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What changed in Ares Commercial Real Estate Corp's 10-K — 2022 vs 2023

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Paragraph-level year-over-year comparison of Ares Commercial Real Estate Corp's 2022 and 2023 10-K annual filings, covering the Business, Risk Factors, Legal Proceedings, Cybersecurity, MD&A and Market Risk sections. Every new, removed and edited paragraph is highlighted side-by-side so you can see exactly what management changed in the 2023 report.

+893 added−425 removedSource: 10-K (2024-02-22) vs 10-K (2023-02-15)

Top changes in Ares Commercial Real Estate Corp's 2023 10-K

893 paragraphs added · 425 removed · 312 edited across 7 sections

Item 1. Business

Business — how the company describes what it does

11 edited+439 added−56 removed1 unchanged
Biggest changeGenerally, we seek to partially offset interest rate risk by matching the interest index of loans held for investment with the interest index of the Secured Funding Agreements used to fund them. 8 Table of Contents As of December 31, 2022, we had $150.0 million outstanding under our $150.0 million Credit and Guaranty Agreement with the lenders referred to therein and Cortland Capital Market Services LLC, as administrative agent and collateral agent for the lenders (the “Secured Term Loan”).
Biggest changeSecured Term Loan The Company and certain of its subsidiaries are party to a $150.0 million Credit and Guaranty Agreement with the lenders referred to therein and Cortland Capital Market Services LLC, as administrative agent and collateral agent for the lenders (the “Secured Term Loan”). The maturity date of the Secured Term Loan is November 12, 2026.
A TRS generally may engage in any business, including investing in assets and engaging in activities that could not be held or conducted directly by us without jeopardizing our qualification as a REIT. A TRS is subject to applicable United States federal, state, and local income tax on its taxable income.
A TRS generally may engage in any business, including investing in assets and engaging in activities that could not be held or conducted directly by the Company without jeopardizing its qualification as a REIT. A TRS is subject to applicable United States federal, state and local income tax on its taxable income.
We have elected and qualified to be taxed as a real estate investment trust (“REIT”) for United States federal income tax purposes under the Internal Revenue Code of 1986, as amended (the “Code”), commencing with our taxable year ended December 31, 2012.
The Company has elected and qualified to be taxed as a real estate investment trust (“REIT”) for United States federal income tax purposes under the Internal Revenue Code of 1986, as amended (the “Code”), commencing with its taxable year ended December 31, 2012.
Additionally, we also formed a wholly-owned subsidiary, ACRC WM Tenant LLC (“ACRC WM”), in March 2019 in order to lease from an affiliate the hotel property classified as real estate owned, which was acquired on March 8, 2019, and subsequently sold on March 1, 2022.
Additionally, the Company also formed a wholly-owned subsidiary, ACRC WM Tenant LLC (“ACRC WM”), in March 2019 in order to lease the hotel property classified as real estate owned, which was acquired on March 8, 2019.
We generally will not be subject to United States federal income taxes on our REIT taxable income, as long as we annually distribute to stockholders an amount at least equal to our REIT taxable income prior to the deduction for dividends paid and comply with various other requirements as a REIT.
The Company generally will not be subject to United States federal income taxes on its REIT taxable income as long as it annually distributes all of its REIT taxable income prior to the deduction for dividends paid to stockholders and complies with various other requirements as a REIT. 2.
Financing Agreements We borrow funds, as applicable in a given period, under the Wells Fargo Facility, the Citibank Facility, the CNB Facility, the MetLife Facility and the Morgan Stanley Facility (as individually defined in Note 6 to the consolidated financial statements included in this annual report on Form 10-K, and collectively, the “Secured Funding Agreements”), Notes Payable (as defined below) and the Secured Term Loan (as defined below).
DEBT Financing Agreements The Company borrows funds, as applicable in a given period, under the Wells Fargo Facility, the Citibank Facility, the CNB Facility, the MetLife Facility and the Morgan Stanley Facility (individually defined below and collectively, the “Secured Funding Agreements”), Notes Payable (as defined below) and the Secured Term Loan (as defined below).
We refer to our manager, Ares Commercial Real Estate Management LLC, as our “Manager” or “ACREM,” and the parent company of our Manager, Ares Management Corporation, together with its consolidated subsidiaries, as “Ares Management.” GENERAL We are a specialty finance company primarily engaged in originating and investing in commercial real estate (“CRE”) loans and related investments.
ORGANIZATION Ares Commercial Real Estate Corporation (together with its consolidated subsidiaries, the “Company” or “ACRE”) is a specialty finance company primarily engaged in originating and investing in commercial real estate loans and related investments.
In addition, as a REIT, we may also be subject to a 100% excise tax on certain transactions between us and our TRS that are not conducted on an arm’s-length basis. COMPETITION Our net income depends, in part, on our ability to originate or acquire assets at favorable spreads over our borrowing costs.
In addition, as a REIT, the Company also may be subject to a 100% excise tax on certain transactions between it and its TRS that are not conducted on an arm’s-length basis.
ACRC W TRS, FL3 TRS and ACRC WM filed elections seeking to be taxed as corporations and also filed elections, along with us, to be treated as taxable REIT subsidiaries (“TRS”).
Entity classification elections to be taxed as a corporation and taxable REIT subsidiary (“TRS”) elections were made with respect to ACRC W TRS, FL3 TRS and ACRC WM.
We formed a wholly-owned subsidiary, ACRC Lender W TRS LLC (“ACRC W TRS”), in December 2013 to issue and hold certain loans intended for sale. We formed another wholly-owned subsidiary, ACRC 2017-FL3 TRS LLC (“FL3 TRS”), in March 2017 in order to hold a portion of the non-investment grade notes and the preferred equity of ACRE Commercial Mortgage 2017-FL3 Ltd.
Excise tax expense is included in the line item income tax expense (benefit), including excise tax in the consolidated statements of operations included in this annual report on Form 10-K. The Company formed a wholly-owned subsidiary, ACRC Lender W TRS LLC (“ACRC W TRS”), in December 2013 in order to issue and hold certain loans intended for sale.
We refer to the Secured Funding Agreements, Notes Payable and the Secured Term Loan as the “Financing Agreements.” While the borrowers under the Financing Agreements generally are our consolidated subsidiaries, the majority of such debt agreements are guaranteed by us in whole or in part.
The Company refers to the Secured Funding Agreements, Notes Payable and the Secured Term Loan as the “Financing Agreements.” The outstanding balance of the Financing Agreements in the table below are presented gross of debt issuance costs.
Removed
Item 1. Business The following description of the business of Ares Commercial Real Estate Corporation (“ACRE”) should be read in conjunction with the information included elsewhere in this annual report on Form 10-K for the year ended December 31, 2022.
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Item 1: Consolidated Financial Statements ARES COMMERCIAL REAL ESTATE CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands, except share and per share data) As of December 31, 2023 2022 ASSETS Cash and cash equivalents $ 110,459 $ 141,278 Loans held for investment ($892,166 and $887,662 related to consolidated VIEs, respectively) 2,126,524 2,264,008 Current expected credit loss reserve (159,885) (65,969) Loans held for investment, net of current expected credit loss reserve 1,966,639 2,198,039 Loans held for sale, at fair value ($38,981 related to consolidated VIEs as of December 31, 2023) 38,981 — Investment in available-for-sale debt securities, at fair value 28,060 27,936 Real estate owned, net 83,284 — Other assets ($3,690 and $2,980 of interest receivable related to consolidated VIEs, respectively; $32,002 and $129,495 of other receivables related to consolidated VIEs, respectively) 52,354 155,749 Total assets $ 2,279,777 $ 2,523,002 LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES Secured funding agreements $ 639,817 $ 705,231 Notes payable 104,662 104,460 Secured term loan 149,393 149,200 Collateralized loan obligation securitization debt (consolidated VIEs) 723,117 777,675 Due to affiliate 4,135 5,580 Dividends payable 18,220 19,347 Other liabilities ($2,263 and $1,913 of interest payable related to consolidated VIEs, respectively) 14,584 13,969 Total liabilities 1,653,928 1,775,462 Commitments and contingencies (Note 9) STOCKHOLDERS' EQUITY Common stock, par value $0.01 per share, 450,000,000 shares authorized at December 31, 2023 and 2022 and 54,149,225 and 54,443,983 shares issued and outstanding at December 31, 2023 and 2022, respectively 532 537 Additional paid-in capital 812,184 812,788 Accumulated other comprehensive income 153 7,541 Accumulated earnings (deficit) (187,020) (73,326) Total stockholders' equity 625,849 747,540 Total liabilities and stockholders' equity $ 2,279,777 $ 2,523,002 See accompanying notes to consolidated financial statements.
Removed
We refer to ACRE together with our consolidated subsidiaries as “we,” “us,” “Company,” or “our,” unless we specifically state otherwise or the context indicates otherwise.
Added
F-5 Table of Contents ARES COMMERCIAL REAL ESTATE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except share and per share data) For the Years Ended December 31, 2023 2022 2021 Revenue: Interest income $ 198,608 $ 170,171 $ 133,631 Interest expense (109,652) (65,994) (50,080) Net interest margin 88,956 104,177 83,551 Revenue from real estate owned 3,970 2,672 18,518 Total revenue 92,926 106,849 102,069 Expenses: Management and incentive fees to affiliate 12,263 14,898 12,136 Professional fees 3,054 3,350 2,436 General and administrative expenses 7,244 6,394 4,741 General and administrative expenses reimbursed to affiliate 3,434 3,777 3,016 Expenses from real estate owned 2,518 4,309 18,548 Total expenses 28,513 32,728 40,877 Provision for current expected credit losses 91,825 46,061 10 Realized losses on loans 10,499 — — Unrealized losses on loans held for sale 995 — — Gain on sale of real estate owned — 2,197 — Income (loss) before income taxes (38,906) 30,257 61,182 Income tax expense (benefit), including excise tax (39) 472 722 Net income (loss) attributable to common stockholders $ (38,867) $ 29,785 $ 60,460 Earnings per common share: Basic earnings (loss) per common share $ (0.72) $ 0.58 $ 1.43 Diluted earnings (loss) per common share $ (0.72) $ 0.57 $ 1.42 Weighted average number of common shares outstanding: Basic weighted average shares of common stock outstanding 54,281,998 51,679,744 42,399,613 Diluted weighted average shares of common stock outstanding 54,281,998 52,126,256 42,681,505 See accompanying notes to consolidated financial statements.
Removed
We are externally managed by Ares Commercial Real Estate Management LLC (“ACREM” or our “Manager”), a subsidiary of Ares Management Corporation (NYSE: ARES) (“Ares Management”), a publicly traded, leading global alternative asset manager, pursuant to the terms of the Amended and Restated Management Agreement dated July 26, 2022, between us and our Manager (the “Management Agreement”).
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F-6 Table of Contents ARES COMMERCIAL REAL ESTATE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (in thousands) For the Years Ended December 31, 2023 2022 2021 Net income (loss) attributable to common stockholders $ (38,867) $ 29,785 $ 60,460 Other comprehensive income (loss): Realized and unrealized gains (losses) on derivative financial instruments (7,486) 4,642 2,844 Unrealized gains (losses) on available-for-sale debt securities 98 55 — Comprehensive income (loss) $ (46,255) $ 34,482 $ 63,304 See accompanying notes to consolidated financial statements.
Removed
From the commencement of our operations in late 2011, we have been primarily focused on directly originating and managing a diversified portfolio of CRE debt-related investments for our own account. We were formed and commenced operations in late 2011. We are a Maryland corporation and completed our initial public offering (the “IPO”) in May 2012.
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F-7 Table of Contents ARES COMMERCIAL REAL ESTATE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (in thousands, except share and per share data) Common Stock Additional Paid-in Capital Accumulated Other Comprehensive Income (Loss) Accumulated Earnings (Deficit) Total Stockholders’ Equity Shares Amount Balance at December 31, 2020 33,442,332 $ 329 $ 497,803 $ — $ (25,117) $ 473,015 Sale of common stock 13,637,237 136 204,643 — — 204,779 Offering costs — — (436) — — (436) Stock‑based compensation 64,489 — 1,940 — — 1,940 Other comprehensive income — — — 2,844 — 2,844 Net income — — — — 60,460 60,460 Dividends declared — — — — (63,974) (63,974) Balance at December 31, 2021 47,144,058 $ 465 $ 703,950 $ 2,844 $ (28,631) $ 678,628 Sale of common stock 7,190,369 72 106,195 — — 106,267 Offering costs — — (233) — — (233) Stock‑based compensation 109,556 — 2,876 — — 2,876 Other comprehensive income — — — 4,697 — 4,697 Net income — — — — 29,785 29,785 Dividends declared — — — — (74,480) (74,480) Balance at December 31, 2022 54,443,983 $ 537 $ 812,788 $ 7,541 $ (73,326) $ 747,540 Stock‑based compensation 241,207 — 3,991 — — 3,991 Repurchase and retirement of common stock (535,965) (5) (4,595) — — (4,600) Other comprehensive loss — — — (7,388) — (7,388) Net loss — — — — (38,867) (38,867) Dividends declared — — — — (74,827) (74,827) Balance at December 31, 2023 54,149,225 $ 532 $ 812,184 $ 153 $ (187,020) $ 625,849 See accompanying notes to consolidated financial statements.
Removed
We also operate our business in a manner that is intended to permit us to maintain our exemption from registration under the Investment Company Act of 1940, as amended (the “1940 Act”). Our Investment Strategy We target borrowers whose capital needs are not being suitably met by traditional bank or capital markets sources by offering these borrowers customized financing solutions.
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F-8 Table of Contents ARES COMMERCIAL REAL ESTATE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) For the Years Ended December 31, 2023 2022 2021 Operating activities: Net income (loss) $ (38,867) $ 29,785 $ 60,460 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Amortization of deferred financing costs 3,899 7,096 9,895 Accretion of discounts, deferred loan origination fees and costs (6,135) (10,347) (8,433) Stock-based compensation 3,991 2,876 1,940 Depreciation and amortization of real estate owned 1,016 — 825 Provision for current expected credit losses 91,825 46,061 10 Realized losses on loans 10,499 — — Unrealized losses on loans held for sale 995 — — Amortization of derivative financial instruments (921) (1,029) — Gain on sale of real estate owned — (2,197) — Changes in operating assets and liabilities: Other assets (19,879) (17,674) (18,545) Due to affiliate (1,445) 1,424 1,006 Other liabilities 1,811 1,162 1,192 Net cash provided by (used in) operating activities 46,789 57,157 48,350 Investing activities: Issuance of and fundings on loans held for investment (199,829) (652,720) (1,241,996) Principal collections and cost-recovery proceeds on loans held for investment 288,626 824,940 534,973 Proceeds from sale of loans held for sale 37,200 — — Receipt of origination fees 1,463 8,513 7,632 Purchases of capitalized additions to real estate owned — — (144) Proceeds from sale of real estate owned — 38,227 — Purchases of available-for-sale debt securities — (27,872) — Amounts received (paid) under derivative financial instruments — 2,085 (150) Net cash provided by (used in) investing activities 127,460 193,173 (699,685) Financing activities: Proceeds from secured funding agreements 43,668 267,192 970,036 Repayments of secured funding agreements (109,082) (402,008) (885,541) Proceeds from notes payable — 105,000 15,869 Repayments of notes payable — (51,110) (27,880) Proceeds from secured term loan — — 90,000 Repayments of secured term loan — — (50,000) Repayments of secured borrowings — (22,715) (37,500) Payment of secured funding costs (4,049) (4,467) (13,066) Proceeds from issuance of debt of consolidated VIEs — — 540,471 Repayments of debt of consolidated VIEs (55,051) (85,856) (121,246) Dividends paid (75,954) (71,807) (58,424) Proceeds from sale of common stock — 106,267 204,779 Repurchase of common stock (4,600) — — Payment of offering costs — (163) (324) Net cash provided by (used in) financing activities (205,068) (159,667) 627,174 Change in cash and cash equivalents (30,819) 90,663 (24,161) Cash and cash equivalents, beginning of period 141,278 50,615 74,776 Cash and cash equivalents, end of period $ 110,459 $ 141,278 $ 50,615 Supplemental Information: Interest paid during the period $ 103,717 $ 57,819 $ 40,126 Income taxes paid during the period $ 375 $ 250 $ 1,406 Supplemental disclosure of noncash investing and financing activities: Dividends declared, but not yet paid $ 18,220 $ 19,347 $ 16,674 Other receivables related to consolidated VIEs $ 32,002 $ 129,495 $ 128,589 Assumption of real estate owned $ 84,300 $ — $ — Assumption of other assets related to real estate owned $ 353 $ — $ — Assumption of other liabilities related to real estate owned $ 1,713 $ — $ — Transfer of senior mortgage loan to real estate owned $ 82,940 $ — $ — See accompanying notes to consolidated financial statements.
Removed
We implement a strategy focused on direct origination combined with experienced portfolio management. Targeted borrowers are generally pursuing value improving business plans on commercial real estate which we believe often face challenges in raising capital to meet their financing needs through traditional bank and capital markets sources.
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F-9 Table of Contents ARES COMMERCIAL REAL ESTATE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS As of December 31, 2023 (in thousands, except share and per share data, percentages and as otherwise indicated) 1.
Removed
As a result, we continue to find increasing demand from borrowers and sponsors for customized solutions in this segment of the market. We act as a single “one stop” source of financing for our customers through our customized financing solutions. We generally hold our loans for investment and earn interest and interest-related income.
Added
Through Ares Commercial Real Estate Management LLC (“ACREM” or the Company’s “Manager”), a Securities and Exchange Commission (“SEC”) registered investment adviser and a subsidiary of Ares Management Corporation (NYSE: ARES) (“Ares Management” or “Ares”), a publicly traded, leading global alternative investment manager, it has investment professionals strategically located across the United States and Europe who directly source new loan opportunities for the Company with owners, operators and sponsors of commercial real estate (“CRE”) properties.
Removed
Direct Origination We generally source new investments through our Manager’s national direct origination platform consisting of five offices across the United States as of December 31, 2022.
Added
The Company was formed and commenced operations in late 2011. The Company is a Maryland corporation and completed its initial public offering (the “IPO”) in May 2012. The Company is externally managed by its Manager, pursuant to the terms of a management agreement (the “Management Agreement”).
Removed
Investment Strategy In pursuing investment opportunities with attractive risk-reward profiles, our Manager incorporates our views of the current and future economic environment, our outlook for real estate in general and particular asset classes and our assessment of the risk-reward profile derived from our underwriting.
Added
The Company operates as one operating segment and is primarily focused on directly originating and managing a diversified portfolio of CRE debt-related investments for the Company’s own account. The Company’s target investments include senior mortgage loans, subordinated debt, preferred equity, mezzanine loans and other CRE investments, including commercial mortgage backed securities.
Removed
Our Manager’s underwriting standards center on the creditworthiness and valuation of the asset collateralizing the loan as well as the strength of the borrower and the underlying sponsor of a given asset, with particular focus on an asset’s business plan, competitive positioning within the market, existing capital structure and potential exit opportunities.
Added
These investments are generally held for investment and are secured, directly or indirectly, by office, multifamily, retail, industrial, lodging, self storage, student housing, residential and other commercial real estate properties, or by ownership interests therein.
Removed
All investment decisions are made to seek to ensure that we maintain our qualification as a REIT and our exemption from registration under the 1940 Act.
Added
SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The accompanying consolidated financial statements have been prepared on the accrual basis of accounting in conformity with United States generally accepted accounting principles (“GAAP”) and include the accounts of the Company, the consolidated variable interest entities (“VIEs”) that the Company controls and of which the Company is the primary beneficiary, and the Company’s wholly-owned subsidiaries.
Removed
In addition, as part of our investment strategy, we may from time to time engage in discussions with counterparties with respect to various potential strategic transactions, including potential investments in, and acquisitions of, other real estate or finance companies or asset portfolios.
Added
The consolidated financial statements reflect all adjustments and reclassifications that, in the opinion of management, are necessary for the fair presentation of the Company’s results of operations and financial condition as of and for the periods presented. All intercompany balances and transactions have been eliminated.
Removed
In connection with evaluating potential strategic transactions and assets, we may incur significant expenses for the evaluation and due diligence investigation and negotiation of any potential transaction. 6 Table of Contents Our investment strategy may be amended from time to time without the approval of our stockholders, if recommended by our Manager and approved by our board of directors.
Added
Use of Estimates in the Preparation of Financial Statements The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect certain reported amounts and disclosures.
Removed
We expect to disclose any material changes to our investment strategy in the periodic quarterly and annual reports that we file with the Securities and Exchange Commission (“SEC”). Our Target Assets Our target investments primarily include senior mortgage loans, subordinated debt, mezzanine loans, preferred equity and other CRE investment opportunities, including commercial mortgage-backed securities.
Added
Global macroeconomic conditions, including high inflation, changes to fiscal and monetary policy, high interest rates, potential market-wide liquidity problems, currency fluctuations, labor shortages and challenges in the supply chain, have the potential to negatively impact the Company and its borrowers.
Removed
Investment Portfolio For information about our investment portfolio, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Investment Portfolio” and Note 3 to our consolidated financial statements included in this annual report on Form 10-K.
Added
These current macroeconomic conditions may continue or aggravate and could cause the United States economy or other global economies to experience an economic slowdown or recession. We anticipate our business and operations could be materially adversely affected by a prolonged recession in the United States or other major global economy.
Removed
Targeted Investments • Senior Mortgage Loans: These mortgage loans are typically secured by first liens on commercial properties, including the following property types: office, multifamily, self storage, retail, hotel, healthcare, student housing, industrial, mixed-use, residential and residential condominium. Our senior mortgage loans may include construction loans.
Added
The Company believes the estimates and assumptions underlying its consolidated financial statements are reasonable and supportable based on the information available as of December 31, 2023, however, uncertainty over the global economy and the Company’s business, makes any estimates and assumptions as of December 31, 2023 inherently less certain than they would be absent the current and potential impacts of current macroeconomic conditions.
Removed
In some cases, first lien mortgages may be divided into an A-Note and a B-Note.
Added
Actual results could differ from those estimates. F-10 Table of Contents Variable Interest Entities The Company evaluates all of its interests in VIEs for consolidation. When the Company’s interests are determined to be variable interests, the Company assesses whether it is deemed to be the primary beneficiary of the VIE.
Removed
The A-Note is typically a privately negotiated loan that is secured by a first mortgage on a commercial property or group of related properties that is senior to a B-Note secured by the same first mortgage property or group. • Subordinated Debt: These loans may include structurally subordinated first mortgage loans and junior participations in first mortgage loans or participations in these types of assets.
Added
The primary beneficiary of a VIE is required to consolidate the VIE.
Removed
As noted above, a B-Note is typically a privately negotiated loan that is secured by a first mortgage on a commercial property or group of related properties and is subordinate to an A-Note secured by the same first mortgage property or group.
Added
Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 810, Consolidation , defines the primary beneficiary as the party that has both (i) the power to direct the activities of the VIE that most significantly impact its economic performance, and (ii) the obligation to absorb losses and the right to receive benefits from the VIE which could be potentially significant.
Removed
The subordination of a B-Note or junior participation typically is evidenced by participations or intercreditor agreements with other holders of interests in the note.
Added
The Company considers its variable interests, as well as any variable interests of its related parties in making this determination. Where both of these factors are present, the Company is deemed to be the primary beneficiary and it consolidates the VIE.
Removed
B-Notes are subject to more credit risk with respect to the underlying mortgage collateral than the corresponding A-Note. • Mezzanine Loans: Like B‑Notes, these loans are also subordinated CRE loans, but are usually secured by a pledge of the borrower’s equity ownership in the entity that owns the property or by a second lien mortgage on the property.
Added
Where either one of these factors is not present, the Company is not the primary beneficiary and it does not consolidate the VIE.
Removed
In a liquidation, these loans are generally junior to any mortgage liens on the underlying property, but senior to any preferred equity or common equity interests in the entity that owns the property.
Added
To assess whether the Company has the power to direct the activities of a VIE that most significantly impact the VIE’s economic performance, the Company considers all facts and circumstances, including its role in establishing the VIE and its ongoing rights and responsibilities.
Removed
Investor rights are usually governed by intercreditor agreements. • Preferred Equity: Real estate preferred equity investments are subordinate to first mortgage loans and are not collateralized by the property underlying the investment.
Added
This assessment includes first, identifying the activities that most significantly impact the VIE’s economic performance; and second, identifying which party, if any, has power over those activities.
Removed
As a holder of preferred equity, we seek to enhance our position with covenants that limit the activities of the entity in which we have an interest and protect our equity by obtaining an exclusive right to control the underlying property after an event of default, should such a default occur on our investment. • Other CRE Investments: To a lesser extent, we may invest in other loans and securities, subject to maintaining our qualification as a REIT, including but not limited to commercial mortgage-backed securities, loans to real estate or hospitality companies, debtor-in-possession loans and selected other income producing equity investments, such as triple net lease equity.
Added
In general, the parties that make the most significant decisions affecting the VIE or have the right to unilaterally remove those decision makers are deemed to have the power to direct the activities of a VIE.
Removed
Ares Commercial Real Estate Management LLC and Ares Management Corporation We are externally managed by our Manager, a subsidiary of Ares Management, pursuant to the terms of the Management Agreement. As of December 31, 2022, Ares Management had over 2,550 employees located in over 30 offices in more than 15 countries.
Added
To assess whether the Company has the obligation to absorb losses of the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE, the Company considers all of its economic interests, including debt and equity investments, servicing fees, and other arrangements deemed to be variable interests in the VIE.
Removed
Since its inception in 1997, Ares Management has adhered to a disciplined investment philosophy that focuses on delivering strong risk-adjusted investment returns throughout market cycles. Ares Management believes each of its distinct but complementary investment groups in Credit, Private Equity, Real Assets, Secondaries and Strategic Initiatives is a market leader based on investment performance.
Added
This assessment requires that the Company applies judgment in determining whether these interests, in the aggregate, are considered potentially significant to the VIE.
Removed
Ares Management was built upon the fundamental principle that each group benefits from being part of the greater whole. Ares Management has advised us that it believes that its people and culture are the most critical strategic drivers of its success as a firm.
Added
Factors considered in assessing significance include: the design of the VIE, including its capitalization structure; subordination of interests; payment priority; relative share of interests held across various classes within the VIE’s capital structure; and the reasons why the interests are held by the Company.
Removed
Ares Management has also advised us that it believes creating a 7 Table of Contents welcoming and inclusive work environment with opportunities for growth and development is essential to attracting and retaining a high-performance team, which is in turn necessary to drive differentiated outcomes.
Added
For VIEs of which the Company is determined to be the primary beneficiary, all of the underlying assets, liabilities, equity, revenue and expenses of the structures are consolidated into the Company’s consolidated financial statements.
Removed
Ares Management believes that the unique culture, which centers upon values of collaboration, responsibility, entrepreneurialism, self-awareness and trustworthiness, makes it a preferred place for top talent at all levels to build a long-term career within the alternative asset management industry.
Added
The Company performs an ongoing reassessment of: (1) whether any entities previously evaluated under the majority voting interest framework have become VIEs, based on certain events, and therefore are subject to the VIE consolidation framework, and (2) whether changes in the facts and circumstances regarding its involvement with a VIE cause the Company’s consolidation conclusion regarding the VIE to change.
Removed
Ares Management invests heavily in its human capital efforts, including (i) talent management, (ii) diversity, equity and inclusion, (iii) employee health and wellness, (iv) flexibility and (v) philanthropy. We do not currently have any employees and rely on our Manager to provide us with investment advisory services.
Added
See Note 16 included in these consolidated financial statements for further discussion of the Company’s VIEs. Cash and Cash Equivalents Cash and cash equivalents include funds on deposit with financial institutions, including demand deposits with financial institutions.
Removed
These services are provided by individuals who are employees of our Manager or one of its affiliates and each of our officers is an employee of our Manager or one of its affiliates. Our executive officers also serve as officers of our Manager and certain of its affiliates.
Added
Cash and short‑term investments with an original maturity of three months or less when acquired are considered cash and cash equivalents for the purpose of the consolidated balance sheets and statements of cash flows.
Removed
Our Manager is responsible for administering our business activities and day-to-day operations and providing us our executive management team, principal investment team and appropriate support personnel. Pursuant to the Management Agreement, our Manager is entitled to receive a base management fee, an incentive fee and expense reimbursements.
Added
Concentration of Credit Risk Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents, loans held for investment, available-for-sale debt securities and interest receivable. The Company places its cash and cash equivalents with financial institutions and, at times, cash held may exceed the Federal Deposit Insurance Corporation insured limit.
Removed
In addition, under certain circumstances, our Manager will be entitled to receive a termination fee if the Management Agreement is terminated.
Added
The Company has exposure to credit risk on its loans held for investment and available-for-sale debt securities. The Company and the Company’s Manager seek to manage credit risk by performing due diligence prior to origination or acquisition and through the use of non‑recourse financing, when and where available and appropriate.
Removed
Our Manager, including our officers and employees of our Manager and its affiliates, may also receive grants of equity-based awards pursuant to the Ares Commercial Real Estate Corporation Amended and Restated Equity Incentive Plan, as amended (the “Amended and Restated 2012 Equity Incentive Plan”).
Added
Loans Held for Investment The Company originates CRE debt and related instruments generally to be held for investment. Loans that are held for investment are carried at cost, net of unamortized purchase discounts, deferred loan fees and origination costs and cost-recovery proceeds (the “carrying value”). Loans are generally collateralized by real estate.
Removed
For more information on the terms of the Management Agreement, see Note 14 to our consolidated financial statements included in this annual report on Form 10-K. MARKET OPPORTUNITY We believe market conditions are favorable for well capitalized, disciplined and scaled direct lenders with broad and flexible product offerings.

