Ares Commercial Real Estate Corp (ACRE)·Q1 2025 Earnings Summary

Executive Summary

• Q1 2025 was a stabilization quarter: GAAP net income was $9.3M and diluted EPS $0.17, with Distributable Earnings of $7.2M ($0.13/share) and no realized loan losses .
• Balance sheet was materially de‑levered: $307M of loan repayments reduced borrowings to ~$946M and lifted available capital to $147M; CECL reserves fell to $140M (9.9% of loan principal) .
• Office exposure declined further to $585M outstanding (−9% QoQ; −25% YoY), and risk-rated 4/5 loans saw progress, notably positive leasing at the Chicago office (risk 5) and construction milestones at the Brooklyn condo (risk 4) .
• Versus S&P Global consensus, Q1 EPS and revenue both beat materially; management highlighted CECL reserve reversal and absence of realized losses as key drivers*.

What Went Well and What Went Wrong

What Went Well

• Liquidity and leverage: “We successfully increased liquidity, further reduced debt and achieved our targeted balance sheet position,” with available capital of $147M as of May 2 and cash of $113M (~$2/share) .
• Portfolio progress: No new risk‑rated 4 or 5 loans; most underperformers advanced business plans; office loans reduced to $585M outstanding .
• Asset‑level milestones: Chicago office (risk 5) extended leases (WALT 8 years, >90% occupancy) and Brooklyn condo (risk 4) completed exterior work and procured materials, positioning for 2H25 marketing .

What Went Wrong

• Earnings headwinds: Interest income fell to $27.5M (from $44.0M YoY) and total revenue to $14.9M due to portfolio repayments and lower earning assets .
• Continued credit costs albeit improved: While CECL reserve reversed $5.3M QoQ, total CECL remained high at $140M and concentrated in risk‑rated 4/5 loans and office/condo (90%) .
• Near‑term earnings variability: Management cautioned quarterly variability as de‑levering and resolution efforts continue amid macro volatility (including tariff-related uncertainty) .

Financial Results

Vs S&P Global Consensus – Q1 2025

Values retrieved from S&P Global. Note: S&P’s revenue definition may differ from company “Total revenue.”*

Segment/Property Type Carrying Values

KPIs and Balance Sheet Trajectory

Guidance Changes

No formal top‑line, margin, OpEx, OI&E or tax rate guidance was provided; management emphasized balance sheet flexibility and selective deployment of capital .

Earnings Call Themes & Trends

Management Commentary

• CEO: “Stable to improving trends across the portfolio coupled with our strong available capital allows us to actively consider a wider range of uses for our additional liquidity… enhanced by Ares’ recent acquisition of GCP” .
• CFO: “During the first quarter, our balance sheet was further strengthened by $307 million of repayments… As of May 2, 2025, we have approximately $147 million of available capital, including $113 million of cash equating to more than $2.00 per share” .
• CEO (call): “Our current balance sheet positions us to evaluate… selectively originate new loans, opportunistically buy common shares, further repay debt, distribute a dividend and/or fund other strategic initiatives” .
• CFO (call): “We opportunistically redeemed our FL3 securitization, replacing it with more efficient financing… pricing 86 bps lower… and extended our $450 million Wells Fargo facility by 3 years” .

Q&A Highlights

• Chicago office (risk 5) valuation vs fundamentals: Despite >90% occupancy and 8‑year WALT, market risk premium and rates pressure valuation; reserves reflect asset risk .
• Cadence of resolutions: Expect measured, less predictable cadence amid industry volatility; balance sheet positioned to accelerate when appropriate .
• New originations and tariffs: Management being patient/selective; expects better backdrop in 2H 2025 as tariff impacts settle; evaluating refinancing opportunities .
• Buyback authorization: $50M authorization through July under evaluation as a capital allocation option .
• Life sciences Boston project: Market has struggled; in discussions with sponsor; reserves deemed appropriate; more to come .

Estimates Context

• EPS and revenue beats: Q1 2025 Primary EPS ($0.13) exceeded S&P Global consensus ($0.046); revenue ($~20.3M) exceeded consensus ($~16.1M)*. Drivers included CECL reserve reversal ($5.3M), no realized losses, and steady REO income .
• Forward setup: With $147M of available capital and lower borrowing costs, estimate revisions may reflect improved credit outcomes and potential selective deployments; near‑term earnings may remain variable as portfolio resets .

Values retrieved from S&P Global.*

Key Takeaways for Investors

• Balance sheet repair largely in place: borrowings cut to ~$946M; net debt/equity down to 1.2x; liquidity ample for accelerated resolutions and optionality .
• Credit normalization advancing: No new 4/5 migrations; CECL reserve down to $140M and concentrated in known problem assets; positive asset‑level traction at largest exposures .
• Earnings quality improved: No realized losses; CECL reversal supported GAAP and Distributable EPS; expect quarter‑to‑quarter variability as redeployment timing unfolds .
• Capital allocation optionality: Dividend maintained at $0.15; buyback authorization in place; extended low‑cost funding facilities lower back‑leverage cost .
• Office exposure trending lower: Outstanding office loans reduced to $585M; ongoing efforts to minimize risk and monetize REO .
• Ares ecosystem scale: GCP acquisition enhances vertical integration and sector expertise (e.g., data centers, self‑storage), supporting underwriting and asset management .
• Trading narrative: Shares trade at a large discount to book; management focused on “demonstrating book value” via resolutions, selective originations, and possible buybacks—a potential catalyst for multiple re‑rating .