Ares Commercial Real Estate Corporation (NYSE:ACRE) Q3 2021 Earnings Conference Call November 3, 2021 12:00 PM ET Company Participants Veronica Mayer - Investor Relations Bryan Donohoe - Chief Executive Officer Tae-Sik Yoon - Chief Financial Officer Carl Drake - Investor Relations Conference Call Participants Doug Harter - Credit Suisse Stephen Laws - Raymond James Jade Rahmani - KBW Richard Shane - JPMorgan Steve Delaney - JMP Securities Tim Hayes - BTIG Operator Good afternoon and welcome to Ares Commerci ...

Ares Commercial Real Estate Corporation (NYSE:ACRE) Q2 2021 Earnings Conference Call July 30, 2021 12:00 PM ET Company Participants John Stilmar – Investor Relations Bryan Donohoe – Chief Executive Officer Tae-Sik Yoon – Chief Financial Officer Conference Call Participants Steve Delaney – JMP Securities Rick Shane – JPMorgan Jade Rahmani – KBW Stephen Laws – Raymond James Doug Harter – Credit Suisse Tim Hayes – BTIG Operator Good afternoon. And welcome to the Ares Commercial Real Estate Corporation’s Confer ...

Financial Data and Key Metrics Changes - The company reported distributable earnings of $0.40 per share for Q1 2021, up 25% year-over-year, exceeding combined regular and supplemental dividends [6][12] - GAAP net income was $15.7 million or $0.45 per common share, with a book value per share increasing by $0.09 to $14.23 [12] - The weighted average 1-month LIBOR rate on the loan portfolio was 1.56%, significantly higher than the previous rate of approximately 11 basis points [13] Business Line Data and Key Metrics Changes - The portfolio is well-constructed with 97% invested in senior loans, primarily secured by multifamily, industrial, self-storage, and select office properties [9] - The company closed $205 million in new commitments across multiple property types in Q1 2021, with over $270 million of new loans closed in the second quarter [7][8] Market Data and Key Metrics Changes - The company is targeting loans to high-quality sponsors in markets with strong demographics and favorable real estate fundamentals, reflecting an improving economy and active real estate market [6][7] - The company remains underweight in hotels and stand-alone retail centers, focusing instead on sectors with better performance [9] Company Strategy and Development Direction - The company aims to expand access to efficient financing and capital, having closed its fourth CLO, which provided additional match-funded non-recourse financing [8] - The strategy includes originating short-term, primarily senior loans with strong covenant protections to support value-creating business plans [7] Management's Comments on Operating Environment and Future Outlook - Management expressed optimism about the economic recovery's benefits on the portfolio, noting that 100% of loans made their contractual debt service payments for Q1 2021 [10] - The company expects to fully cover or exceed dividends with distributable earnings for the full year 2021 [11] Other Important Information - The company declared a second-quarter dividend of $0.33 per share, plus a $0.02 per share supplemental dividend, consistent with the previous quarter [11] - The CECL reserve was reduced by $3.2 million, reflecting improved macroeconomic forecasts, although the reserve remains at about 4x pre-pandemic levels [13][36] Q&A Session Summary Question: How do all-in levered returns look relative to pre-pandemic levels? - Management indicated that ROEs are in line with pre-pandemic levels, although there has been some compression in the multifamily space [19] Question: What is the current liquidity position versus the pipeline? - Management noted that available liquidity has decreased but expects about $40 million of financing proceeds soon, allowing for continued loan origination [23][24] Question: Update on non-accrual loans? - Management reported a positive trend in occupancy for lodging assets and resolved a student housing property on non-accrual, sold above carrying value [28] Question: Comments on prepayments and expectations for the full year? - Management anticipates a return to normal repayment levels in the latter half of the year, with borrowers starting to achieve their business plans [34] Question: Are there any M&A opportunities? - Management stated there are no specific M&A targets currently, but they are open to opportunities for scaling the business [41] Question: Thoughts on the impact of 1031 exchanges? - Management believes the potential curtailment of 1031 exchanges will have minimal impact, as they traditionally underwrite conservatively against such investors [47] Question: What types of office assets are being targeted for new originations? - Management emphasized a focus on high-quality tenants and core locations, avoiding outdated business models [50]