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Item 1A. Risk Factors

Risk Factors — what could go wrong, per management

182 edited+80 added−27 removed439 unchanged
Biggest changeRisk Factors SUMMARY OF RISK FACTORS The following is a summary of the principal risks that you should carefully consider before investing in our securities: • A global economic slowdown, a recession or declines in real estate values could impair our investments and have a significant adverse effect on our business, financial condition and results of operations; • Changes in interest rates, credit spreads and the market value of our investments could adversely impact our financial condition; • Our board of directors may change our investment strategy or guidelines, financing strategy or leverage policies, and such changes could affect our financial condition, results of operations and the market price of our common stock; • Our failure to remain qualified as a REIT would subject us to United States federal income tax and potentially state and local tax, and would adversely affect our operations and the market price of our common stock; • We are dependent upon certain key personnel of our Manager for our future success and upon their access to other Ares investment professionals; • Our indebtedness may subject us to increased risk of loss and may reduce cash available for distribution; • There are significant potential conflicts of interest that could impact our investment returns; • We operate in a competitive market for investment opportunities and loan originations, and competition may limit our ability to originate or acquire assets on attractive terms; • We are exposed to risks associated with changes in interest rates, including the transition away from LIBOR and the adoption of alternative reference rates; • We are subject to the risk of health pandemics or epidemics, including the ongoing COVID-19 pandemic; • Our mezzanine loan assets involve greater risks of loss than senior loans secured by real properties, and investments in preferred equity involve a greater risk of loss than traditional debt financing; • Our loans and investments expose us to risks associated with debt-oriented real estate investments generally; • Our investments may be concentrated and could be subject to risk of default; • The lack of liquidity in our investments may adversely affect our business; • We will allocate our available capital without input from our stockholders; • We are subject to various risks related to the ownership of certain real property; • We may experience a decline in the fair value of our assets; • We have not established a minimum distribution payment level to our stockholders and we may be unable to generate sufficient cash flows from our operations to make distributions to our stockholders at any time in the future; • Maintenance of our exemption from registration under the 1940 Act imposes significant limits on our operations; and • Complying with REIT requirements may cause us to forego otherwise attractive investment opportunities. 11 Table of Contents RISK FACTORS You should carefully consider these risk factors, together with all of the other information included in this annual report on Form 10-K, including our consolidated financial statements and the related notes thereto, before you decide whether to make an investment in our securities.
Biggest changeRisk Factors SUMMARY OF RISK FACTORS The following is a summary of the principal risks that you should carefully consider before investing in our securities: • A global economic slowdown, a recession or declines in real estate values could impair our investments and have a significant adverse effect on our business, financial condition and results of operations; • Macroeconomic conditions, including those adversely impacting office properties, have resulted in increases to our current expected credit loss reserve and could have an adverse effect on our financial results; • Changes in interest rates, credit spreads and the market value of our investments could adversely impact our financial condition; • Our board of directors may change our investment strategy or guidelines, financing strategy or leverage policies, and such changes could affect our financial condition, results of operations and the market price of our common stock; • We are dependent upon certain key personnel of our Manager for our future success and upon their access to other Ares investment professionals; • Our indebtedness may subject us to increased risk of loss and may reduce cash available for distribution; • There are significant potential conflicts of interest that could impact our investment returns; • We operate in a competitive market for investment opportunities and loan originations, and competition may limit our ability to originate or acquire assets on attractive terms; • Our mezzanine loan assets involve greater risks of loss than senior loans secured by real properties, and investments in preferred equity involve a greater risk of loss than traditional debt financing; • Our loans and investments expose us to risks associated with debt-oriented real estate investments generally; • Our investments may be concentrated and could be subject to risk of default; • The lack of liquidity in our investments may adversely affect our business; • We will allocate our available capital without input from our stockholders; • We are subject to various risks related to the ownership of certain real property; • We may experience a decline in the fair value of our assets; • We have not established a minimum distribution payment level to our stockholders and we may be unable to generate sufficient cash flows from our operations to make distributions to our stockholders at any time in the future; • Maintenance of our exemption from registration under the 1940 Act imposes significant limits on our operations; • Our failure to remain qualified as a REIT would subject us to United States federal income tax and potentially state and local tax, and could result in us facing a substantial tax liability, which would reduce the amount of cash available for distribution to our shareholders, and otherwise adversely affect our operations and the market price of our common stock; • Complying with REIT requirements may cause us to forego otherwise attractive investment opportunities; and • We are subject to risks from major public health crises like COVID-19, which have affected and could again affect various aspects of our business. 10 Table of Contents RISK FACTORS You should carefully consider these risk factors, together with all of the other information included in this annual report on Form 10-K, including our consolidated financial statements and the related notes thereto, before you decide whether to make an investment in our securities.
As a result, these investments should be expected to have a higher risk of default and loss than investment grade rated assets. Any loss we incur may be significant and may reduce distributions to our stockholders and adversely affect the market value of our common stock.
As a result, these investments should be expected to have a higher risk of default and loss than investment grade rated assets. Any loss we incur as a result may be significant and may reduce distributions to our stockholders and adversely affect the market value of our common stock.
RISKS RELATED TO OUR COMMON STOCK The market price of our common stock may fluctuate significantly. Our common stock is listed on the New York Stock Exchange (“NYSE”) under the trading symbol “ACRE.” Recently, the global capital and credit markets have experienced increased volatility.
RISKS RELATED TO OUR COMMON STOCK The market price of our common stock may fluctuate significantly. Our common stock is listed on the New York Stock Exchange (“NYSE”) under the trading symbol “ACRE.” Recently, our common stock and the global capital and credit markets have experienced increased volatility.
Although REITs generally receive better tax treatment than entities taxed as regular corporations, it is possible that future legislation would result in a REIT having fewer tax advantages, and it could become more advantageous for a company that invests in real estate to elect to be treated for United States federal income tax purposes as a corporation.
Although REITs generally receive better tax treatment than entities taxed as regular corporations, it is possible that future legislation would result in a REIT having fewer tax advantages, and it could become more advantageous for a company that invests in real estate to elect to be treated for United States federal income tax purposes as a regular corporation.
If (a) we are a “pension-held REIT,” (b) a tax-exempt stockholder has incurred (or is deemed to have incurred) debt to purchase or hold our common stock or (c) a holder of common stock is a certain type of tax-exempt stockholder, dividends on, and gains recognized on the sale of, common stock by such tax-exempt stockholder may be subject to United States federal income tax as unrelated business taxable income under the Code.
However, if (a) we are a “pension-held REIT,” (b) a tax-exempt stockholder has incurred (or is deemed to have incurred) debt to purchase or hold our common stock or (c) a holder of common stock is a certain type of tax-exempt stockholder, dividends on, and gains recognized on the sale of, our common stock by such tax-exempt stockholder may be subject to United States federal income tax as unrelated business taxable income under the Code.
Furthermore, any REIT in which we invest directly or indirectly, including the REIT through which we own our interest in the CLO Securitizations, ACRC 2017-FL3 Holder REIT LLC (“FL3 REIT”), is independently subject to, and must comply with, the same REIT requirements that we must satisfy in order to qualify as a REIT, together with all other rules applicable to REITs.
Any REIT in which we invest directly or indirectly, including the REIT through which we own our interest in the CLO Securitizations, ACRC 2017-FL3 Holder REIT LLC (“FL3 REIT”), is independently subject to, and must comply with, the same REIT requirements that we must satisfy in order to qualify as a REIT, together with all other rules applicable to REITs.
Some of the factors that could negatively affect the market price of our common stock include: • our actual or projected operating results, financial condition, cash flows and liquidity, or changes in business strategy or prospects; • actual or perceived conflicts of interest with our Manager or Ares Management and individuals, including our executives; • equity issuances by us, or share resales by our stockholders, or the perception that such issuances or resales may occur; • loss of a major funding source; • actual or anticipated accounting problems; • publication of research reports about us or the real estate industry; 30 Table of Contents • changes in market valuations of similar companies; • adverse market reaction to any increased indebtedness we incur in the future; • additions to or departures of our Manager’s or Ares Management’s key personnel; • speculation in the press or investment community; • increases in market interest rates and widening of market credit spreads, which may lead investors to demand a higher distribution yield for our common stock and would result in increased interest expenses on our debt; • failure to maintain our REIT qualification or exemption from the 1940 Act; • price and volume fluctuations in the overall stock market from time to time; • general market and economic conditions, and trends, including concerns regarding a recession and the current state of the credit and capital markets; • significant volatility in the market price and trading volume of securities of publicly traded REITs or other companies in our sector, which are not necessarily related to the operating performance of these companies; • changes in law, regulatory policies or tax guidelines, or interpretations thereof, particularly with respect to REITs; • changes in the value of our portfolio; • any shortfall in revenue or net income or any increase in losses from levels expected by investors or securities analysts; • operating performance of companies comparable to us; • short-selling pressure with respect to shares of our common stock or REITs generally; • uncertainty surrounding the continued strength of the United States economy; and • concerns regarding volatility in the United States and global financial markets.
Some of the factors that could negatively affect the market price of our common stock include: • our actual or projected operating results, financial condition, cash flows and liquidity, or changes in business strategy or prospects; • actual or perceived conflicts of interest with our Manager or Ares Management and individuals, including our executives; • equity issuances by us, or share resales by our stockholders, or the perception that such issuances or resales may occur; • loss of a major funding source; • actual or anticipated accounting problems; • publication of research reports about us or the real estate industry; 31 Table of Contents • changes in market valuations of similar companies; • adverse market reaction to any increased indebtedness we incur in the future; • additions to or departures of our Manager’s or Ares Management’s key personnel; • speculation in the press or investment community; • fluctuations in market interest rates and widening of market credit spreads, which may lead investors to demand a higher distribution yield for our common stock and could result in increased interest expenses on our debt; • failure to maintain our REIT qualification or exemption from the 1940 Act; • price and volume fluctuations in the overall stock market from time to time; • general market and economic conditions, and trends, including concerns regarding a recession and the current state of the credit and capital markets; • significant volatility in the market price and trading volume of securities of publicly traded REITs or other companies in our sector, which are not necessarily related to the operating performance of these companies; • changes in law, regulatory policies or tax guidelines, or interpretations thereof, particularly with respect to REITs; • changes in the value of our portfolio; • any shortfall in revenue or net income or any increase in losses from levels expected by investors or securities analysts; • operating performance of companies comparable to us; • short-selling pressure with respect to shares of our common stock or REITs generally; • uncertainty surrounding the continued strength of the United States economy; and • concerns regarding volatility in the United States and global financial markets.
Incurring substantial debt could subject us to many risks that, if realized, would materially and adversely affect us, including the risk that: • our cash flow from operations may be insufficient to make required payments of principal of and interest on the debt or we may fail to comply with all of the other covenants contained in the debt, which is likely to result in 15 Table of Contents (a) acceleration of such debt (and any other debt containing a cross-default or cross-acceleration provision) that we may be unable to repay from internal funds or to refinance on favorable terms, or at all, (b) our inability to borrow unused amounts under our financing arrangements, even if we are current in payments on borrowings under those arrangements, and/or (c) the loss of some or all of our assets to foreclosure or sale; • our debt may increase our vulnerability to adverse economic and industry conditions with no assurance that investment yields will increase with higher financing costs; • we may be required to dedicate a substantial portion of our cash flow from operations to payments on our debt, thereby reducing funds available for operations, future business opportunities, stockholder distributions or other purposes; • we are not able to refinance debt that matures prior to the investment it was used to finance on favorable terms, or at all; and • as the holder of the subordinated classes of securitizations, we may be required to absorb losses.
Incurring substantial debt could subject us to many risks that, if realized, would materially and adversely affect us, including the risk that: • our cash flow from operations may be insufficient to make required payments of principal of and interest on the debt or we may fail to comply with all of the other covenants contained in the debt, which is likely to result in (a) acceleration of such debt (and any other debt containing a cross-default or cross-acceleration provision) that we may be unable to repay from internal funds or to refinance on favorable terms, or at all, (b) our inability to borrow unused amounts under our financing arrangements, even if we are current in payments on borrowings under those arrangements, and/or (c) the loss of some or all of our assets to foreclosure or sale; • our debt may increase our vulnerability to adverse economic and industry conditions with no assurance that investment yields will increase with higher financing costs; • we may be required to dedicate a substantial portion of our cash flow from operations to payments on our debt, thereby reducing funds available for operations, future business opportunities, stockholder distributions or other purposes; • we are not able to refinance debt that matures prior to the investment it was used to finance on favorable terms, or at all; and • as the holder of the subordinated classes of securitizations, we may be required to absorb losses.
In addition, interest rate hedging may fail to protect or could adversely affect us because, among other things: • interest rate hedging can be expensive, particularly during periods of rising and volatile interest rates; • available interest rate hedges may not correspond directly with the interest rate risk for which protection is sought; • due to a credit loss, the duration of the hedge may not match the duration of the related liability; • we may have to limit our use of hedging techniques that might otherwise be advantageous or implement those hedges through a TRS to comply with REIT requirements, increasing the cost of our hedging activities because our TRSs would be subject to tax on gains and hedging-related losses in our TRSs will generally not provide any tax benefit, except for losses carried forward against future taxable income in the TRSs; • legal, tax and regulatory changes could occur and may adversely affect our ability to pursue our hedging strategies and/or increase the costs of implementing such strategies; • the credit quality of the hedging counterparty owing money on the hedge may be downgraded to such an extent that it impairs our ability to sell or assign our side of the hedging transaction; and • the hedging counterparty owing money in the hedging transaction may default on its obligation to pay.
In addition, interest rate hedging may fail to protect or could adversely affect us because, among other things: • interest rate hedging can be expensive, particularly during periods of rising and volatile interest rates; • available interest rate hedges may not correspond directly with the interest rate risk for which protection is sought; • due to a credit loss, the duration of the hedge may not match the duration of the related liability; 20 Table of Contents • we may have to limit our use of hedging techniques that might otherwise be advantageous or implement those hedges through a TRS to comply with REIT requirements, increasing the cost of our hedging activities because our TRSs would be subject to tax on gains and hedging-related losses in our TRSs will generally not provide any tax benefit, except for losses carried forward against future taxable income in the TRSs; • legal, tax and regulatory changes could occur and may adversely affect our ability to pursue our hedging strategies and/or increase the costs of implementing such strategies; • the credit quality of the hedging counterparty owing money on the hedge may be downgraded to such an extent that it impairs our ability to sell or assign our side of the hedging transaction; and • the hedging counterparty owing money in the hedging transaction may default on its obligation to pay.
No assurance can be given that we will be able to obtain any such financing (including any replacement financing for our current financing arrangements) on favorable terms or at all. Lender consent rights under our warehouse facilities may limit our ability to originate or acquire assets.
No assurance can be given that we will be able to obtain any such financing (including any replacement financing for our current financing arrangements) on favorable terms or at all. Lender consent rights under warehouse facilities we may utilize may limit our ability to originate or acquire assets.
These regulations, and other proposed regulations affecting securitization, could alter the structure of securitizations in the future, pose additional risks to our participation in future securitizations or reduce or eliminate the economic incentives for participating in future securitizations, increase the costs associated with our origination, securitization or acquisition activities, or otherwise increase the risks or costs of our doing business.
These regulations, and other proposed regulations affecting securitizations, could alter the structure of securitizations in the future, pose additional risks to our participation in future securitizations or reduce or eliminate the economic incentives for participating in future securitizations, increase the costs associated with our origination, securitization or acquisition activities, or otherwise increase the risks or costs of us doing business.
Tenants of properties we may own may elect to not renew their leases, or to renew them for less space than they currently occupy, which could increase vacancy, place downward pressure on occupancy, rental rates and income and property valuation.
Additionally, tenants of properties we may own may elect to not renew their leases or to renew them for less space than they currently occupy, which could increase vacancy, place downward pressure on occupancy, rental rates and income and property valuation.
If market interest rates continue to increase, prospective investors may demand a higher distribution rate or seek alternative investments paying higher dividends or interest. As a result, interest rate fluctuations and conditions in the capital markets can affect the market value of our common stock.
If market interest rates continue to increase, prospective investors may demand a higher distribution rate or seek alternative investments paying higher dividends or interest. As a result, interest rate fluctuations and conditions in the capital markets affect the market value of our common stock.
If we cannot meet these requirements, the lender could accelerate our indebtedness, increase the interest rate on advanced funds and terminate our ability to borrow funds from it, which could materially and adversely affect our financial condition and ability to implement our investment strategy.
If we cannot meet these requirements, the lender could accelerate our indebtedness, increase the interest rate on advanced funds or terminate our ability to borrow funds from it, which could materially and adversely affect our financial condition and ability to implement our investment strategy.
In periods of declining interest rates and/or credit spreads, prepayment rates on loans generally increase. Borrowers may seek to make prepayments as a result of LIBOR, SOFR or other interest rate floors in our loans which could result in higher interest expense.
