Ares Commercial Real Estate (ACRE) Q2 FY26 earnings call: guidance and Q&A

Where are we in the commercial real estate cycle, are new pressures emerging in risk 4/5 or risk 3 loans, and what is Ares' broader real estate perspective, including the industrial sector?

Management believes the market is in a 'fourth inning with a rain delay,' digesting higher rates. They continue to avoid CapEx-intensive assets and recognize increased operating expertise is needed. No new pressures were noted on risk-rated 1-3 loans, but all loans are impacted by rate changes. The industrial sector is still strong, but higher carry costs mean shorter mark-to-market rent capture, with some submarket pressures but overall comfort with reduced supply.

“It feels like we're somewhere in the fourth in probably in a bit of a rain delay, if that makes sense.”

asked by Jade Rahmani · answered by Bryan Donohoe

Given the $150 million tied up in nonaccruing loans, what is the expected cadence for recycling capital from risk-rated 4 and 5 loans over the next 12-18 months, especially with the Chicago loan nearing resolution?

Management aims to accelerate resolutions but notes the idiosyncratic nature of each loan makes a regular cadence difficult to predict. They are focused on redeploying capital from resolved loans to increase earnings, with a goal to return to historical ROE of 9-10% on book in the longer term. The balance sheet has been positioned to allow for unforeseen outcomes.

“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.”

asked by Richard Shane · answered by Bryan Donohoe

Considering current market conditions and capital recycling efforts, what is the expected go-forward risk-adjusted return on equity (ROE) profile for the REIT, and how does it relate to the current dividend level?

The company expects to increase earnings to cover the dividend and eventually exceed it as 4 and 5 rated loans are resolved and capital is redeployed. The longer-term goal is to return to a historical ROE of 9% to 10% on book. They are seeking high single-digit net returns through a more diversified portfolio and stable income profile, avoiding excessive risk-taking.

“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.”

asked by Gabriel Poggi · answered by Jeffrey Gonzales

How patient is management willing to be with the Chicago office loan's sales process, especially given the recent 3-month extension, versus potentially taking back the asset?

Management is encouraged by the progress in negotiations for the Chicago office loan's sale, viewing the extended timeline as reflective of the expected outcome. While they prefer to exit, the asset's strong leasing profile (over 90% occupancy, 7-year WALT) and positive cash flow provide comfort that it could still be an accretive asset if a sale doesn't materialize quickly.

“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.”

asked by Christopher Muller · answered by Bryan Donohoe

Are the held-for-sale transactions pre-negotiated, or does the company take on market risk if conditions change dramatically before the loans are sold?

While there is short-duration risk, the company generally has a view of potential outcomes and homes for these assets, though they are not fully pre-negotiated. They only hold loans where they like the underlying collateral and position, believing them to be liquid positions. The typical hold period for these loans ranges from 30 to 120 days.

“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.”

asked by Christopher Muller · answered by Bryan Donohoe