Ares Commercial Real Estate Corporation Stock

Good afternoon. Welcome to the Ares Commercial Real Estate Corporation's Second Quarter Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded on Tuesday, August 4th, 2026 I would now like to turn the call over to Mr. John Stilmar, Partner of Public Markets Investor Relations. Please go ahead, sir.

Good afternoon, 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 www.arescre.com. .

Before we begin, I want to remind everyone that comments made during the course of this conference call and webcast and the accompanying documents contain forward-looking statements and are subject to risks and uncertainties. Many of these forward-looking statements can be identified by the use of words such as anticipates, believes, expects, intends, will, should, may and similar such 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, conditions or results and do involve a number of risks and uncertainties.

The company's actual results could differ materially from those expressed in forward-looking statements as a result of a number of 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 for or a substitute for measures prepared in accordance with generally accepted accounting principles.

These measures may not be comparable to like-kind measures used by other companies. Now I'd like to turn the call over to our CEO, Brian Donohoe. Brian?

Thank you, John. Good afternoon, everyone, and thank you for joining us. I'm here today with Jeff Gonzales, our CFO; Tae-Sik Yoon, our COO; as well as other members of the management and Investor Relations teams. During the second quarter, we saw the commercial real estate market exhibit relative stability despite broader macroeconomic and geopolitical uncertainty.

Property prices appreciated modestly financing markets remained open and liquidity continued to improve. While sales transaction activity did moderate somewhat during the second quarter, we see compelling opportunities driven by refinancing needs and a robust pipeline of floating rate lending opportunities, offering attractive risk-adjusted returns.

Consistent with recent trends, private real estate capital continues to increase its role in the market. Today, debt funds have become the second largest source of commercial real estate lending behind banks according to MSCI, reflecting both the continued evolution of the lending market and the growing importance of alternative asset managers.

We continue to believe that the scale of the Ares Real Estate platform is a key differentiator in allowing us to access greater institutional quality assets in a diversified manner and efficiently deploying our available capital.

The strength of the platform allowed ACRE to deploy over $900 million in new loan commitments in the past 12 months, which represents more than 40% of our current loan portfolio. Supported by these platform benefits and the progress we have made in executing our business plan, we believe ACRE is well positioned to capitalize on market opportunities while continuing to advance our portfolio repositioning strategy.

To this end, we have continued to make meaningful progress in addressing risk-weighted 4 and 5 loans while further reducing office loans and REO properties. At the same time, we are strategically redeploying capital into high-quality new investments, largely to support growth in earnings and achieve our long-term portfolio objectives.

We believe our second quarter results reflect the continued execution against that strategy. Importantly, key portfolio and financial metrics remain consistent quarter-over-quarter as reflected by our relatively stable CECL reserve.

Additionally, for the third consecutive quarter, no risk-weighted 1 through 3 loans migrated to risk rated 4 or 5 ones. We also have no new REO properties and the operating performance across our existing REO assets remain stable. Supported by these metrics, the depth of the Ares platform and a supportive commercial real estate market, ACRE saw another quarter of steady portfolio growth.

As of June 30, 2026, we increased the outstanding principal balance of the total portfolio by 36% year-over-year, while improving portfolio diversification and reducing the office loan portfolio. During the second quarter, we closed 3 new loan commitments totaling $130 million across multifamily, self-storage and hotel properties.

Consistent with last quarter, all 3 new loan commitments were part of co-investment opportunities alongside other Ares management affiliated vehicles. We believe ACRE's ability to selectively co-invest alongside Ares managed vehicles allows us to reduce asset concentration risk while participating in institutional properties in major markets, which would otherwise be beyond our stand-alone capital base.

Loans originated over the past 12 months now account for 42% of the total portfolio of loans held for investment. These loans contribute to broader diversification across vintage, sector, geography and credit while providing gross levered returns in the low double digits.

These zones also reinforce the solid foundation of the underlying portfolio. By number of loans, 89% of the loan portfolio is risk rated 1 to 3 and primarily consist of loans collateralized by multifamily, industrial and self-storage loans. These loans continue to execute their business plan in line with expectations.

In order to achieve the goals of the business over the past several years, we proactively strengthened our balance sheet to address identified assets within our portfolio that were adversely affected by changing market dynamics or property-specific challenges.

The progress we have made in repositioning the portfolio is a direct result of the continued focus on addressing risk-weighted Form 5 loans and REO properties and further reducing our office investments. We believe that resolving these assets and redeploying that capital into yielding new investments remains an important driver of future earnings growth.

Let me now dive a bit deeper into the specific investments we continue to focus on and provide an update on the progress we're making towards resolutions. Starting with our risk-rated 4 and 5 loans, similar to last quarter for our 4 loans outstanding.

Looking at the largest risk-graded 5 loan in the portfolio, the Chicago office loan remains on nonaccrual, but continues to make its contractual interest payments. Fundamentals at the property remains steady. Occupancy is above 90%, with a weighted average lease term of over 7 years and positive net cash flow.

Further, while Chicago remains challenged, there have been positive signs of a nascent recovery in the market. As mentioned in our previous quarter's call, we remain engaged with the borrower on their ongoing sales process. Although the time line has extended beyond our original expectations, we remain encouraged by the negotiations, which continue to advance towards a resolution.

We note that post quarter end, the loan was extended from July 2026 by 3 months to support the virus business plan and continued efforts to reach a conclusion in the sales process. Turning to the second largest risk-weighted Form 5 loan.

The Brooklyn residential condo remains on nonaccrual, but advancements in the business plan continued during the quarter. Construction on this building is now substantially complete. Our CECL reserve takes into account estimated future costs with remaining cost larger limits of settling payables from completed work and completing punch list items.

Early marketing and presales efforts remain ongoing, supporting a more visible path towards resolution. Next, I want to address the $13 million subordinate loan collateralized by a California industrial property adjusted to a risk-weighted 5 from a risk-weighted 4 during the quarter.

As a reminder, this subordinate loan is part of the larger capital structure. We continue to receive sponsor support as well as growing interest from prospective tenants alongside positive trends in this submarket. However, with the maturity of the loan in January 2027 we adjusted the risk rating to reflect the higher probability of a near-term realized loss.

These updates underscore the highly asset-specific nature of our 4 remaining risk rated 4 and 5 loans. Throughout this cycle, we have proactively identified challenges, deleveraged the balance sheet and enhance liquidity, enabling us to resolve underperforming assets, while positioning the company to address these remaining investments.

We believe that our work to date has narrowed the potential outcomes, in part reflected in the stability of CECL this quarter. During the quarter, and consistent with our goals to change the complexion of our investment portfolio, office loans decreased to $442 million or less than 25% of the total loan portfolio as compared to 39% of the total loan portfolio at the end of Q2 2025.

As of June 30, 2026, there were 5 risk-rated once 3 office loans remaining, further demonstrating the execution of our strategy to reduce our office investments. Last quarter, we launched the sale of the North Carolina office REO asset. Market interest in this property has been strong, and we continue to work towards the sale of this asset.

With regard to our other remaining REO, the Florida mixed-use property continues to exhibit consistent occupancy with an income yield of 10%. While we do not intend to be long-term owners of this property, we believe the current yield of this investment is attractive while we evaluate the optimal path to exit this investment.

In closing, we continue to execute the strategy we've outlined over the past several quarters. We are making steady progress resolving underperforming assets while selectively investing alongside the broader Ares platform in high-quality new originations.

Although there is still work ahead, the portfolio today is materially different than it was a year ago. It is larger more diversified and increasingly comprised of new investments originated in today's attractive lending environment.

With more than $150 million in carrying value of loans, net of CECL not accruing interest, we are squarely focused on resolving these assets and capturing the potential earnings power of our future balance sheet. Looking ahead, we expect repayments to continue advancing our portfolio repositioning efforts while successful asset resolutions will provide additional capacity to support future growth.

We are encouraged by the progress achieved thus far and remain confident that the actions we're taking today are building a high-quality portfolio enhancing future earnings power and creating a clear path back to increased levels of profitability.

With that, I'll turn the call over to Jeff, who will walk you through our second quarter financial results.

Thank you, Brian. For the second quarter of 2026, we reported GAAP net income of approximately $4.4 million or $0.08 per diluted common share. Our distributor earnings for the second quarter of 2026 was approximately $6.9 million or $0.12 per diluted common share, and there were no realized gains or losses recognized in the quarter.

Additionally, during the second quarter, we collected $1.7 million or $0.03 per diluted common share of cash interest on loans that were on nonaccrual and was accounted for as a reduction in our loan basis. We continue to maintain our strong balance sheet position with moderate leverage, which supports further resolution of underperforming loans and future growth.

We ended the second quarter with a net debt-to-equity ratio, excluding CECL, of 2.0x. Our portfolio of loans held for investment reached $1.8 billion as of June 30, 2026. An increase of $129 million quarter-over-quarter and $484 million year-over-year. During the quarter, we sold the $69 million loan that correspond to a larger $144 million retail loan that was originated and classified as held for sale in Q1 2026.

This short-term hold led to additional earnings from accrued interest and fee income during the second quarter. We anticipate utilizing this strategy opportunistically in the future in order for ACRE to selectively deploy its available liquidity on a short-term basis while capturing attractive economics on high conviction loans.