In periods of declining interest rates and/or credit spreads, prepayment rates on loans generally increase. Borrowers may seek to make prepayments as a result of SOFR or other interest rate floors in our loans which could result in higher interest expense.
We conduct our operations in a manner designed so that we do not come within the definition of 34 Table of Contents an investment company because less than 40% of the value of our adjusted total assets on an unconsolidated basis consist of “investment securities.” As such, the securities issued by our wholly-owned or other majority-owned subsidiaries that are exempted from the definition of “investment company” based on Section 3(c)(1) or 3(c)(7) of the 1940 Act, together with any other investment securities we may own, may not have a value in excess of 40% of the value of our adjusted total assets on an unconsolidated basis.
We conduct our operations in a manner designed so that we do not come within the definition of 35 Table of Contents an investment company because less than 40% of the value of our adjusted total assets on an unconsolidated basis consist of “investment securities.” As such, the securities issued by our wholly-owned or other majority-owned subsidiaries that are exempted from the definition of “investment company” based on Section 3(c)(1) or 3(c)(7) of the 1940 Act, together with any other investment securities we may own, may not have a value in excess of 40% of the value of our adjusted total assets on an unconsolidated basis.
As a result, investors in our common stock will invest on a “gross” basis and receive distributions on a “net” basis after expenses, resulting in, among other things, a lower rate of return than one might achieve through direct investments.
As a result, investors in our common stock will invest on a “gross” basis and receive distributions on a “net” basis after expenses, resulting in, among other things, a lower rate of return than investors might achieve through direct investments.
The SEC staff has issued little interpretive guidance with respect to Section 3(c)(6) and any guidance published by the SEC staff could require us to adjust our strategy accordingly. 35 Table of Contents There can be no assurance that the laws and regulations governing the 1940 Act status of REITs, including the SEC or its staff providing more specific or different guidance regarding these exemptions, will not change in a manner that adversely affects our operations.
The SEC staff has issued little interpretive guidance with respect to Section 3(c)(6) and any guidance published by the SEC staff could require us to adjust our strategy accordingly. 36 Table of Contents There can be no assurance that the laws and regulations governing the 1940 Act status of REITs, including the SEC or its staff providing more specific or different guidance regarding these exemptions, will not change in a manner that adversely affects our operations.
United States regulators have elected to implement substantially all of the Basel III standards adopted by the Basel Committee on Banking Supervision several years ago in response to various financial crises and the volatility of financial markets.
United States regulators elected to implement substantially all of the Basel III standards adopted by the Basel Committee on Banking Supervision several years ago in response to various financial crises and the volatility of financial markets.
As a result of this arrangement, our Manager’s interests may be less aligned with our interests. 39 Table of Contents Our Management Agreement with our Manager was not negotiated on an arm’s-length basis and may not be as favorable to us as if it had been negotiated with an unaffiliated third party, and the manner of determining the management fees may not provide sufficient incentive to our Manager to maximize risk-adjusted returns for our portfolio since it is based on our stockholders’ equity per annum and not on our performance.
As a result of this arrangement, our Manager’s interests may be less aligned with our interests. 40 Table of Contents Our Management Agreement with our Manager was not negotiated on an arm’s-length basis and may not be as favorable to us as if it had been negotiated with an unaffiliated third party, and the manner of determining the management fees may not provide sufficient incentive to our Manager to maximize risk-adjusted returns for our portfolio since it is based on our stockholders’ equity per annum and not on our performance.
At the same time, the interest income we earn on our fixed rate investments would not change, the duration and weighted average life of our fixed rate investments would increase and the market value of our fixed rate investments would decrease.
At the same time, the interest income we earn on our fixed rate investments does not change, the duration and weighted average life of our fixed rate investments would increase and the market value of our fixed rate investments would decrease.
Further, when there are turbulent conditions in the real estate markets or distress in the credit markets, the attention of our Manager’s personnel and our executive officers and the resources of Ares Management will also be required by other investment vehicles managed by affiliates of Ares Management. 37 Table of Contents In addition, we offer no assurance that our Manager will remain our investment manager or that we will continue to have access to our Manager’s officers and key personnel.
Further, when there are turbulent conditions in the real estate markets or distress in the credit markets, the attention of our Manager’s personnel and our executive officers and the resources of Ares Management will also be required by other investment vehicles managed by affiliates of Ares Management. 38 Table of Contents In addition, we offer no assurance that our Manager will remain our investment manager or that we will continue to have access to our Manager’s officers and key personnel.
As a result, we could have “excess inclusion income.” Certain categories of stockholders, such as non-United States stockholders eligible for treaty or other benefits, stockholders with net operating losses, and certain tax-exempt stockholders that are subject to unrelated business income tax, could be subject to increased taxes on a portion of their dividend income from us that is attributable to any such excess inclusion income.
As a result of owning a TMP, we could have “excess inclusion income.” Certain categories of stockholders, such as non-United States stockholders eligible for treaty or other benefits, stockholders with net operating losses, and certain tax-exempt stockholders that are subject to unrelated business income tax, could be subject to increased taxes on a portion of their dividend income from us that is attributable to any such excess inclusion income.
See “Risk Factors—Risks Relating to Sources of Financing and Hedging—The Financing Agreements and any bank 12 Table of Contents credit facilities and repurchase agreements that we may use in the future to finance our assets may require us to provide additional collateral or pay down debt” included in this annual report on Form 10-K.
See “Risk Factors—Risks Relating to Sources of Financing and Hedging—The Financing Agreements and any bank 11 Table of Contents credit facilities and repurchase agreements that we may use in the future to finance our assets may require us to provide additional collateral or pay down debt” included in this annual report on Form 10-K.
Similarly, in a period of declining interest rates or tightening credit spreads, our interest income on floating rate investments would decrease, while any decrease in the interest we are charged on our floating rate debt may be subject to floors or the interest rate costs on certain of our borrowings could be fixed at a higher floor and not compensate for such decrease in interest income or tightened credit spread.
Similarly, in a period of declining interest rates or tightening credit spreads, our interest income on floating rate investments decreases, while any decrease in the interest we are charged on our floating rate debt may be subject to floors or the interest rate costs on certain of our borrowings could be fixed at a higher floor and not compensate for such decrease in interest income or tightened credit spread.
All of these factors could have a material adverse effect on any income we could generate, or expenses we could incur, from the ownership of such properties. Moreover, our ability to sell CRE is affected by public perception that banks are inclined to accept large discounts from market value in order to quickly liquidate properties.
All of these factors could have a material adverse effect on any income we could generate, or expenses we could incur, from the ownership of such properties. Moreover, our ability to sell CRE is affected by public perception that lenders are inclined to accept large discounts from market value in order to quickly liquidate properties.
The business combination statute may discourage others from trying to acquire control of us and increase the difficulty of consummating any offer. 33 Table of Contents Stockholders have limited control over changes in our policies and operations. Our board of directors determines our major policies, including with regard to financing, growth, debt capitalization, REIT qualification and distributions.
The business combination statute may discourage others from trying to acquire control of us and increase the difficulty of consummating any offer. 34 Table of Contents Stockholders have limited control over changes in our policies and operations. Our board of directors determines our major policies, including with regard to financing, growth, debt capitalization, REIT qualification and distributions.
This could result in increased risk to the value of our investment portfolio. 40 Table of Contents Our Manager manages our portfolio in accordance with very broad investment guidelines and our board of directors does not approve each investment and financing decision made by our Manager, which may result in us making riskier investments than those currently comprising our investment portfolio.
This could result in increased risk to the value of our investment portfolio. 41 Table of Contents Our Manager manages our portfolio in accordance with very broad investment guidelines and our board of directors does not approve each investment and financing decision made by our Manager, which may result in us making riskier investments than those currently comprising our investment portfolio.
A cyber incident may be caused by disasters, insiders (through inadvertence or with malicious intent) or malicious third parties (including nation-states or nation-state affiliated actors) using sophisticated, targeted methods to circumvent firewalls, encryption and other security defenses, including hacking, fraud, trickery or other forms of deception.
A cyber-attack may be caused by disasters, insiders (through inadvertence or with malicious intent) or malicious third parties (including nation-states or nation-state affiliated actors) using sophisticated, targeted methods to circumvent firewalls, encryption and other security defenses, including hacking, fraud, trickery or other forms of deception.
In a period of rising interest rates or widening credit spreads, our interest expense on floating rate debt would increase, while any additional interest income we earn on our floating rate investments may be subject to caps or may be subject to a tighter credit spread and as a result may not compensate for such increase in interest expense.
In a period of rising interest rates or widening credit spreads, our interest expense on floating rate debt increases, while any additional interest income we earn on our floating rate investments may be subject to caps or may be subject to a tighter credit spread and as a result may not compensate for such increase in interest expense.
Further, declining real estate values may make it difficult for our borrowers to refinance our loans and significantly increase the likelihood that we will incur losses on our loans in the event of default because the value of our collateral may be insufficient to cover our cost on the loan.
Further, declining real estate values have and may continue to make it difficult for our borrowers to refinance our loans and significantly increase the likelihood that we will incur losses on our loans in the event of default because the value of our collateral may be insufficient to cover our cost on the loan.
The CECL Reserve takes into consideration the assumed impact of macroeconomic conditions on CRE properties and is not specific to any loan losses or impairments on our loans held for investment, unless we determine that a specific reserve is warranted for a select asset.
In addition, the CECL Reserve takes into consideration the assumed impact of macroeconomic conditions on CRE properties and is not specific to any loan losses or impairments on our loans held for investment, unless we determine that a specific reserve is warranted for a select asset.
Subject to market conditions and availability, we may incur significant debt through bank credit facilities (including term loans and revolving facilities), repurchase agreements, warehouse facilities and structured financing arrangements, public and private debt issuances and derivative instruments, in addition to transaction or asset specific funding arrangements.
We have and, subject to market conditions and availability, we may continue to incur significant debt through bank credit facilities (including term loans and revolving facilities), repurchase agreements, warehouse facilities and structured financing arrangements, public and private debt issuances and derivative instruments, in addition to transaction or asset specific funding arrangements.
In addition, many of the loans and securities we invest in will not be registered under the relevant securities laws, resulting in a prohibition against their transfer, sale, pledge or disposition except in a transaction that is exempt from the registration requirements of, or otherwise in accordance with, those laws.
In addition, many of the securities we invest in will not be registered under the relevant securities laws, resulting in a prohibition against their transfer, sale, pledge or disposition except in a transaction that is exempt from the registration requirements of, or otherwise in accordance with, those laws.
We may continue to issue additional restricted common stock and other equity-based awards under our Amended and Restated 2012 Equity Incentive Plan. We may continue to issue additional shares in subsequent public offerings or private 31 Table of Contents placements to make new investments or for other purposes.
We may continue to issue additional restricted common stock and other equity-based awards under our Amended and Restated 2012 Equity Incentive Plan. We may continue to issue additional shares in subsequent public offerings or private 32 Table of Contents placements to make new investments or for other purposes.
With the approval of our board of directors, we may provide 36 Table of Contents such indemnification and advance for expenses to any individual who served a predecessor of ours in any of the capacities described above and any employee or agent of ours or a predecessor of ours, including our Manager and its affiliates.
With the approval of our board of directors, we may provide 37 Table of Contents such indemnification and advance for expenses to any individual who served a predecessor of ours in any of the capacities described above and any employee or agent of ours or a predecessor of ours, including our Manager and its affiliates.
Nevertheless, it is possible that we may not be given the opportunity to participate in certain investments made by investment vehicles managed by affiliates of our Manager. In addition, there may be conflicts in the allocation of investment opportunities among us and the investment vehicles managed by affiliates of our Manager. 38 Table of Contents Co-investments.
Nevertheless, it is possible that we may not be given the opportunity to participate in certain investments made by investment vehicles managed by affiliates of our Manager. In addition, there may be conflicts in the allocation of investment opportunities among us and the investment vehicles managed by affiliates of our Manager. 39 Table of Contents Co-investments.
Although as a holder of preferred equity we may enhance our position with covenants that limit the activities of the entity in which we hold an interest and protect our equity by obtaining an exclusive right to control the underlying property after an event of default, should such a default occur on our investment, we would only be able to proceed against the entity in which we hold an interest, and not the property owned by such entity and underlying our investment.
Although as a holder of preferred equity we may enhance our position with covenants that limit the activities of the entity in which we hold an interest and protect our equity by obtaining an exclusive right to control the underlying property after an event of default, should such a default occur on our investment, we would only be able to proceed 27 Table of Contents against the entity in which we hold an interest, and not the property owned by such entity and underlying our investment.
When purchasing securities, we may rely on opinions or advice of counsel for the issuer of such securities, or statements made in related offering documents, for purposes of determining whether such securities represent debt or equity 45 Table of Contents securities for United States federal income tax purposes, and also to what extent those securities constitute real estate assets for purposes of the asset tests and produce qualifying income for purposes of the 75% gross income test.
When purchasing securities, we may rely on opinions or advice of counsel for the issuer of such securities, or statements made in related offering documents, for purposes of determining whether such securities represent debt or equity securities for United States federal income tax purposes, and also to what extent those securities constitute real estate assets for purposes of the asset tests and produce qualifying income for purposes of the 75% gross income test.
In addition, the SEC has also announced that it is working on proposals for mandatory disclosure of certain ESG-related matters, including with respect to corporate and fund carbon emissions, board diversity and human capital management. At this time, there is uncertainty regarding the scope of such proposals or when they would become effective (if at all).
In addition, the SEC has also announced that it is continuing to work on proposals for mandatory disclosure of certain ESG-related matters, including with respect to corporate and fund carbon emissions, board diversity and human capital management. At this time, there is uncertainty regarding the scope of such proposals or when they would become effective (if at all).
The efficient operation of our business is dependent on computer hardware and software systems, as well as data processing systems and the secure processing, storage and transmission of information, all of which are potentially vulnerable to security breaches and cyber incidents or other data security breaches.
The efficient operation of our business is dependent on computer hardware and software systems, as well as data processing systems and the secure processing, storage and transmission of information, all of which are potentially vulnerable to security breaches and cyber-attacks or other security breaches.
The current term of our Management Agreement expires on April 25, 2023. Thereafter, the Management Agreement automatically renews for one-year terms unless terminated upon 180 days’ written notice prior to the expiration of the current term in accordance with its terms.
The current term of our Management Agreement expires on April 25, 2024. Thereafter, the Management Agreement automatically renews for one-year terms unless terminated upon 180 days’ written notice prior to the expiration of the current term in accordance with its terms.
In addition, if a significant number of our stockholders determine to sell shares of our common stock in order to pay taxes owed on dividend income, such sale may put downward pressure on the market price of our common stock. 46 Table of Contents Various tax aspects of such a taxable cash/stock distribution are uncertain and have not yet been addressed by the IRS.
In addition, if a significant number of our stockholders determine to sell shares of our common stock in order to pay taxes owed on dividend income, such sale may put downward pressure on the market price of our common stock. Various tax aspects of such a taxable cash/stock distribution are uncertain and have not yet been addressed by the IRS.
We are affected by the fiscal and monetary policies of the United States Government and its agencies, including the policies of the Federal Reserve, which regulates the supply of money and credit in the United States. Changes in fiscal and monetary policies are beyond our control and are difficult to predict.
We are affected by the fiscal and monetary policies of the United States Government and its agencies, including the policies of the United States Federal Reserve (the “Federal Reserve”), which regulates the supply of money and credit in the United States. Changes in fiscal and monetary policies are beyond our control and are difficult to predict.
A projection of an economic downturn, for example, could cause a decline in the price of lower credit quality CMBS and CLOs because the ability of borrowers to make principal and interest payments on the mortgages or loans underlying such securities may be impaired, as had occurred throughout the global financial crisis.
A projection of an economic downturn, for example, could cause a decline in the price of lower credit quality 28 Table of Contents CMBS and CLOs because the ability of borrowers to make principal and interest payments on the mortgages or loans underlying such securities may be impaired, as had occurred throughout the global financial crisis.
The current term of our Management Agreement expires on April 25, 2023, with automatic one-year term renewals thereafter. However, our Manager may decline to renew the Management Agreement with 180 days’ written notice prior to the expiration of the renewal term.
The current term of our Management Agreement expires on April 25, 2024, with automatic one-year term renewals thereafter. However, our Manager may decline to renew the Management Agreement with 180 days’ written notice prior to the expiration of the renewal term.
The documents that govern the Financing Agreements and our securitizations contain, and any additional lending facilities would be expected to contain, customary negative covenants and other financial and operating covenants, that among other things, may affect our ability to incur additional debt, make certain investments or acquisitions, reduce liquidity below certain levels, make distributions to our stockholders, redeem debt or equity securities, make other restricted payments, impose asset concentration limits, impact our flexibility to determine our operating policies and investment strategies.
The documents that govern the Financing Agreements and our securitizations contain, and any additional lending facilities would be expected to contain, customary negative covenants and 17 Table of Contents other financial and operating covenants, that among other things, may affect our ability to incur additional debt, make certain investments or acquisitions, reduce liquidity below certain levels, make distributions to our stockholders, redeem debt or equity securities, make other restricted payments, impose asset concentration limits, impact our flexibility to determine our operating policies and investment strategies.
