ARES COMMERCIAL REAL ESTATE CORPORATION Q3 2026 EARNINGS - ARES COMMERCIAL REAL ESTATE CORP

Financial Performance:

• Reported GAAP net income of approximately $10 million ($0.18 per diluted share) for Q3 2026.
• Distributable earnings were $6.7 million ($0.12 per share), including a $0.3 million net realized gain from the sale of the Charlotte office REO; excluding this gain, distributable earnings were $6.4 million ($0.11 per share).
• Collected $1.7 million in cash interest from non-accrual loans, recorded as a reduction in loan basis.
• CECL reserves remained stable at $141 million (approx. 8% of total loan principal), with $133 million allocated to risk-rated 4 and 5 loans.
• Book value remained stable at $8.86 per share.
• Net debt-to-equity ratio (excluding CECL) stood at 1.9x; subsequent to quarter-end, the secured term loan was fully repaid.
• Total repayments collected year-to-date reached $146 million.

Guidance and Future Outlook:

• Management expects resolution of non-accruing investments to be a primary driver of future earnings growth, capitalizing on redeployment of idle capital.
• Future capital deployment will be disciplined, leveraging cost-efficient financing to grow the portfolio while maintaining a flexible balance sheet.
• Anticipated EPS growth is expected to meet or exceed dividend payouts over the long term.
• The Board declared a Q4 2026 cash dividend of $0.15 per share, payable January 15, 2027.
• No specific guidance on timeline for full dividend coverage was provided, reiterating focus on resolving risk-rated 4 and 5 assets first.

Business Segments and Product Lines:

• Office REO: Successfully sold the Charlotte, NC office asset with net proceeds of $7 million above carrying value; one REO asset remains to be resolved.
• Risk-Rated 1-3 Loans: Portfolio totaled $444 million (down 10% QoQ, 19% YoY); seven loans remain, five rated 1-3 showing stable/improving performance with sponsor support.
• Risk-Rated 4 & 5 Loans: Represent 10% of carrying value; resolutions underway for the Chicago office loan (initiating title acquisition for control) and Brooklyn residential condo (construction complete, sales activity increasing).
• Multifamily: Portfolio reduced to six loans following full repayment of largest loan; two pre-2025 vintage loans extended due to strong sponsorship and performance.
• New Investments: Closed a $35 million senior co-investment loan on an industrial portfolio; $7 million portion classified as held-for-sale was sold during the quarter.
• Industrial: Fully repaid a $28 million New Jersey industrial loan in maturity default subsequent to quarter-end.

Market and Competitive Landscape:

• Commercial real estate market viewed as "moderately constructive" with positive underlying fundamentals countering the impact of rising interest rates.
• Portfolio benefits from Aries' scale ($10 billion in new loan commitments globally over 12 months), allowing selective investment in institutional-quality assets.
• Market trends indicate 2% to 6% valuation adjustments in certain products due to rate hikes, though cap rates remain stable in many markets.
• Inflation and supply constraints are expected to limit new supply, supporting long-term fundamentals.

Risks and Challenges:

• Primary risk involves the resolution timeline for the $160 million (net of CECL) portfolio of non-accruing investments (risk-rated 4/5 loans and remaining REO).
• Macroeconomic forecast decline contributed to a $2 million increase in CECL reserves during the quarter.
• Interest rate environment remains a headwind for property values, though the floating-rate structure of assets and liabilities mitigates significant balance sheet risk.
• Buyer behavior in the Brooklyn condo project remains sensitive to higher interest rates, though construction completion has improved market signs.

Management Commentary and Tone:

• Tone is described as "patient," "highly selective," and "constructive," emphasizing the strength of the active management approach and balance sheet flexibility.
• Management expressed pride in portfolio repositioning and highlighted the successful exit strategies for distressed assets.
• Emphasis placed on maintaining a well-matched asset/liability profile with 100% floating rate financing and structural interest rate protections (94% of loans have caps).

Analyst Questions and Answers:

• Q: Clarification on the Newark industrial loan default and whether it falls in risk-rated 4/5. A: It was a technical default not reflective of stress value; loan was well-collateralized and rated 3; full principal and default interest recovered.
• Q: Impact of higher rates on existing portfolio and debt yields in multifamily. A: Rates negatively impact values (2-6%), but portfolio stability remains robust; pre-2025 multifamily loans performed via extensions and sponsorship support.
• Q: Update on Chicago office loan and projected yield if taken as REO. A: Taking title simplifies structure and control; no significant CapEx expected due to >90% occupancy and 7-year lease term; generates direct cash flow.
• Q: Pace of sales for Brooklyn condo and loss recognition timing. A: Sales pace follows typical NYC seasonality; losses recognized proportionally as individual units close.
• Q: Future strategy regarding offense vs. defense and dividend coverage timeline. A: Repayment of term loan reinforces flexibility for future originations; dividend coverage timeline depends on resolution progress of non-accrual assets.

Other Key Points:

• The Brooklyn condo loan risk rating was adjusted from 4 to 5 based on increased visibility of sales proceeds and project progression.
• Portfolio growth has increased over 40% in the past 12 months.
• The company continues to utilize short-term origination and sale strategies to efficiently deploy excess liquidity while preserving flexibility.