As we continue to reposition the portfolio, we remain focused on maintaining balance sheet flexibility through strong liquidity and disciplined liability management. In the first half of 2026 of repayment, while repayments in the second quarter slowed from the first quarter, we expect repayment activity in the second half to be driven by natural portfolio turnover as well as further resolution.

In addition, we continue to maintain liquidity of over $100 million in order to support asset resolutions and new investing activity. As of June 30, 2026, our available capital was $106 million. Supported by our strong liquidity position, deep lender relationships, access to financing and the resources of the Ares Real Estate platform, we believe we are well positioned to continue to execute on our portfolio objectives and future growth initiatives.

Turning to our CECL reserve. The total CECL reserve increased marginally to $139 million as of June 30, 2026, an increase of approximately $900,000 from the CECL reserve as of March 31, 2026. This increase was primarily driven by a reserve increase of $1 million related to the new loans closed in the quarter while the CECL reserve for our previously existing loan portfolio was largely flat quarter-over-quarter.

The total CECL reserve at the end of the second quarter of $139 million represents approximately 8% of the total outstanding principal balance of our loans held for investment. 94% of our total fees reserve or a $130 million related to our risk-rated 4 and 5 loan and nearly half of the total CECL reserve is attributed to the risk-rated 5 Chicago office loan.

Overall, the $130 million of reserves attributable to our risk rated 4 and 5 loans represents approximately 34% of the outstanding principal balance of those risk rated 4 and 5 loans. Our book value remained relatively stable at $8.82 per share.

While we still have work to do, we believe that the relative stability of our book value and reserve level reflects the progress we have made in repositioning the portfolio and underlines the strength of the overall portfolio. We believe this foundation, combined with our liquidity and financial flexibility positions us well for the opportunities ahead.

Subsequent to quarter end and as part of our ongoing capital allocation framework, our Board of Directors reauthorized our share repurchase program for an additional year through July 31, 2027, authorizing the repurchase of up to $50 million of our common back. We will continue to assess share repurchases relative to other capital deployment opportunities.

To conclude, the Board declared a regular cash dividend of $0.15 per common share for the third quarter of 2026. The third quarter dividend will be payable on October 15, 2026, to common stockholders of record as of September 30, 2026.

At our current stock price on July 30, 2026, the annualized dividend yield on our third quarter dividend is approximately 14%. With that, I will turn the call back over to Bryan for some closing remarks.

Thanks, Jeff. Before we begin Q&A, we'd like to take a moment to comment on the leadership transition that we announced this morning. Tae-Sik Yoon will be stepping down as our Chief Operating Officer and expect to transition from his day-to-day executive role to serve as a senior adviser to Ares management, including continuing to work with ACRE. .

We believe this transition will allow ACRE to continue benefiting from Tae-Sik's deep industry expertise and experience. He will remain a valued adviser to me and the rest of our team as we continue executing on our strategy.

On behalf of our Board of Directors and everyone at ACRE, I want to sincerely thank Tae-Sik's for his 14 years of dedication, leadership and significant contributions to the company. One of Tae-Sik's strength has been the active mentorship of the team around him, which has created a deep bench of talent, positioning us well for the future.

We at ACRE look forward to his continued guidance in friendship as we move forward together. As always, we appreciate you joining our call today, and we'd be happy to open the line for questions. Operator?

[Operator Instructions] Our first question will come from Jade Rahmani with KBW.

We started the year with investors seeming optimistic around the commercial real estate cycle, yet something most people didn't expect has been the spike in interest rates and the shifting outlook. .

Can you comment on your thoughts as to where we are in the cycle, if you're seeing any new pressures emerge either in the existing risk 4 to 5 loan bucket or in the risk 3 area? And also, if you could share a broader perspective about how Ares is viewing the world from a real estate perspective and also within that from his own equity investing perspective.

Yes. Thanks for the question, Jade. I'll start with overall market view and then come back to your question on portfolio a little bit. I guess to start with in terms of where we are in the cycle and what we see out there, it feels like we're somewhere in the fourth in probably in a bit of a rain delay, if that makes sense.

With the idea being the digestion of the higher rate seems to be on the come. I think that people still have a viewpoint out there that there may be reason in the future for rates to either stabilize or come down some bit but the inflationary pressures are real. What that leads us to is to continue to avoid heavy CapEx-intensive assets.

And while there's always something to do in the addressable universe of real estate, it isn't always the same thing, right? So whether it's equity or credit that we dig into more or less, I think humbly recognizing the cyclicality of our business is a really important attribute of what we've created at Ares in terms of our participation in real estate.

So look, I think there's still growth to create out there on the equity side of the ledger, but it is much more intensive at the actual asset level. So the operating expertise is more important than it was in prior cycles. And I think we additionally humbly recognize that the disparity of outcomes on certain assets is candidly broader than it was in prior cycles.

So I think there's still plenty to do as we reflect in the refinancing side. Acquisitions certainly slowed for the broader market as a whole in end of Q1 and into Q2. But we're still in a digestion phase for geopolitics and where rates are. And I was looking at the yen versus dollar chart last night. There's more questions out there that I think we as an industry and as an economy needs to answer.

And just the follow-up would be any pressure on the risk-free side. It didn't sound like you had seen anything. Maybe you could also comment on the industrial since we haven't really seen pressure in that space.

Yes. I think, look, we have consistently team around what we think is as of the moment going on in the market and our portfolio, and that is reflected in the risk ratings that you see today. That takes into account market rates, borrower behavior, loan structure and the like.

And I think as I said a minute ago, it does recognize or we positioned the balance sheet to be able to allow for changes in that, right? Because I think there has been a very dynamic marketplace for us to digest over the past 3 years. So absolutely, the risk rated wants to. But I wouldn't say any loan is not impacted by the change in rates, but those impacts are part of the calculation for what goes into that risk rating.

In terms of logistics, I think it is still asset to asset and market to market. We have been extremely active across the board, equity and debt in the sector. But given the higher rates, which equates to higher carry costs, I would say that the time line that one might be willing to wait to mark-to-market rents.

If you start with the premise that rents have gone up over the past 5 to 7 years, the capture of that mark-to-market is going to be shorter in nature than it would have been with lower rates, if that makes sense. There are pressures in an Empire in certain submarkets.

But largely speaking, we still very -- still feel very comfortable with the reduction in supply in that marketplace and the long-term viability of Class A industrial around the country.

Our next question will come from Rick Shane with JPMorgan.

First of all, and I'm not big on compliments on earnings calls, but I will throw one out here. Finding a twist on Wall Street's favorite metaphor of what [indiscernible] I got to give you credit for that one. So thank you for making smile with that.

In terms of real question. A year ago, you guys had $120 million worth of reserves. In the last 12 months, I think you've realized about $5 million of actual losses. The reserve has gone up to about $140 million since then, again, very conservative. But ultimately, the opportunity here is to recycle the capital that is tied up in the nonaccruing loans.

It sounds like Chicago, which represents about 30% of the reserve should be resolved fairly quickly. What is the cadence that we should expect for recycling of the remaining 4 and 5 rated loans over the next, call it, 12 to 18 months?

Yes, it's a great question, Rick, I'd say that look, I think we've said we have narrowed these, we feel like we've narrowed these potential outcomes, but we've consistently over the past few years to position the balance sheet to allow for something unforeseen to occur because I feel like that has occurred in the broader real estate market over the past few years. So I'm going to start with that.

You're right that the redeployment of -- if all goes to plan and you're able to resolve that loan, you reduce the office allocation by another 50% or thereabouts and free up capital to reinvest. That is the charge. That's what we set for it to do years ago, and we addressed that in the prepared remarks.

So I think in terms of the build back, Jeff, maybe you want to opine in terms of what that leads to but the conditions present, and I think we did a good job framing Rick, in terms of getting through those assets over the period of time that they allow for.

Yes. So I think we have a significant earnings potential tied up in those foreign 5-year loans. I think we said in our prepared remarks, it was about $150-ish million. So I think it happen stages as we resolve these foreign fiber loans that we will increase our earnings to -- up to the dividend level and eventually beyond it. So we are hyper focused on resolving those as efficiently as possible in getting that capital back to deploying an interest-earning loans.

Yes. And I think, Rick, here, right, is the -- if you had a much larger granular portfolio, you'd point to averages and kind of run things off over a period of time.

We have isolated these loans and they are somewhat idiosyncratic. So what we've attempted to do is not count it until it's done, but work very hard to accelerate those resolutions.

So it's tough to point to a regular cadence. Obviously, we wish it was faster, but a lot of what we're going to deal with over the coming quarters is how can we accelerate those resolutions. And then how quickly can we redeploy. But it's difficult to point to a consistent cadence given almost the idiosyncratic nature of each of them and the behaviors that sit behind those assets.

Fair enough. And again, look, having them fully reserved is the foundation for being able to achieve that. And Bryan, you made a comment that I thought was interesting. You talked about sort of the dispersion in terms of valuations across the industry.