In the event of the bankruptcy of a mortgage loan borrower, the mortgage loan to such borrower will be deemed to be secured only to the extent of the value of the underlying collateral at the time of bankruptcy (as determined by the bankruptcy court), and the lien securing the mortgage loan will be subject to the avoidance powers of the bankruptcy trustee or debtor-in-possession to the extent the lien is unenforceable under state law.
In the event of the bankruptcy of a mortgage loan borrower, the mortgage loan to such borrower will be deemed to be secured only to the extent of the value of the underlying collateral at the time of bankruptcy (as determined by the bankruptcy court), and the lien securing the mortgage loan will be subject to the avoidance powers of the bankruptcy trustee or 24 Table of Contents debtor-in-possession to the extent the lien is unenforceable under state law.
We invest in and may continue to invest in real estate preferred equity, which involves a higher degree of risk than first mortgage loans due to a variety of factors, including the risk that, similar to mezzanine loans, such investments are subordinate 26 Table of Contents to first mortgage loans and are not collateralized by property underlying the investment.
We invest in and may continue to invest in real estate preferred equity, which involves a higher degree of risk than first mortgage loans due to a variety of factors, including the risk that, similar to mezzanine loans, such investments are subordinate to first mortgage loans and are not collateralized by property underlying the investment.
Therefore, in order to avoid the prohibited transactions tax, we may choose not to engage in certain sales of loans, other than through a TRS, and we may be required to limit the structures we use for our securitization transactions, even though such sales or structures might otherwise be beneficial for us.
Therefore, in order to avoid the prohibited transactions tax, we may choose not to engage in certain sales of loans, other than through a 45 Table of Contents TRS, and we may be required to limit the structures we use for our securitization transactions, even though such sales or structures might otherwise be beneficial for us.
If we are unable to obtain and renew short-term facilities or to consummate securitizations to finance our investments on a long-term basis, we may be required to seek other forms of potentially less attractive financing or to liquidate assets at an inopportune time or price.
If we are unable to obtain and renew short- 19 Table of Contents term facilities or to consummate securitizations to finance our investments on a long-term basis, we may be required to seek other forms of potentially less attractive financing or to liquidate assets at an inopportune time or price.
As a result, we expect many of our investments will be illiquid, and if we are required to liquidate all or a portion of our portfolio quickly, for example as a result of margin calls, we may realize significantly less than the value at which we have previously recorded investments.
As a 22 Table of Contents result, we expect many of our investments will be illiquid, and if we are required to liquidate all or a portion of our portfolio quickly, for example, as a result of margin calls, we may realize significantly less than the value at which we have previously recorded investments.
Accordingly, we will not receive any proceeds from repayment of loans in commercial 24 Table of Contents mortgage-backed securities or collateralized loan obligations until all senior notes are repaid in full, which could materially and adversely impact our liquidity, capital resources and financial condition.
Accordingly, we will not receive any proceeds from repayment of loans in commercial mortgage-backed securities or collateralized loan obligations until all senior notes are repaid in full, which could materially and adversely impact our liquidity, capital resources and financial condition.
It is possible, however, that the IRS could assert that we did not own the assets during the term of the repurchase agreement, in which case we could fail to qualify as a REIT if our remaining assets do not satisfy the asset tests or if our income does not satisfy the gross income tests.
It is possible, however, that the IRS could assert that we did not own the assets during the term of the repurchase agreement, in which case we 46 Table of Contents could fail to qualify as a REIT if our remaining assets do not satisfy the asset tests or if our income does not satisfy the gross income tests.
Such structures may expose us to risks which could result in losses. 18 Table of Contents We have utilized and, if available, we may utilize in the future non-recourse long-term securitizations of our investments in mortgage loans, especially loan originations, if and when they become available.
Such structures may expose us to risks which could result in losses. We have utilized and, if available, we may utilize in the future non-recourse long-term securitizations of our investments in mortgage loans, especially loan originations, if and when they become available.
In the event of default and the 27 Table of Contents exhaustion of any equity support, reserve fund, letter of credit, mezzanine loans or B-Notes, and any classes of securities junior to those in which we invest, we will not be able to recover all of our investment in the securities we purchase.
In the event of default and the exhaustion of any equity support, reserve fund, letter of credit, mezzanine loans or B-Notes, and any classes of securities junior to those in which we invest, we will not be able to recover any or all of our investment in the securities we purchase.
We may need to foreclose on loans that are in default, which could result in losses. We may find it necessary to foreclose on loans that are in default. Foreclosure processes are often lengthy and expensive.
We may need to foreclose on loans that are in default, which could result in losses. We have found and may find it necessary to foreclose on loans that are in default. Foreclosure processes are often lengthy and expensive.
Net operating income of an income-producing property can be adversely affected by, among other things, the following: • tenant mix; • success of tenant businesses; • property management decisions; • property location, condition and design; • competition from comparable types of properties; • changes in laws that increase operating expenses or limit rents that may be charged; • changes in national, regional or local economic conditions, including as a result of a potential recession, and/or specific industry segments, including the credit and securitization markets; • declines in regional or local real estate values; • changes in local markets in which our tenants operate, including changes in oil and gas prices; • declines in regional or local rental or occupancy rates; • increases in interest rates, real estate tax rates and other operating expenses; • costs of remediation and liabilities associated with environmental conditions; • the potential for uninsured or underinsured property losses; • the potential for casualty or condemnation loss; 23 Table of Contents • changes in governmental laws and regulations, including fiscal policies, zoning ordinances and environmental legislation and the related costs of compliance; • changes in supply (resulting from the recent growth in CRE debt funds or otherwise) and demand; and • acts of God, pandemics, terrorist attacks, social unrest and civil disturbances.
Net operating income of an income-producing property can be adversely affected by, among other things, the following: • tenant mix; • success of tenant businesses; • property management decisions; • property location, condition and design; • competition from comparable types of properties; • changes in laws that increase operating expenses or limit rents that may be charged; • changes in national, regional or local economic conditions, including as a result of a potential recession, and/or specific industry segments, including the credit and securitization markets; • declines in regional or local real estate values; • changes in local markets in which our tenants operate, including changes in oil and gas prices; • declines in regional or local rental or occupancy rates; • increases in interest rates, real estate tax rates and other operating expenses, including the cost of insurance; • costs of remediation and liabilities associated with environmental conditions; • the potential for uninsured or underinsured property losses; • the potential for casualty or condemnation loss; • changes in governmental laws and regulations, including fiscal policies, zoning ordinances and environmental legislation and the related costs of compliance; • changes in supply (resulting from the recent growth in CRE debt funds or otherwise) and demand (resulting from increases in remote working arrangements or otherwise); and • acts of God, pandemics, terrorist attacks, social unrest and civil disturbances, which may decrease the availability of or increase the cost of insurance or result in uninsured losses.
In the event of any default under transitional loans that may be held by us, we bear the risk of loss of principal and non-payment of interest and fees to the extent of any deficiency between the value of the mortgage 25 Table of Contents collateral and the principal amount and unpaid interest of the transitional loan.
In the event of any default under transitional loans that may be held by us, we bear the risk of loss of principal and non-payment of interest and fees to the extent of any deficiency between the value of the mortgage collateral and the principal amount and unpaid interest of the transitional loan.
In any reorganization or liquidation proceeding relating to our investments, we may lose our entire investment, may be required to accept cash or securities with a value less than our original 28 Table of Contents investment and/or may be required to accept payment over an extended period of time.
In any reorganization or liquidation proceeding relating to our investments, we may lose our entire investment, may be required to accept cash or securities with a value less than our original investment and/or may be required to accept payment over an extended period of time.
Our investments in construction loans require us to make estimates about the fair value of land improvements that may be challenged by the IRS. 29 Table of Contents We may invest in construction loans, the interest from which would be qualifying income for purposes of the gross income tests applicable to REITs, provided that the loan value of the real property securing the construction loan was equal to or greater than the highest outstanding principal amount of the construction loan during any taxable year.
Our investments in construction loans require us to make estimates about the fair value of land improvements that may be challenged by the IRS. 30 Table of Contents We invest in construction loans, the interest from which could generally be qualifying income for purposes of the gross income tests applicable to REITs, provided that the loan value of the real property securing the construction loan was equal to or greater than the highest outstanding principal amount of the construction loan during any taxable year.
Furthermore, competition for originations of and investments in our target investments may lead to the price of such assets increasing, which may further limit our ability to generate desired returns. We cannot assure you that the competitive pressures we face will not have a material adverse effect on our business, financial condition and results of operations.
Furthermore, competition for originations of and investments in our target investments may lead to the yield on such assets decreasing, which may further limit our ability to generate desired returns. We cannot assure you that the competitive pressures we face will not have a material adverse effect on our business, financial condition and results of operations.
A cyber incident is considered to be any adverse event that threatens the confidentiality, integrity or availability of the information resources of us or our borrowers.
A cyber-attack is considered to be any adverse event that threatens the confidentiality, integrity or availability of the information resources of us or our borrowers.
Section 3(a)(1)(C) of the 1940 Act defines an investment company as any issuer that is engaged or proposes to engage in the business of investing, reinvesting, owning, holding or trading in securities and owns or proposes to acquire investment securities having a value exceeding 40% of the value of the issuer’s total assets (exclusive of United States Government securities and cash items) on an unconsolidated basis, or the “40% test.” The term “investment securities” generally includes all securities except United States Government securities and securities of majority-owned subsidiaries that are not themselves investment companies and are not relying on the exemption from the definition of “investment company” under Sections 3(c)(1) or 3(c)(7) of the 1940 Act.
Section 3(a)(1)(C) of the 1940 Act defines an investment company as any issuer that is engaged or proposes to engage in the business of investing, reinvesting, owning, holding or trading in securities and owns or proposes to acquire investment securities having a value exceeding 40% of the value of the issuer’s total assets (exclusive of United States Government securities and cash items) on an unconsolidated basis, or the “40% test.” The term “investment securities” as used in this annual report on Form 10-K generally includes all securities except United States Government securities and securities of majority-owned subsidiaries that are not themselves investment companies and are not relying on the exemption from the definition of “investment company” under Sections 3(c)(1) or 3(c)(7) of the 1940 Act.
If we are unable to successfully integrate new assets and manage our growth, our results of operations and financial condition may suffer . We have in the past and may in the future significantly increase the size and/or change the mix of our portfolio of assets.
If we are unable to successfully integrate new assets and manage our growth, our results of operations and financial condition may suffer . 25 Table of Contents We have in the past and may in the future significantly increase the size and/or change the mix of our portfolio of assets.
For any period during which our investments are not match-funded, the income earned on such investments may respond more slowly to interest rate and credit spread fluctuations than the cost of our borrowings.
For any period during 16 Table of Contents which our investments are not match-funded, the income earned on such investments may respond more slowly to interest rate and credit spread fluctuations than the cost of our borrowings.
We may use hedging instruments in conjunction with our investment portfolio and related borrowings to reduce or mitigate risks associated with changes in interest rates, mortgage spreads, yield curve shapes, currency fluctuations and market volatility.
We use, from time to time, hedging instruments in conjunction with our investment portfolio and related borrowings to reduce or mitigate risks associated with changes in interest rates, mortgage spreads, yield curve shapes, currency fluctuations and market volatility.
If the current macroeconomic environment worsens and an economic slowdown or a recession occurs or real estate values continue to decline, our investments could be impaired, which would materially and adversely affect our results of operations, financial condition, liquidity and business and our ability to pay dividends to stockholders. Rising interest rates could adversely impact our financial condition.
If the current macroeconomic environment worsens and an economic slowdown or a recession occurs or real estate values continue to decline, our investments could be impaired, which would materially and adversely affect our results of operations, financial condition, liquidity and business and our ability to pay dividends to stockholders.
Although we have made and intend to continue to make distributions sufficient to meet the annual 43 Table of Contents distribution requirements and to avoid United States federal income taxes on our earnings while we qualify as a REIT, it is possible that we might not always be able to do so.
Although we have made and intend to continue to make distributions sufficient to meet the annual distribution requirements and to avoid United States federal income taxes on our earnings while we qualify as a REIT, it is possible that we might not always be able to do so.
We have structured and intend to continue structuring our activities in a manner designed to satisfy all the requirements for qualification as a REIT and believe that we have qualified as a REIT since the year of our initial election.
We have structured and intend to continue structuring our activities in a manner designed to satisfy all the requirements 43 Table of Contents for qualification as a REIT and believe that we have qualified as a REIT since the year of our initial election.
Until appropriate investments can be identified, our Manager may invest our available capital in interest-bearing short-term investments, including money market accounts or funds, commercial mortgage-backed securities, or corporate bonds, 21 Table of Contents which are consistent with our intention to qualify as a REIT.
Until appropriate investments can be identified, our Manager may invest our available capital in interest-bearing short-term investments, including money market accounts or funds, commercial mortgage-backed securities, or corporate bonds, which are consistent with our intention to qualify as a REIT.
Our loans held for investment are carried at cost, net of unamortized loan fees and origination costs, however, under the CECL methodology we adopted pursuant to Accounting Standards Update No. 2016-13, we are required to estimate expected credit losses on such loans using a range of historical experience adjusted for current and future conditions.
Our loans held for investment are carried at cost, net of unamortized purchase discounts, deferred loan fees and origination costs and cost-recovery proceeds, however, under the CECL methodology we adopted pursuant to Accounting Standards Update No. 2016-13, we are required to estimate expected credit losses on such loans using a range of historical experience adjusted for current and future conditions.
A change in our investment strategy may increase our exposure to interest rate risk, default risk and real estate market fluctuations. Furthermore, a change in our asset allocation could result in our making investments in asset categories different from those described in this annual report on Form 10-K.
A change in our investment strategy may increase our exposure to interest rate risk, default risk and real estate market fluctuations. Furthermore, a change in our asset 13 Table of Contents allocation could result in our making investments in asset categories different from those described in this annual report on Form 10-K.
We cannot assure you that a liquid secondary market will exist for hedging instruments purchased or sold, and we may be required to maintain a position until exercise or expiration, which could result in significant losses. 20 Table of Contents We may fail to qualify for hedge accounting treatment.
We cannot assure you that a liquid secondary market will exist for hedging instruments purchased or sold, and we may be required to maintain a position until exercise or expiration, which could result in significant losses. We may fail to qualify for hedge accounting treatment.
Cybersecurity risks require continuous and increasing attention and other resources from us to, among other actions, identify and quantify these risks, upgrade and expand 49 Table of Contents our technologies, systems and processes to adequately address such risks. Such attention diverts time and other resources from other activities and there is no assurance that our efforts will be effective.
Cybersecurity risks require continuous and increasing attention and other resources from us to, among other actions, identify and quantify these risks, upgrade and expand our technologies, systems and processes to adequately address such risks. Such attention diverts time and other resources from other activities and there is no assurance that our efforts will be effective.
Hedging against interest rate or currency exposure may adversely affect our earnings, which could reduce our cash available for distribution to our stockholders. 19 Table of Contents Subject to maintaining our qualification as a REIT, we may pursue various hedging strategies to seek to reduce our exposure to adverse changes in interest rates or currencies.
Hedging against interest rate or currency exposure may adversely affect our earnings, which could reduce our cash available for distribution to our stockholders. Subject to maintaining our qualification as a REIT, we may pursue various hedging strategies to seek to reduce our exposure to adverse changes in interest rates or currencies.
In addition, under certain circumstances, payments to us and distributions by us to the stockholders may be reclaimed if any such payment or distribution is later determined to have been a fraudulent conveyance, preferential payment or similar transaction under applicable bankruptcy and insolvency laws.
In addition, under certain circumstances, payments to us and distributions by us to the stockholders may be reclaimed if any such payment or distribution is later determined to have been a fraudulent conveyance, preferential payment or similar transaction under applicable bankruptcy and 29 Table of Contents insolvency laws.
Moreover, concerns over the United States’ debt ceiling and budget-deficit have increased the possibility of downgrades by rating agencies to the U.S. government’s credit rating, which could cause interest rates and borrowing costs to rise further, negatively impacting both the perception of credit risk associated with our debt portfolio and our ability to access the debt markets on favorable terms.
Moreover, concerns over the United States’ debt ceiling and budget-deficit have driven downgrades by rating agencies to the U.S. government’s credit rating, which could cause borrowing costs to rise further, negatively impacting both the perception of credit risk associated with our debt portfolio and our ability to access the debt markets on favorable terms.
The market prices of such securities are subject to erratic and abrupt market movements and the spread between bid and ask prices may be greater than normally expected. Investment in the securities of financially troubled issuers and operationally troubled issuers involves a high degree of credit and market risk.
The market prices of such loans are subject to erratic and abrupt market movements and the spread between bid and ask prices may be greater than normally expected. Investment in the loans of financially troubled borrowers and operationally troubled borrowers involves a high degree of credit and market risk.
Our opportunity to purchase loans from such vehicle may be on different and potentially less favorable economic terms than other Ares managed vehicles if our Manager deems such purchase as being otherwise in our best interests. Fees and expenses.
Our opportunity to purchase loans from Ares Management and its affiliates may be on different and potentially less favorable economic terms than other Ares managed vehicles if our Manager deems such purchase as being otherwise in our best interests. Fees and expenses.

