ACRE Cuts Office Loans 30% But Raises Leverage Near-Term

Date of Call: Feb 10, 2026

Financials Results

• EPS: GAAP net loss of $0.07 per diluted common share for Q4 2025; distributable earnings of $0.15 per diluted common share for Q4 2025, or $0.11 excluding a $0.04 per share realized gain.

Guidance:

• Focus on resolving remaining risk rated 4 and 5 loans to reposition portfolio for future growth and earnings.
• Expect leverage to temporarily max out around 2.0x in the near term before targeting a long-term historical ratio of 3.0x.
• Anticipate a path of earnings growth to meet the current $0.15 per quarter dividend level.
• Originations volume will depend on repayment cadence of existing assets; the origination engine is active and ready.
• Target loan portfolio size of approximately $2 billion when reaching the 3.0x debt-to-equity ratio.

Business Commentary:

Portfolio Restructuring and Risk Mitigation:

• Ares Commercial Real Estate Corporation reduced its office loans by 30% since year-end 2024 to $447 million. Risk rated 4 and 5 loans were reduced by 13% quarter-over-quarter.
• The reduction and restructuring efforts were aimed at derisking the portfolio and enhancing potential investment outcomes.

Origination Activity and Co-investment Strategy:

• In the second half of 2025, ACRE closed 13 new loan commitments totaling $486 million, with more than 50% collateralized by residential and industrial properties.
• The increase in origination activity was supported by co-investment opportunities alongside other Ares management affiliated vehicles, expanding access to quality institutional opportunities.

Financial Performance and Dividend Declaration:

• For full year 2025, ACRE reported a GAAP net loss of $1 million or $0.02 per diluted common share, while distributable earnings were a loss of $7 million or $0.12 per diluted common share.
• Despite the losses, the board declared a regular cash dividend of $0.15 per common share for Q1 2026, reflecting confidence in the company's earnings potential and path to growth.

Leverage and Liquidity Management:

• ACRE ended the fourth quarter with a net debt-to-equity ratio, excluding CECL, of 1.6x, and increased its borrowing capacity by $250 million.
• These actions reflect the strength of lender relationships and provide flexibility to access attractive financing and support future growth initiatives.

Sentiment Analysis:

Overall Tone: Positive

• Statements such as 'we remain confident in ACRE's earnings potential' and 'we believe that the alignment of ACRE alongside the Ares platform creates a powerful and compelling foundation for shareholder value' reflect a confident and optimistic tone. Management highlighted progress in derisking the portfolio, returning to investing, and achieving balance sheet objectives.

Q&A:

• Question from Jade Rahmani (Keefe, Bruyette, & Woods, Inc.): When will Brooklyn condo project start receiving repayments assuming sales in the first half, would closings take place in 2026?
  Response: Management expects sales to begin in the second half of 2026, with proceeds first used to pay down debt, after which liquidity will return to the company.

• Question from Jade Rahmani (Keefe, Bruyette, & Woods, Inc.): Could you give context on the current debt yield for the Chicago office loan and demand for this asset type?
  Response: Management noted that office assets with strong fundamentals like the Chicago property have been less stressed; specific yield details were not provided, but it can be inferred from market rental rates and occupancy.

• Question from Unknown Analyst (JPMorgan): Where do you think office exposure can be reduced to by the end of 2026?
  Response: Focus is squarely on resolving risk rated 4 and 5 loans, particularly the Chicago office asset; a normalized cadence of repayments is expected, though timing is not entirely within control.

• Question from Unknown Analyst (UBS): Where are you seeing the most attractive risk-adjusted returns in new originations across hotel, industrial, and self-storage, and how do new spreads compare to repayments?
  Response: Attractive opportunities exist broadly across sectors except office; spreads vary with capital availability, being tighter in logistics/multifamily and higher in self-storage and hospitality where selectivity is key.

• Question from Unknown Analyst (UBS): Can you give color on milestones or covenants for the upgraded Arizona office tranche to maintain its rating?
  Response: Covenants are tailored to each loan; restructuring generally seeks acceleration of the business plan, sector/regional expertise from the sponsor, and capital admission, leading to adjusted covenant compliance periods.

• Question from John Nickodemus (BTIG): How much higher is leverage envisioned trending in 2026 based on origination pipeline and repayment schedule?
  Response: Leverage is expected to temporarily max out around 2.0x near-term before targeting a long-term historical ratio of 3.0x as resolutions of risk rated 4 and 5 loans progress.

• Question from Gabriel Poggi (Raymond James): What is the timing of loan closings in Q4, and what ROE is targeted on new originations?
  Response: Management aims to smooth origination impact through co-investments and does not specify timing; ROE targets were not directly quantified.