When we think about loan types isn't the right word, but transaction types, whether it is a new development, a sort of traditional refi or a workout resolution is that dispersion particularly pronounced? Is that one of the things that sort of drives the slower time line on resolutions right now?

Well, it certainly drove our approach to the balance sheet, right? We felt like I think if I go back in history, the loss severity of certain assets in this cycle has been more broad than typical reserves would have provided for, right?

We saw an orphaning of life science assets given what went on with the credits, underlying the tenancy there as well as very heavy CapEx. We see massive dispersion from Park at to Third Avenue on office sector. And so based on that higher loss severity, we wanted to position the balance sheet to allow for those outcomes. But certainly, to your specific question, absolutely, that dispersion will impact velocity.

Got it. And then very last question. implicitly, it looks like the new fundings in the quarter were put on with about a 75 basis point CECL reserve. Is that correct? And is that sort of what we should expect for new originations in this environment as you start to build the balance sheet again?

Typically, you should expect to see on a standard 3-year floating rate loan, around 100 basis points reserve at closing. That's typically what we see that it's usually is lower if it's not -- if it's below a 3-year term.

Got it. And is that what drove it lower this quarter? .

Correct. One of the loans had a 2-year initial term on it.

Our next question comes from Gabe Poggi with Raymond James.

I kind of want to piggyback on what Jade and Rick were asking about and just think about the go forward, if you're successful with some of this capital recycling. How do you think about in conjunction with the world we live in and geopolitics and rate ball, et cetera. How should we think about today's kind of go-forward return on equity profile for the REIT.

Right? If I think about where the dividend is set today where DE is today, the ability to recycle capital and get above it, how do you think about what the right level is from a risk-adjusted return perspective in the here and now?

Let me -- it's a great question. I'll let Jeff walk through the math of how we build back the book, if you will, and then I'll talk markets if that works for you. .

Sure.

Yes. So I think -- yes, just going back, we did reset our dividend last year to more closely align with our strategic objective of building liquidity, reducing leverage. So we troughed at a ratio of about 1.1 a year ago, and we provisioned positioned ourselves to start investing in over that time.

As we mentioned in our prepared remarks, we've originated $900 million over the last 12 months of new loans. So I think we've built up to the earnings to a higher amount, and we are working through those 4 and 5 rated loans. It will happen in stages. If it takes on, I would say, to probably get us to the point of hitting the dividend as soon as we have the capital deployed again.

And then over a longer-term period as we resolve the remaining 4 and 5 rated loans, we expect to get back to our historical ROE of about 9% to 10% on our book.

Yes. Maybe, Chris, I'll just pile on in terms of the market landscape. I think we've proven with the $900 million of deployment that Jeff references that we have found more than enough to originate to service the capital base of ACRE.

We have a massive addressable universe of $7 trillion of transactions across the U.S. and Europe that our platform invest in and therefore, the scale of this platform is very ably serviced by the team that we've created. In terms of the ROE, I think what we are seeking out is certainly those high single-digit net returns.

I think that we've proven that as achievable and how you achieve that can ebb and flow to some degree with the use of back leverage and things like that. So there's a lot of ways to create that yield. But I believe what we are attempting to do is create a much more diversified company in terms of smaller portions of assets comprising that baseline and then creating a very stable and consistent income profile that the market provides for.

I don't think that the market and investors will reward risk-taking when it is not available and is not going to create that durable income profile. So hopefully, that's helpful from a partially macro view of how we're thinking about it.

Our next question will come from Chris Muller with Citizens Capital Markets. .

Congrats on a solid quarter. It's nice to see the market rewarding your guys' stock today. I guess on the Chicago 5-rated loan. So there's been a note in the slide deck for several quarters now about them engaging in a sales process, and you guys mentioned that in your prepared remarks as well.

I guess the question is, how patient are you guys willing to be on this asset versus just taking it back yourselves. Is that 3-month extension, what we should be watching for more clarity on that path forward?

I think we mention it because it's the best indication, right? We remain the lender there. Obviously, the result is frustrating and the time line has been frustrating, but we do feel encouraged by where it's gone.

And that time line, I think, is as reflective of the expected outcome as we can put forth today, right, as I mentioned, I think, in Jade's question around the risk rating, right? It's reflective of everything we know when we know it.

I do think, and we mentioned in the prepared remarks, a little bit around that nascent recovery, certainly a bifurcation of assets that either have leasing and our relevant assets to a potential tenant in the market versus those that have a very heavy CapEx cycle in front of them to make them relevant building us again.

But when we combine what this buildings leasing profile is, especially when you look at the yields versus our reserve hold position, I think we would like to exit, but at the same time, the credit quality and that durable income profile with the 7 years of Waltz remaining gives us a good bit of comfort that if it doesn't come to fruition, we can still create an accretive asset for our position moving forward.

So we are hopeful and encouraged, but we also like the relative position and the cash flow profile of the asset.

Got it. That's helpful. And then maybe changing gears a little bit. On the held-for-sale loan strategy, are these transactions prenegotiated? Or are you guys taking on some risk if the market moves dramatically while those loans are on your balance sheet before you can sell it off?

Yes, it's a great question. So the I want to say there is -- certainly, if we entered into a period of volatility, we would consider that it is -- I think we generally have a view of the potential outcomes in the homes for those assets, but they are not fully baked, if that makes sense. .

So there is short duration risk. But obviously, since we end up holding that loan, we are -- we begin the day liking the underlying collateral and position as it relates to overall profile, and we feel like they are liquid positions on the other side.

And just to add to that typical hold period ranges between 30 to 120 days. So it's not a significant period of time that we're holding these.

[Operator Instructions] We do have a follow-up from Jade Rahmani with KBW.

Can you give an update on the Brooklyn condo and if there's presales marketing or anything of that nature, like any initial indications as to how it's going?

Yes. We have entered into the typical presale period for the condominium. It is obviously, the summer months are -- can be a little bit slower, but we have been -- I'd say, we look forward to an acceleration, but we have entered that presale period and no issues as we sit here today in terms of velocity or price. .

This concludes our question-and-answer session. I would now like to turn the meeting back over to Bryan Donohoe for any closing remarks.

Thank you very much, and I want to just thank everybody for their time today. We appreciate your continued support of Ares Commercial Real Estate and look forward to speaking with you again on our next earnings call. Thank you, and have a good day.

Ladies and gentlemen, this concludes our conference call today. If you missed any part of today's call, an archived replay of this conference call will be available approximately 1 hour after the end of this call through September 4, 2026. To domestic callers by dialing plus +1(800) 723-0532 or to international callers by dialing plus +1(402) 220-2655.

An archived replay will also be available on the webcast link located on the homepage of the Investor Resources section of our website. Thank you. Have a great day. Goodbye.

Good afternoon, everyone. Welcome to the Ares Commercial Real Estate Corporation's First Quarter Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded on Thursday, May 7, 2026.

I will now turn the call over to Mr. John Stilmar, Partner of Public Markets Investor Relations. Please go ahead, sir.

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 www.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 the words such as anticipates, believes, expects, intends, will, should, may and similar such 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'll 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'd like to turn the call over to our CEO, Bryan Donohoe. Bryan?

Thanks, John. Good afternoon, everyone, and thank you for joining us. I'm here today with Jeff 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. 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 3 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 12 months. We believe today's commercial real estate environment offers the opportunity to originate at attractive attachment points with stronger credit structures and risk-adjusted returns.

ACRE is committed to approximately $780 million in new loans in the last 12 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 12 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 that enhance portfolio diversification and support efficient capital deployment. We believe that this deployment reflects success against our goals for the portfolio that we laid out 1 year ago. As of March 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 continue to improve portfolio quality through active resolution efforts on our risk rated 4 and 5 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 4 and 5 loans.

With respect to the total portfolio of loans held for investment, 31 of our 35 loans carry a risk rating of 1 through 3. There were no negative credit migrations during the first quarter within the risk-rated 1 to 3 loan portfolio. While the majority of the 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 2 of these 4 loans, which comprise more than 90% of the outstanding principal balance of the total risk-rated 4 and 5 loans as of March 31, 2026. The largest of these loans is a risk-rated 5 Chicago office loan. This loan remains on nonaccrual, 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 8 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 4 and 5 loan is a risk-rated 4 residential condominium loan located in Brooklyn, New York. This loan also remains on nonaccrual. The preliminary condominium sales process began earlier this year. And 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 analysis for the first quarter. And combined with reserve increase for the risk rated 5 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 the fourth quarter of 2025, we recognized a gain related to the partial sale of this property. And 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 4 and 5 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 second quarter results.

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 was 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 5 Pennsylvania multifamily loans. Distributable earnings for the first quarter, excluding this loss, was 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 nonaccrual and was accounted for as a reduction in our loan basis. We continue 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 1.9x.

Our portfolio of loans held for investment reached $1.7 billion as of March 31, 2026, with the majority of our loans collateralized by multifamily and industrial properties. Looking at the $294 million of new loan commit made in the first quarter, $225 million of these new loan commitments are classified as loans held for investment and $69 million is classified as held for sale as of March 31, 2026. The $69 million loan classified as held for sale corresponds to a larger $144 million senior loan commitment collateralized by 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 asset 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 March 31, 2026, our available capital was [ $153 million ], including $86 million of cash. In addition, during the quarter, we increased our borrowing capacity by $300 million, subject feature available collateral as well as reduced our borrowing costs through 3 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 3 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 positions us well to access attractive financing and to support future growth initiatives.