[Part I. Financial Information](index=6&type=section&id=Part%20I.%20Financial%20Information) [Consolidated Financial Statements](index=6&type=section&id=Item%201.%20Consolidated%20Financial%20Statements) This section presents the unaudited consolidated financial statements for the quarter ended March 31, 2021, including balance sheets, statements of operations, comprehensive income, stockholders' equity, and cash flows, with notes detailing accounting policies and financial data Consolidated Balance Sheet Summary (unaudited) | Account | March 31, 2021 ($ in thousands) | December 31, 2020 ($ in thousands) | | :--- | :--- | :--- | | **Total Assets** | **2,090,803** | **1,929,497** | | Loans held for investment, net | 1,887,106 | 1,791,615 | | Cash and cash equivalents | 97,944 | 74,776 | | **Total Liabilities** | **1,514,830** | **1,456,482** | | Collateralized loan obligation securitization debt | 979,257 | 443,871 | | Secured funding agreements | 349,582 | 755,552 | Consolidated Statement of Operations Summary (unaudited) | Account | Three Months Ended March 31, 2021 ($ in thousands) | Three Months Ended March 31, 2020 ($ in thousands) | | :--- | :--- | :--- | | Total Revenue | 21,223 | 21,134 | | Net Interest Margin | 18,565 | 15,914 | | Provision for current expected credit losses | (3,240) | 27,117 | | **Net Income (Loss)** | **15,740** | **(17,263)** | | **Diluted EPS** | **$0.45** | **($0.54)** | [Notes to Consolidated Financial Statements](index=11&type=section&id=Notes%20to%20Consolidated%20Financial%20Statements) Notes detail the company's organization, accounting policies, and financial accounts, including its **$1.9 billion** loan portfolio, **$22.0 million** CECL reserve, debt, related-party transactions, and subsequent events - The company is a specialty finance company primarily engaged in originating and investing in commercial real estate (CRE) loans, externally managed by Ares Commercial Real Estate Management LLC (ACREM), a subsidiary of Ares Management Corporation[28](index=28&type=chunk) - The company has elected to be taxed as a real estate investment trust (REIT) for U.S. federal income tax purposes, commencing with its taxable year ended December 31, 2012[30](index=30&type=chunk) Loans Held for Investment Portfolio (as of March 31, 2021) | Loan Type | Carrying Amount ($ in thousands) | Outstanding Principal ($ in thousands) | Weighted Avg. Unleveraged Effective Yield | | :--- | :--- | :--- | :--- | | Senior mortgage loans | 1,842,782 | 1,853,141 | 5.7% | | Subordinated debt and preferred equity | 65,219 | 65,866 | 15.1% | | **Total** | **1,908,001** | **1,919,007** | **6.0%** | Current Expected Credit Loss (CECL) Reserve (as of March 31, 2021) | CECL Reserve Component | Amount ($ in thousands) | | :--- | :--- | | Reserve for Funded Loan Commitments | 20,895 | | Reserve for Unfunded Loan Commitments | 1,101 | | **Total CECL Reserve** | **21,996** | - Subsequent to the quarter end, the company originated a **$19.5 million** loan, purchased two loans totaling **$68.3 million** in commitment, and declared a Q2 2021 dividend of **$0.33 per share** plus a **$0.02 supplemental dividend**[179](index=179&type=chunk)[180](index=180&type=chunk) [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=39&type=section&id=Item%202.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses Q1 2021 performance, including **$667.3 million** CLO securitization, **$100.7 million** equity offering, increased net interest margin to **$18.6 million**, and **$36 million** liquidity - Key developments in Q1 2021 include the issuance of the **$667.3 million** FL4 CLO Securitization, an equity offering generating **$100.7 million** in net proceeds, and the origination and purchase of several new loans[185](index=185&type=chunk) Results of Operations Comparison (Q1 2021 vs Q1 2020) | Metric ($ in thousands) | Q1 2021 | Q1 2020 | | :--- | :--- | :--- | | Net Interest Margin | 18,565 | 15,914 | | Total Revenue | 21,223 | 21,134 | | Provision for CECL | (3,240) | 27,117 | | **Net Income (Loss)** | **15,740** | **(17,263)** | - The increase in net interest margin was primarily due to the benefit from LIBOR floors on the loan portfolio, as **97.0%** of loans have floors while only **13.8%** of borrowings do[199](index=199&type=chunk) - As of May 3, 2021, the company had approximately **$36 million** in liquidity, comprising **$4 