Operator
Good morning. Welcome to Aries Commercial Real Estate Corporation's third-quarter earnings conference call. At this time, all participants are in a listen-only mode. As a reminder, this conference is being recorded on Friday, November 6, 2026. I will now turn the call over to Mr. John Stillmar, partner of Public Markets Investor Relations.
Thank you, and good morning. We appreciate you for joining us on today's conference call. Before we begin, I want to remind everyone that comments made during the course of this conference call and webcast and the accompanying documents contain forward-looking statements and are subject to risks and uncertainties. Many of these forward-looking statements can be identified by the use of words such as anticipates, believes, expects, intends, will, should, may, and similar such expressions. These forward-looking statements are based on management's current expectations of market conditions and management's judgments. These statements are not guarantees of future performance, conditional results, and involve a number of risks and uncertainties. The company's actual results could differ materials from those expressed as forward-looking statements as a result of a number of factors, including those listed in its SEC filings. Aries Commercial Real Estate assumes no obligation to update any such forward-looking statements. During this call, we will refer to certain non-GAAP financial measures. We use these as measures of operating performance, and these measures should not be considered in isolation from, or as a substitute for, measures prepared in accordance with generally accepted accounting principles. These measures may not be comparable to leg-titled measures used by other companies. Now, I'd like to turn the call over to our CEO, Brian Donahoe.
Brian? Thank you, John. Good morning, everyone, and thank you for joining us. I'm here today with Jeff Gonzalez, our CFO, as well as other members of the management and investor relations teams. Overall, the commercial real estate market remains moderately constructive as the recent rise in interest rates runs counter to the generally positive underlying property fundamentals. We believe at times like these it is valuable to be a part of the scaled ARIES platform, which provides us with differentiated market insights and a deep pipeline of opportunities, allowing us to remain patient and highly selective as the market continues to adjust to these macro drivers. During the third quarter, and so far in the fourth quarter, we sold one of our two REO properties, we were fully repaid on our only loan in default, and we made progress on our risk-graded four and five loans. Leading off with the REO property, we completed the sale of the Charlotte, North Carolina office asset in the third quarter with net proceeds of approximately $7 million above our carrying value. When we acquired title in 2024, we believed that our ownership would allow us to enhance the value of the property, benefit from a relatively attractive cash flow yield, and control the exit in a more constructive environment. This successful exit underscores the merits of our view, the strength of our active management approach, and the benefits of our balance sheet position. Supported by this outcome, our office loan and office REO investments totaled $444 million at the end of the third quarter, down 10% quarter-over-quarter and 19% year-over-year. There are seven remaining office loans, of which five are risk-rated one through three and continue to exhibit stable to improving performance with sponsor support to further advance their respective business plans. Additionally, subsequent to quarter end, the $28 million Newark, New Jersey industrial loan that had been in maturity default was fully repaid, including all accrued default interest. Now let us discuss the advancements towards resolutions across four risk-rated 4 and 5 loans. As of 3Q2026, the Chicago office loan and the Brooklyn residential condo loan accounted for 95% of the outstanding principal balance of risk-rated 4 and 5 loans. Starting with the Chicago office loan, our goal is to accelerate the resolution of this loan and have therefore recently begun the process of acquiring title to the property. We believe this action will provide us with greater control over the sales process while benefiting from the cash flow of the property. Importantly, fundamentals of the property remain stable with occupancy above 90% and a weighted average lease term over seven years. The property's operating cash flow relative to our carrying value, net of CECL, as of September 30, 2026, represents a double-digit debt yield. Taken together with the balance sheet flexibility we have maintained, we believe we have the ability to better determine the optimal outcome for this asset. Turning to the Brooklyn residential condo. During the quarter, construction was completed, supporting increased marketing and