Ares Commercial Real Estate Corp Q3 FY2025 earnings call

• Continued execution against strategic objectives: maintaining strong balance sheet, addressing risk rated 4 and 5 loans, and reducing office loans. Sequential quarterly earnings increased, CECL reserves were stable, book value per share was consistent, and net debt-to-equity ratio decreased.
• Progress on risk rated loans: $28 million multifamily loan migrated with expeditious resolution expected; $11 million risk rated 4 subordinated loan was restructured, resulting in a realized loss of $1.6 million but CECL reserve reduction of $7 million; $81 million senior loan in Arizona was restructured. Risk rated 4 and 5 loans still have challenges but progress is being made.
• Capital deployment: Ares Real Estate Group has grown to over 740 professionals, and the Real Estate Debt Strategy has grown, with over $6 billion in new loan commitments in the last 12 months. ACRE closed $93 million in Q3 and over $270 million in Q4 in new loan commitments.
• CECL reserve: Total CECL reserve declined to $117 million as of September 30, 2025, a decrease of approximately $2 million from June 30, 2025. 95% of the reserve relates to risk rated 4 and 5 loans.
• Dividend: Board declared a regular cash dividend for the fourth quarter of 2025, payable on January 15, 2026, to common stockholders of record as of December 31, 2025.

In the third quarter, the Office portfolio was reduced to $495 million, a 6% quarter-over-quarter and 26% year-over-year decrease. Risk rated 1-3 loans continue to perform well, primarily collateralized by multifamily, industrial, and self storage properties. In Q3, 5 new loan commitments totaling $93 million were closed across multifamily and self storage properties. In Q4, over $270 million of loans across 5 new commitments collateralized by industrial, multifamily, hotel, and self storage properties were closed. The Office portfolio's revenue contribution decreased due to the reduction, while risk rated 1-3 loans and new loan originations contributed to the overall portfolio performance.

• Goal to return to portfolio growth in the first half of 2026.
• Maintain strong liquidity position with available capital of $173 million as of September 30, 2025, including $88 million of cash.
• CECL reserve is expected to remain relatively stable.
• Fourth quarter dividend of $0.10 per diluted common share declared, payable on January 15, 2026.

• Risks associated with resolving risk rated 4 and 5 loans, including potential losses and uncertainties in market conditions. For example, the risk rated 5 Chicago office loan remains on nonaccrual, and discussions with the borrower are ongoing regarding potential sale. The risk rated 4 Brooklyn residential condominium loan's formal marketing process for unit sale is expected later in Q4 but carries risks.
• Market conditions could impact loan resolutions and portfolio performance, including uncertainties in office market fundamentals and potential challenges in resolving certain loans.

Q: Just a couple of pennies below full dividend coverage. Could you comment on the portfolio strategy, sweet spot, and average loan sizes?

A: Yes, the data set is small. Self storage assets have smaller tickets, but ACRE can participate in larger transactions with the Ares Real Estate platform. Core competencies are in industrial, multifamily, student housing, and self storage. Sweet spot is in these asset classes, and average loan sizes are expected to vary based on asset class.

Q: It looks like a strong quarter and a big turning point. Over what time period do you expect to work out remaining risk 4 or 5 loans?

A: It's difficult to pinpoint an exact time period, but we're constantly balancing velocity and principal resolution. Progress is being made, and we're focused on expediting resolutions where it's the best net outcome.

Q: Can you comment on what drove the multifamily downgrade and Texas loans?

A: The multifamily downgrade was driven by an upcoming maturity date. In Texas, loans were extended for a short period to allow continued progress, with demand for multifamily surprising to the upside but rent growth stagnant in the short term. The takeaway is a positive forward outlook with longer investment durations in certain asset classes reflecting strength.