Ares Commercial Real Estate Corp Q4 FY2024 earnings call

• Market commentary: 2024 saw a moderate recovery in commercial real estate, with office market showing stabilization.
• 2024 accomplishments: Reduced risk-rated 4 and 5 loans by ~34% ($182 million), reduced office exposure by $151 million, collected $118 million in equity contributions on loans for the full year, reduced borrowings by $444 million for the full year of 2024, and net debt-to-equity ratio (excluding CECL) improved to 1.6 times.
• 2025 focus: Continue reducing risk-weighted 4 and 5 loans, office loans, and REO properties; goal to prove out book value. Collected $166 million in loan repayments in 2025, with cash balance ~40% of stock market value.
• Dividend adjustment: Quarterly dividend adjusted to $0.15 per share.

In the fourth quarter of 2024, the outstanding principal balance of loans with a risk rating of 4 or 5 increased 12% or $37 million. The outstanding principal balance of loans risk-rated 4 or 5 totaled $357 million at year-end. The office exposure, including REOs, was reduced by $151 million in 2024, representing an 18% year-over-year decline. The cash balance now represents approximately 40% of the current market value of the stock.

• 2025 focus on further reducing risk-weighted 4 and 5 loans, office loans, and REO properties to prove out book value.
• Collected $166 million in loan repayments in 2025, generating over $200 million of available capital.
• Adjusted quarterly dividend to $0.15 per share.

• Impact of higher liquidity and lower financial leverage on current earnings.
• Risks related to market conditions causing actual results to differ from forward-looking statements as outlined in SEC filings.

Q: 2025 is going to be a year of transition, some acceleration of repayments, increase in deal activity, realized losses. Can you outline the timing contours?

A: Continued pace of reducing risk-rated 4 and 5 loans is expected in the first half of 2025, with positive capital flows aiding this effort.

Q: What type of environment would be needed to pick up your pace of originations, stabilize the leverage level, and possibly increase the size of the portfolio?

A: Continued reduction of 4 and 5 risk-rated loans will catalyze deployment. Once asset management issues are resolved, the company will look to grow the portfolio again, with the engine for origination already running and seeing market opportunities.

Q: Could you discuss the Boston Life Science deal, its dynamics, and outlook?

A: There's a pivoting of business plans from life science to traditional office use. The situation is fluid with the sponsorship group, and the reserve on the asset was increased this quarter.

Q: Do changes in interest rates and outlook have implications for multi-family credit?

A: Fundamentals from a leasing perspective have been positive, with absorption and rent growth. Rate rise impacts are more on the equity side rather than the debt side, with muted transaction volume.

Q: Thoughts on CLO issuance timing, new lending, and if runoff impacts new lending?

A: CLO market is opportunistic, with warehouse lender pricing competitive. Cash position and resolution of problem assets work in tandem, with acceleration of repayments expected to influence new lending going forward.