Good afternoon, everyone. Welcome to Ares Commercial Real Estate Corporation's Second Quarter Earnings Conference Call. As a reminder, this conference is being recorded on Tuesday, August 5, 2025. I would now like to turn the call over to Mr. John Stilmar, Partner of Public Markets Investor Relations. Please go ahead, sir.

Thank you, and good afternoon, everybody. Thanks for joining us on today's conference call. In addition to our press release and the 10-Q 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 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 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 on its SEC filings. Ares Commercial Real Estate assumes no obligation to update any such forward-looking statements. During this call, we will refer to certain non-GAAP financial measures. We use these as measures of operating performance, and these measures should not be considered in isolation from or as a substitute for measures prepared in accordance with generally accepted accounting principles. These measures may not be comparable to like-titled measures used by other companies. Now I'd like to turn the call over to our CEO, Bryan Donohoe.

Thank you, John. Good afternoon, everyone, and thank you for joining us. I am also joined today by Jeff Gonzales, our Chief Financial Officer; Tae-Sik Yoon, our Chief Operating Officer; as well as other members of the management and Investor Relations team. During the second quarter, we continued to execute on our strategic objectives. We maintained a strong balance sheet, which has driven our progress addressing our risk-rated 4 and 5 loans and further reducing our office loans in the quarter. Importantly, the portfolio no longer includes loans collateralized by properties that are primarily used for life sciences. Given the progress we have made in narrowing the range of potential outcomes in our portfolio and having achieved our target balance sheet objective, we have begun investing in new and attractive loans. As we look forward, we expect origination activity to increase as we collect repayments and further address our risk-rated 4 and 5 loans and reduce our office loan holdings. Let me now walk you through the details of the quarter and lay the foundation for how we see these activities unfolding in order to drive higher levels of distributable earnings and dividend coverage. During the second quarter, we reduced our office loans to $524 million, a decrease of 10% quarter-over-quarter and a decrease of 30% year-over-year. This decrease was driven by repayments, active asset management and the decision to accelerate resolutions. Across office loans, including our rated 5 office loan, we saw improved leasing fundamentals and broadly speaking, more positive capital markets around the sector, which may also impact the rate of resolutions. During the second quarter, we exited a $51 million office life sciences loan and took a $33 million realized loss, which was in excess of the prior quarter CECL reserve. While we don't take any loss lightly, we believe the resolution of this loan creates greater stability in our portfolio. Reductions in federal funding for life science research led to further erosions in tenant demand and further elevated the supply-demand imbalance for life science properties. By exiting this loan, we removed significant unfunded commitments in the portfolio. The exit of this loan contributed to the 50% decrease in future funding commitments from $73 million in 1Q 2025 to $36.5 million as of June 30, 2025. We believe utilizing the strength of our balance sheet to exit the loan created greater certainty around our portfolio and allows us to get back to growth more quickly. We see this as an important advancement for the company as there are no remaining loans in the portfolio collateralized with properties that are primarily used for life sciences. We also changed the risk rating on an $81 million senior loan collateralized by an office property in Arizona to a risk-rated 4 loan from a risk rating of 3. While occupancy increased at this property during the quarter and the sponsor has historically supported the asset, the lease-up business plan is taking longer than expected and with maturity coming up in October, discussions regarding an extension or modification with the sponsor are taking place. Let me now shift to our overall risk-rated 4 and 5 loans. As of June 30, 2025, we had 1 risk-rated 5 loan and 4 risk-rated 4 loans, maintaining the same number of risk-rated 4 and 5 loans as we held last quarter. Notably, 2 of the 5 risk-rated 4 and 5 loans comprised 75% of the outstanding principal balance. The first of these 2 loans is our risk-rated 5 Chicago office loan with a carrying value of $146 million. Occupancy at this property has stabilized and remains above 90% with a weighted average lease term of more than 8 years. Post-quarter end, the positive momentum at the property continued as a significant tenant amended and extended its lease, resulting in a $3 million payment to our borrower upon which the borrower applied these proceeds to reduce the principal balance of the loan. While we continue to see positive momentum towards the business plan, we note that challenges remain in the office sector with respect to the depth of investor demand, financing availability and thus valuations for office properties. The second of the 2 largest risk-rated 4 and 5 loans is our risk-rated 4 Brooklyn, New York residential condominium loan with a carrying value of $113 million. This property continues to hit development milestones on budget with nearly all of the remaining necessary materials to complete construction procured, which mitigates supply chain and known tariff risks. Subsequent to quarter end, the soft marketing launch began at the property, while the formal marketing and sales process is targeted to begin by 4Q 2025. Beyond these areas of focus in our loan portfolio, our risk-rated 1 to 3 loans, which are primarily collateralized by multifamily, industrial, and self-storage properties continue to perform well with strong overall execution of business plans. Specifically, during the second quarter, we upgraded a risk-rated 3 $56 million loan collateralized by a hotel property to a risk-rated 2 loan based on positively trending occupancy and operating cash flow levels. Beyond this positive risk rating upgrade, we believe the overall loan portfolio is much improved over recent quarters. Further, our balance sheet is positioned to both drive additional resolutions as well as invest our capital in new loans. To this end, following the end of the second quarter, we successfully executed our first investment commitments of the year. We closed 4 senior loans totaling $43 million in loan commitments collateralized by self-storage properties. While this marks our initial deployment into new loans in 2025, the overall Ares debt business has remained actively engaged in the real estate market with a strong and growing pipeline of opportunities. In the past 12 months, the team has originated over $6 billion of new investment commitments, primarily focused on mixed-use industrial and multifamily assets. Supported by the scale and reach of the broader Ares real estate platform, we expect origination activities to build in the third quarter and in future periods. While it is hard to predict timing, over the next 12 months, we expect the portfolio to be equal to or larger than it was as of 2Q 2025. From an earnings standpoint, we recognize that 2Q 2025 distributable earnings, excluding losses of $0.09 per share is below our dividend level of $0.15 per share. However, we remain confident that our earnings potential is in excess of the current dividend level. Our confidence in our earnings potential is derived from a number of levers that we can pull to enhance earnings, including the resolutions of our higher risk-weighted assets, redeploying our additional capital and making new loans. Looking ahead, we recognize that results may be uneven quarter-to-quarter, but our strategy remains clear, our execution purposeful and our outlook optimistic. Through our deliberate actions, we remain focused on accelerating resolutions on our higher-risk assets while not jeopardizing the integrity and strength of our balance sheet as we seek to clarify and demonstrate book value as quickly as possible. Ultimately, these actions and our return to investing in today's attractive environment should collectively begin to methodically rebuild our earnings in future periods.