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Item 2. Properties

Properties — owned and leased real estate

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Added
During the year ended December 31, 2023, we acquired legal title to a mixed-use property located in Florida through a consensual foreclosure.
Added
Prior to our acquisition date, the mixed-use property collateralized an $82.9 million senior mortgage loan that we held that was in maturity default due to the failure of the borrower to repay the outstanding principal balance of the loan by the February 2023 maturity date.
Added
In conjunction with the consensual foreclosure, we derecognized the $82.9 million senior mortgage loan and recognized the mixed-use property as real estate owned and also recognized the associated assets and liabilities held at the mixed-use property.

Item 3. Legal Proceedings

Legal Proceedings — active lawsuits and investigations

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Biggest changeIf the current macroeconomic and geopolitical conditions worsen, litigation may increase to the extent we find it necessary to foreclose or otherwise enforce remedies with respect to loans that are in default, which borrowers may seek to resist by asserting counterclaims and defenses against us.
Biggest changeLegal proceedings may increase to the extent we find it necessary to foreclose or otherwise enforce remedies with respect to loans that are in default, which borrowers may seek to resist by asserting counterclaims and defenses against us or our Manager. As of December 31, 2023, we were not subject to any material pending legal proceedings.
Removed
Item 3. Legal Proceedings In the normal course of business, we may be subject to various legal proceedings from time to time. Furthermore, third parties may try to seek to impose liability on us in connection with our loans. As of December 31, 2022, we were not subject to any material pending legal proceedings.
Added
Item 3. Legal Proceedings From time to time, we, our executive officers, directors and our Manager, and its affiliates and/or any of their respective principals and employees are subject to legal proceedings in the ordinary course of business, including those arising from our loans, and may, as a result, incur significant costs and expenses in connection with such legal proceedings.
Added
We and our Manager are also subject to extensive regulation, which, from time to time, results in requests for information from us or our Manager or regulatory proceedings or investigations against us or our Manager, respectively. We may incur significant costs and expenses in connection with any such information requests, proceedings or investigations.

Item 5. Market for Registrant's Common Equity

Market for Common Equity — stock, dividends, buybacks

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Biggest changeISSUERS PURCHASES OF EQUITY SECURITIES Purchases of Equity Securities by the Issuer and Affiliated Purchasers Period Total Number of Shares Purchased Average Price Paid Per Share Total Number of Shares Purchased as Part of Publicly Announced Program (1) Maximum Approximate Dollar Value of Shares that May Yet Be Purchased Under the Program (1) ($ in thousands) October 1, 2022 to October 31, 2022 — $— — $50,000 November 1, 2022 to November 30, 2022 — — — 50,000 December 1, 2022 to December 31, 2022 — — — 50,000 Total — — (1) On July 26, 2022, our Board of Directors approved the Repurchase Program of up to $50 million of our common stock which is expected to be in effect until July 26, 2023, or until the approved dollar amount has been used to repurchase shares.
Biggest changeISSUERS PURCHASES OF EQUITY SECURITIES Purchases of Equity Securities by the Issuer and Affiliated Purchasers Period Total Number of Shares Purchased Average Price Paid Per Share (1) Total Number of Shares Purchased as Part of Publicly Announced Program (2) Maximum Approximate Dollar Value of Shares that May Yet Be Purchased Under the Program (2) ($ in thousands) October 1, 2023 to October 31, 2023 — $— — $50,000 November 1, 2023 to November 30, 2023 — — — 50,000 December 1, 2023 to December 31, 2023 — — — 50,000 Total — — _____________________________ (1) Represents purchase price including expenses paid.
Excise tax payable is included in the line item “Other liabilities” in the consolidated balance sheets included in this annual report on Form 10-K. Excise tax expense is included in the line item “Income tax expense, including excise tax” in the consolidated statements of operations included in this annual report on Form 10-K.
Excise tax payable is included in the line item “Other liabilities” in the consolidated balance sheets included in this annual report on Form 10-K. Excise tax expense (benefit) is included in the line item “Income tax expense (benefit), including excise tax” in the consolidated statements of operations included in this annual report on Form 10-K.
However, if a REIT elects to retain any of its net capital gain for any tax year, it must notify its stockholders and pay tax at regular corporate rates on the retained net capital gain. For the year ended December 31, 2022, we plan to satisfy the REIT distribution requirement in part with dividends paid in 2023.
However, if a REIT elects to retain any of its net capital gain for any tax year, it must notify its stockholders and pay tax at regular corporate rates on the retained net capital gain. For the year ended December 31, 2023, we plan to satisfy the REIT distribution requirement in part with dividends paid in 2024.
The Repurchase Program does not obligate us to acquire any particular amount of shares of our common stock and may be modified or suspended at any time at our discretion. 53 Table of Contents STOCK PERFORMANCE GRAPH Comparison of Cumulative Total Return SOURCE: Bloomberg NOTES: Assumes $100 invested on December 31, 2017 in ACRE, the S&P 500 Index and the Bloomberg Mortgage REIT Index.
The Repurchase Program does not obligate us to acquire any particular amount of shares of our common stock and may be modified or suspended at any time at our discretion. 56 Table of Contents STOCK PERFORMANCE GRAPH Comparison of Cumulative Total Return SOURCE: Bloomberg NOTES: Assumes $100 invested on December 31, 2018 in ACRE, the S&P 500 Index and the Bloomberg Mortgage REIT Index.
For the year ended December 31, 2021, we elected to satisfy the REIT distribution requirement in part with dividends paid in 2022.
For the year ended December 31, 2022, we elected to satisfy the REIT distribution requirement in part with dividends paid in 2023.
Item 5. Market For Registrant’s Common Equity, Related Stockholder Matters And Issuer Purchases Of Equity Securities COMMON STOCK Our common stock is listed for trading on the NYSE under the symbol “ACRE.” On February 14, 2023, the closing price of our common stock, as reported on the NYSE, was $11.89 per share.
Item 5. Market For Registrant’s Common Equity, Related Stockholder Matters And Issuer Purchases Of Equity Securities COMMON STOCK Our common stock is listed for trading on the NYSE under the symbol “ACRE.” On February 20, 2024, the closing price of our common stock, as reported on the NYSE, was $8.20 per share.
Any of these taxes would decrease cash available for distribution to our stockholders. For the years ended December 31, 2022, 2021 and 2020, we accrued an excise tax of $430 thousand, $272 thousand and $369 thousand, respectively.
Any of these taxes would decrease cash available for distribution to our stockholders. For the years ended December 31, 2023, 2022 and 2021, we accrued an excise tax expense (benefit) of $(73) thousand, $430 thousand and $272 thousand, respectively.
HOLDERS As of February 14, 2023, there were 169 holders of record of our common stock, including Cede & Co, which holds shares as nominee for The Depository Trust Company, which itself holds shares on behalf of the beneficial owners of shares of our common stock.
HOLDERS As of February 20, 2024, there were 174 holders of record of our common stock, including Cede & Co, which holds shares as nominee for The Depository Trust Company, which itself holds shares on behalf of the beneficial owners of shares of our common stock.
However, distributions that we 52 Table of Contents designate as capital gain dividends generally will be taxable as long-term capital gain to our stockholders. Some portion of these distributions may not be subject to tax in the year in which they are received because depreciation expense reduces the amount of taxable income, but does not reduce cash available for distribution.
Some portion of these distributions may not be subject to tax in the year in which they are received because depreciation expense reduces the amount of taxable income, but does not reduce cash available for distribution.
Assumes all dividends are reinvested on the respective dividend payment dates without commissions. The SNL US Finance REIT Index has been discontinued. As a result, we elected to replace the SNL US Finance REIT Index with the Bloomberg Mortgage REIT Index for disclosure purposes. Item 6. [Reserved] 54 Table of Contents
Assumes all dividends are reinvested on the respective dividend payment dates without commissions. Item 6. [Reserved] 57 Table of Contents
As of December 31, 2022, $50 million remained available for future purchases of our common stock under the Repurchase Program.
On July 25, 2023, our board of directors renewed the Repurchase Program of up to $50.0 million, which is expected to be in effect until July 31, 2024, or until the approved dollar amount has been used to repurchase shares. As of December 31, 2023, $50.0 million remained available for future purchases of our common stock under the Repurchase Program.
Added
This deduction is available to 55 Table of Contents non-corporate taxpayers and is applicable for tax years beginning before January 1, 2026. However, distributions that we designate as capital gain dividends generally will be taxable as long-term capital gain to our stockholders.
Added
(2) On July 26, 2022, our board of directors approved a stock repurchase program of up to $50.0 million of our common stock, which was in effect until July 26, 2023 (the “Repurchase Program”).