greater buyer interest. While we continue to monitor the potential impact of higher interest rates on buyer behavior, we remain encouraged by activity at the property as traffic has continued to pick up since Labor Day, and early market signs remain positive. As we have increased visibility of timing and proceeds from condominium sales based on the progression of the project, we have greater clarity into the probability of our financial results, which was one of the primary factors that drove The adjustment of the risk rating from a four to a five. With respect to timing of recognizing losses, as a condominium project, proportional losses will be recognized as individual unit sales are closed. The remaining two risk-rated four and five loans total $20 million of carrying value at quarter end or $6 million net of related CECL reserves. Collectively, the four risk-graded 4 and 5 loans represent 10% of carrying value net of related CESA reserves. While we continue to make progress on our risk-graded 4 and 5 loans, we selectively added to the portfolio. Supported by the depth and breadth of the ARIES platform, we continue to see compelling opportunities to invest. However, as we have long communicated, the pace of portfolio growth reflects our management of liquidity, the pace of resolutions, and our assessment of market conditions. To that end, During the third quarter, we closed one new senior co-investment loan on a portfolio of industrial properties with a $35 million commitment, of which $28 million is classified as held for investment, and $7 million was classified as held for sale and thereafter sold. Over the past 12 months, Aker's portfolio has increased over 40%. We believe the ARIES platform provides us with a scale, deep market insights, and broad opportunity set to selectively invest in loans that we believe offer attractive, risk-adjusted returns. By leveraging the ARIES real estate debt platform, which has completed nearly $10 billion of new loan commitments globally over the past 12 months, and co-investing alongside other ARIES-managed vehicles, ACRE is able to access what we believe are high-quality investment opportunities. This scale enables ACRE to drive greater portfolio diversification objectives while participating in larger institutional quality loans. Despite a backdrop of higher interest rates, we continue to see generally healthy fundamentals in our risk-rated one through three loans. These loans represent 90% of our loan portfolio carrying value, NetAV-related CECL. Given the change in interest rates and the market's focus on multifamily assets, let me now provide a little bit more specificity on the positioning of our multifamily portfolio. Following the full repayment of our largest multifamily loan in October, we now have six multifamily loans. Four of the loans were originated in 2025 or 2026 and continue to make progress on their business plans. The two pre-2025 vintage multifamily loans continue to benefit from strong sponsorship and structural protections. Subsequent to quarter end, the larger of these two loans, a $67 million multifamily loan in San Antonio, Texas, was extended after the sponsor contributed new equity to reduce the principal amount of the loan. In addition, the loan benefits from the partial principal guarantee as well as interest and carry guarantees for the remainder of the loan term. The other pre-2025 loan, a $57 million multifamily loan in Cincinnati, Ohio, Qualified for a contractual extension, given the property performance exceeded its required extension tests. We are encouraged by the performance of our risk-rated 1 through 3 loans, including both our multifamily and office portfolios. The stability of our risk-rated 1 through 3 risk ratings and the level of our overall CESA reserve reinforce our view of the underlying health and quality of our portfolio. In conclusion, we're proud of our progress this year while recognizing there is more work to do. Our focus remains clear. Number one, resolving our remaining REO asset and risk-graded 4 and 5 loans, including loans that are on non-accrual, which in the aggregate total approximately $160 million of carrying value net of CECL, but gross of associated financing. And two, deploying our available capital in a disciplined manner to drive additional portfolio growth, utilizing cost-efficient leverage. As we execute in our business plan, we believe that the resolution of our non-accruing investments represents a more significant potential driver of earnings growth, as those resolutions can redeploy capital currently generating little or no income into new earning assets. Combined with the diversification and repositioning of our portfolio, we expect our actions to drive EPS growth and support earnings that meet or exceed our dividend while delivering long-term value for shareholders. With that, I'll turn the call over to Jeff, who will walk through our third quarter financial results.