Thank you, Bryan. For the second quarter of 2025, we reported a GAAP net loss of approximately $11 million or $0.20 per diluted common share. Our distributable earnings for the second quarter of 2025 was a net loss of approximately $28 million or $0.51 per diluted common share. This includes the impact from the realized loss of $33 million or $0.60 per diluted common share related to the exit of a Massachusetts office life sciences loan. Distributable earnings for the second quarter, excluding this loss, was approximately $5 million or $0.09 per diluted common share. During the quarter, we also collected $3 million or $0.05 per diluted common share of cash interest on loans that were on nonaccrual and was accounted for as a reduction in our loan basis. In the second quarter of 2025, we collected an additional $30 million of repayments, bringing the year-to-date total repayments to $337 million, nearly 3 times the amount of repayments in the first half of 2024. The acceleration of repayments that began in the second half of 2024 and continued through the first half of 2025 has bolstered our liquidity position and further strengthened our balance sheet. While these repayments are having an impact on our near-term earnings, we believe our strengthened balance sheet provides us the flexibility to accelerate resolutions and opportunistically deploy capital into new loans. Reinforced by the repayments and purposeful execution, we maintained the financial flexibility and balance sheet positioning we achieved in the first quarter. We maintained our net debt-to-equity ratio, excluding CECL, at 1.2 times at the end of the second quarter, stable quarter-over-quarter, but down from 1.9 times year-over-year. We reduced our outstanding borrowings further to $889 million at the end of the quarter, a decrease of 6% quarter-over-quarter and a decrease of 39% year-over-year. In addition, we reduced our unfunded commitments to $37 million at the end of the second quarter, a decrease of 50% quarter-over-quarter and a decrease of 58% year-over-year. Furthermore, we took proactive steps to further optimize our financial flexibility and capital structure. During the second quarter, we amended and extended our Morgan Stanley facility to reduce the current commitment to $150 million, but we have a built-in $100 million accordion option to increase the commitment to the previous size of $250 million. The reduced near-term commitment size with consistent terms allows us to more efficiently size our financing for our near-term needs, while the accordion supports growth as it comes to fruition. During the second quarter, we continued to focus on maintaining our liquidity position. As we have discussed in the past, we believe this continued focus on liquidity enables greater optionality to accelerate resolutions and opportunistically invest, both of which will have a positive impact on earnings. Our liquidity position, as measured by available capital was $178 million as of June 30, 2025. This includes $94 million of cash. Turning to our CECL reserve. The total CECL reserve declined to $119 million as of June 30, 2025, a decrease of approximately $20 million from the CECL reserve as of March 31, 2025. This reduction was due to the exit of an office life sciences loan, loan repayments, and other loan-specific attributes. The total CECL reserve at the end of the second quarter of $119 million represents approximately 9% of the total outstanding principal balance of our loans held for investment. 94% of our total $119 million CECL reserve relates to our risk-rated 4 and 5 loans or $112 million. Overall, the $112 million of reserves represent 27% of the outstanding principal balance of risk-rated 4 and 5 loans held for investment. Our book value of $9.52 per share includes the $119 million CECL reserve. Our goal is to continue to prove out book value over time, and as Bryan stated, to enhance earnings and our dividend coverage. To conclude, the Board declared a regular cash dividend of $0.15 per common share for the third quarter of 2025. The third quarter dividend will be payable on October 15, 2025, to common stockholders of record as of September 30, 2025.