Item 7. Management's Discussion & Analysis

Management's Discussion & Analysis (MD&A) — revenue / margin commentary

92 edited+49 added−27 removed58 unchanged
Biggest changeThis senior mortgage loan refinanced the previously existing $61.0 million senior mortgage loan that was held by ACRE. • ACRE amended the Wells Fargo Facility (as defined below) to, among other things, (1) extend the funding period of the Wells Fargo Facility to December 15, 2025, (2) extend the initial maturity date of the Wells Fargo Facility to December 15, 2025, subject to two 12-month extensions, each of which may be exercised at ACRE’s option, subject to the satisfaction of certain conditions, including payment of an extension fee, which, if both were exercised, would extend the maturity date of the Wells Fargo Facility to December 14, 2027 and (3) update the interest rate on advances under the Wells Fargo Facility from a per annum rate equal to the sum of one-month LIBOR or SOFR plus a pricing margin range of 1.50% to 2.75%, subject to certain exceptions, to a per annum rate equal to the sum of one-month LIBOR or SOFR plus a pricing margin range of 1.50% to 3.75%, subject to certain exceptions.
Biggest changeIn January 2024, we amended the secured revolving funding facility with City National Bank (the “CNB Facility”) to, among other things: (1) extend the initial maturity date of the CNB Facility to March 10, 2025, subject to one 12-month extension, which may be exercised at our option if certain conditions described in the CNB Facility are met, including applicable extension fees being paid, which, if exercised, would extend the maturity date to March 10, 2026 and (2) set the interest rate on advances under the CNB Facility to a per annum rate equal to the sum of, at our option, either (a) a SOFR-based rate plus 3.25% or (b) a base rate plus 2.25%, in each case, subject to an interest rate floor.
Related Party Expenses For the year ended December 31, 2022, related party expenses included $14.9 million in management and incentive fees due to our Manager pursuant to the Management Agreement, which consisted of $11.5 million in management fees and $3.4 million in incentive fees.
For the year ended December 31, 2022, related party expenses included $14.9 million in management and incentive fees due to our Manager pursuant to the Management Agreement, which consisted of $11.5 million in management fees and $3.4 million in incentive fees.
The amount of leverage we will deploy for particular investments in our target investments will depend upon our Manager’s assessment of a variety of factors, which may include, among others, our liquidity position, the anticipated liquidity and price volatility of the assets in our loans held for investment portfolio, the potential for losses and extension risk in our portfolio, the gap between the duration of our assets and liabilities, including hedges, the availability and cost of financing the assets, our opinion of the creditworthiness of our financing counterparties, the impact of the macroeconomic environment on the United States economy generally or in specific geographic regions and commercial mortgage markets, our outlook for the level and volatility of interest rates, the slope of the yield curve, the credit quality of our assets, the collateral underlying our assets, and our outlook for asset spreads relative to the LIBOR or SOFR curve or another alternative interest index rate commonly used for floating rate loans.
The amount of leverage we will deploy for particular investments in our target investments will depend upon our Manager’s assessment of a variety of factors, which may include, among others, our liquidity position, the anticipated liquidity and price volatility of the assets in our loans held for investment portfolio, the potential for losses and extension risk in our portfolio, the gap between the duration of our assets and liabilities, including hedges, the availability and cost of financing the assets, our opinion of the creditworthiness of our financing counterparties, the impact of the macroeconomic environment on the United States economy generally or in specific geographic regions and commercial mortgage markets, our outlook for the level and volatility of interest rates, the slope of the yield curve, the credit quality of our assets, the collateral underlying our assets, and our outlook for asset spreads relative to the SOFR curve or another alternative interest index rate commonly used for floating rate loans.
Loan balances that are deemed to be uncollectible are written off as a realized loss and are deducted from the current expected credit loss reserve. The write-offs are recorded in the period in which the loan balance is deemed uncollectible based on management’s judgment. There were no write-offs during the years ended December 31, 2022, 2021 and 2020.
Loan balances that are deemed to be uncollectible are written off as a realized loss and are deducted from the current expected credit loss reserve. The write-offs are recorded in the period in which the loan balance is deemed uncollectible based on management’s judgment. There were no write-offs during the years ended December 31, 2023, 2022 and 2021.
Management's Discussion and Analysis of Financial Condition and Results of Operations, which is incorporated by reference herein. LIQUIDITY AND CAPITAL RESOURCES Liquidity is a measure of our ability to meet potential cash requirements, including ongoing commitments to repay borrowings, fund and maintain our assets and operations, make distributions to our stockholders and other general business needs.
Management's Discussion and Analysis of Financial Condition and Results of Operations, which is incorporated by reference herein. LIQUIDITY AND CAPITAL RESOURCES Liquidity is a measure of our ability to meet potential cash requirements, including ongoing commitments to repay borrowings, fund and maintain our assets and operations, make distributions to our stockholders, repurchase shares and other general business needs.
Other than as set forth in Note 3 to our consolidated financial statements included in this annual report on Form 10-K, as of December 31, 2022, all loans held for investment were paying in accordance with their contractual terms. Our loans held for investment are accounted for at amortized cost.
Other than as set forth in Note 3 to our consolidated financial statements included in this annual report on Form 10-K, as of December 31, 2023, all loans held for investment were paying in accordance with their contractual terms. Our loans held for investment are accounted for at amortized cost.
The increase in management fees for the year ended December 31, 2022 compared to the year ended December 31, 2021 primarily relates to an increase in our weighted average stockholders’ equity for the year ended December 31, 2022 as a result of the public offering of 7,000,000 shares of our common stock in May 2022, which generated net proceeds of approximately $103.2 million.
The increase in management fees for the year ended December 31, 2023 compared to the year ended December 31, 2022 primarily relates to an increase in our weighted average stockholders’ equity for the year ended December 31, 2023 as a result of the public offering of 7,000,000 shares of our common stock in May 2022, which generated net proceeds of approximately $103.2 million.
Other than as set forth in Note 3 to our consolidated financial statements included in this annual report on Form 10-K, and as set forth below, as of December 31, 2022 and 2021, all loans held for investment were paying in accordance with their contractual terms.
Other than as set forth in Note 3 to our consolidated financial statements included in this annual report on Form 10-K, and as set forth below, as of December 31, 2023 and 2022, all loans held for investment were paying in accordance with their contractual terms.
Given current market conditions and our focus on first or senior mortgages, we currently expect that such leverage would not exceed, on a debt-to-equity basis, a 4.5-to-1 ratio. Our charter and bylaws do not restrict the amount of leverage that we may use.
Given current macroeconomic conditions and our focus on first or senior mortgages, we currently expect that such leverage would not exceed, on a debt-to-equity basis, a 4.5-to-1 ratio. Our charter and bylaws do not restrict the amount of leverage that we may use.
Financing Activities For the year ended December 31, 2022, net cash used in financing activities totaled $159.7 million and primarily related to repayments of our Secured Funding Agreements of $402.0 million, repayments of our Notes Payable of $51.1 million, repayments of debt of consolidated VIEs of $85.9 million and dividends paid of $71.8 million, partially offset by proceeds from our Secured Funding Agreements of $267.2 million, proceeds from our Notes Payable of $105.0 million and proceeds from the sale of our common stock of $106.3 million.
For the year ended December 31, 2022, net cash used in financing activities totaled $159.7 million and primarily related to repayments of our Secured Funding Agreements of $402.0 million, repayments of our Notes Payable of $51.1 million, repayments of debt of consolidated VIEs of $85.9 million and dividends paid of $71.8 69 Table of Contents million, partially offset by proceeds from our Secured Funding Agreements of $267.2 million, proceeds from our Notes Payable of $105.0 million and proceeds from the sale of our common stock of $106.3 million.
Our Financing Agreements contain various affirmative and negative covenants, including negative pledges, and provisions related to events of default that are normal and customary for similar financing agreements. As of December 31, 2022, we were in compliance with all financial covenants of each respective Financing Agreement.
Our Financing Agreements contain various affirmative and negative covenants, including negative pledges, and provisions related to events of default that are normal and customary for similar financing agreements. As of December 31, 2023, we were in compliance with all financial covenants of each respective Financing Agreement.
Our Manager seeks to mitigate this risk by seeking to originate or acquire investments of higher quality at appropriate prices with appropriate risk adjusted returns given anticipated and unanticipated losses, by employing a comprehensive review and selection process and by proactively monitoring originated or acquired investments (see the performance monitoring methodology above in 57 Table of Contents Changes in Fair Value of Our Assets).
Our Manager seeks to mitigate this risk by seeking to originate or acquire investments of higher quality at appropriate prices with appropriate risk adjusted returns given anticipated and unanticipated losses, by employing a comprehensive review and selection process and by proactively monitoring originated or acquired investments (see the performance monitoring methodology above in Changes in Fair Value of Our Assets).
The initial advance funded under such loan was $30.7 million, with up to another $25.0 million of additional loan proceeds to be available 61 Table of Contents for future advances to cover a portion of the anticipated property renovation plan costs, provided certain conditions are satisfied. At closing, the buyer contributed $12.9 million of equity into the purchase.
The initial advance funded under such loan was $30.7 million, with up to another $25.0 million of additional loan proceeds to be available for future advances to cover a portion of the anticipated property renovation plan costs, provided certain conditions are satisfied. At closing, the buyer contributed $12.9 million of equity into the purchase.
As a result of the current macroeconomic environment, borrowers may be unable to make interest and principal payments timely, including at the maturity date of the borrower’s loan. We have increased our CECL Reserve to reflect this risk. Our Secured Funding Agreements contain margin call provisions following the occurrence of certain mortgage loan credit events.
As a 67 Table of Contents result of the current macroeconomic environment, borrowers may be unable to make interest and principal payments timely, including at the maturity date of the borrower’s loan. We have increased our CECL Reserve to reflect this risk. Our Secured Funding Agreements contain margin call provisions following the occurrence of certain mortgage loan credit events.
The total Weighted Average Unleveraged Effective Yield is calculated based on the average of Unleveraged Effective Yield of all interest accruing loans held by us as of December 31, 2022 as weighted by the total outstanding principal balance of each interest accruing loan (excludes loans on non-accrual status as of December 31, 2022).
The total Weighted Average Unleveraged Effective Yield is calculated based on the average of Unleveraged Effective Yield of all interest accruing loans held by us as of December 31, 2023 as weighted by the total outstanding principal balance of each interest accruing loan (excludes loans on non-accrual status as of December 31, 2023).
For the years ended December 31, 2021 and 2020 The comparison of our cash flows for the fiscal years ended December 31, 2021 and 2020 can be found in our annual report on Form 10-K for the fiscal year ended December 31, 2021 located within Part II, Item 7.
For the years ended December 31, 2022 and 2021 The comparison of our cash flows for the fiscal years ended December 31, 2022 and 2021 can be found in our annual report on Form 10-K for the fiscal year ended December 31, 2022 located within Part II, Item 7.
(2) Unleveraged Effective Yield is the compounded effective rate of return that would be earned over the life of the investment based on the contractual interest rate (adjusted for any deferred loan fees, costs, premiums or discounts) and assumes no dispositions, early prepayments or defaults.
(2) Unleveraged Effective Yield is the compounded effective rate of return that would be earned over the life of the investment based on the contractual interest rate (adjusted for any deferred loan fees, costs, premiums or discounts) 61 Table of Contents and assumes no dispositions, early prepayments or defaults.
Our sources of liquidity may be impacted to the extent we do not receive cash payments that we would otherwise expect to receive from the CLO Securitizations if these tests were met. Ares Management or one of its investment vehicles, including the Ares Warehouse Vehicle, may originate mortgage loans.
Our sources of liquidity may be impacted to the extent we do not receive cash payments that we would otherwise expect to receive from the CLO Securitizations if these tests were met. Ares Management or one of its investment vehicles may originate mortgage loans.
The total Weighted Average Unleveraged Effective Yield is calculated based on the average of Unleveraged Effective Yield of all loans held by us as of December 31, 2022 as weighted by the outstanding principal balance of each loan.
The total Weighted Average Unleveraged Effective Yield is calculated based on the average of Unleveraged Effective Yield of all loans held by us as of December 31, 2023 as weighted by the outstanding principal balance of each loan.
(8) The maturity date of the Credit and Guaranty Agreement with the lenders referred to therein and Cortland Capital Market Services LLC, as administrative agent and collateral agent for the lenders (the "Secured Term Loan") is November 12, 2026 and the interest rate on advances under the Secured Term Loan are the following fixed rates: (i) 4.50% per annum until May 12, 2025, (ii) after May 12, 2025 through November 12, 2025, the interest rate increases 0.125% every three months and (iii) after November 12, 2025 through November 12, 2026, the interest rate increases 0.250% every three months.
(8) The maturity date of the Credit and Guaranty Agreement with the lenders referred to therein and Cortland Capital Market Services LLC, as administrative agent and collateral agent for the lenders (the “Secured Term Loan”) is 70 Table of Contents November 12, 2026 and the interest rate on advances under the Secured Term Loan are the following fixed rates: (i) 4.50% per annum until May 12, 2025, (ii) after May 12, 2025 through November 12, 2025, the interest rate increases 0.125% every three months and (iii) after November 12, 2025 through November 12, 2026, the interest rate increases 0.250% every three months.
If our cash available for distribution is less than our REIT taxable income, we could be required to sell assets or borrow funds to make cash 68 Table of Contents distributions or we may elect to make a portion of the Required Distribution in the form of a taxable stock distribution or distribution of debt securities.
If our cash available for distribution is less than our REIT taxable income, we could be required to sell assets or borrow funds to make cash distributions or we may elect to make a portion of the Required Distribution in the form of a taxable stock distribution or distribution of debt securities.
Subsequent period increases and decreases to expected credit losses impact earnings and are recorded within provision for current expected credit losses in our consolidated statements of operations.
Increases and decreases to expected credit losses impact earnings and are recorded within provision for current expected credit losses in our consolidated statements of operations.
Interest payments received on non-accrual loans may be recognized as income or applied to principal depending upon management’s judgment regarding the borrower’s ability to make pending principal and interest payments. Non-accrual loans are restored to accrual status when past due principal and interest are paid and, in management’s judgment, are likely to remain current.
Interest payments received on non-accrual loans may be recognized as income or applied to reduce loan carrying value depending upon management’s judgment regarding the borrower’s ability to make pending principal and interest payments. Non-accrual loans are restored to accrual status when past due principal and interest are paid and, in management’s judgment, are likely to remain current.
Such analyses are completed and reviewed by asset management and finance personnel who utilize various data sources, including periodic financial data such as property occupancy, tenant profile, rental rates, operating expenses, and the borrower’s exit plan, among other factors.
Such analyses are completed and reviewed by asset management and finance personnel who 59 Table of Contents utilize various data sources, including periodic financial data such as property occupancy, tenant profile, rental rates, operating expenses, and the borrower’s exit plan, among other factors.
“Core Earnings” is defined in the Management Agreement as GAAP net income (loss) computed in accordance with GAAP, excluding non-cash equity compensation expense, the incentive fee, depreciation and amortization (to the extent that any of our target investments are structured as debt and we foreclose on any properties underlying such debt), any unrealized gains, losses or other non-cash items recorded in net income (loss) for the period, regardless of whether such items are included in other comprehensive income or loss, or in net income (loss), and one-time events pursuant to changes in GAAP and certain non-cash charges after discussions between our Manager and our independent directors and after approval by a majority of our independent directors.
“Core Earnings” is defined in the Management Agreement as net income (loss) computed in accordance with GAAP, excluding non-cash equity compensation expense, the incentive fee, depreciation and amortization (to the extent that any of the Company’s target investments are structured as debt and the Company forecloses on any properties underlying such debt), any unrealized gains, losses or other non-cash items recorded in net income (loss) for the period, regardless of whether such items are included in other comprehensive income or loss, or in net income (loss), and one-time events pursuant to changes in GAAP and certain non-cash charges after discussions between ACREM and the Company’s independent directors and after approval by a majority of the Company’s independent directors.
During the year ended December 31, 2022, we sold 190,369 shares of our common stock under the Equity Distribution Agreement at an average price of $15.33 per share. The sales generated net proceeds of approximately $2.9 million. The “at the market offering” program is currently unavailable.
During the year ended December 31, 2022, we sold 190,369 shares of our common stock under the Equity Distribution Agreement at an average price of $15.33 per share. The sales generated net proceeds of approximately $2.9 million. There were no shares sold during the year ended December 31, 2023 and the “at the market offering” program is currently unavailable.
Factors Impacting Our Operating Results The results of our operations are affected by a number of factors and primarily depend on, among other things, the level of our net interest income, the market value of our assets and the supply of, and demand for, commercial mortgage loans, CRE debt and other financial assets in the marketplace.
Factors Impacting Our Operating Results The results of our operations are affected by a number of factors and primarily depend on, among other things, the level of our net interest income, the market value of our assets, including the real estate collateralizing our investments, and the supply of, and demand for, commercial mortgage loans, CRE debt and other financial assets in the marketplace.
(2) The maturity date of the master repurchase funding facility with Wells Fargo Bank, National Association (the “Wells Fargo Facility”) is subject to two 12-month extensions at our option provided that certain conditions are met and applicable extension fees are paid.
(2) The maturity date of the master repurchase funding facility with Wells Fargo Bank, National Association (the “Wells Fargo Facility”) is subject to two 12-month extensions at our option, each of which may be exercised at our option provided that certain conditions are met and applicable extension fees are paid.
For the year ended December 31, 2021, related party expenses also included $3.0 million for our share of allocable general and administrative expenses for which we were required to reimburse our Manager pursuant to the Management Agreement.
For the year ended December 31, 2023, related party expenses also included $3.4 million for our share of allocable general and administrative expenses for which we were required to reimburse our Manager pursuant to the Management Agreement.
If we experience borrower default as a result of the current macroeconomic conditions, we may not be able to negotiate modifications to our borrowings with our lenders, similar to those negotiated during COVID-19, or to receive financing from our Secured Funding Agreements with respect to our commitments to fund our loans held for investment in the future.
If we experience borrower default as a result of the current macroeconomic conditions, we may not be able to negotiate modifications to our borrowings with our lenders or receive financing from our Secured Funding Agreements with respect to our commitments to fund our loans held for investment in the future.
For the years ended December 31, 2021 and 2020 63 Table of Contents The comparison of our results of operations for the fiscal years ended December 31, 2021 and 2020 can be found in our annual report on Form 10-K for the fiscal year ended December 31, 2021 located within Part II, Item 7.
For the years ended December 31, 2022 and 2021 The comparison of our results of operations for the fiscal years ended December 31, 2022 and 2021 can be found in our annual report on Form 10-K for the fiscal year ended December 31, 2022 located within Part II, Item 7.
We may not be able to obtain the amount of leverage we desire and, consequently, the returns generated from our investments may be less than we currently expect. To grow our portfolio of investments, we also may determine to raise additional equity.
We expect to use leverage to make additional investments that may increase our potential returns. We may not be able to obtain the amount of leverage we desire and, consequently, the returns generated from our investments may be less than we currently expect. To grow our portfolio of investments, we also may determine to raise additional equity.
Subject to maintaining our qualification as a REIT, we may also change our dividend practice, including by reducing the amount of, or temporarily suspending, our future dividends or making dividends that are payable in cash and shares of our common stock for some period of time.
Subject to maintaining our qualification as a REIT, we may also change our dividend practice, including by reducing the amount of, or temporarily suspending, our future dividends or making dividends that are payable in cash and shares of our common stock for some period of time. We may also continue or discontinue share repurchases under the Repurchase Program.
The CECL Reserve related to outstanding balances on loans held for investment required under ASU No. 2016-13 is a valuation account that is deducted from the amortized cost basis of our loans held for investment in our consolidated balance sheets.
The CECL Reserve related to outstanding balances on loans held for investment required under ASC 326 is a valuation account that is deducted from the amortized cost basis of our loans held for investment in our consolidated balance sheets.
Changes in Fair Value of Our Assets. We originate CRE debt and related instruments generally to be held for investment. Loans that are held for investment are carried at cost, net of unamortized loan fees and origination costs (the “carrying value”). 56 Table of Contents Loans are generally collateralized by real estate.
Changes in Fair Value of Our Assets. We originate CRE debt and related instruments generally to be held for investment. Loans that are held for investment are carried at cost, net of unamortized purchase discounts, deferred loan fees and origination costs and cost-recovery proceeds (the “carrying value”). Loans are generally collateralized by real estate.
The increase in general and administrative expenses for the year ended December 31, 2022 compared to the year 62 Table of Contents ended December 31, 2021 primarily relates to an increase in stock-based compensation expense due to restricted stock and restricted stock unit awards granted after December 31, 2021.
The increase in general and administrative expenses for the year ended December 31, 2023 compared to the year ended December 31, 2022 primarily relates to an increase in stock-based compensation expense due to restricted stock and restricted stock unit awards granted in December 2022 and after December 31, 2022.
The MetLife Facility is subject to one 12-month extension, which may be exercised at our option provided that certain conditions are met and applicable extension fees are paid. (6) In December 2022, we exercised a 12-month extension option on the master repurchase and securities contract with Morgan Stanley (the “Morgan Stanley Facility”).
(6) The master repurchase and securities contract with Morgan Stanley (the “Morgan Stanley Facility”) is subject to one 12-month extension, which may be exercised at our option provided that certain conditions are met and applicable extension fees are paid.
Securitizations As of December 31, 2022, the carrying amount and outstanding principal of our CLO Securitizations was $777.7 million and $779.0 million, respectively. See Note 16 to our consolidated financial statements included in this annual report on Form 10-K for additional terms and details of our CLO Securitizations.
Securitizations As of December 31, 2023, the carrying amount and outstanding principal of our CLO Securitizations was $723.1 million and $723.9 million, respectively. See Note 16 to our consolidated financial statements included in this annual report on Form 10-K for additional terms and details of our CLO Securitizations.
For the years ended December 31, 2022 and 2021, interest income of $170.2 million and $133.6 million, respectively, was generated by weighted average earning assets of $2.5 billion and $2.2 billion, respectively, offset by $66.0 million and $50.1 million, respectively, of interest expense, unused fees and amortization of deferred loan costs.
For the years ended December 31, 2023 and 2022, interest income of $198.6 million and $170.2 million, respectively, was generated by weighted average earning assets of $2.3 billion and $2.5 billion, respectively, offset by $109.7 million and $66.0 million, respectively, of interest expense, unused fees and amortization of deferred loan costs.
Stock Repurchase Program On July 26, 2022, our Board of Directors approved a stock repurchase program of up to $50.0 million, which is expected to be in effect until July 26, 2023, or until the approved dollar amount has been used to repurchase shares (the “Repurchase Program”).
Stock Repurchase Program On July 25, 2023, our board of directors renewed the Repurchase Program of up to $50.0 million, which is expected to be in effect until July 31, 2024, or until the approved dollar amount has been used to repurchase shares.
The increase in incentive fees for the year ended December 31, 2022 compared to the year ended December 31, 2021 primarily relates to our Core Earnings (defined below) for the year ended December 31, 2022 exceeding the 8% minimum return by a higher margin than the year ended December 31, 2021.
The decrease in incentive fees for the year ended December 31, 2023 compared to the year ended December 31, 2022 primarily relates to our Core Earnings (defined below) for the twelve months ended December 31, 2023 exceeding the 8% minimum return by a lower margin than the twelve months ended December 31, 2022.
