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What changed in Ares Commercial Real Estate Corp's 10-K — 2023 vs 2024

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Paragraph-level year-over-year comparison of Ares Commercial Real Estate Corp's 2023 and 2024 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 2024 report.

+791 added−715 removedSource: 10-K (2025-02-12) vs 10-K (2024-02-22)

Top changes in Ares Commercial Real Estate Corp's 2024 10-K

791 paragraphs added · 715 removed · 598 edited across 8 sections

Item 1. Business

Business — how the company describes what it does

232 edited+69 added−24 removed195 unchanged
Biggest changeF-17 Table of Contents A more detailed listing of the Company’s loans held for investment portfolio based on information available as of December 31, 2023 is as follows ($ in millions): Loan Type Location Outstanding Principal (1) Carrying Amount (1) Interest Rate Unleveraged Effective Yield (2) Maturity Date (3) Payment Terms (4) Senior Mortgage Loans: Office IL $159.0 $154.0 (5) 7.6% (5) Mar 2025 (5) I/O Multifamily NY 132.2 131.4 S+3.90% 9.7% Jun 2025 I/O Office Diversified 121.9 121.9 S+3.75% 9.4% Jan 2025 (6) P/I (7) Industrial IL 100.7 100.6 S+4.65% 10.4% May 2024 I/O Multifamily TX 100.0 99.5 S+3.50% 9.7% Jul 2025 I/O Residential/Condo NY 91.0 86.4 S+8.95% —% (8) Apr 2024 (8) I/O Mixed-use NY 76.7 76.6 S+3.75% 9.5% Jul 2024 I/O Residential/Condo FL 75.0 75.0 S+5.35% 10.7% Jul 2024 (9) I/O Office NY 73.1 71.3 S+3.95% —% (10) Aug 2025 I/O Office AZ 69.2 69.0 S+3.61% 9.4% Oct 2024 I/O Office NC 68.9 68.8 S+3.65% 9.5% Aug 2024 I/O Office NC 68.7 67.2 S+4.35% —% (11) Mar 2024 (11) P/I (7) Multifamily TX 68.4 68.2 S+2.95% 8.7% Dec 2024 I/O Multifamily/Office SC 67.0 66.9 S+3.00% 8.6% Nov 2024 I/O Multifamily OH 57.0 56.5 S+3.05% 8.8% Oct 2026 I/O Office IL 56.9 49.8 S+3.95% —% (12) Feb 2024 (12) I/O Office IL 56.0 55.7 S+4.25% 10.1% Jan 2025 I/O Hotel NY 50.7 50.4 S+4.40% 10.1% Mar 2026 I/O Office MA 48.7 48.2 S+3.75% 9.8% Apr 2025 I/O Office GA 48.5 48.4 S+3.15% 8.8% Dec 2024 (13) P/I (7) Industrial MA 47.5 47.2 S+2.90% 8.4% Jun 2028 I/O Hotel CA 46.9 46.5 S+4.20% 10.0% Mar 2025 I/O Mixed-use TX 35.3 35.3 S+3.85% 9.5% Sep 2024 I/O Student Housing CA 34.0 34.0 S+3.95% 9.3% Jan 2024 (14) I/O Office CA 33.2 30.6 S+3.45% —% (15) Dec 2023 (15) I/O Multifamily CA 31.7 31.6 S+3.00% 8.6% Dec 2025 I/O Multifamily PA 28.2 28.2 S+2.50% 7.9% Dec 2025 (16) I/O Industrial NJ 27.8 27.7 S+3.85% 9.8% May 2024 I/O Industrial FL 25.5 25.4 S+3.00% 8.6% Dec 2025 I/O Multifamily WA 23.1 23.0 S+3.00% 8.5% Nov 2025 I/O Multifamily TX 22.8 22.8 S+2.60% 8.3% Oct 2024 I/O Office CA 20.5 20.4 S+3.50% 9.1% Nov 2025 (17) P/I (7) Industrial CA 19.6 19.1 S+3.85% —% (18) Sep 2024 (18) I/O Student Housing AL 19.5 19.5 S+3.95% 9.7% May 2024 I/O Multifamily WA 18.8 18.8 S+3.10% —% (19) Sep 2023 (19) I/O Self Storage PA 18.2 18.1 S+3.00% 8.7% Dec 2025 I/O Self Storage NJ 17.6 17.4 S+2.90% 9.0% Apr 2025 I/O Self Storage WA 11.5 11.4 S+2.90% 9.0% Mar 2025 I/O Self Storage IN 10.8 10.6 S+3.60% 9.7% Jun 2026 I/O Industrial TX 10.0 10.0 S+5.35% 11.1% Dec 2024 I/O Self Storage MA 7.7 7.7 S+3.00% 8.6% Nov 2024 I/O Self Storage MA 6.8 6.7 S+3.00% 8.6% Oct 2024 I/O Industrial TN 6.4 6.4 S+5.60% 11.3% Nov 2024 I/O Self Storage NJ 5.9 5.9 S+3.00% 8.8% Jul 2024 I/O Subordinated Debt and Preferred Equity Investments: Multifamily SC 20.6 20.5 S+9.53% 15.3% Sep 2025 I/O Office NJ 18.5 15.9 12.00% —% (20) Jan 2026 I/O Total/Weighted Average $2,158.0 $2,126.5 7.5% _________________________ (1) The difference between the Carrying Amount and the Outstanding Principal amount of the loans held for investment consists of unamortized purchase discounts, deferred loan fees and origination costs and cost-recovery proceeds.
