Ares mercial Real Estate (ACRE) - 2025 Q3 - Quarterly Report

Interest Expense and Income - For the three months ended September 30, 2025, interest expense totaled $14,790,000, a decrease from $27,401,000 in the same period of 2024[51] - For the nine months ended September 30, 2025, interest expense was $49,081,000, down from $83,703,000 in the corresponding period of 2024[51] - The Company capitalizes and amortizes debt issuance costs over the term of the respective debt instrument, impacting interest expense recognition[47] - The Company's net interest margin for the three months ended September 30, 2025, was $8.471 million, down from $11.944 million in the same period of 2024[151] Loans and Investments - The Company monitors its loans held for investment portfolio through borrower review, economic review, property review, and market review[39] - As of September 30, 2025, the Company held 27 loans for investment with an outstanding principal of $1.3 billion, down from $1.7 billion as of December 31, 2024[53] - The total loans held for investment portfolio had a carrying amount of $1.231 billion and an outstanding principal of $1.292 billion as of September 30, 2025[54] - The weighted average unleveraged effective yield for the total loans held for investment portfolio was 6.1% as of September 30, 2025[54] - The Company experienced a loan payoff of $530.6 million during the nine months ended September 30, 2025[61] - The Company continues to monitor and evaluate its loans, making modifications as necessary based on individual circumstances[60] - As of September 30, 2025, the Company had three loans on non-accrual status with a carrying value of $271.8 million, down from five loans valued at $318.4 million as of December 31, 2024[63] - The Company's CECL Reserve for loans held for investment is $117.3 million, representing 880 basis points of the total loans held for investment commitment balance of $1.3 billion[68] Real Estate Assets - The Company evaluates real estate assets held for investment for impairment on a quarterly basis, considering factors such as significant underperformance and economic trends[46] - Total real estate owned held for investment as of September 30, 2025, is valued at $146,137 thousand, net of accumulated depreciation of $12,285 thousand[82] - The Company has no impairment charges recognized for real estate owned held for investment as of September 30, 2025[82] - The net real estate owned held for investment is $133,852 thousand, down from $139,032 thousand as of December 31, 2024[82] Revenue Recognition - Revenue from real estate owned includes operations from properties acquired in September 2024 and June 2024, with a focus on rental revenue from operating leases[49][50] - The Company recognizes rental revenue on a straight-line basis over the lease term when collectability is probable, including variable lease payments[50] - Future minimum lease payments to be collected under non-cancelable operating leases total $107,044 thousand as of September 30, 2025[87] Financial Performance - For the three months ended September 30, 2025, the net income attributable to common stockholders was $4,653,000, compared to a net loss of $5,880,000 for the same period in 2024[106] - Basic earnings per common share for the three months ended September 30, 2025, was $0.08, while for the same period in 2024, it was $(0.11)[106] - The total income tax expense for the nine months ended September 30, 2025, was $280,000, compared to a benefit of $(1,000) for the same period in 2024[109] - Total cash dividends declared for the nine months ended September 30, 2025, amounted to $25.09 million, with a per share amount of $0.45, compared to $41.42 million and $0.75 per share for the same period in 2024[136] Risk Management - A significant increase in interest rates could strain operating cash flows of real estate assets, potentially leading to non-performance or default[230] - The estimated fair value of fixed-rate investments is expected to decrease in a rising interest rate environment, while it would generally increase in a decreasing interest rate environment[234] - Prepayment rates on existing CRE loans can negatively impact net income if they occur faster than anticipated, potentially leading to liquidity issues[235] - The company is subject to risks from defaults by large banking institutions, which could impact liquidity and borrowing capabilities[236] - Continued weakness in financial markets could adversely affect lenders' willingness to provide financing, increasing costs[239] - Real estate investments are subject to volatility from various factors, including economic conditions and rising operating costs, which could pressure cash flow performance[240] - Inflation risks are significant as changes in interest rates may not correlate with inflation rates, potentially leading to lower investment returns[241] Commitments and Facilities - The outstanding balance of the Company's Financing Agreements as of September 30, 2025, is $693,046 thousand, with total commitments of $1,100,000 thousand[88] - The Company has total commitments of $1,332.2 million as of September 30, 2025, down from $1,773.1 million as of December 31, 2024, resulting in total unfunded commitments of $40.6 million[99] - The Secured Term Loan has a total commitment of $100.0 million, with an outstanding principal balance of $100.0 million as of September 30, 2025[96] - The effective interest rate of the Secured Term Loan was 6.1% for the three months ended September 30, 2025, compared to 5.7% for the same period in 2024[97] - The Company has a master repurchase facility with Citibank with a maximum commitment of $325.0 million, which can be increased to $425.0 million[92] - The Wells Fargo Facility allows the Company to borrow up to $450.0 million, with the potential to increase to $500.0 million[91] - The CNB Facility has a maximum commitment of $75.0 million, with no immediate availability as of September 30, 2025[93] Management and Fees - The Company recorded a base management fee of $2.42 million for Q3 2025, down from $2.65 million in Q3 2024, and a total of $7.42 million for the nine months ended September 30, 2025, compared to $8.11 million for the same period in 2024[132] - The incentive fee structure is based on Core Earnings, with no incentive fees incurred for the three and nine months ended September 30, 2025, and 2024[127] - The term of the Management Agreement is set to end on April 25, 2026, with automatic one-year renewal terms thereafter[131] - The Company is responsible for its proportionate share of certain fees and expenses, including due diligence costs, as determined by ACREM and Ares Management[128] - The Company will not reimburse ACREM for salaries and other compensation of its personnel, except for specific allocable shares[129] Acquisitions and Fair Value - The Company recognized a realized loss of $33.0 million for the nine months ended September 30, 2025, due to a discounted payoff on a senior mortgage loan with an outstanding principal of $51.5 million[66] - The Company recognized a realized loss of $5.8 million on the acquisition of an office property in North Carolina, with the property's fair value at acquisition being $60.2 million[77] - The Company recognized a realized loss of $16.4 million on the acquisition of an office property in California, with an estimated fair value of $14.5 million at acquisition[78] - The fair value of loans held for investment is determined based on a discounted cash flow methodology, considering various market factors[123] - The fair value of the office property acquired on September 19, 2024, was estimated using capitalization rates ranging from 6.4% to 11.0% and discount rates from 14.0% to 16.0%[119] - The fair value of the mixed-use property acquired on September 8, 2023, was estimated using capitalization rates ranging from 6.4% to 8.3% and discount rates from 8.0% to 9.5%[120]