Thank you, Brian. For the third quarter of 2026, we reported gap net income of approximately $10 million, or $0.18 per diluted common share. Our distributable earnings for the third quarter of 2026 was approximately $6.7 million, or $0.12 per diluted common share. This includes the impact from the net realized gain of $300,000, or $0.01 per dilute common share, related to the sale of the North Carolina office REO property Brian previously mentioned. For distributable earnings purposes, the $7.1 million gap gain is adjusted to exclude the impact of accumulated depreciation and amortization, as those charges were not previously recognized in distributable earnings since the acquisition of the REO property. Distribable earnings for the third quarter, excluding this realized net gain, was approximately $6.4 million, or $0.11 per diluted common share. Additionally, during the third quarter, we collected $1.7 million, or $0.03 per diluted common share, of cash interest on loans that were on non-accrual and was accounted for as a reduction in our loan basis. Turning to liquidity and leverage, we've made meaningful progress towards strengthening and diversifying our funding model with a focus on creating greater capacity, flexibility, and efficiency as we reposition the portfolio. We continue to maintain moderate leverage, which supports further resolutions of underperforming loans and future growth. We ended the quarter with a net debt-to-equity ratio, excluding CECL, of 1.9 times. In the third quarter of 2026, we collected $35 million of repayments, bringing year-to-date total repayments to $146 million. Given the timing of repayments and resolutions during the quarter, we closed one new senior co-investment loan on a portfolio of industrial properties with a $35 million commitment, of which $28 million is classified as hell for investment, and $7 million was classified as hell for sale at origination and sold during the quarter. During the period between origination and the completion of the sale, we earned interest and fee income on the portion of the loan classified as hell for sale. While the loan held for sale this quarter was small relative to the overall portfolio, we continue to believe this strategy of short-term origination provides an efficient way to deploy excess liquidity while preserving balance sheet flexibility for longer-term investment opportunities. As we continue to address our remaining risk-rated four-and-five loans, office loans, and REO property, we remain focused on maintaining a flexible balance sheet. As of September 30th, 2026, available capital totaled $116 million, providing ample liquidity to support asset resolution and selective deployment of capital into new investment opportunities. Our balance sheet also benefits from a well-matched asset and liability profile with predominantly floating rate assets and liabilities. To that end, subsequent to quarter end, we fully repaid the secured term loan, and its term was not extended. The repayment of the term loan was supported by our flexible balance sheet position and reflects our broader strategy to optimize and align our financing structure with the evolving composition of the portfolio. As part of this strategy, we also consider the interest rate structure of our portfolio. Importantly, we have intentionally structured both our assets and liabilities with features designed to mitigate interest rate risk. Currently, Acre's predominantly floating rate portfolio is 100% financed with floating rate borrowings, providing a natural alignment between our assets and liabilities. At the individual loan level, we also seek to employ structural protections that mitigate the impact of changes in interest rates while our borrowers execute their respective business plans. Across our risk-rated one to three loans, 100 percent are floating rate and 94 percent have interest rate caps, with an average one-month SOFR strike rate of 4.3 percent. Importantly, the expiration of these caps generally aligns with the maturity of the underlying loans. More broadly, we underwrite and stress test our loans for potential rate fluctuations and continuously monitor the portfolio. Now, turning to our CECL Reserve, the total CECL Reserve remained relatively stable for the second consecutive quarter at $141 million as of September 30, 2026, an increase of approximately $2 million from the CECL Reserve as of June 30, 2026. This increase was largely attributed to certain asset level changes in our risk-graded 4 and 5 loans, as well as a relative decline in the macroeconomic forecast compared to the prior quarter. The total CISA reserve at the end of the third quarter of $141 million represents approximately 8% of the total outstanding principal balance of our loan's health or investment. Ninety-four percent of our total CESA reserve, or $133 million, relates to risk-graded four and five loans, and nearly half of the total CESA reserve is attributed to the risk-graded five Chicago office loan. Overall, the $133 million of reserves attributed to our risk-graded four and five loans represent approximately 34 percent of the outstanding principal balance of those risk-graded four and five loans. Our book value remained relatively stable at $8.86 per share. This continued stability reflects the progress we have made repositioning the portfolio and paired with stable CESA Reserve is increasingly evident of the strength and health of the overall portfolio. To conclude, the Board declared a regular cash dividend of $0.15 per common share for the fourth quarter of 2026. The fourth-quarter dividend will be payable on January 15, 2027 to common stockholders of record as of December 31, 2026. At our current stock price on November 3, 2026, the annualized dividend yield on our third-quarter dividend is approximately 18%. With that, I will turn the call back over to Brian for some closing remarks.