Biggest changeF-19 Table of Contents A more detailed listing of the Company’s loans held for investment portfolio based on information available as of December 31, 2024 is as follows ($ in millions): Loan Type Location Outstanding Principal (1) Carrying Amount (1) Interest Rate Unleveraged Effective Yield (2) Maturity Date (3) Payment Terms (4) Senior Mortgage Loans: Office IL $163.8 $150.1 (5) —% (5) Mar 2025 I/O Multifamily NY 132.2 131.9 S+3.90% 8.7% Jun 2025 I/O Residential/Condo NY 119.0 99.7 S+8.95% —% (6) Dec 2025 (6) I/O Office Diversified 83.9 83.3 S+3.75% 8.6% Jul 2026 (7) P/I (8) Mixed-use NY 77.2 77.1 S+3.75% 8.3% Jul 2025 (9) I/O Office AZ 77.1 76.9 S+3.61% 8.3% Oct 2025 (10) I/O Residential/Condo FL 75.0 75.0 S+5.35% 9.7% Jul 2025 (11) I/O Office NC 70.6 70.5 S+3.65% 8.0% Aug 2028 (12) I/O Multifamily TX 68.5 68.3 S+2.95% 7.6% Dec 2025 (13) I/O Hotel CA 60.2 60.2 S+4.20% 9.0% Mar 2025 I/O Multifamily SC 59.2 58.9 S+3.00% 9.2% Mar 2025 (14) I/O Office NY 59.0 59.0 S+2.65% 7.0% (15) Jul 2027 (15) I/O Multifamily OH 57.3 56.9 S+3.05% 7.8% Oct 2026 I/O Office IL 55.7 55.7 S+4.25% 9.1% Jan 2025 P/I (8) Hotel NY 55.5 55.3 S+4.40% 9.1% Mar 2026 I/O Office (Life Sciences) MA 51.5 50.1 S+3.75% —% (16) Apr 2026 (16) I/O Office GA 48.1 48.1 S+3.15% 12.5% Mar 2025 (17) P/I (8) Industrial MA 47.4 47.3 S+2.90% 7.4% Jun 2028 I/O Mixed-use TX 34.3 34.3 S+3.85% 9.0% Dec 2024 (18) I/O Multifamily CA 31.7 31.7 S+3.00% 7.6% Dec 2025 I/O Multifamily PA 28.2 28.2 S+2.50% 6.8% Dec 2025 I/O Industrial NJ 27.8 27.8 S+8.85% 13.2% Nov 2024 (19) I/O Industrial FL 25.5 25.5 S+3.00% 7.6% Dec 2025 I/O Multifamily WA 23.1 23.1 S+3.00% 7.5% Nov 2025 I/O Multifamily TX 23.1 23.0 S+2.60% 7.5% Oct 2025 (20) I/O Office CA 20.2 20.1 S+3.50% 8.1% Nov 2025 P/I (8) Self Storage PA 18.2 18.1 S+3.00% 7.6% Dec 2025 I/O Self Storage NJ 17.6 17.6 S+2.90% 8.0% Apr 2025 I/O Self Storage WA 11.5 11.5 S+2.90% 8.0% Mar 2025 I/O Self Storage IN 11.2 11.2 S+3.60% 8.0% Jun 2026 I/O Self Storage MA 7.7 7.7 S+3.00% 7.6% Nov 2025 (21) I/O Industrial CA 7.0 7.0 S+3.85% 8.2% Jan 2027 (22) I/O Self Storage MA 6.8 6.7 S+3.00% 7.6% Oct 2025 (23) I/O Subordinated Debt and Preferred Equity Investments: Multifamily SC 20.6 20.4 S+9.53% 15.7% Sep 2025 I/O Industrial CA 12.6 10.9 S+3.85% —% (22) Jan 2027 (22) I/O Office NY 10.2 7.6 5.50% —% (15) Jul 2027 (15) I/O Total/Weighted Average $1,698.5 $1,656.7 6.9% _________________________ (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.
