ACRE Q1 2026 Earnings Call TranscriptMay 7, 2026
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DATE
Thursday, May 7, 2026 at 12:00 p.m. ET
CALL PARTICIPANTS
Chief Executive Officer — Bryan Patrick Donohoe Chief Financial Officer — Jeffrey Gonzales Chief Operating Officer — Tae Sik Yoon Managing Director, Investor Relations — John W. Stilmar
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Full Conference Call Transcript
John W. Stilmar: Good afternoon, everyone, and thank you for joining us on today's conference call. In addition to our press release and the 10-Q that we filed with the SEC, we have posted an earnings presentation under the Investor Resources section of our website at arescre.com. Before we begin, I want to remind everyone that comments made during the course of this conference call and webcast, as well as the accompanying documents, contain forward-looking statements and are subject to risks and uncertainties. Many of these forward-looking statements can be identified by words such as anticipates, believes, expects, intends, will, should, may, or similar expressions. These forward-looking statements are based on management's current expectations of market conditions and management's judgment.
These statements are not guarantees of future performance, condition, or results and involve a number of risks and uncertainties. The company's actual results could differ materially from those expressed in the forward-looking statements as a result of a number of risk factors, including those listed in its SEC filings. Ares Commercial Real Estate Corporation assumes no obligation to update any such forward-looking statements. During this conference call, we will refer to certain non-GAAP financial measures. We use these as measures of operating performance, and these measures should not be considered in isolation from, or as a substitute for, measures prepared in accordance with generally accepted accounting principles. These measures may not be comparable to like-titled measures used by other companies.
Now I would like to turn the call over to our CEO, Bryan Patrick Donohoe. Bryan?
Bryan Patrick Donohoe: Thanks, John. Good afternoon, everyone, and thank you for joining us. I am here today with Jeffrey Gonzales, our CFO, Tae Sik Yoon, our COO, as well as other members of the management and Investor Relations teams. During the first quarter, the commercial real estate market exhibited relative stability despite broader macroeconomic and corporate credit market uncertainty. Fundamentals in commercial real estate showed strength as limited forward supply supported modest valuation growth. The combination of reset valuations and what we believe is the beginning of capital rotation into the asset class helped create what, in our view, is an attractive investment environment.
Story Continues
With this backdrop, we continue to make progress against our strategic objectives of reducing risk in our portfolio while investing in attractive, high-quality commercial real estate loans. We closed three new loan commitments totaling $294 million during the first quarter, collateralized by multifamily, mixed-use, and retail properties. This origination activity supported steady growth in the loan portfolio for the second consecutive quarter. At the end of the first quarter, the portfolio of loans held for investment grew to 35 loans and $1.7 billion, an increase of $110 million quarter-over-quarter. Notably, 37% of the investment loan portfolio balance was originated in the past twelve months.
We believe today's commercial real estate environment offers the opportunity to originate at attractive attachment points with stronger credit structure and risk-adjusted returns. ACRE is committed to approximately $780 million in new loans in the last twelve months, with more than 75% of the dollars committed through co-investments alongside other Ares Management affiliated vehicles. This represents just a portion of the nearly $10 billion in new loan commitments across the Ares real estate debt platform in the last twelve months. The scale of the Ares real estate debt platform and capital base is a key differentiator, enabling disciplined selectivity and access to high-quality opportunities while providing ACRE with co-investment opportunities, enhanced portfolio diversification, and support for efficient capital deployment.
We believe that this deployment reflects success against our goals for the portfolio that we laid out one year ago. As of 03/31/2026, we have increased the outstanding principal balance of the portfolio by 22% year-over-year while improving portfolio diversification and reducing the office loan balance by nearly 25%. Consistent with our strategic objectives, the reduction in office loans was reallocated and redeployed into other attractive property types, including industrial, multifamily, select retail, and self-storage. We also continued to improve portfolio quality through active resolution efforts on our risk-rated four and five loans.
During the quarter, we accelerated the resolution and exit of a legacy $28 million Pennsylvania multifamily loan, contributing to a year-over-year and quarter-over-quarter decline in the number of risk-rated four and five loans. With respect to the total portfolio of loans held for investment, 31 of our 35 loans carry a risk rating of one through three. There were no negative credit migrations during the first quarter within the risk-rated one to three loan portfolio. While the majority of the loan portfolio continues to exhibit sound credit performance, certain idiosyncratic risks persist in the sector and ACRE’s portfolio.