Additionally, our financial flexibility allows us to further address our higher risk-weighted 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 5 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 March 31, 2026, an increase of approximately $11 million from the CECL reserve as of December 31, 2025. This increase was primarily driven by a $15 million combined increase in the reserves for our risk-rated 4 and 5 loans, specifically the 2 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 5 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 the total outstanding principal balance of our loans held for investment. 94% of our total CECL reserve were $129 million relates to our risk-weighted 4 and 5 loans and approximately half of the total CECL reserve is attributed to the only risk-weighted 5 loan in the portfolio.

Overall, the $129 million of reserves attributed to our risk-weighted 4 and 5 loans represents approximately 35% of the outstanding principal balance of those risk-weighted 4 and 5 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 high -- 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 July 15, 2026, to common stockholders of record as of June 30, 2026. At our current stock price on May 4, 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.

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'd be happy to open the line for questions.

[Operator Instructions] We'll go first today to Jade Rahmani with KBW.

Do you have any updated thoughts as to potential time line for resolution on the Chicago risk 5? And also over what time period do you expect the Brooklyn condo risk 5 to be amortized down based on condo sales? Is that going to take -- do you think 2 years, 3 years? If you could just provide any commentary on that.

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're getting closer and the outcome have certainly narrowed. We do need the functioning market, which I think we've seen over the past 6 to 9 months, 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're 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're all sharing. Sellout can obviously vary, but it's fair to say it's inside of 2 years would be the general expectation for a similarly sized project.

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?

Do you mean in terms of sectors? Or what's the specific [indiscernible].

Yes, thematics, it's a sector, property type geography or if it's participations in certain capital structures. Any nuances that you care to provide.

Yes, of course. I think that when -- as it relates to ACRE, ACRE is obviously -- we talk over the past 5 years really about the disadvantages being subscale. But certainly, when we think about the landscape of opportunities in real estate credit across the U.S., and you're talking kind of a $5 trillion market opportunity, there's plenty to do. The overall theme that you and I have covered in the past still relates to banks being very driven to provide capital and back leverage, and that has provided us the opportunity to really go a lot on the risk spectrum, but still create ROEs that are in keeping with our historical norms. As it relates to sectors, we've -- you've seen us pivot at times through logistics, student housing, multi, seniors to some degree and obviously underweight office as we sit here today and on a go forward. So our focus remains on lower CapEx cycle asset classes. And then we're looking at the fundamentals, both from supply/demand and otherwise and geographical focus that has really ebbed and flowed over the past 3 or 4 years. I mean, I know you all have had 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'll see us find given the broad landscape in which we participate, plenty to do given the size of ACRE's balance sheet.

We'll go next now to Chris Muller with Citizens Capital Markets.

I guess on the $3.3 million realized loss, and sorry, I missed this in your guys' prepared remarks, but can you just break that down for me? Is that related to the REO property being reclassified as held for sale or the resolution of the 5-rated? Or is it a combo of both of those?

Thanks for the question, Chris. Yes, it is related to the Pennsylvania multifamily loan. All of it is as. We -- 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's all related to the multifamily loan.

Got it. That's helpful. And it's nice to see no downward credit migration in the quarter. Do you guys feel that credit has largely stabilized. And then I guess, how are you thinking about new originations in 2026? Is 1Q a decent run rate for deployment?

Yes. Look, the overall market is certainly constructive. I said earlier that we've seen capital flow back into the sector, broadly speaking, both debt and equity. We've seen stability in values or modest appreciation. And that 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 out there. And I think those capital flows are supportive of valuations. So we have got a pretty constructive backdrop in which to invest right now. So 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 focused assets that you heard about earlier and you've heard about in prior quarters as well.

[Operator Instructions] We'll go next now to Gabe Poggi with Raymond James.

Kind of piggybacking on the last one. How do you think about leverage, right, while you're working through the 4 and the 5 loans and REO. Is there a leverage level that you're comfortable going to while you wait for resolutions there, right? You guys have gone from kind of 1 turn in 3Q '25 to now 2 turns. Can we see another full turn of leverage even if the watch list loan capital/REO capital still is in TBD zone?

Yes, it's a great question, Gabe. I'd say the answer probably lies somewhere in between. We've taken a bifurcated approach to the portfolio as you've seen over prior quarters, where what we wanted to have, and we've proven we did have is the flexibility to accelerate resolutions on assets where we wanted to move on, right? And 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, right, things that were -- that we touched on in terms of those focused assets of 4s and 5s, et cetera. But we, I think, have 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 4 and 5, as we touched on, you'll see really that de novo portfolio, really the assets that or post '25 or post '24 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 3 turns of leverage, you'll see a push in that direction over time.

No. That makes sense. 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 I guess, and Ares into, call it, is it called A note, B note? Is that the way to think about it?

Nothing senior sub. So all the sharing is on a pari-passu basis, but it's a larger loan overall and shared across different vehicles within the Ares family, I would say.

And gentlemen, it appears we have no further questions today. Mr. Donohoe, I'd like to turn things back to you, sir, for any closing comments.

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 and look forward to speaking with you all on our next earnings call. Thank you, and have a good afternoon.

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 1 hour after the end of this call through June 7, 2026, to domestic callers by dialing 1 (800) 839-4016 and to international callers by dialing on 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, everyone. We wish you all a great day. Goodbye.

Good afternoon. Welcome to Ares Commercial Real Estate Corporation's Fourth Quarter Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded on Tuesday, February 10, 2026. I will now turn the call over to Mr. John Stilmar, Partner of Public Markets Investor Relations. Please go ahead.

Good afternoon, everyone, and thank you for joining us on today's conference call. In addition to our press release and the 10-K that we filed with the SEC, we have posted an earnings presentation under the Investor Resources section of our website at www.arescre.com.

Before we begin, I want to remind everyone that comments made during the course of this conference call and the accompanying webcast as well as associated documents contain forward-looking statements and are subject to risks and uncertainties. Many of these forward-looking statements can be identified by the use of words such as anticipates, believes, expects, intends, will, should, and similar such 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, conditions 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 factors, including those listed in its SEC filings. Ares Commercial Real Estate assumes no obligation to update any such forward-looking statements.

During this conference call, we'll refer to several non-GAAP financial measures. We use these measures as a measure 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'd like to turn the call over to our CEO, Bryan Donohoe. Bryan?

Thank you, John. Good afternoon, everyone, and thank you for joining us. I'm here today with Jeff Gonzales, our Chief Financial Officer; Tae-Sik Yoon, our Chief Operating Officer; as well as other members of the management and Investor Relations teams.

Today, I'll start off with some market commentary. Take a look back at all that we accomplished in 2025 and discuss where we're focused in '26 and beyond. Jeff will then take us through our fourth quarter and full year results in detail. 2025 marked a year of transition for the commercial real estate market. Early in the year, macroeconomic and geopolitical uncertainty weighed on valuations and transaction activity. Conditions improved in the second half as the Fed began easing monetary policy leading to greater stability, a rebound in transaction volumes and stabilizing values. Against this backdrop for commercial real estate and through deliberate and thoughtful action, we made meaningful progress towards our goals of further positioning the balance sheet to address risk rated 4 and 5 loans, reducing office and REO assets, and we're actively investing to reshape the portfolio. During 2025, we achieved our objective of creating and maintaining flexibility on our balance sheet through moderate leverage and ample liquidity in excess of $100 million. The positioning of our balance sheet has provided us the opportunity to drive outcomes on underperforming loans and more recently, supported increased investment activity into new loans.

Now let me walk through some of the specifics. To start, we reduced our office loans by 30% since year-end 2024 to $447 million. Our active management approach and deep structuring capabilities led to increased repayments as well as opportunities to selectively exit and restructure loans that we believe further reduce the risk from these office loans. To this end, we restructured 2 office loans in 2025, which brought in additional equity capital from the borrowers, derisking our position and in our view, enhancing the potential outcomes of the investment. We also exited the one loan collateralized by purpose-built life science properties in the portfolio and do not anticipate making new commitments to other office properties. Our proactive asset management focus on derisking and stabilizing property fundamentals is also reflected in the progress of our risk-weighted 4 and 5 loans. At a high level, there are 5 risk rated 4 and 5 loans remaining.

We continue to make meaningful progress on the majority of risk rated 4 and 5 loans including the 2 largest, which comprise approximately 85% of the balance of the overall risk rated 4 and 5 loans. The largest of these loans is a risk rated 5 Chicago office loan, which has a carrying value of $140 million, representing approximately 44% of the risk rated 4 and 5 loan portfolio. While this loan remains on nonaccrual, we've made progress on the loan. Fundamentals of this property remained stable, and occupancy remains above 90%, with a weighted average lease term of 8 years. As we mentioned last quarter, discussions with the borrower are ongoing and among the options the borrower is considering is the potential sale of the asset. The second largest is a risk rated for Brooklyn New York residential condominium loan, which has a carrying value of $130 million, representing approximately 41% of the risk rated 4 and 5 loan portfolio. Throughout the year, construction advanced of this property. Early in the year, nearly all of the necessary materials to complete construction were procured in order to mitigate supply chain and known tariff risks.

