Ares Commercial Real Estate NYSE: ACRE reported a first-quarter loss as higher credit reserves tied to two large troubled loans weighed on results, while management said it continued to reshape the portfolio through new originations, asset resolutions and reduced office exposure.
Chief Executive Officer Bryan Donohoe said the commercial real estate market showed “relative stability” during the quarter despite uncertainty in broader macroeconomic and corporate credit markets. He said limited new supply supported modest valuation growth and that reset valuations, along with what the company views as early capital rotation back into commercial real estate, created an attractive lending environment.
Against that backdrop, Donohoe said ACRE remained focused on reducing risk while originating higher-quality loans. The company closed three new loan commitments totaling $294 million in the first quarter, backed by multifamily, mixed-use and retail properties. Loans held for investment rose to 35 loans totaling $1.7 billion at quarter-end, up $110 million from the prior quarter.
“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,” Donohoe said.
Portfolio Growth Comes Alongside Office Reduction
Management highlighted that 37% of the investment loan portfolio balance was originated during the past 12 months. ACRE committed approximately $780 million to new loans over that period, with more than 75% of those dollars committed through co-investments alongside other Ares Management-affiliated vehicles. Donohoe said that activity represents a portion of nearly $10 billion in new loan commitments across the broader Ares real estate debt platform during the same period.
Donohoe said ACRE has increased the outstanding principal balance of its portfolio by 22% year over year while improving diversification and reducing the office loan balance by nearly 25%. The company has redeployed capital into property types including industrial, multifamily, select retail and self-storage.
As of March 31, 31 of ACRE’s 35 loans were rated risk grade one through three. Donohoe said there were no negative credit migrations during the first quarter among loans in those categories.
Credit Reserves Rise on Chicago Office and Brooklyn Condo Loans
Management said four loans remain rated risk grade four or five, with the two largest accounting for more than 90% of the outstanding principal balance in that group.
The largest is a risk-rated five Chicago office loan that remains on nonaccrual. Donohoe said the loan continues to make contractual interest payments, which are applied to the company’s basis. He said the property’s occupancy remains above 90%, with a weighted average lease term of about eight years and positive net cash flow. However, the sales process has taken longer than expected, and ACRE increased its CECL reserve for the loan by about $5 million to reflect current market indications for a potential sale.
The second-largest troubled loan is a risk-rated four residential condominium loan in Brooklyn, New York, which also remains on nonaccrual. Donohoe said the preliminary condo sales process began earlier this year, and initial sales proceeds are expected to pay down project debt, with later sales expected to generate cash flow back to the company. In response to an analyst question, management said a sellout period for a similarly sized project would generally be expected to be inside two years, though timing depends on demand.
ACRE also began a formal sales process during the quarter for its North Carolina office real estate owned property. Donohoe said the decision was supported by improved property fundamentals and capital markets activity. The remaining property was reclassified as held for sale at the end of the quarter.
First-Quarter Results Reflect Realized Loss and Higher CECL
Chief Financial Officer Jeff Gonzales said ACRE reported a GAAP net loss of approximately $9.6 million, or $0.17 per diluted common share, for the first quarter of 2026. Distributable earnings were approximately $3.2 million, or $0.06 per diluted common share. That figure included a realized loss of $3.3 million, or $0.06 per diluted common share, related to the exit of a risk-rated five Pennsylvania multifamily loan.
Excluding that realized loss, distributable earnings were approximately $6.5 million, or $0.12 per diluted common share. Gonzales also said ACRE collected $2.1 million, or $0.04 per diluted common share, of cash interest on nonaccrual loans, which was accounted for as a reduction in loan basis.
The company’s total CECL reserve increased to $138 million as of March 31, up approximately $11 million from the end of 2025. Gonzales said the increase was primarily driven by a $15 million combined increase in reserves for risk-rated four and five loans, particularly the Chicago office and Brooklyn condominium loans, as well as a $2 million reserve increase tied to new loans closed in the quarter. These increases were partially offset by the realized loss associated with exiting the Pennsylvania multifamily loan and other factors.
The total CECL reserve represented approximately 8% of the outstanding principal balance of loans held for investment. Gonzales said 94% of the reserve, or $129 million, related to risk-rated four and five loans. About half of the total reserve is tied to the only risk-rated five loan in the portfolio. Book value was $8.89 per share, inclusive of the CECL reserve.
Liquidity, Leverage and Dividend
ACRE ended the quarter with a net debt-to-equity ratio, excluding CECL, of 1.9 times. Gonzales said the company collected $94 million in repayments during the quarter and had $163 million of available capital as of March 31, including $86 million in cash.
The company also increased borrowing capacity by $300 million, subject to available collateral, and reduced borrowing costs. Gonzales said ACRE upsized its Morgan Stanley facility to $350 million and extended it by three years, increased its Citibank facility to $425 million, and redeemed its FL4 CLO securitization.
In the second quarter to date, ACRE has closed $95 million of new loan commitments collateralized by multifamily and self-storage properties, both structured as co-investment opportunities.
The board declared a regular cash dividend of $0.15 per common share for the second quarter of 2026, payable July 15 to stockholders of record as of June 30. Gonzales said that, based on ACRE’s stock price on May 4, the annualized dividend yield on the second-quarter dividend was approximately 11.5%.
Management Sees Constructive Lending Backdrop
During the question-and-answer session, management said the broader commercial real estate market remains constructive, with capital flowing back into the sector and values showing stability or modest appreciation. In discussing new investments, management said banks’ willingness to provide capital and back leverage has allowed ACRE to move lower on the risk spectrum while still targeting returns consistent with historical norms.
Management said ACRE remains underweight office on a go-forward basis and is focused on lower capital-expenditure asset classes, while evaluating fundamentals including supply, demand, geography, property vintage and location.
Donohoe closed by saying the company remains focused on reducing risk-rated four and five loans, addressing office and REO exposures, and opportunistically investing in new loans.
About Ares Commercial Real Estate NYSE: ACRE
Ares Commercial Real Estate Corporation NYSE: ACRE is a publicly traded real estate investment trust (REIT) primarily focused on commercial real estate debt investments. Externally managed by an affiliate of Ares Management Corporation, ACRE seeks to generate attractive risk-adjusted returns through its diversified portfolio of CRE financing strategies. The company specializes in originating, acquiring, financing and managing first mortgages, mezzanine loans, preferred equity and other structured finance products.
Since its inception, Ares Commercial Real Estate has targeted a broad range of property types, including multifamily, office, industrial, retail and hospitality assets.
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