Thank you, Jeff. As we look ahead, we believe Acre is increasingly well-positioned to benefit from the progress we have made repositioning the portfolio. We have greater diversification, a growing mix of newer vintage loans, and a flexible balance sheet, while continuing to advance resolutions across our remaining risk-rated 4 and 5 loans. We believe executing against It's a strategy we outlined today. Can drive earnings growth over time while maintaining the discipline and flexibility that remains central to our strategy. As always, we appreciate you joining our call today, and we'd be happy to open the line for questions.
Operator
At this time, if you would like to ask a question, please press star, then 1 on your touchtone phone. If you would like to withdraw your question, please press star, then 2. We'll take our first question from Jade Romani with KBW. Your line is open.
Hi. Hi, thanks. This is Jason Sabshan on for Jade. Did you say that an industrial loan in default repaid post-quarter end? That's correct. Great. And was that in the risk four or five bucket, and what was the carrying value of that loan?
It was not in the risk-rated four and five bucket. We felt we were very well collateralized. So, therefore, I believe Jeff is still three. And we realized 100% of principal plus interest as well as default interest. So, we felt the default is more of a technical nature and not indicative of the stress value.
And just to add, that was our only default. The default is not in the portfolio.
Great, thank you. Yeah, and also, I'd be curious if you're seeing incremental pressure anywhere in your existing portfolio due to higher rates. I know you commented on it a bit, but I guess also within that, in your multifamily book, what kind of debt yields are you seeing?
Yeah, I think we've spoken, if you were to go back, whatever it was, three years ago now when you saw SOFR move up, I think a 10 times order of magnitude than it has over the last six months or so, and there was certainly more stress, but we've always spoken about interest rates effectively being like gravity for values. So I think the impact of the rate movement over the past stretch here has probably moved values 2 to 6 percent for most product and some good variability. The backdrop of that in many markets, though, is improving fundamentals. The inflation story is going to further limit supply, so you're seeing less of a move in cap rates in real time than you are. So, I think we'd all be remiss to think about rates not impacting valuations, but as you heard us describe in the prepared remarks, we feel like the earlier vintage transactions that withstood both of these rate movements would, in general, be more impacted, but as we outlined on the two remaining multifamily deals from that vintage, We saw one perform in keeping with our original underwriting, qualifying as a right for its extension, and the second seeing pretty significant structural support from sponsorship. So certainly rates are impactful and directionally negative for real estate, but the stability of our risk-rated one-to-three book. I think should be indicative of how we feel about that part of the portfolio.
Great. Thank you. And then lastly, on the RISC-V Chicago office loan, it would be helpful if you could provide an update, and if you were to take it REO, what kind of income yields would you see?
If we did take it back, I think it's just to simplify the structure to some degree. We've been collecting all free cash flow for some period of time and paying down our basis, as you're aware. I think by stepping in, it may just simplify the structure, change the manner in which we benefit and allow us to have more direct control over the resolution and the resolution timing. But the profile of the transaction has not changed. We outlined the lease term. This is not a capex intensive asset. This has quality tenancy. So really not much of a change except a change in the control and the path towards resolution.
Operator
We'll take our next question from Rick Shane with JPMorgan. Your line is open.
Yeah, hey, this is Hong on for Rick. I guess as it relates to the Brooklyn condo loan, you talked, could you provide some color on how you expect the pace of unit sales going forward? And do you expect, just given the fact that you recognize losses, is this something where we should just expect, I guess, a short trip of losses on the snow quarter until the sale is complete?