Comprehensive Income Comprehensive income consists of net income (loss) and OCI that are excluded from net income (loss). Stock-Based Compensation The Company recognizes the cost of stock‑based compensation, which is included within general and administrative expenses in the Company’s consolidated statements of operations.
Comprehensive Income (Loss) Comprehensive income (loss) consists of net income (loss) and OCI that are excluded from net income (loss). Stock-Based Compensation The Company recognizes the cost of stock‑based compensation, which is included within general and administrative expenses in the Company’s consolidated statements of operations.
When determining the fair value of a mixed-use property, certain assumptions are made including, but not limited to: (1) projected operating cash flows, including factors such as property operating expenses and re-leasing assumptions that take into account the number of months to re-lease, market rental revenue and required tenant improvements; and (2) projected cash flows from the eventual disposition of a mixed-use property based upon the Company’s estimation of a capitalization rate, discount rates and comparable selling prices in the market.
When determining the fair value of the mixed-use property, certain assumptions are made including, but not limited to: (1) projected operating cash flows, including factors such as property operating expenses and re-leasing assumptions that take into account the number of months to re-lease, market rental revenue and required tenant improvements; and (2) projected cash flows from the eventual disposition of the mixed-use property based upon the Company’s estimation of a capitalization rate, discount rates and comparable selling prices in the market.
“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.
“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 (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.
Variable lease payments are recognized as rental revenue in the period when the changes in facts and circumstances on which the variable lease payments are based occur. Certain of the Company’s mixed-use property leases also contain provisions for tenants to reimburse the Company for property operating expenses. Such reimbursements are included in rental revenue on a gross basis.
Variable lease payments are recognized as rental revenue in the period when the changes in facts and circumstances on which the variable lease payments are based occur. Certain of the Company’s mixed-use and office property leases also contain provisions for tenants to reimburse the Company for property operating expenses. Such reimbursements are included in rental revenue on a gross basis.
ASU No. 2023-09 is effective for fiscal years beginning after December 15, 2024 and is to be adopted on a prospective basis with the option to apply retrospectively. The Company is currently assessing the impact of this guidance, however, the Company does not expect a material impact to its consolidated financial statements. 3.
ASU No. 2023-09 is effective for fiscal years beginning after December 15, 2024 and is to be adopted on a prospective basis with the option to apply retrospectively. The Company is currently assessing the impact of this guidance, however, the Company does not expect a material impact to its consolidated financial statements.
As the Company does not expect to complete a sale of the mixed-use property within the next twelve months, the mixed-use property is considered held for use, and is carried at its estimated fair value at acquisition and is presented net of accumulated depreciation or amortization and impairment charges.
As the Company does not expect to complete a sale of the mixed-use property within the next twelve months, the mixed-use property is considered held for investment, and is carried at its estimated fair value at acquisition and is presented net of accumulated depreciation or amortization and impairment charges.
On the acquisition date, the Company designates investments in CRE debt securities as available-for-sale. Investments in CRE debt securities that are classified as available-for-sale are carried at fair value. Unrealized holding gains and losses for available-for-sale debt securities are recorded each period in other comprehensive income (“OCI”).
On the acquisition date, the Company designates investments in CRE debt securities as available-for-sale. Investments in CRE debt securities that are classified as available-for-sale are carried at fair value. Unrealized holding gains and losses for available-for-sale debt securities are recorded each period in other comprehensive income (loss) (“OCI”).