Construction on the exterior was completed on time and on budget. Soft marketing was launched this past summer, and formal marketing has been commenced. Construction continues to progress on plan with internal finishes underway. With the progress made at this property, sales are anticipated to begin in the first half of 2026. The progress in addressing our risk rated 4 and 5 loans allowed ACRE to return to investing in the second half of 2025. During this period, we closed 13 new loan commitments totaling $486 million, with more than 50% of the new originations collateralized by residential and industrial properties. This increased loan activity resulted in loan portfolio growth in the fourth quarter. More than half of the dollars committed in new loans represented co-investment opportunities alongside other Ares management affiliated vehicles. We believe co-investment opportunities are important for a few reasons. First, it expands ACRE's access to quality institutional opportunities of scale. Second, it allows ACRE to appropriately size its commitment to such opportunity based on available capital and suitability. Lastly, we believe it allows ACRE to enhance its diversification and more efficiently deploy its available capital over time. This strategy allows ACRE to benefit from the depth, breadth and extensive capabilities of the broader Ares real estate platform.

Ares has built one of the largest real estate platforms in the world. As a reflection of the growing presence in the real estate market, the Ares real estate debt platform originated over $9 billion globally in new commitments in 2025, nearly double 2024. Looking out to 2026, we are focused on the resolutions of our remaining risk rated 4 and 5 loans for the ultimate benefit of portfolio growth and earnings. While we recognize the trajectory of earnings may be uneven depending on the outcome of asset resolutions, we remain confident in ACRE's earnings potential. As a reflection of this confidence, the board declared a regular cash dividend of $0.15 per common share for the first quarter of 2026. We believe that the execution of our business plan creates a path of earnings growth to meet the current dividend level.

Let me now turn the call over to Jeff, who will provide more details on our fourth quarter and full year results.

Thank you, Bryan. I will walk through our financial results for both the quarter and full year in more detail and provide more color on what was a busy and productive fourth quarter for the company. For full year 2025, we reported a GAAP net loss of $1 million or $0.02 per diluted common share and a distributable earnings loss of $7 million or $0.12 per diluted common share. Focusing on the fourth quarter of 2025, we reported a GAAP net loss of approximately $4 million or $0.07 per diluted common share.

Our distributable earnings for the fourth quarter of 2025 were approximately $8 million or $0.15 per diluted common share. This includes the impact from the realized gain of $2 million or $0.04 per diluted common share related to the partial sale of the North Carolina office REO property. Distributable earnings for the fourth quarter, excluding this realized gain, were approximately $6 million or $0.11 per diluted common share. Additionally, during the fourth quarter, we collected $2 million or $0.04 per diluted common share of cash interest on loans that were on nonaccrual and was accounted for as a reduction in our loan basis. As Bryan mentioned, we achieved our balance sheet objectives in 2025. We maintained moderate leverage to support further resolutions of underperforming loans and future growth. We ended the fourth quarter with a net debt-to-equity ratio, excluding CECL, of 1.6x.

In the fourth quarter, we closed 8 new loan commitments totaling $393 million. This resulted in ACRE's portfolio reaching an outstanding principal balance of $1.6 billion, an increase of 24% versus the third quarter of 2025. New loans closed in the second half of 2025 now comprise about 29% of the total loan portfolio. We also continue to reshape our loan portfolio in the fourth quarter by reducing loans collateralized by office properties to $447 million, a decrease of 10% quarter-over-quarter. This decrease was driven by both normal course repayments, including one full loan repayment and the strategic restructuring of the risk rated 4 loan collateralized by the Arizona office property. At the end of the fourth quarter, office loans now represent 28% of the total loan portfolio, down from 38% at the end of the third quarter of 2025 and at year-end 2024.

As Bryan laid out, we have made measurable progress in 2025 as well as in the fourth quarter in addressing and resolving our risk rated 4 and 5 loans. I want to address 2 loan changes specifically. The first is the restructuring of the previous $81 million senior risk rated 4 loan, collateralized by an office property in Arizona into a $65 million senior risk rated 3 loan and an $8 million risk rated 4 subordinated loan. Importantly, the sponsor repaid a portion of the principal balance of the loan, committed additional equity and made future capital commitments further supporting the execution of the business plan. This was the primary driver of the 13% reduction in risk rated 4 and 5 loans quarter-over-quarter. The second loan I want to address is the $28 million loan collateralized by a Pennsylvania multifamily property. Despite the property being 95% occupied, this loan was downgraded to a risk rated 5 loan in the fourth quarter from a risk rating of 4, given our expectations a loss may be realized with the potential sale of the underlying property. While we take any loss seriously, we view the potential loss severity as limited. In summary, we are proud of the progress we have made in addressing our risk rated forward 5 loans and reducing office loans in 2025. As we step forward into 2026, the continued progress addressing risk rated 4 and 5 loans and reducing office loans remain the key objective as we believe this is a significant component in repositioning ACRE's portfolio for future growth.

Now turning to our CECL reserve. The total CECL reserve at year-end 2025 was $127 million, an increase of $10 million from September 30, 2025. Notably, 40% of the increase came from the closing of new loans. Year-over-year, the CECL reserve decreased by $18 million from December 31, 2024. The total CECL reserve at the end of the fourth quarter of $127 million represents approximately 8% of the total outstanding principal balance of our loans held for investment. 92% of our total $127 million CECL reserve or $170 million relates to our risk rated 4 and 5 loans and approximately half of this is attributed to the risk rated 5 office loan in the portfolio. Our book value is $9.26 per share, which includes the $127 million CECL reserve. Our goal remains to prove up book value over time while advancing our efforts to rebuild earnings.

Turning now to our available capital and liquidity. We have a flexible balance sheet, evidenced by our available capital of $110 million at the end of the fourth quarter. In addition, we have increased our borrowing capacity by $250 million subject to future available collateral and reduced our borrowing costs through 3 distinct actions. First, we upsized the Wells Fargo facility to $600 million, an increase of $150 million in the fourth quarter. Second, we exercised our recording option to upsize the Morgan Stanley facility by $100 million in January 2026. Third, subsequent to quarter end, we reduced the cost of our borrowing 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 positions us well to access attractive financing and support future growth initiatives.

To conclude, the Board declared a regular cash dividend of $0.15 per common share for the first quarter of 2026. The first quarter dividend will be payable on April 15, 2026, to common stockholders of record as of March 31, 2026. At our current stock price on February 5, 2026, the annualized dividend yield on our first quarter dividend is approximately 12%.

With that, I will turn the call back over to Bryan for some closing remarks.

Thank you, Jeff. We remain focused on addressing the 5 remaining risk rated 4 and 5 loans in our portfolio. We've begun to reshape ACRE's portfolio through active deployment and a strategic approach to leverage. We have conviction in this strategy and believe that the alignment of ACRE alongside the Ares platform creates a powerful and compelling foundation for shareholder value.

As always, we appreciate you joining our call today, and we'd be happy to open the line for questions.

[Operator Instructions] We'll take our first question from Jade Rahmani with KBW.

I wanted to ask when you think Brooklyn will start receiving repayments, the condo project assuming there are sales in the first half, would those closings take place in 2026?

Yes. Jade, thanks for the question. I think, obviously, there's a lag as you go through the sales process from contract -- for marketing to contract to ultimate sale. So it's while a little bit tough to predict, our hope is that over the second half of the year, you start to see a smooth sales process for the individual units. And once you pay down some of the debt associated there, you should start to see proceeds come back into the company. So we're happy with the progress on the underlying property itself. I think the market in general has held up well for assets like this, and we'll have more clarity as we start to see contracts come in.

And Jade, just to layer on top of that, as Bryan alluded to, the first proceeds that come out from the sales go to pay down debt. So we will see the immediate benefit of interest expense savings. We do have a modest amount of debt on that asset. So once that debt is repaid, that's when we'll start seeing the liquidity return.

Okay. That's good to know. Turning to the Chicago office. Could you give any context around what the current debt yield is? And if you're seeing demand for this type of asset from a location class type, the occupancy certainly looks good and so does the weighted average lease duration.

Yes, it's a good question, Jade. I think you have seen a bit of have and have-nots across office assets. I think that the assets that have seen more stress have been those that have immediate capital needs or lack of existing tenancy. And as we said, we've got that [indiscernible] and that -- and the occupancy, which provides some patients that's available to us. That said, I don't think we could be more clear over the past quarters on our focus on resolving this asset. In terms of actual yield, I think we have not given a specific, but you could probably extrapolate it based on rental rates in the market and the underlying occupancy and walk from there.

Our next question comes from Rick Shane with JPMorgan.

This is [ AJ ] on for Rick. You all made a lot of progress working down your office exposure. It's basically down like half since 2023. Where do you think you all can get that balanced by the end of 2026?