These cases are driven by discrete local market dynamics or property-specific factors that may not align with the aforementioned commercial real estate trends. Now let me walk you through the largest two of these; four loans comprise more than 90% of the outstanding principal balance of the total risk-rated four and five loans as of 03/31/2026. The largest of these loans is a risk-rated five Chicago office loan. This loan remains on non-accrual but continues to make its contractual interest payments, which are applied to the basis. Property fundamentals remain stable, with occupancy above 90%, a weighted average lease term of approximately eight years, and positive net cash flow. We remain engaged with the borrower on their ongoing sales process.
It is unfortunately taking longer than we anticipated. We increased our CECL reserve for this loan by approximately $5 million to reflect our most current market indications for the potential sale of this property. The second largest risk-rated four and five loan is a risk-rated four residential condominium loan located in Brooklyn, New York. This loan also remains on non-accrual. The preliminary condominium sales process began earlier this year; as a reminder, initial sales proceeds will be used to pay down debt associated with the project, while subsequent sales are expected to generate cash flow back to the company.
As the project nears completion and with increased visibility into final construction costs, we have incorporated incremental costs and adjusted the timing into the business plan. These updates are also reflected in the CECL reserve for the first quarter and, combined with the reserve increase for the risk-rated five office loan, were the primary drivers of the overall CECL reserve increase during the quarter. As it relates to our North Carolina office REO, we began the formal sales process for this property this quarter. This decision was supported by improved property fundamentals and capital markets activity. Notably, in 2025, we recognized a gain related to the partial sale of this property.
As of the end of the first quarter, the remaining property was reclassified as held for sale. In closing, we remain highly focused on our current objectives of reducing our risk-rated four and five loans and addressing office and REO loans while opportunistically investing into new loans. Let me now turn the call over to Jeff, who will provide more details on our first quarter results.
Jeffrey Gonzales: Thank you, Bryan. For the first quarter of 2026, we reported a GAAP net loss of approximately $9.6 million, or $0.17 per diluted common share. Our distributable earnings for the first quarter of 2026 were approximately $3.2 million, or $0.06 per diluted common share. This includes the impact from the realized loss of $3.3 million, or $0.06 per diluted common share, related to the exit of the risk-rated five Pennsylvania multifamily loan. Distributable earnings for the first quarter, excluding this loss, were approximately $6.5 million, or $0.12 per diluted common share.
Additionally, during the first quarter, we collected $2.1 million, or $0.04 per diluted common share, of cash interest on loans that were on non-accrual, which was accounted for as a reduction in our loan basis. We continued to maintain our strong balance sheet position with moderate leverage, which supports further resolutions of underperforming loans and future growth. We ended the first quarter with a net debt-to-equity ratio, excluding CECL, of 1.9 times. Our portfolio of loans held for investment reached $1.7 billion as of 03/31/2026, with the majority of our loans collateralized by multifamily and industrial properties.
Looking at the $294 million of new loan commitments made in the first quarter, $225 million of these new loan commitments are classified as loans held for investment and $69 million are classified as held for sale as of 03/31/2026. The $69 million loan classified as held for sale corresponds to a larger $144 million senior loan commitment collateralized by a retail property in California. $75 million of this loan will be retained by ACRE and is classified as held for investment. The remaining $69 million of the loan is expected to be sold to either an Ares affiliated fund or a third-party investor during the second quarter.
Notably, until the sale is completed, ACRE will accrue interest and fee income associated with this loan. Let me take a minute to discuss the strategy behind this action. We believe this specific loan structure provides a strategic opportunity for ACRE to selectively deploy its available liquidity on a short-term basis, capturing attractive economics on high-conviction loans that we intend to hold a portion of on a long-term basis while still maintaining diversity across the broader portfolio. Ultimately, we believe this strategy is another example of how ACRE can leverage the robust capabilities and broad market presence of the Ares real estate platform.
As we reshape the portfolio through resolutions and new investments, we continue to prioritize strong liquidity and disciplined liability management. During the first quarter, we collected $94 million in repayments, further strengthening our liquidity position. As of 03/31/2026, our available capital was $163 million, including $86 million of cash. In addition, during the quarter, we increased our borrowing capacity by $300 million, subject to future available collateral, as well as reduced our borrowing costs through three distinct actions. First, we upsized the Morgan Stanley facility to $350 million, an increase of $200 million from the prior quarter, and extended the facility by three years.
Second, we upsized the Citibank facility to $425 million, an increase of $100 million from the prior quarter. Lastly, as mentioned on our last earnings call, we reduced the cost of our borrowings through the redemption of our FL4 CLO securitization. We believe these actions reflect the strength and scale of our lender relationships, driven by the Ares platform, and position us well to access attractive financing and to support future growth initiatives. Additionally, our financial flexibility allows us to further address our higher risk-rated loans as well as invest in new loans, resulting in what we believe is a more stable portfolio.
