Ares Commercial Real Estate Corp Q1 FY2026 earnings call

• Brian Donahoe mentioned that during the first quarter, the commercial real estate market exhibited relative stability with fundamentals showing strength. Closed three new loan commitments totaling $294 million, with the loan portfolio for investment growing to 35 loans and $1.7 billion, an increase of $110 million quarter over quarter. 37% of the investment loan portfolio balance was originated in the past 12 months. Reduced office loan balance by nearly 25% and reallocated into other property types. Actively resolved risk-rated 4 and 5 loans, accelerated the resolution and exit of a legacy $28 million Pennsylvania multifamily loan. There were no negative credit migrations within the risk-rated one-to-three loan portfolio. Walked through the largest two risk-rated 4 and 5 loans including a risk-rated 5 Chicago office loan and a risk-rated 4 residential condominium loan in Brooklyn. - Jeff Gonzalez reported that the first quarter had a gap net loss of approximately $9.6 million, or $0.17 per diluted common share. Distributable earnings were approximately $3.2 million, or $0.06 per diluted common share. Collected $2.1 million of cash interest on loans on non-accrual. Ended the first quarter with a net debt-to-equity ratio of 1.9 times. Loan portfolio held for investment reached $1.7 billion, with majority collateralized by multifamily and industrial properties. Closed $95 million of new loan commitments in the second quarter collateralized by multifamily and self-storage properties. Board declared a regular cash dividend of 15 cents per common share for the second quarter of 2026.

During the first quarter, the commercial real estate market was relatively stable. The loan portfolio held for investment grew to 35 loans and $1.7 billion at the end of the first quarter, an increase of $110 million quarter over quarter. 37% of the investment loan portfolio balance was originated in the past 12 months. The office loan balance was reduced by nearly 25% and reallocated into other attractive property types including industrial, multifamily, select retail, and self-storage. The largest two risk-rated 4 and 5 loans comprised more than 90% of the outstanding principal balance of the total risk-rated 4 and 5 loans as of March 31, 2026.

• Second quarter has continued to execute against objectives with closing of $95 million of new loan commitments collateralized by multifamily and self-storage properties. - Board declared a regular cash dividend of 15 cents per common share for the second quarter of 2026, payable on July 15th, 2026 to common stockholders of record as of June 30th, 2026. - Goal remains to prove out book value over time while advancing efforts to rebuild earnings and cover the dividend, which is achievable.

• Certain idiosyncratic risks persist in the commercial real estate sector and ACRE's portfolio, driven by discrete local market dynamics or property-specific factors that may not align with commercial real estate trends. - For the risk-rated five Chicago office loan, the sales process is taking longer than anticipated, and CECL reserve was increased by approximately $5 million. - For the risk-rated 4 residential condominium loan in Brooklyn, project nears completion with adjusted costs and timing reflected in CECL reserve analysis, contributing to reserve increase.

Q: Do you have any updated thoughts as to potential timeline for resolution on the Chicago risk-rated 5 and also over what time period do you expect the Brooklyn condo risk 4 to be amortized down based on condo sales?

A: As to the Chicago risk-rated 5 loan, we're getting closer and outcomes have narrowed, needing a functioning market which has been seen in the past 6 - 9 months, but it's outside of our control. As to the Brooklyn condominium asset, it's largely through construction phase and began sales process last quarter, with a sellout expected inside of two years for a similarly sized project.

Q: In terms of how ARIES is looking at the debt capital markets in commercial real estate, where do you see the best opportunities risk adjusted at this point?

A: As to ACRE, in the broad landscape of opportunities in real estate credit across the U.S., banks being subsidized and driven to provide capital and back leverage provides opportunity to go lower on risk spectrum but create ROEs in line with historical norms. Focus on lower CapEx cycle asset classes, consider fundamentals from supply, demand, geography, and location and vintage matter.

Q: On the $3.3 million realized loss, is it related to the REO property being reclassified as held for sale or the resolution of the five-rated loan?

A: It is related to the Pennsylvania multifamily loan.

Q: How do you think about leverage while you're working through the four and the five loans and REO?

A: We've taken a bifurcated approach, having flexibility to accelerate resolutions on assets we want to move on with legacy assets having lower leverage approach, and will see higher leverage as we increase confidence in resolution of four and five loans and de novo portfolio becomes larger percentage of the portfolio.