million** of unrestricted cash and **$32 million** of availability under secured funding agreements[215](index=215&type=chunk) [Quantitative and Qualitative Disclosures About Market Risk](index=48&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) This section outlines the company's exposure to various market risks and its management strategies, including credit risk, interest rate risk mitigated by derivatives, and financing risk from margin calls - The company is subject to credit risk from its CRE loan portfolio, managed via thorough due diligence and ongoing review, with the COVID-19 pandemic increasing this risk due to potential borrower payment challenges[234](index=234&type=chunk)[235](index=235&type=chunk) - Interest rate risk is managed by primarily originating floating-rate assets financed with index-matched floating-rate liabilities and using derivatives like swaps and caps to hedge exposure[236](index=236&type=chunk)[238](index=238&type=chunk) Hypothetical Impact of Interest Rate Changes on Net Income (12-Month Period) | Change in 30-Day LIBOR | Increase/(Decrease) in Net Income ($ in millions) | | :--- | :--- | | Up 100 basis points | (1.9) | | Up 50 basis points | (2.2) | | LIBOR at 0 basis points | (0.4) | - Financing risk is significant due to margin call provisions in secured funding agreements, where market volatility can depress asset valuations and trigger these calls, posing a liquidity risk[247](index=247&type=chunk) [Controls and Procedures](index=51&type=section&id=Item%204.%20Controls%20and%20Procedures) Management concluded the company's disclosure controls and procedures were effective as of March 31, 2021, with no material changes in internal control over financial reporting during the quarter - The Principal Executive Officer and Principal Financial Officer concluded that the company's disclosure controls and procedures were effective as of March 31, 2021[252](index=252&type=chunk) - No changes in internal control over financial reporting occurred during the quarter ended March 31, 2021, that have materially affected, or are reasonably likely to materially affect, internal controls[253](index=253&type=chunk) [Part II. Other Information](index=51&type=section&id=Part%20II.%20Other%20Information) [Legal Proceedings](index=51&type=section&id=Item%201.%20Legal%20Proceedings) The company was not subject to any material pending legal proceedings as of March 31, 2021, but acknowledges potential litigation for defaulted loans - As of March 31, 2021, the company was not subject to any material pending legal proceedings[254](index=254&type=chunk) [Risk Factors](index=51&type=section&id=Item%201A.%20Risk%20Factors) The COVID-19 pandemic continues to pose significant risks, including adverse impacts on borrower payments, collateral values, liquidity, and increased CECL reserves - The COVID-19 pandemic continues to cause severe disruptions, adversely impacting global commercial activity and contributing to significant volatility in equity and debt markets, which negatively affects the company's business and operations[256](index=256&type=chunk)[257](index=257&type=chunk) - The pandemic particularly affects industries whose properties serve as collateral for the company's loans (e.g., hospitality), increasing the risk of borrower defaults and potential losses on insufficient collateral[259](index=259&type=chunk) - Financing agreements contain margin call provisions that could be triggered by credit events or declining collateral values, potentially forcing the company to post additional collateral or face default if unable to meet these calls[261](index=261&type=chunk) [Unregistered Sales of Equity Securities and Use of Proceeds](index=53&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) The company reported no unregistered sales of equity securities during the period - None[264](index=264&type=chunk) [Defaults Upon Senior Securities](index=53&type=section&id=Item%203.%20Defaults%20Upon%20Senior%20Securities) The company reported no defaults upon senior securities during the period - None[264](index=264&type=chunk) [Mine Safety Disclosures](index=53&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) This section is not applicable to the company - Not applicable[264](index=264&type=chunk) [Other Information](index=53&type=section&id=Item%205.