As Bryan mentioned, we exited a risk-rated five loan and had no negative credit migrations in the risk ratings across the portfolio in the first quarter. Turning to our CECL reserve, the total CECL reserve increased to $138 million as of 03/31/2026, an increase of approximately $11 million from the CECL reserve as of 12/31/2025. This increase was primarily driven by a $15 million combined increase in the reserves for our risk-rated four and five loans, specifically the two largest loans Bryan previously mentioned, as well as a $2 million reserve increase related to the new loans closed in the quarter.
These increases were partially offset by the previously mentioned realized loss in connection with the exit of the risk-rated five Pennsylvania multifamily loan and other macroeconomic and loan-specific attributes. The total CECL reserve at the end of the first quarter of $138 million represents approximately 8% of total outstanding principal balance of our loans held for investment. Ninety-four percent of our total CECL reserve, or $129 million, relates to our risk-rated four and five loans, and approximately half of the total CECL reserve is attributed to the only risk-rated five loan in the portfolio.
Overall, the $129 million of reserves attributed to our risk-rated four and five loans represents approximately 35% of the outstanding principal balance of those risk-rated four and five loans. Our book value is $8.89 per share, which includes the $138 million CECL reserve. Our goal remains to prove out book value over time while advancing our efforts to rebuild earnings and cover our dividend, which we believe is achievable. So far in the second quarter, we have continued to execute against our objectives with the closing of $95 million of new loan commitments collateralized by multifamily and self-storage properties. These are both high-conviction property types across the Ares real estate platform, and both loans represent co-investment loan opportunities.
To conclude, the Board declared a regular cash dividend of $0.15 per common share for the second quarter of 2026. The second quarter dividend will be payable on 07/15/2026 to common stockholders of record as of 06/30/2026. At our current stock price on 05/04/2026, the annualized dividend yield on our second quarter dividend is approximately 11.5%. With that, I will turn the call back over to Bryan for some closing remarks.
Bryan Patrick Donohoe: Thank you, Jeff. As we sit here today with the first quarter of 2026 under our belts, we are excited about the opportunities that lay ahead. We believe ACRE is uniquely positioned to capitalize on Ares’ powerful and growing real estate platform, depth of capabilities, and robust pipeline to create shareholder value. As always, we appreciate you joining our call today, and we would be happy to open the line for questions.
Operator: Thank you, Mr. Donohoe. Ladies and gentlemen, at this time, if you have any questions, please press 1. Additionally, you can remove yourself from the queue by pressing the appropriate key. We will go first today to Jade Joseph Rahmani with KBW.
Jade Joseph Rahmani: Thank you very much. Do you have any updated thoughts as to potential timeline for resolution on the Chicago risk five, and also over what time period do you expect the Brooklyn condo risk five to be amortized down based on condo sales? Is that going to take, do you think, two years, three years? If you could just provide any commentary on that. Thank you.
Bryan Patrick Donohoe: Yes. Thanks for the question, Jade. I think, as you can tell from our prepared remarks today and in prior quarters, these assets remain one of our primary focus points. I think the short answer is we are getting closer, and the outcomes have certainly narrowed. We do need a functioning market, which I think we have seen over the past six to nine months, with some return of capital back into the office sector and a process that is well underway, but that is a little bit outside of our control.
With respect to the Brooklyn condominium asset, as you heard in the remarks as well, we are largely through the construction phase and began the sales process last quarter. So that will be a function of demand for the product, which we think is fairly priced for the landscape in which we are all operating. Sellout can obviously vary, but it is fair to say it is inside of two years would be the general expectation for a similarly sized project.
Jade Joseph Rahmani: And then just more broadly, in terms of how Ares is looking at the debt capital markets in commercial real estate, where do you see the best opportunities, risk-adjusted, at this point? Thematics, if it is sector, property type, geography, or if it is participation in certain capital structures, any nuances that you care to provide?
Bryan Patrick Donohoe: Of course. I think that as it relates to ACRE, we have talked over the past five years about the disadvantages of being subscale, but certainly when we think about the broad landscape of opportunities in real estate credit across the U.S., and you are talking about a roughly $5 trillion market opportunity, there is plenty to do. The overall theme that you and I have covered in the past still relates to banks being less driven to provide capital and back leverage, and that has provided us the opportunity to really go lower on the risk spectrum but still create ROEs that are in keeping with our historical norms.
As it relates to sectors, you have seen us pivot at times through logistics, student housing, multifamily, seniors to some degree, and obviously underweight office as we sit here today and on a go-forward basis. So our focus remains on lower CapEx cycle asset classes, and then we are looking at the fundamentals both from supply-demand and otherwise and a geographical focus that has really ebbed and flowed over the past three or four years. I know there have been questions on Sunbelt assets for some different operators and different lenders in the space, and I think location continues to matter, as does vintage.