Summary of Financing Agreements The sources of financing, as applicable in a given period, under our Secured Funding Agreements, Notes Payable and the Secured Term Loan (collectively, the “Financing Agreements”) are described in the following table ($ in thousands): As of December 31, 2022 December 31, 2021 Total Commitment Outstanding Balance Interest Rate Maturity Date Total Commitment Outstanding Balance Interest Rate Maturity Date Secured Funding Agreements: Wells Fargo Facility $ 450,000 $ 270,798 Base Rate (1) +1.50 to 3.75% December 15, 2025 (2) $ 450,000 $ 399,528 LIBOR+1.50 to 2.75% December 14, 2022 (2) Citibank Facility 325,000 236,240 Base Rate (1) +1.50 to 2.10% January 13, 2025 (3) 325,000 192,970 LIBOR+1.50 to 2.25% January 13, 2022 (3) CNB Facility 75,000 — SOFR+2.65% March 10, 2023 (4) 75,000 — SOFR+2.65% March 10, 2022 (4) MetLife Facility 180,000 — Base Rate (1) +2.10 to 2.50% August 13, 2023 (5) 180,000 20,648 LIBOR+2.10 to 2.50% August 13, 2022 (5) Morgan Stanley Facility 250,000 198,193 Base Rate (1) +1.50 to 3.00% January 16, 2024 (6) 250,000 226,901 LIBOR+1.50 to 3.00% January 16, 2023 (6) Subtotal $ 1,280,000 $ 705,231 $ 1,280,000 $ 840,047 Notes Payable $ 105,000 $ 105,000 SOFR+2.00% July 28, 2025 (7) $ 51,755 $ 51,110 LIBOR+3.00 to 3.75% (7) Secured Term Loan $ 150,000 $ 150,000 4.50% November 12, 2026 (8) $ 150,000 $ 150,000 4.50% November 12, 2026 (8) Total $ 1,535,000 $ 960,231 $ 1,481,755 $ 1,041,157 _____________________________ (1) The base rate is LIBOR for loans pledged prior to December 31, 2021 and SOFR for loans pledged subsequent to December 31, 2021.
Summary of Financing Agreements The sources of financing, as applicable in a given period, under our Secured Funding Agreements, Notes Payable and the Secured Term Loan (collectively, the “Financing Agreements”) are described in the following table ($ in thousands): As of December 31, 2023 December 31, 2022 Total Commitment Outstanding Balance Interest Rate Maturity Date Total Commitment Outstanding Balance Interest Rate Maturity Date Secured Funding Agreements: Wells Fargo Facility $ 450,000 $ 208,540 SOFR+1.50 to 3.75% December 15, 2025 (2) $ 450,000 $ 270,798 Base Rate(1)+1.50 to 3.75% December 15, 2025 (2) Citibank Facility 325,000 221,604 SOFR+1.50 to 2.10% January 13, 2025 (3) 325,000 236,240 Base Rate(1)+1.50 to 2.10% January 13, 2025 (3) CNB Facility 75,000 — SOFR+2.65% March 11, 2024 (4) 75,000 — SOFR+2.65% March 10, 2023 (4) MetLife Facility 180,000 — SOFR+2.50% August 13, 2024 (5) 180,000 — Base Rate(1)+2.10 to 2.50% August 13, 2023 (5) Morgan Stanley Facility 250,000 209,673 SOFR+1.60 to 3.10% July 16, 2025 (6) 250,000 198,193 Base Rate(1)+1.50 to 3.00% January 16, 2024 (6) Subtotal $ 1,280,000 $ 639,817 $ 1,280,000 $ 705,231 Notes Payable $ 105,000 $ 105,000 SOFR+2.00% July 28, 2025 (7) $ 105,000 $ 105,000 SOFR+2.00% July 28, 2025 (7) Secured Term Loan $ 150,000 $ 150,000 4.50% November 12, 2026 (8) $ 150,000 $ 150,000 4.50% November 12, 2026 (8) Total $ 1,535,000 $ 894,817 $ 1,535,000 $ 960,231 _____________________________ (1) The base rate was LIBOR for loans pledged prior to December 31, 2021 and SOFR for loans pledged subsequent to December 31, 2021.
Operating Activities For the years ended December 31, 2022 and 2021, net cash provided by operating activities totaled $57.2 million and $48.4 million, respectively.
Operating Activities For the years ended December 31, 2023 and 2022, net cash provided by operating activities totaled $46.8 million and $57.2 million, respectively.
As of December 31, 2022, the Company had three loans held for investment on non-accrual status with a carrying value of $99.1 million. As of December 31, 2021, the Company had two loans held for investment on non-accrual status with a carrying value of $45.0 million.
As of December 31, 2023, the Company had nine loans held for investment on non-accrual status with a carrying value of $399.3 million. As of December 31, 2022, the Company had three loans held for investment on non-accrual status with a carrying value of $99.1 million.
For the year ended December 31, 2021, related party expenses included $12.1 million in management and incentive fees due to our Manager pursuant to the Management Agreement, which consisted of $9.4 million in management fees and $2.8 million in incentive fees.
Related Party Expenses For the year ended December 31, 2023, related party expenses included $12.3 million in management and incentive fees due to our Manager pursuant to the Management Agreement, which consisted of $11.9 million in management fees and $0.3 million in incentive fees.
Provision for Current Expected Credit Losses For the years ended December 31, 2022 and 2021, the provision for current expected credit losses was $46.1 million and $10 thousand, respectively.
Provision for Current Expected Credit Losses For the years ended December 31, 2023 and 2022, the provision for current expected credit losses was $91.8 million and $46.1 million, respectively.
The weighted average borrowings under the Secured Funding Agreements, Notes Payable (excluding the Note Payable on the hotel property that was recognized as real estate owned in our consolidated balance sheets), the Secured Term Loan, secured borrowings (described in Note 7 to our consolidated financial statements included in this annual report on Form 10-K) and securitization debt were $1.9 billion for the year ended December 31, 2022 and $1.6 billion for the year ended December 31, 2021.
The weighted average borrowings under the Secured Funding Agreements, Notes Payable, the Secured Term Loan, secured borrowings (described in Note 7 to our consolidated financial statements included in this annual report on Form 10-K) and securitization debt were $1.7 billion for the year ended December 31, 2023 and $1.9 billion for the year ended December 31, 2022.
Other Expenses For the years ended December 31, 2022 and 2021, professional fees were $3.4 million and $2.4 million, respectively. The increase in professional fees for the year ended December 31, 2022 compared to the year ended December 31, 2021 primarily relates to an increase in our use of third-party professionals due to changes in transaction activity year over year.
The decrease in professional fees for the year ended December 31, 2023 compared to the year ended December 31, 2022 primarily relates to a decrease in our use of third-party professionals due to changes in transaction activity year over year. For the years ended December 31, 2023 and 2022, general and administrative expenses were $7.2 million and $6.4 million, respectively.
Operating Expenses For the years ended December 31, 2022 2021 Management and incentive fees to affiliate $ 14,898 $ 12,136 Professional fees 3,350 2,436 General and administrative expenses 6,394 4,741 General and administrative expenses reimbursed to affiliate 3,777 3,016 Expenses from real estate owned 4,309 18,548 Total expenses $ 32,728 $ 40,877 See the Related Party Expenses, Other Expenses and Expenses from Real Estate Owned discussions below for the cause of the decrease in operating expenses for the year ended December 31, 2022 compared to the year ended December 31, 2021.
Operating Expenses For the Years Ended December 31, 2023 2022 Management and incentive fees to affiliate $ 12,263 $ 14,898 Professional fees 3,054 3,350 General and administrative expenses 7,244 6,394 General and administrative expenses reimbursed to affiliate 3,434 3,777 Expenses from real estate owned 2,518 4,309 Total expenses $ 28,513 $ 32,728 See the Related Party Expenses, Other Expenses and Expenses from Real Estate Owned discussions below for the cause of the decrease in operating expenses for the year ended December 31, 2023 compared to the year ended December 31, 2022.
Decreases in property values reduce the value of the collateral and the potential proceeds available to a borrower to repay the underlying loan or loans, as the case may be, which could also cause us to suffer losses. Availability of Leverage and Equity. We expect to use leverage to make additional investments that may increase our potential returns.
Decreases in property values reduce the value of the collateral and the potential proceeds available to a borrower to repay the underlying loan or loans, as the case may be, which could also cause us to suffer losses. 60 Table of Contents Availability of Leverage and Equity.
As of December 31, 2022, 90.2% of our loans have LIBOR or SOFR floors, with a weighted average floor of 0.95%, calculated based on loans with LIBOR or SOFR floors. References to LIBOR or “L” are to 30-day LIBOR and references to SOFR or “S” are to 30-day SOFR (unless otherwise specifically stated).
As of December 31, 2023, 69.0% of our loans have SOFR floors, with a weighted average floor of 1.13%, calculated based on loans with SOFR floors. References to SOFR or “S” are to 30-day SOFR (unless otherwise specifically stated).
For the year ended December 31, 2021, adjustments to net income related to operating activities primarily included the provision for current expected credit losses of $10 thousand, accretion of discounts, deferred loan origination fees and costs of $8.4 million, amortization of deferred financing costs of $9.9 million and change in other assets of $18.5 million.
For the year ended December 31, 2023, adjustments to net loss related to operating activities primarily included the provision for current expected credit losses of $91.8 million, accretion of discounts, deferred loan origination fees and costs of $6.1 million, amortization of deferred financing costs of $3.9 million, change in other assets of $19.9 million and realized losses on loans of $10.5 million.
Furthermore, we have sold, and may continue to sell certain of our mortgage loans, or interests therein, in order to manage liquidity needs.
Macroeconomic conditions may impair our ability to access the financing and capital markets. Furthermore, we have sold, and may continue to sell certain of our mortgage loans, or interests therein, in order to manage liquidity needs.
We have had and may continue to have the opportunity to purchase such loans that are determined by our Manager in good faith to be appropriate for us, depending on our available liquidity.
We have had and may continue to have the opportunity to purchase such loans that are determined by our Manager in good faith to be appropriate for us, depending on our available liquidity. Ares Management or one of its investment vehicles may also acquire mortgage loans from us.
Investing Activities For the years ended December 31, 2022 and 2021, net cash provided by (used in) investing activities totaled $193.2 million and $(699.7) million, respectively.
Investing Activities For the years ended December 31, 2023 and 2022, net cash provided by investing activities totaled $127.5 million and $193.2 million, respectively.
Other than as set forth in this annual report on Form 10-K, we do not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured investment vehicles, special purpose entities or variable interest entities, established to facilitate off-balance sheet arrangements or other contractually narrow or limited purposes.
The maximum potential future payment amount we could be required to pay under these indemnification obligations may be unlimited. 71 Table of Contents Other than as set forth in this annual report on Form 10-K, we do not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured investment vehicles, special purpose entities or variable interest entities, established to facilitate off-balance sheet arrangements or other contractually narrow or limited purposes.
The stockholders must include their proportionate share of the retained net capital gain in their taxable income for the tax year, and they are deemed to have paid the REIT’s tax on their proportionate share of the retained capital gain. Furthermore, such retained capital gain may be subject to the nondeductible 4% excise tax.
The stockholders must include their proportionate share of the retained net capital gain in their taxable income for the tax year, receive a credit for their share of the tax paid by such REIT, and are deemed to have paid the REIT’s tax on their proportionate share of the retained capital gain.
In connection with the sale of the hotel property, we provided a senior mortgage loan to the buyer of the hotel property.
Revenues consisted of room sales, food and beverage sales and other hotel revenues. In connection with the sale of the hotel property, we provided a senior mortgage loan to the buyer of the hotel property.
Cash Flows The following table sets forth changes in cash and cash equivalents for the years ended December 31, 2022 and 2021 ($ in thousands): For the years ended December 31, 2022 2021 Net income $ 29,785 $ 60,460 Adjustments to reconcile net income to net cash provided by (used in) operating activities: 27,372 (12,110) Net cash provided by (used in) operating activities 57,157 48,350 Net cash provided by (used in) investing activities 193,173 (699,685) Net cash provided by (used in) financing activities (159,667) 627,174 Change in cash and cash equivalents $ 90,663 $ (24,161) During the years ended December 31, 2022 and 2021, cash and cash equivalents increased (decreased) by $90.7 million and $(24.2) million, respectively.
Cash Flows The following table sets forth changes in cash and cash equivalents for the years ended December 31, 2023 and 2022 ($ in thousands): For the Years Ended December 31, 2023 2022 Net income (loss) $ (38,867) $ 29,785 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities 85,656 27,372 Net cash provided by (used in) operating activities 46,789 57,157 Net cash provided by (used in) investing activities 127,460 193,173 Net cash provided by (used in) financing activities (205,068) (159,667) Change in cash and cash equivalents $ (30,819) $ 90,663 During the years ended December 31, 2023 and 2022, cash and cash equivalents increased (decreased) by $(30.8) million and $90.7 million, respectively.
Expenses From Real Estate Owned For the years ended December 31, 2022 and 2021, expenses from real estate owned was comprised of the following ($ in thousands): For the years ended December 31, 2022 2021 Hotel operating expenses $ 3,631 $ 16,058 Interest expense on note payable 678 1,665 Depreciation expense — 825 Expenses from real estate owned $ 4,309 $ 18,548 For the years ended December 31, 2022 and 2021, hotel operating expenses were $3.6 million and $16.1 million, respectively.
Expenses From Real Estate Owned For the years ended December 31, 2023 and 2022, expenses from real estate owned was comprised of the following ($ in thousands): For the Years Ended December 31, 2023 2022 Mixed-use property operating expenses $ 1,215 $ — Hotel property operating expenses — 3,631 Interest expense on note payable — 678 Depreciation and amortization expense 1,303 — Expenses from real estate owned $ 2,518 $ 4,309 For the year ended December 31, 2023, mixed-use property operating expenses were $1.2 million.
For the year ended December 31, 2022, no depreciation expense was incurred as the hotel property was classified as real estate owned held for sale effective in November 2021. For the year ended December 31, 2021, depreciation expense was $0.8 million.
For the year ended December 31, 2023, depreciation and amortization expense was $1.3 million and relates primarily to our mixed-use property that was acquired on September 8, 2023. For the year ended December 31, 2022, no depreciation and amortization expense was incurred as the hotel property was classified as real estate owned held for sale effective in November 2021.
This change in net cash provided by investing activities was primarily as a result of the cash received from principal repayment of loans held for investment and from the sale of real estate owned 65 Table of Contents exceeding the cash used for the origination and funding of loans held for investment and purchases of available-for-sale debt securities for the year ended December 31, 2022.
This change in net cash provided by investing activities was primarily a result of the cash received from principal collections and cost-recovery proceeds on loans held for investment and from the sale of loans held for sale exceeding the cash used for the origination and funding of loans held for investment for the year ended December 31, 2023.
Revenue From Real Estate Owned On March 8, 2019, we acquired legal title to a hotel property through a deed in lieu of foreclosure.
Revenues consist primarily of rental revenue from operating leases. 64 Table of Contents On March 8, 2019, we acquired legal title to a hotel property through a deed in lieu of foreclosure.
The standard replaced the incurred loss impairment methodology pursuant to GAAP with a methodology that reflects current expected credit losses (“CECL”) on both the outstanding balances and unfunded commitments on loans held for investment and requires consideration of a broader range of historical experience adjusted for current conditions and reasonable and supportable forecast information to inform credit loss estimates (the “CECL Reserve”).
FASB ASC Topic 326, Financial Instruments—Credit Losses (“ASC 326”), requires us to reflect current expected credit losses (“CECL”) on both the outstanding balances and unfunded commitments on loans held for investment and requires consideration of a broad range of historical experience adjusted for current conditions and reasonable and supportable forecast information to inform credit loss estimates (the “CECL Reserve”).
Recent Accounting Pronouncements See Note 2 to our consolidated financial statements included in this annual report on Form 10-K, which describes recent accounting pronouncements that we have adopted or are currently evaluating.
Recent Accounting Pronouncements See Note 2 to our consolidated financial statements included in this annual report on Form 10-K, which describes recent accounting pronouncements that we have adopted or are currently evaluating. RECENT DEVELOPMENTS Our board of directors declared a regular cash dividend of $0.25 per common share for the first quarter of 2024.
The following table summarizes our loans held for investment as of December 31, 2022 ($ in thousands): 58 Table of Contents As of December 31, 2022 Carrying Amount (1) Outstanding Principal (1) Weighted Average Unleveraged Effective Yield Weighted Average Remaining Life (Years) Senior mortgage loans $ 2,225,725 $ 2,243,818 8.4 % (2) 8.8 % (3) 1.3 Subordinated debt and preferred equity investments 38,283 39,003 14.0 % (2) 14.0 % (3) 2.8 Total loans held for investment portfolio $ 2,264,008 $ 2,282,821 8.5 % (2) 8.9 % (3) 1.4 _______________________________ (1) The difference between the Carrying Amount and the Outstanding Principal amount of the loans held for investment consists of unamortized purchase discount, deferred loan fees and loan origination costs.
The following table summarizes our loans held for investment as of December 31, 2023 ($ in thousands): As of December 31, 2023 Carrying Amount (1) Outstanding Principal (1) Weighted Average Unleveraged Effective Yield Weighted Average Remaining Life (Years) Senior mortgage loans $ 2,090,146 $ 2,118,947 7.5 % (2) 9.3 % (3) 1.1 Subordinated debt and preferred equity investments 36,378 39,098 8.1 % (2) 15.3 % (3) 1.8 Total loans held for investment portfolio $ 2,126,524 $ 2,158,045 7.5 % (2) 9.4 % (3) 1.1 _______________________________ (1) The difference between the Carrying Amount and the Outstanding Principal amount of the loans held for investment consists of unamortized purchase discounts, deferred loan fees and origination costs and cost-recovery proceeds.
Food and beverage expense primarily included the cost of food, the cost of beverages and associated labor costs. Other operating expenses included labor and other costs associated with administrative departments, sales and marketing, repairs and maintenance, real estate taxes, insurance, utility costs and management and incentive fees paid to the hotel property manager.
Other operating expenses included labor and other costs associated with administrative departments, sales and marketing, repairs and maintenance, real estate taxes, insurance, utility costs and management and incentive fees paid to the hotel property manager. Interest expense on note payable relates to the financing costs incurred for our hotel property that was classified as real estate owned.
CONTRACTUAL OBLIGATIONS AND COMMITMENTS Our contractual obligations as of December 31, 2022 are described in the following table ($ in thousands): 67 Table of Contents Total Less than 1 year 1 to 3 years 3 to 5 years More than 5 years Wells Fargo Facility $ 270,798 $ — $ 270,798 $ — $ — Citibank Facility 236,240 — 236,240 — — CNB Facility — — — — — MetLife Facility — — — — — Morgan Stanley Facility 198,193 — 198,193 — — Notes Payable 105,000 — 105,000 — — Secured Term Loan 150,000 — — 150,000 — Future Loan Funding Commitments 227,487 36,279 169,543 21,665 — Total $ 1,187,718 $ 36,279 $ 979,774 $ 171,665 $ — The table above does not include the related interest expense under the Secured Funding Agreements, Notes Payable and the Secured Term Loan, as all our interest is variable.
CONTRACTUAL OBLIGATIONS AND COMMITMENTS Our contractual obligations as of December 31, 2023 are described in the following table ($ in thousands): Total Less than 1 year 1 to 3 years 3 to 5 years More than 5 years Wells Fargo Facility $ 208,540 $ — $ 208,540 $ — $ — Citibank Facility 221,604 — 221,604 — — CNB Facility — — — — — MetLife Facility — — — — — Morgan Stanley Facility 209,673 — 209,673 — — Notes Payable 105,000 — 105,000 — — Secured Term Loan 150,000 — 150,000 — — Future Loan Funding Commitments 116,539 52,237 62,752 1,550 — Total $ 1,011,356 $ 52,237 $ 957,569 $ 1,550 $ — The table above does not include the related interest expense under the Secured Funding Agreements, Notes Payable and the Secured Term Loan, as all our interest is variable.
We believe the following critical accounting policy represents an area where more significant judgments and estimates are used in the preparation of our consolidated financial statements. Current Expected Credit Loss Reserve . In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments .
We believe the following critical accounting policy represents an area where more significant judgments and estimates are used in the preparation of our consolidated financial statements.
Hotel operating expenses consisted primarily of expenses incurred in the day-to-day operation of our hotel property, including room expense, food and beverage expense and other operating expenses. Room expense included housekeeping and front office wages and payroll taxes, reservation systems, room supplies, laundry services and other costs.
Room expense included housekeeping and front office wages and payroll taxes, reservation systems, room supplies, laundry services and other costs. Food and beverage expense primarily included the cost of food, the cost of beverages and associated labor costs.
RECENT DEVELOPMENTS In January 2023, the senior mortgage loan held by us on an office property located in Illinois was not repaid upon its contractual maturity, which triggered an event of default under the loan agreement. As of February 14, 2023, the outstanding principal balance of the senior Illinois loan is $27.2 million.
In February 2024, the senior mortgage loan we hold on an office property located in Illinois was not repaid upon its contractual maturity, which triggered an event of default under the loan agreement.
At the Market Stock Offering Program On November 22, 2019, we entered into an equity distribution agreement (the “Equity Distribution Agreement”), governing an “at the market offering” program having an aggregate offering price of up to $100.0 million.
As of February 20, 2024, we had approximately $170 million in liquidity including $95 million of unrestricted cash and $75 million of availability under our Secured Funding Agreements. 68 Table of Contents At the Market Stock Offering Program On November 22, 2019, we entered into an equity distribution agreement (the “Equity Distribution Agreement”), governing an “at the market offering” program having an aggregate offering price of up to $100.0 million.
The third party’s loan database includes historical loss data for commercial mortgage-backed securities, or CMBS, issued dating back to 1998, which we believe is a reasonably comparable and available data set to our type of loans. 59 Table of Contents See Note 4 to our consolidated financial statements included in this annual report on Form 10-K for CECL related disclosures.
The third party’s loan database includes historical loss data for commercial mortgage-backed securities, or CMBS, issued dating back to 1998, which we believe is a reasonably comparable and available data set to our type of loans. In certain instances, we may identify specific loans to be collateral dependent.
The increase in net interest margin for the year ended December 31, 2022 compared to the year ended December 31, 2021 primarily relates to an increase in our weighted average earning assets and weighted average borrowings for the year ended December 31, 2022, the benefit received from our interest rate hedging derivative contracts for the year ended December 31, 2022, the benefit received from the increase in LIBOR and SOFR rates on our loans held for investment for the year ended December 31, 2022 and the impact of the accelerated recognition of deferred fees and prepayment penalties received from borrowers related to loans that were repaid during the year ended December 31, 2022.
The decrease in net interest margin for the year ended December 31, 2023 compared to the year ended December 31, 2022 primarily relates to a decrease in our weighted average earning assets and weighted average borrowings for the year ended December 31, 2023, less benefit received from our interest rate hedging derivative contracts due to a decrease in our weighted average notional amount outstanding for the year ended December 31, 2023 and an increase in the amount of loans held for investment on non-accrual status for the year ended December 31, 2023.
As of December 31, 2022, the aggregate originated commitment under these loans at closing was approximately $2.6 billion and outstanding principal was $2.3 billion. During the year ended December 31, 2022, we funded approximately $676.9 million of outstanding principal and received repayments of $823.2 million of outstanding principal.
As of December 31, 2023, the aggregate originated commitment under these loans at closing was approximately $2.4 billion and outstanding principal was $2.2 billion.
Ares Management or one of its investment vehicles may also acquire mortgage loans from us. 64 Table of Contents We have commitments to fund various senior mortgage loans, as well as subordinated debt and preferred equity investments in our portfolio.
We have commitments to fund various senior mortgage loans, as well as subordinated debt and preferred equity investments in our portfolio.
The first quarter 2023 and supplemental cash dividends will be payable on April 18, 2023 to common stockholders of record as of March 31, 2023. 60 Table of Contents RESULTS OF OPERATIONS For the years ended December 31, 2022 and 2021 The following table sets forth a summary of our consolidated results of operations for the years ended December 31, 2022 and 2021 ($ in thousands): For the years ended December 31, 2022 2021 Total revenue $ 106,849 $ 102,069 Total expenses 32,728 40,877 Provision for current expected credit losses 46,061 10 Gain on sale of real estate owned 2,197 — Income before income taxes 30,257 61,182 Income tax expense, including excise tax 472 722 Net income attributable to common stockholders $ 29,785 $ 60,460 The following tables set forth select details of our consolidated results of operations for the years ended December 31, 2022 and 2021 ($ in thousands): Net Interest Margin For the years ended December 31, 2022 2021 Interest income $ 170,171 $ 133,631 Interest expense (65,994) (50,080) Net interest margin $ 104,177 $ 83,551 For the years ended December 31, 2022 and 2021, net interest margin was approximately $104.2 million and $83.6 million, respectively.
As of February 20, 2024, the outstanding principal balance of the senior Illinois loan is $56.9 million. 63 Table of Contents RESULTS OF OPERATIONS For the years ended December 31, 2023 and 2022 The following table sets forth a summary of our consolidated results of operations for the years ended December 31, 2023 and 2022 ($ in thousands): For the Years Ended December 31, 2023 2022 Total revenue $ 92,926 $ 106,849 Total expenses 28,513 32,728 Provision for current expected credit losses 91,825 46,061 Realized losses on loans 10,499 — Unrealized losses on loans held for sale 995 — Gain on sale of real estate owned — 2,197 Income (loss) before income taxes (38,906) 30,257 Income tax expense (benefit), including excise tax (39) 472 Net income (loss) attributable to common stockholders $ (38,867) $ 29,785 The following tables set forth select details of our consolidated results of operations for the years ended December 31, 2023 and 2022 ($ in thousands): Net Interest Margin For the Years Ended December 31, 2023 2022 Interest income $ 198,608 $ 170,171 Interest expense (109,652) (65,994) Net interest margin $ 88,956 $ 104,177 For the years ended December 31, 2023 and 2022, net interest margin was approximately $89.0 million and $104.2 million, respectively.
In January 2023, the senior mortgage loan held by us on a mixed-use property located in California did not receive the January interest payment, which triggered an event of default under the loan agreement. As of February 14, 2023, the outstanding principal balance of the senior California loan is $37.9 million.
In January 2024, the mezzanine loan we hold on an office property located in New Jersey did not receive the January 2024 interest payment, which triggered an event of default under the loan agreement. As of February 20, 2024, the outstanding principal balance of the mezzanine New Jersey loan is $18.5 million.
The Morgan Stanley Facility is subject to one 12-month extension, which may be exercised at our option provided that certain conditions are met and applicable extension fees are paid. (7) A wholly owned subsidiary of ours is party to a Credit and Security Agreement with the lender referred to therein, which provides for a $105.0 million note (the "Notes Payable").
The $105.0 million note is subject to two 12-month extensions, each of which may be exercised at our option provided that certain conditions are met and applicable extension fees are paid.
We did not conduct any repurchases under the Repurchase Program during the year ended December 31, 2022. Loans Held for Investment Portfolio As of December 31, 2022, our portfolio included 60 loans held for investment, excluding 150 loans that were repaid, sold or converted to real estate owned since inception.
Loans Held for Investment Portfolio As of December 31, 2023, our portfolio included 46 loans held for investment, excluding 167 loans that were repaid, sold, converted to real estate owned or transferred to held for sale since inception.