Observable inputs are inputs that other market participants would use in pricing a security. These may include quoted prices for similar securities, interest rates, prepayment speeds, credit risk and others. • Level 3—Prices are determined using significant unobservable inputs.
Observable inputs are inputs that other market participants would use in pricing a security. These may include quoted prices for similar securities, interest rates, prepayment rates, credit risk and others. • Level 3—Prices are determined using significant unobservable inputs.
For the years ended December 31, 2023 and 2022, the Company recognized a realized gain of $921 thousand and $1.0 million, respectively, through a reduction in interest expense on the termination of the interest rate cap within current earnings.
For the years ended December 31, 2023 and 2022, the Company recognized a realized gain of $921 thousand and $1.0 million, respectively, through a reduction in interest expense on the termination of the interest rate cap within current earnings. 9.
For the year ended December 31, 2022, the Company recognized a $2.2 million gain on the sale of the hotel property as the net carrying value of the hotel property as of the March 1, 2022 sale date was lower than the net sales proceeds received by the Company.
For the year ended December 31, 2022, the Company recognized a $2.2 million gain on the sale of the hotel property as the net carrying value of the hotel property as of the March 1, 2022 sale date was lower than the net sale proceeds received by the Company.
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.
ORGANIZATION Ares Commercial Real Estate Corporation (together with its consolidated subsidiaries, the “Company” or “ACRE”) is a specialty finance company primarily engaged in directly originating and investing in commercial real estate loans and related investments.
As of December 31, 2023, the sale had not yet closed and the loan was reclassified from held for investment to held for sale and is carried at fair value in the Company's consolidated balance sheets.
As of December 31, 2023, the sale had not yet closed and the loan was reclassified from held for investment to held for sale and was carried at fair value in the Company's consolidated balance sheets.
ASU No. 2023-07 will improve financial reporting by requiring disclosure of incremental segment information on an annual and interim basis to develop more useful financial analysis and includes the following changes: (i) single segment entities must follow segment guidance, (ii) must name the title and position of the chief operating decision maker and (iii) the ability to elect more than one performance measure.
ASU No. 2023-07 intends to improve financial reporting by requiring disclosure of incremental segment information on an annual and interim basis to develop more useful financial analysis and includes the following changes: (i) single segment entities must follow segment guidance, (ii) must name the title and position of the chief operating decision maker and (iii) the ability to elect more than one performance measure.
The CNB Facility contains various affirmative and negative covenants and provisions regarding events of default that are applicable to the Company and certain of the Company’s subsidiaries, which are normal and customary for similar financing facilities, including the following: (a) limitations on the incurrence of additional indebtedness or liens, (b) limitations on how borrowed funds may be used, (c) limitations on certain distributions and dividend payments following a default or event of default, (d) limitations on dispositions of assets, (e) maintenance of minimum total asset value by the borrower under the CNB Facility and its subsidiaries and (f) prohibitions of certain change of control events.
The CNB Facility contains various affirmative and negative covenants and provisions regarding events of default that are applicable to the Company and certain of the Company’s subsidiaries, which are normal and customary for similar F-32 Table of Contents financing facilities, including the following: (a) limitations on the incurrence of additional indebtedness or liens, (b) limitations on how borrowed funds may be used, (c) limitations on certain distributions and dividend payments following a default or event of default, (d) limitations on dispositions of assets, (e) maintenance of minimum total asset value by the borrower under the CNB Facility and its subsidiaries and (f) prohibitions of certain change of control events.
The Company monitors performance of its loans held for investment portfolio under the following methodology: (1) borrower review, which analyzes the borrower’s ability to execute on its F-11 Table of Contents original business plan, reviews its financial condition, assesses pending litigation and considers its general level of responsiveness and cooperation; (2) economic review, which considers underlying collateral (i.e. leasing performance, unit sales and cash flow of the collateral and its ability to cover debt service, as well as the residual loan balance at maturity); (3) property review, which considers current environmental risks, changes in insurance costs or coverage, current site visibility, capital expenditures and market perception; and (4) market review, which analyzes the collateral from a supply and demand perspective of similar property types, as well as from a capital markets perspective.