Thanks, [ AJ ]. I think, as I said on Jade's question, our focus remains on those risk rated 4 and 5 loans. There's, obviously, the Chicago office asset that is a fairly material needle mover in terms of those resolutions. In general, we feel comfortable around the remaining portfolio starting to think through normal cadence of performance based on -- if you look through at the risk ratings. But our focus is squarely on the risk rated 4 and 5 at this point. And the time line of that is something that as a lender falls a little bit outside of your control, right? This is an asset that continues to be owned by another party. And there is -- as a creditor, you can encourage resolutions, but you can't necessarily dictate. So we've been clear about the underlying fundamental performance.

I think there is a path towards -- for the market as a whole, a more regular cadence of asset repayments, right? If you think about the way we live in a floating rate origination and asset management world, a normalized cadence of repayments would be 1/3 per annum. Now that will move countercyclically to underlying sectors and things like that. Clearly, duration has been extended on office assets for the market as a whole. But I think our hope and the hope of our peer set is that you start to see more natural resolutions of those assets moving forward.

We will move next with Doug Harter with UBS.

It's actually [ Marissa Lobo ] on for Doug today. Looking at the origination activity on the quarter across hotel, industrial and self storage, where are you seeing the most attractive risk-adjusted returns today? And how do those spreads on the new origination compared to the levels and repayments that were received in the quarter?

It's a great question. I think hopefully, one of the takeaways is that we see a very broad spectrum of opportunities across many sectors. And you've heard in our prepared remarks, it's really the office sector where we will continue to shy away from. What we've created -- attempted to create is this very large denominator of opportunities for us to select into both for the Ares real estate credit platform and then by extension into ACRE. And we pick out the fundamental assets in a bottoms-up approach. So certainly, we have a sector overlay, and we think about what's going to pay off, and we think about what would be attractive from a yield perspective. But I do believe that the most important factors for this industry coming out of the volatility for the last few years is one of underlying principal protection.

So the first thing we focus on is making sure that we have a durable capital structure and a durable property and yield is something that you can create in today's market given the broad opportunity set. I think it's been well publicized that capital has been more attractive to the logistics or industrial and multifamily segment. So you can assume that those spreads would be slightly tighter. We've historically played to some degree in the self-storage sector, where the smaller asset sizes lend themselves to yields that are a little bit higher given that a platform has to have a differentiated approach to those types of sectors. And then hospitality where we remain very, very selective and at times provide enhanced yields. So those have been the common themes throughout the last few years and probably the entirety of my career. I think the pricing of office, which is somewhat irrelevant for us, as I said, but that continues to see a good bit of capital for true Class A cash flow and long-duration leases and a lack of liquidity entirely for anything outside that room.

That's helpful. And just looking at the Arizona office restructuring, the reduction from $81 million to $73 million, can you give us any color on the milestones or covenants in place for this upgraded 3 rated tranche to maintain its rating?

It would be difficult for us to be specific to your question, though, I appreciate it. I think you can understand that, especially with respect to the size of this portfolio and what we do day-to-day, that each of the covenants on every loan are created in keeping with what we believe the milestone should be and we agreed to with the borrower. When we go through restructures generally speaking, we want to see acceleration of that business plan. We want to see sector and regional expertise from that sponsor. And we want to see capital admitted from that sponsor. And the push and pull amongst all of those factors will lead to longer or shorter duration of that, I'll call it, covenant compliance. And I think you can read through how this loan was treated from what our perspective is on the other side of that restructure.

Our next question comes from John Nickodemus with BTIG.

After keeping your leverage quite low for the bulk of the year, you did see it come up somewhat in the fourth quarter. Based on your current visibility into the origination pipeline and repayment schedule for 2026, how much higher are you envisioning ACRE's leverage trending throughout the course of this year?

Thanks for the question. Yes, we -- as you saw, we do continue to maintain moderate leverage of 1.6x. It was higher than last quarter at 1.1. We have begun to ramp investment activity in the second half of '25. So I would say near term, we'd probably max out in the 2.0 range. And then as we get further along in resolving our 4 to 5 rated loans, which we're hyper-focused on doing we expect to get back to our long-term historical target of 3.0 debt to equity, and that's where we believe we'll earn our historical ROE on the portfolio.

We will move next with Gabe Poggi with Raymond James.

A quick one, can you talk to the timing of loan closings in the fourth quarter? And then one more kind of piggybacking on what John just asked about, as you guys think about ROE on new originations, what's kind of the ballpark that we're targeting, I assume, still low mid-double digits?

Yes. So good question on the cadence of originations, Gabe. I'd say that it's not something that we would measure. I think what we're trying to do is truly smooth out. When we talk about the co-investment structure, the attempt is to smooth out as much as possible that impact, right? So I'm guessing if I look to your question, it's kind of how much impact do you have from those originations, right? On early October, would have one impact on the portfolio and the end of Christmas season, would be another. So what we're attempting to do is truly smooth out such that there is a lot less, I'll say, dormant or dead money in the ecosystem due to the diversification of originations that I think hopefully came through in the prepared remarks. But the exact timing of it is not something that we've shared. So hopefully, that's a fair answer, and I appreciate the question.

Yes. No, that's definitely helpful.

We will move next with Chris Muller with Citizens Capital Markets.

Congrats on a solid quarter. It's nice to see the market rewarding you guys today. I guess the gain on the partial REO sale was good to see. And looking at the remaining REO, can you guys just give us a little history or refresher? Income yields of 9% allow you guys to be pretty patient with those assets. So I guess the question is, what did those yields look like when you first took back the properties and occupancy rates, too, would be helpful just compared to where we're at today.

Yes. It's a good question. We've been -- they've been relatively static due to the existing leases in those assets, which, as you say, allows us to be very patient and selective in the ultimate resolution of those assets. And candidly, in a more normalized market, which none of us have shared in for the last 3-ish years, I think these, from a yield perspective, are certainly attractive for a dividend-paying company. But what has given us comfort is the consistency of those yields over time. So I think there's still an angle, and we talk about the resolution of the 4 and 5 in REO assets and probably maybe you're tired of hearing it. But that is our focus. But for the time being, what we take comfort in is those consistency of yields in that sub portfolio.

Got it. And then I guess maybe on the flip side, we saw originations really pick up here in the fourth quarter. Should we view 4Q as a run rate going into 2026? And then kind of the other side of that is, do you guys have a target portfolio size? Or if not, what type size portfolio could your existing equity base support as you guys sit today?

That's a great question. Why don't I start with the Q4 cadence, I think -- and then I'll let Jeff talk portfolio size. But I think probably 18 months ago or so, we talked about the origination capacity of our company being adequate to support what the needs of ACRE when it came back into the offensive side of the ledger. And I think right now, we sit here dependent to some degree on the repayment cadence of the remaining assets and specifically those assets we've cited. But we feel very comfortable that the money that comes in the door, all steady case in terms of the market. But the opportunity set is fairly broad that we can tap into the origination team is extremely active. And I think the originations volume will be a function, to a great degree on where we get repaid and when.

But our intention for everything we've structured is to, as I said earlier, at [ Gabe's ] question smooth out that origination such that we minimize the downtime between the repayment and when we redeploy. But the origination engine is running, and it will be a function of if and when we get repaid on those assets. And then Jeff, over to you for portfolio growth from here.

Yes. I think a simple way to look at it just going back to earlier in the call, is just looking at if we get to our 3.0 ratio that were our target, you're looking at a $1.5 billion of debt and about a $2 billion loan portfolio size. So I would say that's the easiest way to look at it.

Got it. And just one more I just thought of as you guys were talking here. You guys used to have, and I think it's still in place, the facility with Ares the parent that would essentially allow you guys to bring loans onto your balance sheet very quickly. Is that still in place and you're still utilizing that?

We do have capacity for warehousing assets. Part of the impact of all of the structuring we covered is that that will be utilized less because if you think about what that was -- there's a lot of positives to that, and we continue to benefit a lot from our alignment with Ares. But by creating smaller participation interest in these loans, we minimize the need for that, but it's still available to us.

[Operator Instructions] We do have a follow-up from Jade Rahmani with KBW.

We've been in an environment of spread compression in commercial real estate finance for a couple of quarters, and I just wanted to ask if the recent volatility in private credit, some of the concerns there have had any fill over effects if you feel like the spread compression in commercial real estate has kind of reached its trough at this point?

Good question, Jade, and I appreciate it. I would say that generally for more scaled originators across the credit spectrum, we're going to see things in real time that may have a little bit of a lag effect through the direct origination channel. What I mean by that is, if you are not in tune with all of these markets, you might still be originating with a view towards the past rather than a view towards the present or the future. And clearly, I think you and we at Ares and certainly some of our peers benefit from a very broad spectrum of facts and data that will tell us the direction of travel. .

So what I would generally anticipate when we see volatility in the equity markets, the fixed income markets, change in kind of international sentiment and capital flows, there's going to be an immediacy of reaction for originators like ourselves, and there may still be legacy trades out there that would indicate that markets have not moved, but kind of a little bit of a costume for what's actually going on underlying. So to the extent there's an impact from all the volatility out there today, the opportunity set should expand over the coming months. I wouldn't expect it to instantly translate from what's going on in active fixed income liquid market to what we see on the origination side.

Thank you. And this concludes our Q&A session. I will now turn the call back to Bryan for closing remarks.