%20Other%20Information) This section discloses an affiliate's (Ares Management) investment in Daisy Group Limited, which terminated contracts with sanctioned banks - A disclosure was made regarding an affiliate's (Ares Management) investment in Daisy Group Limited. Daisy had customer contracts with Melli Bank Plc and Persia International Bank Plc, which have been designated under U.S. sanctions. Daisy has since terminated these contracts and does not intend to engage in further dealings with these entities[266](index=266&type=chunk)[267](index=267&type=chunk)[268](index=268&type=chunk) [Exhibits](index=54&type=section&id=Item%206.%20Exhibits) This section provides an index of exhibits filed with the Form 10-Q, including corporate governance documents, key agreements, and officer certifications - The Exhibit Index lists key documents filed with the report, including the Indenture for the ACRE Commercial Mortgage 2021-FL4 CLO, CEO and CFO certifications pursuant to Sarbanes-Oxley Sections 302 and 906, and XBRL interactive data files[271](index=271&type=chunk)

Financial Data and Key Metrics Changes - For Q4 2020, the company reported GAAP net income of $14.4 million or $0.43 per share, and distributable earnings of $13.7 million or $0.41 per share [15] - For the full year 2020, GAAP income was $21.8 million or $0.66 per share, and distributable earnings were $45.1 million or $1.36 per share, fully covering dividends for the fourth consecutive year [15][10] - The annualized return on equity for Q4 2020 was 11%, with book value per share increasing by $0.11 [10] Business Line Data and Key Metrics Changes - The portfolio consisted of 94% senior loans, primarily collateralized by multi-family, office, and industrial properties, with no exposure to standalone retail centers or hotels [9][10] - The company closed on seven new loans totaling $146 million in unpaid principal balance, indicating active loan origination [11] Market Data and Key Metrics Changes - The company noted a substantial increase in both the quantity and quality of transactions in its pipeline, with loan spreads in line with or greater than pre-pandemic levels [12] - The company is targeting loans to high-quality sponsors in sectors such as multi-family, industrial, self-storage, and certain office properties [12] Company Strategy and Development Direction - The company aims to opportunistically grow its portfolio while maintaining a focus on credit quality and strong sponsorship [12] - The company has enhanced its funding structure and declared a regular dividend of $0.33 per share along with a supplemental dividend of $0.02 per share, reflecting confidence in future earnings [13][21] Management's Comments on Operating Environment and Future Outlook - Management expressed optimism about the recovery of the real estate sector and the company's positioning to capitalize on new opportunities [12][23] - The company highlighted the importance of maintaining high credit quality and structural benefits from LIBOR floors in its loans [10][19] Other Important Information - The company completed a $667 million CLO, significantly increasing its match-term non-recourse financing, which now represents about two-thirds of its overall debt funding [11][18] - The company has entered into interest rate hedging transactions to manage its floating rate liabilities, enhancing its financial stability [20] Q&A Session Summary Question: Can you discuss the first half maturities this year? - Management is in active dialogue with borrowers regarding extensions and is managing cash flow covenants [25] Question: Can you talk about the remaining balance on the Ares facility? - The warehouse facility is fully available, and management is open to new business opportunities [28] Question: Why not raise the regular quarterly dividend? - The company aims to balance stability in dividends with growth opportunities, reflecting a cautious approach [31][32] Question: Can you provide updates on loan upgrades and downgrades? - Upgrades reflect progress in business plans, while a downgrade was due to a tenant not paying rent [36][37] Question: How do you view the all-in cost of funds on the new CLO? - The CLO is expected to have a lower cost of capital compared to warehouse lines, with benefits from non-recourse positions [42] Question: What is the company's appetite for new net loan growth? - The company expects to be active in the market, utilizing various liquidity sources for growth [54] Question: Can you clarify the supplemental dividend terminology? - The supplemental dividend reflects ongoing earnings benefits, distinguishing it from one-time special dividends [58][59] Question: What is the company's interest in pursuing M&A? - While there are no specific M&A opportunities currently, the company is always monitoring the market for potential growth [70]