The Company monitors performance of its loans held for investment portfolio under the following methodology: (1) borrower review, which analyzes the borrower’s ability to execute on its original business plan, reviews its financial condition, assesses pending litigation and considers its general level of responsiveness and cooperation; (2) economic review, which considers underlying collateral (i.e. leasing performance, unit sales and cash flow of the collateral and its ability to cover debt service, as well as the residual loan balance at maturity); (3) property review, which considers current environmental risks, changes in insurance costs or coverage, current site visibility, capital expenditures and market perception; and (4) market review, which analyzes the collateral from a supply and demand perspective of similar property types, as well as from a capital markets perspective.
There have been no subsequent events that occurred during such period that would require disclosure in this annual report on Form 10-K or would be required to be recognized in the consolidated financial statements as of and for the year ended December 31, 2023, except as disclosed below.
There have been no subsequent events that occurred during such period that would require disclosure in this annual report on Form 10-K or would be required to be recognized in the consolidated financial statements as of and for the year ended December 31, 2024, except as disclosed below.
F-18 Table of Contents (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.
(3) 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) F-18 Table of Contents and assumes no dispositions, early prepayments or defaults.
As of the date of the deed in lieu of foreclosure, the Company did not expect to complete a sale of the hotel property within the next twelve months and thus, the hotel property was considered held for use, and was carried at its estimated fair value at acquisition and was presented net of accumulated depreciation and impairment charges.
As of the date of the deed in lieu of foreclosure, the Company did not expect to complete a sale of the hotel property within the next twelve months and thus, the hotel property was considered held for investment, and was carried at its estimated fair value at acquisition and was presented net of accumulated depreciation and impairment charges.
Secured 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.
Secured Term Loan The Company and certain of its subsidiaries are party to a $130.0 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.
Pursuant to the Amended and Restated 2012 Equity Incentive Plan, as amended by the first amendment, the Company may grant awards consisting of restricted shares of the Company’s common stock, restricted stock units (“RSUs”) and/or other equity-based awards to the Company’s outside directors, employees of the Manager, officers, ACREM and other eligible awardees under the plan.
Pursuant to the Amended and Restated 2012 Equity Incentive Plan, as amended by the second amendment, the Company may grant awards consisting of restricted shares of the Company’s common stock, restricted stock units (“RSUs”) and/or other equity-based awards to the Company’s outside directors, employees of the Manager, officers, ACREM and other eligible awardees under the plan.
(3) 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) and assumes no dispositions, early prepayments or defaults.
The Company has analyzed its various federal and state filing positions and believes that its income tax filing positions and deductions are well documented and supported. As of December 31, 2023 and 2022, based on the Company’s evaluation, there is no reserve for any uncertain income tax positions.
The Company has analyzed its various federal and state filing positions and believes that its income tax filing positions and deductions are well documented and supported. As of December 31, 2024 and 2023, based on the Company’s evaluation, there is no reserve for any uncertain income tax positions.
F-44 Table of Contents In January 2024, the Company amended 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 the Company's 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 the Company's 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.
In January 2024, the Company amended 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 the Company's 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 the Company's 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.
The total Weighted Average Unleveraged Effective Yield is calculated based on the average of Unleveraged Effective Yield of all loans held by the Company as of December 31, 2023 as weighted by the outstanding principal balance of each loan. (3) Reflects the initial loan maturity date excluding any contractual extension options.
The total Weighted Average Unleveraged Effective Yield is calculated based on the average of Unleveraged Effective Yield of all loans held by the Company as of December 31, 2024 as weighted by the outstanding principal balance of each loan. (3) Reflects the initial loan maturity date excluding any contractual extension options.
Amortization of debt issuance costs is included within interest expense, except as noted below, in the Company’s consolidated statements of operations while the unamortized balance on the (i) Secured Funding Agreements (each individually defined in Note 6 included in these consolidated financial statements) is included within other assets and (ii) Notes Payable, the Secured Term Loan (each defined in Note 6 included in these consolidated financial statements) and secured borrowings (described in Note 7 included in these consolidated financial statements) and debt securitizations are each included as a reduction to the carrying amount of the liability in the Company’s consolidated balance sheets.