Thank you. And I just want to reiterate thank you to everyone for joining us today. We appreciate the continued support of Ares Commercial Real Estate, and we look forward to speaking with you all on our next earnings call in about 90 days. Thank you, everyone.

Thank you. Ladies and gentlemen, this concludes our conference call for today. If you missed any part of today's call, an archived replay of this conference call will be available approximately 1 hour after the end of this call through March 10, 2026 to domestic callers by calling 1 (800) 723-0389 and to international callers by calling 1 (402) 220-2647. An archived replay will also be available on a webcast link located on the homepage of the Investor Resources section of our website. Thank you all for your participation, and you may now disconnect.

Good morning, and welcome to Ares Commercial Real Estate Corporation's Third Quarter Earnings Conference Call. [Operator Instructions]. As a reminder, this conference is being recorded on Friday, November 7, 2025.

I will now turn the call over to Mr. John Stilmar, Partner of Public Markets Investor Relations.

Thank you, and good morning, everybody. We appreciate 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've posted an earnings presentation under the Investor Resources section of our website at www.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 the use of words such as anticipate, believe, expect, intend, will, should, may and similar such 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, conditions 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 factors, including those listed in its SEC filings. Ares Commercial Real Estate assumes no obligation to update any such forward-looking statements.

During this conference call, we'll 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'd like to turn the call over to our CEO, Bryan Donohoe. Bryan?

Thanks, John. Good morning, everyone, and thanks for joining us today. I'm here today with Jeff Gonzalez, our Chief Financial Officer; Tae-Sik Yoon, our Chief Operating Officer; as well as other members of the management and Investor Relations teams.

In the third quarter, we continued to execute against our strategic objectives of maintaining a strong balance sheet, addressing our risk rated 4 and 5 loans and further reducing our office loans. Our execution against these goals drove increased sequential quarterly earnings, stable CECL reserves and consistent book value per share while reducing our net debt-to-equity ratio as compared to the prior quarter.

Supported by the strength of our balance sheet and the progress within our risk rated 4 and 5 loan portfolio, we broadened the company's strategic objectives to include more active capital deployment. We believe the collective execution against these goals will ultimately result in a larger and more diversified loan portfolio and drive long-term earnings growth for our investors.

Let me now walk you through the specifics of our progress this quarter and outline the framework for how we expect these initiatives to evolve.

Across the Office portfolio, we saw improved leasing and market fundamentals supported by a more positive demand environment. During the third quarter, we reduced the Office portfolio to $495 million, a decrease of 6% quarter-over-quarter and 26% year-over-year. This decrease was driven by both normal course repayments and the strategic restructuring of a risk rated 4 loan collateralized by a well-leased New York City office property.

At the end of the third quarter, 5 of our 7 remaining office loans were risk rated 3 or better. Shifting now towards our progress in addressing our risk rated 4 and 5 loans. During the third quarter, we had $28 million loan collateralized by a multifamily property migrate though we expect an expeditious resolution. Discussions are ongoing, but we view the potential loss severity, if any, as low as the occupancy of the property now exceeds 95%.

The other movement across our risk rated 4 and 5 loans in the quarter came from the resolution of an $11 million previously risk rated 4, subordinated loan collateralized by an office property in Manhattan. The underlying property has had strong leasing over the past 6 months, achieving over 80% occupancy.

With the progress of the property and a strong borrower relationship, we amended the capital structure to combine a $59 million risk rated 3 senior loan and a portion of the $11 million risk rated 4 subordinate loan into a single larger $65 million senior loan secured by the same property. In exchange, we extended the final maturity of the loan by 2 years to provide for further market stabilization.

Although the restructuring resulted in a realized loss of $1.6 million, the CECL reserve was reduced by approximately $7 million. Furthermore, following the end of the quarter, we completed a restructuring of an $81 million senior loan collateralized by an office property in Arizona that was lowered to a risk rated 4 during the second quarter. Since then, we've seen positive leasing momentum at the property and continued sponsor support in the form of additional equity capital.

In response to these positive developments, in the fourth quarter, we restructured the loan to provide greater flexibility for the sponsor to complete the business plan. When looking at our risk rated 4 and 5 loans in aggregate, 2 loans comprise more than 70% of the outstanding principal balance. The first of these 2 loans is our risk rated 5 Chicago office loan, which has a carrying value of $141 million and remains on nonaccrual.

Fundamentals at this property remains sound with occupancy above 90% and a weighted average lease term of more than 8 years. Discussions with the borrower are ongoing and among the options we are exploring with the borrower is a potential sale of the asset.

The second of the 2 is a risk rated 4 Brooklyn, New York residential condominium loan with a carrying value of $120 million. During the quarter, construction continued, and we anticipate the formal marketing process for the sale of the underlying condominium units to begin later in the fourth quarter of this year.

We're proud of the progress we've made on the risk rated 4 and 5 loans and remain committed to driving continued improvement in the portfolio.

Our risk rated 1-3 loans continue to perform well and are primarily collateralized by multifamily, industrial and self storage properties. As we continue to make improvements across the portfolio and collect repayments that further bolster our balance sheet, we are able to accelerate our investment activity into what we see as an accretive market opportunity given the market presence and capabilities of the Ares Real Estate Group.

Through continuous investment, Ares now operates one of the largest vertically integrated Real Estate platforms globally, which supports broader sourcing and credit capabilities. The Ares Real Estate Group has grown to over 740 Real Estate professionals.

Consistent with the expansion of the Ares Real Estate Group, the Ares Real Estate Debt Strategy has experienced meaningful growth and incremental scale. In the last 12 months, the Real Estate Debt Group has originated more than $6 billion in new loan commitments, a meaningful step function change in terms of scale and capital deployment as compared to 5 or 6 years ago. We believe ACRE is well positioned to capitalize on this expanded scale of the Ares Real Estate Platform.

During the third quarter, we closed 5 new loan commitments totaling $93 million across multifamily and self storage properties. Our investing momentum has continued into the fourth quarter, closing over $270 million of loans across 5 new loan commitments collateralized by industrial, multifamily, hotel and self storage properties.

One important, but maybe less obvious way ACRE is benefiting from the investment scale of the Ares platform is through the ability to co-invest with other Ares Real Estate funds. Beginning in the third quarter, more than half of ACRE's new commitments were co-investments with other Ares Real Estate vehicles. We believe the ability for ACRE to co-invest results in a more granular and diversified portfolio while also allowing ACRE to transcend its capital base to invest in larger institutional quality Real Estate.

An additional benefit from the Ares platform, which underscores the attractiveness of our recent originations, is our ability to obtain accretive financing terms with advance rates between 75% and 80%. Importantly, we believe the types of loans closed in the third and fourth quarter with favorable financing profiles could provide a window into what ACRE's reshaped portfolio and financial profile could look like in the future.

As we look ahead, we remain confident in ACRE's long-term earnings potential. We believe the path to achieving earnings growth will ultimately depend on our continued resolutions on our nonaccrual loans, which total approximately $170 million of carrying value, net of applicable CECL reserves as well as reinvesting the proceeds to expand our loan portfolio. Although we expect the current pace of repayments to continue in the near term, we're focused on redeploying the capital from repayments efficiently to minimize the earnings drag. That being said, our goal is to return to portfolio growth in the first half of 2026.

Let me now turn the call over to Jeff, who will provide more details on our third quarter results.

Thank you, Bryan. For the third quarter of 2025, we reported GAAP net income of approximately $5 million or $0.08 per diluted common share. Our distributable earnings for the third quarter of 2025 was approximately $6 million or $0.10 per diluted common share.

This includes the impact of the realized loss of $1.6 million or $0.03 per diluted common share related to the restructuring of the risk rated 4 loan collateralized by an office property. Distributable earnings for the third quarter, excluding this loss, was approximately $7 million or $0.13 per diluted common share.

Additionally, during the third quarter, we collected $2 million or $0.03 per diluted common share of cash interest on loans that were on nonaccrual and was accounted for as a reduction in our loan basis. We continue to strengthen our financial flexibility and balance sheet positioning. We lowered our net debt-to-equity ratio, excluding CECL, to 1.1x at the end of the third quarter, a decrease from 1.2x quarter-over-quarter and 1.8x year-over-year.

We further reduced our outstanding borrowings to $811 million at the end of the quarter, a decrease of 9% quarter-over-quarter and a decrease of 40% year-over-year. We collected an additional [repayment] during the quarter, bringing the year-to-date total repayments to $498 million, more than double the amount we collected at this time last year. These repayments further bolstered our liquidity position and financial flexibility, allowing us to focus on both of our objectives of accelerating resolutions on risk rated 4 and 5 loans and now accelerating investment activity. We expect current market conditions to result in a continued pace of repayments across our portfolio.

Bolstered by the amount of repayments received during the third quarter, we maintained our strong liquidity position. As of September 30, 2025, our available capital was $173 million, including $88 million of cash.

