating rate loans, functioned economically like fixed-rate loans due to LIBOR floors that were well above the prevailing rates. Thus, it made sense for us to align our economically fixed-rate assets with fixed-rate liabilities, leading us to execute a $1.3 billion interest rate hedge at that time. Currently, we still maintain around a third of that hedge, approximately $410 million in notional value. Additionally, when we refinanced our $150 million secured term loan, we chose a fixed-rate option, benefiting from a favorable interest rate. Moving forward, our decisions will continue to be driven by our policy of match funding rather than predictions about interest rate movements. Presently, we have a 98% floating rate asset base, and we will concentrate on maintaining a floating rate liability base in the future.

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

Thank you.

Thank you. Our next question today is from Jade Rahmani from KBW. Please go ahead; your line is now open.

Thanks for the clarification. I think Rick Shane mentioned that there are $45 million in loans that are non-accrual as of year-end. I was under the impression that the carrying value was approximately $99 million. I just wanted to verify that figure.

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.

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.