Ares Commercial Real Estate Corp Q4 FY2025 earnings call

Market Commentary

• 2025 was a transition year for the commercial real estate market, with macroeconomic and geopolitical uncertainty in early 2025, but conditions improved in the second half as the Fed began easing monetary policy.

2025 Achievements

• Reduced office loans by 30% to $447 million since year-end 2024. Restructured two office loans, exited a life science property loan, and maintained balance sheet flexibility with moderate leverage and over $100 million in liquidity.
• Made progress on risk-rated four and five loans, with five remaining, and significant progress on the majority, including the two largest which comprise ~85% of the risk-rated four and five loan balance.
• Closed 13 new loan commitments in 2025 totaling $486 million, with over 50% collateralized by residential and industrial properties.

Fourth Quarter Results

• GAAP net loss of approximately $4 million or $0.07 per diluted common share, distributable earnings of approximately $8 million or $0.15 per diluted common share. Distributable earnings for the fourth quarter excluding a realized gain were $6 million or $0.11 per diluted common share.
• Closed eight new loan commitments totaling $393 million in the fourth quarter, portfolio outstanding principal balance at $1.6 billion, up 24% from 2025. Office loans reduced to $447 million, 28% of the total portfolio.

Balance Sheet and Dividend

• Net debt to equity ratio excluding CECL was 1.6 times at the end of the fourth quarter. Available capital was $110 million, and borrowing capacity was increased by $250 million. The Board declared a regular cash dividend of $0.15 per common share for 2026, with the first quarter dividend payable on 04/15/2026.

In 2025, Ares Commercial Real Estate Corporation reduced office loans by 30% since year-end 2024 to $447 million, representing 28% of the total loan portfolio. There are five remaining risk-rated four and five loans. The largest is a $140 million Chicago office loan, accounting for approximately 44% of the risk-rated four and five loan portfolio, and a $130 million Brooklyn residential condominium loan making up about 41% of the risk-rated four and five loan portfolio. In the fourth quarter, the company closed eight new loan commitments totaling $393 million, resulting in the portfolio's outstanding principal balance reaching $1.6 billion, a 24% increase from 2025. New loans closed in 2025 now comprise 29% of the total loan portfolio, and office loans were reduced to $447 million, 28% of the total portfolio.

Future Focus

• Focus on resolving the remaining five risk-rated four and five loans for portfolio growth and earnings. Aim to get back to the long-term historical debt to equity target of 3.0 as risk-rated four and five loans are resolved. Board declared a $0.15 per common share dividend for 2026.

• Market uncertainties and geopolitical factors impacting valuations and transaction activity.
• Risks associated with resolving risk-rated four and five loans, as outcomes depend on borrower actions.
• Potential spread compression in commercial real estate finance and spillover effects from private credit volatility.

Q: When will Brooklyn condo project start receiving repayments?

A: Hope for second half 2026, proceeds will pay down debt and return liquidity.

Q: Context on Chicago office debt yield?

A: Occupancy above 90%, weighted average lease term 8 years, focus on resolving the asset.

Q: Office exposure reduction plan by end 2026?

A: Focus on risk-rated four and five loans, Chicago office is material needle mover, expecting more natural resolutions of assets.

Q: Attractive risk-adjusted returns sectors?

A: Logistics/industrial, multi-family, self-storage, selective hospitality; avoiding office except Class A with long leases.

Q: Leverage trend in 2026?

A: Near term max out at ~2.0, long term target 3.0 debt to equity as risk-rated loans are resolved.

Q: Timing of loan closings and ROE on new originations?

A: Origination cadence smooth, targeting low to mid double-digit ROE on new originations.

Q: History of REO income yields and portfolio size?

A: REO yields relatively static, target portfolio size around $2 billion with 3.0 debt to equity ratio.

Q: Utilization of Ares parent facility?

A: Still available but utilized less due to smaller participation interests in loans.

Q: Spread compression and private credit spillover?

A: Volatility may expand opportunity set, with lag effect on origination channel.