Turning to our CECL reserve. The total CECL reserve declined to $117 million as of September 30, 2025, a decrease of approximately $2 million from the CECL reserve as of June 30, 2025. This reduction was primarily due to the restructuring of the risk rated 4 office loan previously mentioned and other loan-specific attributes. The total CECL reserve at the end of the third quarter of $117 million represents approximately 9% of the total outstanding principal balance of our loans held for investment. 95% of our total $117 million CECL reserve or $112 million relates to our risk rated 4 and 5 loans and approximately half of this is attributed to the only risk rated 5 loan in the portfolio.

Overall, the $112 million of reserves attributable to our risk rated 4 and 5 loans represents approximately 25% of the outstanding principal balance of those risk rated 4 and 5 loans. Both CECL and our book value remained relatively stable quarter-over-quarter. Our book value is $9.47 per share, which includes the $117 million CECL reserve. Our goal remains to prove out book value over time while advancing our efforts to rebuild earnings and reestablish full dividend coverage.

We believe the progress we have achieved thus far is a clear reflection of our commitment, and we remain confident that our continued deliberate action will further crystallize these results.

To conclude, the Board declared a regular cash dividend for the fourth quarter of 2025. The fourth quarter dividend will be payable on January 15, 2026, to common stockholders of record as of December 31, 2025. At our current stock price on November 4, 2025, the annualized dividend yield on our third quarter dividend is approximately 14%.

With that, I will turn the call back over to Bryan for some closing remarks.

Thank you, Jeff. We believe our financial position and results continue to demonstrate meaningful progress against our goals. The overall portfolio is exhibiting stable to improving underlying fundamentals and the more active Real Estate market is providing a firm backdrop for repayments and transaction activity. We have a strong conviction that the power of the Ares platform and the expanded presence of the overall Ares Real Estate team provides us with the right people, deep capabilities and robust Real Estate footprint to further execute upon our expanded goals.

Through consistent execution, we are confident that ACRE is on the right track to drive shareholder value and benefit from the secular growth of the Commercial Real Estate lending opportunity. As always, we appreciate you joining our call today, and we'd be happy to open the line for questions.

[Operator Instructions] We'll take our first question from Steve Delaney with Citizens Capital Markets.

Congratulations on a very solid quarter. Just a couple of pennies below full dividend coverage. As you explained to us, it’s interesting to look at the mix of your new loans in the third quarter versus what you shared with us about the loans originated post 9/30. So, 5 loans in the third quarter with an average loan size of $19 million, and that strikes me as middle market. And then when we look at the 5 loans in the fourth quarter, the average is $54 million, which looks more like it's beginning to creep into the large loan. Now I know averages can be misleading.

But could you just comment on sort of your focus in the market, your niche Ares, your parent Ares can do pretty much anything they want. But for ACRE, for your mortgage REIT, your public mortgage REIT, where is your sweet spot? And sort of what should we expect in terms of average loan sizes? And is it safe to say that do you see yourself as primarily a middle market lender? So just a little bit about that portfolio strategy, if you could.

Yes, Steve, I appreciate the question, and it's a good one. The first thing I'd offer up is that we have a little bit of a denominator issue that we shouldn't read too much into in that the data set we're extrapolating off of remains pretty small at this point. So, it's an absolutely fair question about where we're going to take it.

And the first example of that would be in the loans closed in the quarter, that contained a good bit of self storage assets, which by their nature, are going to have smaller tickets associated with them. And the notional balance will, as you say, look more like a middle market lender. We really, really like that asset class. We've created a few different mousetraps with which to participate in it despite the underlying assets remaining at least subjectively from an outsider viewpoint, subscale.

So, when we kind of move the playbook forward and think about further repayments and then what does this portfolio theoretically look like going forward. We mentioned the ability to share in larger transactions with the broader Ares Real Estate platform, and we believe that to be an advantage in that we will be able to participate in larger institutional assets while taking a share that while continuing to be selective, will also allow for proper portfolio management or concentration, if you want to look at it from a different way.

So when we think about the asset classes in which we've been most active across debt and equity here, our core competencies remain in industrial, we're the third largest owner in the world today, multifamily, where we've got a vertically integrated equity team sourcing and managing those opportunities as well as student housing to some degree and self storage to as much of a degree as we can find.

So, we feel in those asset classes, we have more of a right to win given our equity background and orientation. And our view is that that would be a great portfolio to focus on for ACRE and its shareholders as well.

Those are great defensive property types. And what you're telling us is you might see an occasional office loan, but you're not, you don't see yourself as primarily as an office lender. That's what I'm taking away from your comments. And I think that's a positive characteristic.

Just one final thing. This is big picture. We're a couple of years into this for the 20-some commercial mortgage REITs, we're a couple of years into kind of a rougher market. When you look back now, Bryan, at the loans that we're seeing today and the loans that you're booking today, what is the biggest difference you think between these, today's loans and the 2021, '22 vintage, which has broadly performed pretty poorly. I'm just curious if there's 1 or 2 things that you see in today's market that are different.

Well, I think there's certainly supply and demand fundamentals has shifted. I think the office market, which has been more than well publicized broadly and the headwinds there. But those asset classes that are higher in CapEx, right, have struggled more in an inflationary environment. So even when you look at strong performing office assets out there in the world today, generally, you're seeing TI packages that are higher than what would have been underwritten in 2020, '21, '22, right? So that's a pretty interesting shift.

I think in terms of the broad-based change in the Real Estate market is we're now investing in an asset class that has reset materially lower in value. So, your attachment point as a lender has come down from a basis perspective while lesser competition is also allowing for lenders to dictate terms, the most significant of which will be the Loan-To-Value attachment point. So, the L in the equation is coming down, but the V has come down as well.

Our next question will come from Jade Rahmani with KBW.

It looks like a strong quarter and a big turning point. Just in terms of duration of timeline to work out the remaining risk 4 or 5 loans, noting that you mentioned 2 of those, Chicago and Brooklyn comprised 70%. But over what time period do you expect that to transpire?

Yes. It's a good question, Jade. Obviously, we have insights, but certain things that we can control there. We've got certainly progress toward each that we spoke of in our prepared remarks and market fundamentals around these assets generally either remain strong or trending in the right direction. I think for the last few quarters, we've talked about expediting resolutions where we saw it to be the best net outcome, right? And sometimes given our balance sheet flexibility, putting us in a position to accelerate those resolutions without it being overly punitive to the remaining balance sheet.

I think we're constantly balancing the velocity plus the principal resolution of principal recovery in certain cases, and we'll continue to do so. But I think we're sitting in a more transparent seat than we were certainly 2 years ago. And there is no bigger focus for us than resolving these assets. So, we're going to continue to balance the ultimate price resolution with the velocity.

Can you comment on what drove the multifamily downgrade? I note that it has a December '25 maturity date. always looking at maturity dates. And I do see that 2 Texas multifamily have near-term maturity dates. One was in October. If you could comment on those. And just generally, multifamily, I know the Ares foothold in that sector, but we have seen pockets of credit issues this quarter in multifamily. So, a comment would be helpful.

Sure, Jade. I think with respect to the downgrade, obviously, you mentioned the upcoming maturity date. This is an asset that has seen, as we mentioned, an uptick in performance. But given that near-term maturity and probably a revenue and expense alignment that I think we're hoping to see continued progress on, but really driven just by that maturity date and working with the sponsor to make sure that we have adequate coverage and can create a flight path, I would say, for the proper resolution of the property in the near term.

But clearly, the maturity date was the driver there. What we're seeing in multifamily generally, and then I'll come back to your question on the Texas asset is that demand continues to surprise to the upside in terms of absorption. But that absorption number of, I think it was close to 500,000 units nationally over the last 12 months is about 30% or thereabouts higher, maybe a little bit more than that, higher than a consistent yearly average. So, I think that speaks to the go-forward plan, but you're also seeing relatively stagnant rent growth over the last, call it, 90 to 180 days.

So, a little bit of cross current there. But clearly, as a market, you're seeing digestion of a huge amount of supply and certainly differentiation amongst markets and amongst assets within those markets. So, what that leads to, I think, is a pretty positive outlook for the next 3 to 4 years, given the falloff in supply, but business plans that in certain markets are taking longer to materialize.

So, the takeaway, what that leads to for us is potentially longer duration of investments, which in certain asset classes might not be reflective of strength. In this case, I think it's reflective of a more positive forward outlook. And bringing it back to your specific question on the Texas asset, that loan was extended for a short period of time for those purposes, to just allow that continued progress.

And that would be both of the Texas loans? $23 million?

Yes. I think it's, let me come back to you, Jade, but I think it's going to be a 1-year extension there. But really in the normal course for this one.

At this time, there are no further questions. So, I'd like to turn the call back over to Bryan for any additional or closing remarks.

Appreciate it. I just want to thank everyone for their time and attention today. We appreciate the continued support of Ares Commercial Real Estate, and we all look forward to speaking with you again on our next earnings call. Thanks, everybody.

Ladies and gentlemen, this concludes our conference call for today. If you missed any part of today's call, an archived replay of this conference call will be available approximately 1 hour after the end of this call through December 7, 2025, to domestic callers by dialing 1 (800) 723-0479 and to international callers by dialing 1 (402) 220-2650. An archived replay will also be available on a webcast link located on the homepage of the Investor Resources section of our website. Thank you all, and you may now disconnect.