Amortization of debt issuance costs is included within interest expense, except as noted below, in the Company’s consolidated statements of operations while the unamortized balance on the (i) Secured Funding Agreements (each individually defined in Note 6 included in these consolidated financial statements) is included within other assets and (ii) Notes Payable, the Secured Term Loan (each defined in Note 6 included in these consolidated financial statements) and debt securitizations are each included as a reduction to the carrying amount of the liability in the Company’s consolidated balance sheets.
As of December 31, 2023, there were no contingencies recorded on the Company’s consolidated balance sheets as a result of such conditions, however, if global market conditions worsen, it could adversely affect the Company’s business, financial condition and results of operations.
As of December 31, 2024, there were no contingencies recorded on the Company’s consolidated balance sheets as a result of such conditions; however, if global market conditions worsen, it could adversely affect the Company’s business, financial condition and results of operations.
Real estate assets are depreciated or amortized using the straight-line method over estimated useful lives of up to 40 years for buildings and improvements, up to 15 years for furniture, fixtures and equipment and over the lease terms for intangible assets and liabilities.
Real estate assets held for investment are depreciated or amortized using the straight-line method over estimated useful lives of up to 40 years for buildings and improvements, up to 15 years for furniture, fixtures and equipment and over the lease terms for intangible assets and liabilities.
The total Weighted Average Unleveraged Effective Yield is calculated based on the average of Unleveraged Effective Yield of all interest accruing loans held by the Company as of December 31, 2023 and 2022 as weighted by the total outstanding principal balance of each interest accruing loan (excludes loans on non-accrual status as of December 31, 2023 and 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 the Company as of December 31, 2024 and 2023 as weighted by the total outstanding principal balance of each interest accruing loan (excludes loans on non-accrual status as of December 31, 2024 and 2023).
(3) In December 2023, the Company entered into a sale agreement with a third party to sell a senior mortgage loan with outstanding principal of $37.9 million, which is collateralized by a mixed-use property located in California.
(3) In December 2023, the Company entered into a sale agreement with a third party to sell a senior mortgage loan with outstanding principal of $37.9 million, which was collateralized by a mixed-use property located in California.
(4) In March 2022, the Company re-calibrated its net exposure to interest rate changes by terminating its interest rate cap derivative, which had a notional amount of $170.0 million on the termination date and a strike rate of 0.50%.
Further, in March 2022, the Company re-calibrated its net exposure to interest rate changes by terminating its interest rate cap derivative, which had a notional amount of $170.0 million on the termination date and a strike rate of 0.50%.
F-45 Table of Contents SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
F-49 Table of Contents SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Other than amortization related to intangible assets and liabilities for above-market or below-market leases, depreciation or amortization expense related to real estate assets is included within expenses from real estate owned in the Company’s consolidated statements of operations.
Other than amortization related to intangible assets and liabilities for above-market or below-market leases, depreciation or amortization expense related to real estate assets held for investment is included within expenses from real estate owned in the Company’s consolidated statements of operations.
Real estate owned is considered impaired when the sum of estimated future F-38 Table of Contents undiscounted cash flows expected to be generated by the real estate owned over the estimated remaining holding period is less than the carrying amount of such real estate owned.
Real estate owned is considered impaired when the sum of estimated future undiscounted cash flows expected to be generated by the real estate owned over the estimated remaining holding period is less than the carrying amount of such F-41 Table of Contents real estate owned.
The Morgan Stanley Facility also prohibits the Company from amending the management agreement with its Manager in a material respect without the prior consent of the lender. As of December 31, 2023, the Company was in compliance with all financial covenants of the Morgan Stanley Facility.
The Morgan Stanley Facility also prohibits the Company from amending the management agreement with its Manager in a material respect without the prior consent of the lender. As of December 31, 2024, the Company was in compliance with all financial covenants of the Morgan Stanley Facility.
As of December 31, 2023, the Company was in compliance with all financial covenants of the Wells Fargo Facility. Citibank Facility The Company is party to a $325.0 million master repurchase facility with Citibank, N.A. (“Citibank”) (the “Citibank Facility”).
As of December 31, 2024, the Company was in compliance with all financial covenants of the Wells Fargo Facility. Citibank Facility The Company is party to a $325.0 million master repurchase facility with Citibank, N.A. (“Citibank”) (the “Citibank Facility”).
The gain on the sale of the hotel property is included within gain on sale of real estate owned in the Company’s consolidated statements of operations. In connection with the sale of the hotel property, the Company provided a senior mortgage loan to the buyer of the hotel property.