Thanks, Jeff. As we sit here today, halfway through 2025, we are proud of our progress and accomplishments. While we recognize that quarter-to-quarter earnings results may vary, our conviction remains firm and our strategy remains unchanged. The success and conviction of our strategy is evidenced by record low leverage, high levels of liquidity, double-digit decreases in our risk-rated 4 and 5 loans and office portfolio over the last year and ACRE's 3Q 2025 return to new loan investing. We believe that this is the first of many investments as we reshape ACRE's portfolio for future growth. We believe that the power of the Ares platform and the greater Ares real estate team provides us with the right people, comprehensive capabilities, and robust pipeline to continue to execute upon this strategy. Looking ahead, we're encouraged by the signs of stabilization and gradual improvement of the commercial real estate market, particularly driven by valuation stability due to the lack of new inventory in certain property types and submarkets. Through consistent execution, we are confident that ACRE is on the right track to drive shareholder value and benefit from the secular growth of the nonbank commercial real estate lending opportunity. In closing, we would like to take a moment to extend our deepest sympathies to the families of those who lost their lives during last week's tragedy at 345 Park Avenue. In times like these, we are reminded of the importance of standing together as a community with compassion, resilience, and support for one another. We are keeping all who have been affected in our thoughts. As always, we appreciate you joining our call today, and we'd be happy to open the line for questions.

We go first to Rick Shane of JPMorgan.

Look, I'm curious, it sounds like from a balance sheet perspective, you feel like you've reached an inflection point in terms of starting to deploy capital, working through the nonaccruals. On a year-over-year basis, net revenue is down about 25%. Net interest income is down even more than that. Is the second quarter the trough? Or should we expect that because of the timing in the third quarter that it will be sequentially down again and then potentially start to rebuild from there?

Thanks for the question, Rick. So yes, we did reset our dividend in the first quarter to align with our strategic objectives. As you mentioned, we did reach our balance sheet positioning goals, which is allowing us to maximize some of the resolutions of our 4 and 5 loans and accelerate those and also begin to start investing in loans. So as Bryan mentioned in his prepared remarks, we do expect to have the portfolio 12 months from now be at the level it's at today or higher. We do continue to source new loan opportunities, and we do expect to originate additional loans moving forward throughout the third quarter and in the fourth quarter that will absorb any repayments that happen.

Got it. And so does that imply if the balance sheet is going to be roughly the same size a year from now, but you're going to have presumably less drag from nonaccruals that even at a flat balance sheet, you would expect to see net interest income start to rebuild from here.

Yes, that's correct.

And remind me, I know I've got it, and we'll see it in the transcript, but what was the drag this quarter from nonaccruals on NII?

The drag is about $0.17.