I think I heard most of the question. In terms of the Brooklyn condominium, as we mentioned, construction complete, which usually has a positive impact on pace of tours and sales, and while the risk rating was changed, I don't think the progress towards ultimate resolution of the asset itself has. We typically, there is some seasonality around sales within the New York market. It feels like it's a pretty active marketplace today. And in terms of your question from realization of losses, those will occur as individual unit sales are consummated. The typical path would be marketing and contracts and then ultimately sales once the condo is fully effective. So this business plan is progressing in keeping with a typical condominium regime in the New York market.
Got it. And then I guess with the Chicago property, as you acquire the title, should we expect just incremental operating expenses, CapEx, sort of anything going on in the income statement of the balance sheet?
No, I mean, we do not expect any significant CapEx cycle. This is a relatively well-occupied, north of 90% occupied asset, institutional-grade asset with a lease term of approximately seven years, so not a CapEx-intensive asset or cash flow profile from here.
And I'll just add to that, as I mentioned in my prepared remarks, we collected $1.7 million of payments this quarter from net operating cash flow, so it's about $0.03 per share, so it's giving you an idea of the kind of cash flow the property is generating.
Got it. Thanks. And have a great weekend. You too.
Operator
And once more for your questions today, that is star one on your keypad. We'll move next to Chris Mueller with Citizens Capital. Your line is open.
Hi, this is Allison. I'm in for Chris. I appreciate you taking the questions this morning. So with the tournament repaid subsequent quarter end, do you think you'll start looking to shift more to offense or will you stay cautious in this environment?
I don't know that the term loan really will relate too much to our disposition as to aggressive or passive or defensive. I think the manner in which we repaid the term loan should be indicative of the balance sheet positioning that we've undertaken for the past two-plus years to maintain flexibility, and I think that flexibility, as you mentioned, really allowed us to be proactive as it relates to underlying asset resolutions like the North Carolina office, but also, as I said, the manner in which we repaid this loan. And our view of the market as we started in the prepared March was this is a period of digestion given the movement in rates. And our repayments will largely be indicative of how we position for the next round of originations, if you will. So the term loan stands on its own in terms of the flexibility we've afforded ourselves. In terms of growth and positioning of the platform, that will be dictated by more broad market conditions and the opportunity sets that we continue to find.
And Brian, I'll just add on top of that with regard to the term loan, our financing strategy does continue to evolve along with the competition of our portfolio. So as we're moving forward, we expect to be predominantly floating rate senior loan portfolio. So we saw an opportunity to better align our liability structure with our floating rate assets and utilize structures that are more efficient in the current market. So that includes more like repo financing and other financing alternatives that we continue to consider that just provide us more flexibility with regard to those floating-rate assets.
Got it. That makes a lot of sense. And then just one more from me. Any thoughts on timeline for dividend coverage? Any call on that would be super helpful.
Yeah, I think you can read through where we were in prior quarters and today in terms of our focus on the risk-graded four and five loans and the REO assets in terms of that will be catalytic towards the growth of DE. There is a lot of potential energy, if you will, in terms of the assets on non-accrual and the like. So I think the sequence has not changed from prior quarters, and our focus remains the same.
Got it. Appreciate the call on that. That's it for me. I appreciate the time, and thanks again for taking the questions.
Operator
And it does appear that there are no further questions at this time. I would now like to hand it back to Brian for any additional or closing remarks.
Great. I just want to thank everyone for their time today and for the team for the work this quarter. We appreciate your continued support of Acre, and we look forward to speaking with you all on our next earnings call. Thank you.
Operator
Ladies and gentlemen, this concludes our conference call for today. If you missed any part of today's call, an archived replay of this conference call will be available approximately one hour after the end of this call through December 6, 2026, To domestic callers by dialing 1-800-753-6121, and to international callers by dialing 1-402-220-2676. An archived replay will also be available on a webcast link located on the homepage of the Investor Resources section of our website.
