Ares Commercial Real Estate Corporation Q2 FY2026 earnings call

• Market Environment & Platform Strength

  • The commercial real estate market exhibited relative stability in Q2 2026 despite broader macroeconomic and geopolitical uncertainty, with modest property price appreciation, open financing markets, and improving liquidity, though sales transaction activity moderated slightly.
  • Debt funds have become the second largest source of commercial real estate lending behind banks, and the scale of the Aries platform is a key competitive differentiator that allows access to high-quality institutional assets and efficient capital deployment.

• Portfolio Repositioning Progress

  • Over the past 12 months, the firm deployed over $900 million in new loan commitments, representing 42% of the current total loan portfolio, with these new originations delivering low double-digit gross levered returns and improving portfolio diversification across vintage, sector, geography, and credit.
  • For three consecutive quarters, no risk-rated 1 through 3 loans migrated to risk-rated 4 or 5, and no new REO properties were added, with stable operating performance across existing REO assets.
  • There are only four remaining outstanding risk-rated 4 and 5 loans: the Chicago office loan (non-accrual, makes contractual payments, 90%+ occupancy, sales process ongoing, extended 3 months post-quarter end), the Brooklyn residential condo (non-accrual, construction substantially complete, pre-sales underway), and a California industrial subordinate loan (upgraded to risk-rated 5 from 4 due to upcoming January 2027 maturity, but continues to receive sponsor support and see growing tenant interest).
  • The firm has reduced office exposure significantly, with only five risk-rated 1-3 office loans remaining; the North Carolina office REO is under active sale with strong market interest, and the Florida mixed-use REO has consistent occupancy and a 10% income yield, with exit options being evaluated.

• Financial & Capital Update

  • CECL reserve remained largely stable for the existing portfolio, increasing only marginally by $900,000 quarter-over-quarter, driven by reserves for new originations.
  • The Board of Directors extended the share repurchase program for one year through July 31, 2027, authorizing up to $50 million in common share repurchases, and declared a regular Q3 2026 cash dividend of 15 cents per common share.
  • A leadership transition was announced: COO Tae-Sik Yoon will step down from his day-to-day executive role to become Senior Advisor, leveraging his 14 years of industry expertise to support the firm.

As of June 30, 2026, the firm's total loans held for investment reached $1.8 billion, a $129 million quarter-over-quarter increase and $484 million year-over-year increase. Office loans decreased to $442 million, representing 25% of the total loan portfolio, down from 39% at the end of Q2 2025. 89% of the loan portfolio (by number of loans) is risk-rated 1 to 3, which are primarily collateralized by multifamily, industrial, and self-storage properties. The total CECL Reserve is $139 million (8% of total outstanding principal balance), with 94% ($130 million) of the reserve allocated to risk-rated 4 and 5 loans, and nearly half of the total reserve attributed to the risk-rated 5 Chicago office loan. For Q2 2026, GAAP net income was $4.4 million ($0.08 per diluted common share), and distributable earnings were $6.9 million ($0.12 per diluted common share), with no realized gains or losses recognized in the quarter. The company ended the quarter with a net debt-to-equity ratio (excluding CECL) of 2.0x, and available liquidity of $106 million.

• Management expects that successful resolution of remaining underperforming risk-rated 4 and 5 assets will free up capital for redeployment into new high-yield investments, which will drive future earnings growth. Repayment activity in the second half of 2026 is expected to come from natural portfolio turnover and further asset resolution.
• The company targets a historical long-term return on equity of 9% to 10% on book value, which will be achieved in stages as underperforming assets are resolved and capital is redeployed.
• New loan originations typically require a CECL reserve of ~100 basis points at closing for standard 3-year floating rate loans, with lower reserves for shorter loan terms.

• Broader macroeconomic uncertainty, sustained inflationary pressures, and spiked interest rates create ongoing market cyclicality and valuation uncertainty, with broader disparity of outcomes across individual assets compared to prior cycles.
• The four remaining risk-rated 4 and 5 assets are highly idiosyncratic, so resolution timelines are unpredictable and may extend longer than originally expected, potentially delaying capital recycling and earnings growth.
• Short-term held-for-sale loan transactions carry limited market risk during the typical 30 to 120 day hold period if market volatility occurs before sale.
• Geopolitical uncertainty and persistent rate volatility add unaddressed open questions that the industry and economy still need to digest, potentially slowing transaction and resolution velocity.

Q: Where does the company see itself in the current commercial real estate cycle, and are any new pressures emerging, especially for industrial assets?

A: Management views the market as being mid-cycle, in a digestion phase for higher interest rates and geopolitical uncertainty. They are avoiding heavy CapEx-intensive assets, and note that outcome dispersion across assets is far wider than in prior cycles. For industrial/logistics, while there is some pressure in specific Inland Empire submarkets, the firm remains comfortable with reduced new supply and the long-term viability of Class A industrial assets nationwide. All rate impacts are already reflected in the portfolio's current risk ratings, and the balance sheet is positioned to absorb further changes.

Q: What cadence should be expected for recycling capital from resolved risk-rated 4 and 5 loans over the next 12 to 18 months?

A: The four remaining high-risk assets are highly idiosyncratic, so there is no set consistent cadence for resolutions. Management is actively working to accelerate resolutions, but cannot guarantee faster timelines. There is roughly $150 million in net non-accrual carrying value tied up in these assets; as they are resolved and capital is redeployed to interest-earning loans, earnings will increase incrementally to support the current dividend and eventually grow beyond it.

Q: What is the long-term go-forward risk-adjusted ROE profile for the company after capital recycling is complete?

A: Management expects to return to a historical 9% to 10% ROE on book value over the long term, achieved in stages as assets are resolved and capital is redeployed. The firm has already proven it can source enough attractive originations to deploy available capital, and will focus on building a more diversified, stable, durable income profile rather than unnecessary risk-taking.

Q: What is the outlook for the risk-rated 5 Chicago office loan, and what is the company's level of patience for the ongoing sales process? What risk exists with the short-term held-for-sale loan strategy?

A: While the sales timeline has been frustrating, the three-month extension supports the ongoing process. The property has strong fundamentals (90%+ occupancy, 7+ year weighted average lease term, positive net cash flow), so management is comfortable waiting for a sale. If the sale does not complete, the asset's durable cash flow still creates an accretive position for the firm. For held-for-sale loans, there is limited short-term market volatility risk during the typical 30-120 day hold period, and the firm only pursues assets it finds fundamentally attractive and liquid enough to exit quickly.