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Market Risk — interest-rate, FX, commodity exposure

15 edited+6 added−2 removed23 unchanged
Biggest changeInterest Rate Risk Interest rates are highly sensitive to many factors, including fiscal and monetary policies and domestic and international economic and political considerations, as well as other factors beyond our control. We are subject to interest rate risk in connection with our assets and our related financing obligations, including our borrowings under the Financing Agreements.
Biggest changeWe have continued regular dialogue with our borrowers and our financing providers to assess this credit risk. Interest Rate Risk Interest rates are highly sensitive to many factors, including fiscal and monetary policies and domestic and international economic and political considerations, as well as other factors beyond our control.
As market volatility increases or liquidity decreases, the fair value of our investments and liabilities may be adversely impacted. Prepayment and Securitizations Repayment Risk Our net income and earnings may be affected by prepayment rates on our existing CRE loans. When we originate our CRE loans, we anticipate that we will generate an expected yield.
As market volatility increases or liquidity decreases, the fair value of our investments and liabilities may be adversely impacted. Prepayment and Securitizations Repayment Risk Our net income (loss) and earnings may be affected by prepayment rates on our existing CRE loans. When we originate our CRE loans, we anticipate that we will generate an expected yield.
Changes in interest rates do not necessarily correlate with inflation rates or changes in inflation rates but adverse changes in inflation or changes in inflation expectations can lead to lower returns on our investments than originally anticipated. Current record levels of inflation could exacerbate this possibility.
Changes in interest rates do not necessarily correlate with inflation rates or changes in inflation rates but adverse changes in inflation or changes in inflation expectations can lead to lower returns on our investments than originally anticipated. Current levels of inflation could exacerbate this possibility.
Real Estate Risk Our real estate investments are subject to volatility and may be affected adversely by a number of factors, including, but not limited to, national, regional and local economic conditions (which may be adversely affected by industry slowdowns and other factors); local real estate conditions; changes or continued weakness in specific industry segments; local markets with a significant exposure to the energy sector; construction quality, age and design; demographic factors; and retroactive changes to building or similar codes.
Real Estate Risk Our real estate investments and the value of real estate owned are subject to volatility and may be affected adversely by a number of factors, including, but not limited to, national, regional and local economic conditions (which may be adversely affected by industry slowdowns and other factors); local real estate conditions; changes or continued weakness in specific industry segments; local markets with a significant exposure to the energy sector; construction quality, age and design; demographic factors; and retroactive changes to building or similar codes.
Similarly, some of our borrowing costs may be subject to interest rate floors. In a period of decreasing interest rates, the interest rate yields on our floating rate mortgage assets could decrease, while the interest rate costs on certain of our borrowings could be fixed at a higher floor.
Similarly, some of our borrowing costs may be subject to interest rate floors. In a period of decreasing interest rates, the interest rate yields on our floating rate mortgage assets could decrease, while the interest rate 73 Table of Contents costs on certain of our borrowings could be fixed at a higher floor.
Our Manager seeks to manage credit risk by performing our due diligence process prior to origination or acquisition and through the use of non-recourse financing, when and where available and appropriate. Credit risk is also addressed through our Manager’s ongoing review of our loans held for investment portfolio.
Our Manager seeks to manage credit 72 Table of Contents risk by performing a due diligence process prior to origination or acquisition and through the use of non-recourse financing, when and where available and appropriate. Credit risk is also addressed through our Manager’s ongoing review of our loans held for investment portfolio.
Weakness or volatility in the financial markets, the commercial real estate and mortgage markets and the economy generally could adversely affect one or more of our potential lenders and could cause one or more of our potential lenders to be unwilling or unable to provide us with financing or to increase the costs of that financing.
Continued weakness or volatility in the financial markets, the commercial real estate and mortgage markets and the economy generally could adversely affect one or more of our lenders or potential lenders and could cause one or more of our 74 Table of Contents lenders or potential lenders to be unwilling or unable to provide us with financing or to increase the costs of that financing.
We are also subject to cross-default and acceleration rights with respect to our Financing 70 Table of Contents Agreements. In addition, our CLO Securitizations contain certain senior note overcollateralization ratio tests.
We are also subject to cross-default and acceleration rights with respect to our Financing Agreements. In addition, our CLO Securitizations contain certain senior note overcollateralization ratio tests.
The following table estimates the hypothetical increases/(decreases) in net income for a twelve month period, assuming (1) an immediate increase or decrease in 30-day LIBOR or SOFR as of December 31, 2022, (2) no change in the outstanding principal balance of our loans held for investment portfolio and borrowings as of December 31, 2022 and (3) no changes in the notional amount of the interest rate swap agreement entered into as of December 31, 2022 ($ in millions): Change in 30-Day LIBOR or SOFR Increase/(Decrease) in Net Income Up 100 basis points $10.1 Up 50 basis points $5.0 LIBOR or SOFR at 0 basis points $(26.3) The severity of any such impact depends on our asset/liability composition at the time as well as the magnitude and duration of the interest rate increase and any applicable floors or hedging transactions.
The following table estimates the hypothetical increases/(decreases) in net income for a twelve month period, assuming (1) an immediate increase or decrease in 30-day SOFR as of December 31, 2023 and (2) no change in the outstanding principal balance of our loans held for investment portfolio, available-for-sale debt securities and borrowings as of December 31, 2023 ($ in millions): Change in 30-Day SOFR Increase/(Decrease) in Net Income Up 100 basis points $2.9 Up 50 basis points $1.5 SOFR at 0 basis points $(3.5) The severity of any such impact depends on our asset/liability composition at the time as well as the magnitude and duration of the interest rate increase and any applicable floors or hedging transactions.
Inflation Risk Virtually all of our assets and liabilities are sensitive to interest rates. As a result, interest rates and other factors influence our performance far more so than does inflation.
We seek to manage these risks through our underwriting and asset management processes. Inflation Risk Virtually all of our assets and liabilities are sensitive to interest rates. As a result, interest rates and other factors influence our performance far more so than does inflation.
Decreases in property values reduce the value of the collateral and the potential proceeds available to a borrower to repay the underlying loan or loans, as the case may be, which could also cause us to suffer losses. We seek to manage these risks through our underwriting and asset management processes.
Decreases in property values reduce the value of the collateral and the potential proceeds available to a borrower to repay the underlying loan or loans, as the case may be, and reduce the value of properties that we own as a result of default on the underlying loan, each of which could cause us to suffer losses.
The impact of declining interest rates may be mitigated by interest rate floors and the impact of rising or declining interest rates may be mitigated by certain 69 Table of Contents hedging transactions that we have entered into or may enter into in the future.
Interest Rate Effect on Net Income Our interest income and expense will generally change directionally with index rates. The impact of declining interest rates may be mitigated by interest rate floors and the impact of rising or declining interest rates may be mitigated by certain hedging transactions that we have entered into or may enter into in the future.
We primarily originate or acquire floating rate mortgage assets and finance those assets with index-matched floating rate liabilities. As a result, we significantly reduce our exposure to changes in portfolio value and cash flow variability related to changes in interest rates.
As a result, we significantly reduce our exposure to changes in portfolio value and cash flow variability related to changes in interest rates.
Rising interest rates and record-high inflation coupled with the COVID-19 pandemic has, and continues to have, an adverse impact on industries whose properties serve as collateral for some of our portfolio investments. For example, increased demand for work-from-home arrangements, resulting from the COVID-19 pandemic, may adversely impact the operations of office properties.
High interest rates and persistent inflation have had, and continue to have, an adverse impact on industries whose properties serve as collateral for some of our portfolio investments. Similarly, increased demand for work-from-home arrangements has impacted the operations of office properties and rising operating costs, such as property insurance, have further pressured cash flow performance of commercial real estate.
We will not receive any proceeds from the repayment of loans in the CLO Securitizations until all senior notes are repaid in full. Financing Risk We borrow funds under our Financing Agreements to finance our target assets. Our Secured Funding Agreements contain margin call provisions following the occurrence of certain mortgage loan credit events.
We will not receive any proceeds from the repayment of loans in the CLO Securitizations until all senior notes are repaid in full. Financing Risk We borrow funds under our Financing Agreements to finance our target assets. The financial markets have recently encountered volatility associated with concerns about the balance sheets of banks, especially small and regional banks.
Removed
We have been in regular dialogue with our borrowers and our financing providers to assess this credit risk. See Note 3 to our consolidated financial statements included in this annual report on Form 10-K for a more detailed description of the potential impacts of macroeconomic conditions on our loan investments.
Added
We are subject to interest rate risk in connection with our assets and our related financing obligations, including our borrowings under the Financing Agreements. We primarily originate or acquire floating rate mortgage assets and finance those assets with index-matched floating rate liabilities.
Removed
Interest Rate Effect on Net Income Our interest income and expense will generally change directionally with index rates.
Added
We may be subject to risk arising from a default by one of several large banking institutions that are dependent on one another to meet their liquidity or operational needs, so that a default by one institution may cause a series of defaults by the other institutions, and may impact the liquidity of our lenders and their willingness to provide us with borrowings to finance our target assets and other needs.
Added
In addition, our Secured Funding Agreements contain margin call provisions following the occurrence of certain mortgage loan credit events.
Added
For example, certain of our Financing Agreements contain (i) negative covenants that limit, among other things, our ability to repurchase our common stock, make distributions to our stockholders, employ leverage beyond certain amounts, sell assets, engage in mergers or consolidations, grant liens, and enter into transactions with affiliates (including amending the Management Agreement in a material respect) and (ii) operating and financial covenants, including those requiring us to maintain a certain tangible net worth, asset coverage ratio, total net leverage ratio and loan concentration.
Added
Additionally, in such a case, interest income may continue to accrue for the holders of subordinate securities within the CLO Securitizations notwithstanding the cash being used to repay principal on the more senior securities. This would cause us to recognize income but not have a corresponding amount of cash available for operations or for distribution to our stockholders.
Added
From time to time, capital markets may also experience periods of disruption and instability, which may adversely affect our ability to refinance our financing arrangements.

Other ACRE 10-K year-over-year comparisons