Okay. And absolute dollars, I apologize.

Absolute dollars in the $8 million, $9 million range.

We go next now to Tom Catherwood at BTIG.

Bryan, I appreciate your comments on origination activity increasing going forward and that it's likely to track repayments and watch list resolutions. Given your low debt levels, you could leverage up that equity that comes back from repayments and really ramp originations beyond even past the repayment levels. Is that your plan as you're looking at through originations for the rest of '25?

Thank you for the question, Tom. I believe, as Jeff mentioned regarding the accordion feature of the Morgan Stanley facility, it indicates that there is more leverage available than we have currently utilized on our balance sheet. So, there is indeed an opportunity to leverage up. I believe our earnings potential will reflect a market we consider favorable for whole loan originations, as well as for repo or warehouse line debt related to those assets. We are optimistic about both gross deployment and the net interest margin we can achieve from that borrowing, whether we maintain a static level or increase it, as you suggested.

Got it. Appreciate that. And then if we think of just your origination pipeline as it's shaping up now, obviously, you put the money to work with the self-storage loans thus far in 3Q. But how is that pipeline shaping up for the rest of '25?

We have discussed a lot of our platform activity, and it reflects our strong position in this market as nonbank lender participation grows. Our market presence has improved significantly over the past five to six years, providing us with a solid environment for origination. However, the volatility in rates has been noteworthy. If you examine the first half of the year, treasuries ended up where they began, but there was significant intraday volatility. This is important because the real estate industry is still adjusting to these higher rates, which could favor lenders over equity in some respects. Deal velocity is returning, albeit unevenly. Despite this, our pipeline has remained steady throughout the year, thanks to our ability to refinance and the willingness of buyers and sellers to complete transactions. In summary, we are optimistic about our pipeline as we move forward.

Appreciate that, Bryan. And last one for me on the Chicago loan, given that occupancy is above 90% and you received a $3 million paydown in 3Q, is there a consideration to extending the loan beyond, obviously, what was the July maturity and then putting it back on accrual? Or is there something else that's keeping that at a 5 risk rating?

Yes. With respect to the asset itself and our business plan, our interaction with the borrowers, certainly, we like to keep our borrowers in their seat as the equity owner. But I think you can read through what we described and think about this being a mid- to high single-digit yield. And I think that cash flow profile provides a lot of different options for us as we attempt to resolve it. And I think we've reflected over prior quarters, we'd like to move on from it. But we want to make sure that market value reflects the intrinsic value that we see in this asset as well. So the cash flow profile provides us those opportunities. I think we mentioned in the prepared remarks the fact that there's still stress from a valuation perspective around office assets generally. So while I don't see a pathway to returning it to accrual, we do think that the yield from this asset is such that we do have options available to us as we go through the next few months.

We go next now to Jade Rahmani of KBW.

There is a lot of economic uncertainty at the moment, and we are all trying to evaluate potential risks from tariffs and other unknown factors. One of your competitors described the commercial real estate lending market as overly stimulated. I noted that GSE multifamily was quoted with a spread under 100 basis points on stabilized multifamily properties. I'm interested in your perspective on the current market conditions and whether you believe there are any signs of weakening performance across the Ares platform, or if you think things remain stable. Additionally, I would like your thoughts on the health and competitiveness of the commercial real estate lending markets.

Yes, that's a great question, Jade, and it's something we consider regularly as investors in the sector. We've observed some relative stability, particularly as rates have settled into their current positions. Presently, the markets appear relatively stagnant in terms of leasing and fundamental activity in specific asset classes. However, I anticipate that the supply-demand balance in multifamily, industrial, and self-storage will shift positively over the next 24 to 36 months. While we may experience muted growth at the moment, it's possible to envision that this supply-demand imbalance could lead to higher rent growth over the next 3 to 5 years than what we currently see. Regarding the debt markets, there has been a consolidation where banks have altered their participation in the market to some extent. Larger players seem to be gaining market share from smaller ones. When considering if the lending market is tight or excessively competitive, perspectives vary. We are finding ample opportunities that align with our historical return on equity expectations, and our peers likely share similar sentiments about achieving attractive returns across debt and equity. Currently, the income profile from lending is historically appealing, and I’ve also noticed a reset in asset values, meaning the entry points for these properties are lower than they were 2 or 3 years ago. This adjustment is an important factor to consider when assessing the relative value of our sector compared to other real asset categories. I hope that answers your question, but I'm open to discussing further if needed.