So you will see us find, given the broad landscape in which we participate, plenty to do given the size of ACRE's balance sheet.
Operator: Thank you. We will go next to Christopher Muller with Citizens Capital Markets.
Christopher Muller: Hey, thanks for taking the question. I guess on the $3.3 million realized loss—and sorry if I missed this in your prepared remarks—but can you just break that down for me? Is that related to the REO property being reclassified for sale, or the resolution of the five-rated loan? Or is it a combo of both of those?
Jeffrey Gonzales: Thanks for the question, Chris. Yes, it is related to the Pennsylvania multifamily loan—all of it is. As we disclosed in our filings, when we transferred the REO office property to held for sale, there was no impairment loss associated with that. So it is all related to that multifamily loan.
Christopher Muller: Got it. That is helpful. And it is nice to see no downward credit migration in the quarter. Do you feel that credit has largely stabilized? And then how are you thinking about new originations in 2026? Is 1Q a decent run rate for deployment?
Bryan Patrick Donohoe: The overall market is certainly constructive. I said earlier that we have seen capital flow back into the sector broadly speaking, both debt and equity. We have seen stability in values or modest appreciation, and that is obviously in the face of rates that have risen in the U.S. and certainly across Europe as well. So I think people believe in the fundamental story of hard assets with low degrees of obsolescence, and I think those capital flows are supportive of valuations. So we have a pretty constructive backdrop in which to invest right now. What does that mean for forward originations?
I think largely that will be dictated by the repayment schedule of the loans that are in the portfolio today, alongside the resolution of those focus assets that you heard about earlier and you have heard about in prior quarters as well.
Christopher Muller: Got it. That is very helpful. Thanks for taking the questions and congrats on the continued progress.
Bryan Patrick Donohoe: Thanks for the questions.
Operator: We will go next now to Gabe Poggi with Raymond James.
Gabe Poggi: Hey, good afternoon. Thanks for taking the question. Kind of piggybacking on the last one, how do you think about leverage while you are working through the four and the five loans and REO? Is there a leverage level that you are comfortable going to while you wait for resolutions there? You have gone from kind of one turn in 3Q25 to now two turns. Can we see another full turn of leverage, even if the watch list loan capital/REO capital is still in TBD zone?
Bryan Patrick Donohoe: It is a great question, Gabe. I would say the answer probably lies somewhere in between. We have taken a bifurcated approach to the portfolio, as you have seen over prior quarters, where we wanted to have—and we have proven we did have—the flexibility to accelerate resolutions on assets where we wanted to move on. I think the life science asset of a few quarters ago, you saw us do that—not the outcome that we had hoped for, but one that we think looks better today than it even did then, given the headwinds in that sector by way of reference.
So we maintain almost this lower-leverage approach to the legacy assets—things that we touched on in terms of those focus assets of fours and fives, etc. But we have, I think, proven that there is ample capital available to leverage new originations and to do so very accretively. So as we increase that confidence interval on the resolution of those fours and fives, as we touched on, you will see that de novo portfolio—really the assets that are post-2024/post-2025 environment—be a larger percentage of the portfolio, and with that will come higher leverage. So certainly, as we move towards that to get towards the historical three turns of leverage, you will see a push in that direction over time.
Gabe Poggi: That makes sense. Thanks. And then a quick follow-up just so I understand. On the $144 million retail loan in California, that was a co-invest with Ares, and then the REIT is splitting the $144 million with Ares. Is that an A-note/B-note? Is that the way to think about it?
Jeffrey Gonzales: Nothing senior-sub. All the sharing is on a pari passu basis, but it is a larger loan overall and shared across different vehicles within the Ares family, I would say.
Operator: Thank you. And gentlemen, it appears we have no further questions today. Mr. Donohoe, I would like to turn things back to you for any closing comments.
Bryan Patrick Donohoe: Yes, thank you. I just want to thank everybody for their time today and the team for all the work this quarter. We appreciate your continued support of Ares Commercial Real Estate Corporation and look forward to speaking with you all on our next earnings call. Thank you, and have a good afternoon.
Operator: Thank you, Mr. Donohoe. Ladies and gentlemen, this concludes our conference call for today. If you missed any part of today's call, an archived replay of the conference will be available approximately one hour after the end of this call through 06/07/2026 to domestic callers by dialing 1-808-394-016 and to international callers by dialing +1 (402) 220-7240. An archived replay will also be available on a webcast link located on the homepage of the Investor Resources section of our website. Again, thanks so much for joining us, everyone. We wish you all a great day. Goodbye.
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