• Question from Christopher Muller (Citizens JMP Securities): What were income yields and occupancy rates for REO properties when first taken back compared to today?
  Response: Yields have been relatively static due to existing leases, providing consistency and patient selectivity in resolution; focus remains on resolving REO assets.

• Question from Christopher Muller (Citizens JMP Securities): Should Q4 origination be viewed as a run rate for 2026, and what portfolio size can existing equity support?
  Response: Origination volume depends on repayment cadence; the target portfolio size is approximately $2 billion when reaching the 3.0x debt-to-equity ratio.

• Question from Jade Rahmani (Keefe, Bruyette, & Woods, Inc.): Has spread compression in commercial real estate reached its trough given recent volatility in private credit?
  Response: Scaled originators like ACRE react immediately to market direction; any lag in legacy trades should see the opportunity set expand over coming months, with no instant translation from fixed income markets to origination.

Contradiction Point 1

Resolution Timeline for Risk-Rated Loans

Contradiction on the specificity and control over the timeline for resolving risk-rated assets.

Given your office exposure has reduced by half since 2023, what level do you expect to balance by 2026? - Unknown Analyst (JPMorgan, on for Rick Shane)

2025Q4: The resolution timeline is not entirely within the company's control as the borrower owns the asset. - Bryan Donohoe(CEO)

What is the expected timeline for resolving risk-rated 4 and 5 loans, and could you comment on general multifamily credit issues? - Jade Rahmani (Keefe, Bruyette, & Woods, Inc.)

2025Q3: ACRE is focused on expediting resolutions where it is the best net outcome... No specific timeline was given, but resolution is a top priority. - Bryan Donohoe(CEO)

Contradiction Point 2

Office Sector Asset Valuations and Market Outlook

Contradiction on the relevance and outlook of office asset prices.

Where are the most attractive risk-adjusted returns in hotel, industrial, and self-storage sectors, and how do current origination spreads compare to recent repayment rates in the quarter? - Unknown Analyst (UBS, on for Doug Harter)

2025Q4: The office sector's pricing is largely irrelevant to ACRE's strategy. - Bryan Donohoe(CEO)

How do you define your portfolio strategy and sweet spot for average loan sizes, and what's the key difference between today's loans and the 2021–2022 vintage? - Steve Delaney (Citizens Capital Markets)

2025Q3: Key differences include ... The market has reset lower in value, lowering lenders' attachment points. - Bryan Donohoe(CEO)

Contradiction Point 3

Strategic Focus and Capital Allocation Priority

Contradiction on primary investment goal between portfolio growth and stock repurchases.

What is the current debt yield, and is there demand for this asset type considering location class, occupancy, and weighted average lease duration? - Jade Rahmani (Keefe, Bruyette, & Woods, Inc.)

2025Q4: The focus remains squarely on resolving this risk-rated 5 asset. - Bryan Donohoe(CEO)

Have you considered stock buybacks at the current discount to book value and dividend yield versus investing in new loans? What's the trade-off? - Douglas Michael Harter (UBS Investment Bank)

2025Q2: The company is currently in favor of investing in new loans to reposition the portfolio... Stock repurchases are understood quantitatively but are not the current priority, as the focus is on portfolio growth... - Bryan Donohoe(CEO)

Contradiction Point 4

Expected Cadence of Non-Performing Loan Resolutions

Contradiction on predictability of repayment timeline for risk-rated loans.

How much can office exposure be reduced by 2026 given the progress made since 2023? - Unknown Analyst (JPMorgan, on for Rick Shane)

2025Q4: The resolution timeline is not entirely within the company's control... The company's hope is for more natural resolutions moving forward. - Bryan Donohoe(CEO)

What is the expected timeline for resolving non-performing loans (risk rated 4/5) in the next few quarters? - Rick Shane (JPMorgan)

2025Q1: The company has seen a relatively regular cadence of repayments but expects the process to remain measured and somewhat unpredictable. - Bryan Donohoe(CEO)

Contradiction Point 5

Strategy and Timing for New Origination/Lending

Contradiction on patience versus active pursuit of new lending opportunities.

Which sectors—hotel, industrial, or self storage—are showing the most attractive risk-adjusted returns in current origination activity, and how do new origination spreads compare to this quarter's repayment levels? - Unknown Analyst (UBS, on for Doug Harter)

2025Q4: The most attractive opportunities are across a broad spectrum excluding office. The primary focus is on underlying principal protection and durable capital structures. - Bryan Donohoe(CEO)

Is the pause in new lending due to waiting for market stability (e.g., tariffs) or a deliberate conservative strategy, and could lending resume by mid-year? - Steve Delaney (Citizens JMP)

2025Q1: The company is evaluating all opportunities, including new investments, but will be opportunistic and patient. A more stable operating environment, likely in the second half of the year, will provide a better backdrop for making firm lending decisions. - Bryan Donohoe(CEO)