Yes, that's great. Exactly what I was looking for. And I think what you put forth is well reasoned, balanced as always. Can you comment on multifamily trends you're seeing? I think we've seen some mixed reports from the apartment REITs depending on the Sunbelt exposure. Curious as to your views on the multifamily space.

Yes. Jade, I believe this aligns with my previous comments regarding the supply and demand dynamics favoring rent growth. The current data can be challenging to interpret. Much of the CPI data stems from smaller local landlords, who may still be experiencing significant lease losses, and renewal rents are often exceeding the rent increases for new tenants. Therefore, I think we're currently in a phase of digestion. Performance varies significantly from market to market and asset to asset. I feel we've moved past the point where most owners are willing to give up their standing. For instance, if you have an asset that was overleveraged from a purchase earlier in '23, you've likely addressed much of the debt service you didn't plan for due to rising rates. Now, you're looking forward to a more favorable environment for rents over the next 24 months. While we won't return to a rent growth market of 5% to 7%, a growth rate above CPI seems reasonable based on the data we're observing. As I mentioned earlier, the adjustment of the basis for new loans on these assets appears very attractive.

We go next now to Doug Harter of UBS.

Can you discuss your thought process on whether you considered repurchasing stock at the current discount to book dividend yield compared to investing that into new loans, and how you evaluated those trade-offs?

Yes, Doug, that's a valid question. We view stock repurchases as having a fairly straightforward quantitative impact. Currently, our focus is on investing in new loans as we aim to reposition our portfolio, return to scale, and redefine our book, which we believe will ultimately benefit our shareholders in the long run. Additionally, we must consider the practical size of our company and the efficiencies we can achieve with our expenses. The scale of our portfolio and the financing strategies will leverage some of those efficiencies. Other factors, such as covenants and growth prospects, also play a role in our decision-making. While repurchases are an option we have, we recognize the quantitative factors involved, but there are additional considerations that influence our decision before moving forward with that strategy.

We'll go next now to Chris Muller of Citizens Capital Markets.

Can you explain the details behind the $33 million realized loss in the CECL release, considering the $33 million loss on a $51 million loan and the approximately $20 million release? I believe you mentioned that the property was sold for less than your reserve basis, so I'm trying to grasp how all of these elements are related.

Yes. Thanks for the question, Chris. Yes, so as you saw, there was a $33 million gross loss in our earnings presentation, we broke out what the impact was that we had on the reserve there. So $19 million reserve. So the net difference that was affecting book value this quarter and that's running through GAAP earnings would be $14 million.

So is the right way to look at that is that $51 million loan was fully reserved for and then it was sold for like $33 million?

It was a $19 million reserve on a $51 million loan.

Okay. Maybe we can take this offline later and just dig a little bit deeper. So I guess the other question I have here. So you guys talked about how the top 2 loans, I think you said were 75% of that problem loan bucket. So should we expect new originations going forward to be smaller in size? And it looks like the dynamic with third quarter originations is exactly playing out like that. So just curious how you guys are thinking about loan sizing on new originations going forward.

Yes. It's a good question, Chris. I think that a couple of factors to take into account. One, with respect to the originations post quarter end, self-storage assets are generally going to be smaller in nature. I think structurally, we've also grown the rest of our platform such that we have a broader array of origination opportunities and capital sources in front of us today, and we have the potential to maybe split loans between those vehicles. And I think what that should lead to is better diversification while continuing to target the institutional borrower set institutional assets throughout the U.S. So I think the average ticket that goes into ACRE will likely come down to some degree, but we will maintain a bias towards the institutional asset class.

And it appears we have no further questions today. Mr. Donohoe, I'd like to turn things back to you, sir, for any closing comments.

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

Thank you, Mr. Donohoe. 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 will be available approximately 1 hour after the end of this call through September 5, 2025, to domestic callers by dialing 1 (800) 677-7085 and to international callers by dialing 1 (402) 220-0665. An archived replay will also be available on a webcast link located on the homepage of the Investor Resources section of our website. Again, thanks so much for joining us, everyone, and we wish you all a great day. Goodbye.