The gain on the sale of the hotel property is included within realized (gain) loss on sale of real estate owned in the Company’s consolidated statements of operations. In connection with the sale of the hotel property, the Company provided a senior mortgage loan to the buyer of the hotel property.
Subsequent to the January 2022 amendment, the Company incurs a non-utilization fee of 25 basis points per annum on the average daily positive difference between the maximum advances approved by Citibank and the actual advances outstanding on the Citibank Facility. For the year ended December 31, 2023, the Company did not incur a non-utilization fee.
Subsequent to the January 2022 amendment, the Company incurs a non-utilization fee of 25 basis points per annum on the average daily positive difference between the maximum advances approved by Citibank and the actual advances outstanding on the Citibank Facility. For the years ended December 31, 2024 and 2023, the Company did not incur a non-utilization fee.
The total Weighted Average Unleveraged Effective Yield is calculated based on the average of Unleveraged Effective Yield of all loans held by the Company as of December 31, 2023 and 2022 as weighted by the total 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 the Company as of December 31, 2024 and 2023 as weighted by the total outstanding principal balance of each loan.
On April 25, 2022, the Company and ACREM entered into an amendment to the Management Agreement to (a) exclude $2.4 million of net income associated with the sale of the real estate owned property for the three months ended March 31, 2022 and to (b) include $2.0 million of net income associated with the Company’s gain on the termination of its interest rate cap derivative for the three months ended March 31, 2022, in each case, with respect to Core Earnings for the three months ended March 31, 2022.
On April 25, 2022, the Company and ACREM entered into an amendment to the Management Agreement to (a) exclude $2.4 million of net income associated with the sale of the real estate owned property for the three months ended March 31, 2022 and to (b) include $2.0 million of net income associated with the Company’s gain on the termination of its interest rate cap derivative for the three F-43 Table of Contents months ended March 31, 2022, in each case, with respect to Core Earnings for the three months ended March 31, 2022.
In March 2023, the senior mortgage loan was not repaid upon its contractual maturity, which triggered an event of default under the loan agreement and as of December 31, 2023, the loan remains in default.
In March 2023, the senior mortgage loan was not repaid upon its contractual maturity, which triggered an event of default under the loan agreement and as of December 31, 2023, the loan remained in default.
As of December 31, 2023, the FL3 Notes were collateralized by interests in a pool of 16 mortgage assets having a total principal balance of $526.0 million (the “FL3 Mortgage Assets”) that were closed by a wholly-owned subsidiary of the Company and approximately $31.0 million of receivables related to repayments of outstanding principal on previous mortgage assets.
As of December 31, 2023, the FL3 Notes were collateralized by interests in a pool of 16 mortgage assets having a total principal balance of $526.0 million that were closed by a wholly-owned subsidiary of the Company and $31.0 million of receivables related to repayments of outstanding principal on previous mortgage assets.
RELATED PARTY TRANSACTIONS Management Agreement The Company is party to an Amended and Restated Management Agreement under which ACREM, subject to the supervision and oversight of the Company’s board of directors, is responsible for, among other duties, (a) performing all of the Company’s day-to-day functions, (b) determining the Company’s investment strategy and guidelines in conjunction with the F-39 Table of Contents Company’s board of directors, (c) sourcing, analyzing and executing investments, asset sales and financing, and (d) performing portfolio management duties.
RELATED PARTY TRANSACTIONS Management Agreement The Company is party to an Amended and Restated Management Agreement under which ACREM, subject to the supervision and oversight of the Company’s board of directors, is responsible for, among other duties, (a) performing all of the Company’s day-to-day functions, (b) determining the Company’s investment strategy and guidelines in conjunction with the Company’s board of directors, (c) sourcing, analyzing and executing investments, asset sales and financing, and (d) performing portfolio management duties.
Some of the Company’s Financing Agreements are collateralized by (i) assignments of specific loans, preferred equity or a pool of loans held for investment or loans held for sale owned by the Company, (ii) interests in the subordinated portion of the Company’s securitization debt, or (iii) interests in wholly-owned entity subsidiaries that hold the Company’s loans held for investment.
Some of the Company’s Financing Agreements are collateralized by (i) assignments of specific loans, preferred equity or a pool of loans held for investment or loans held for sale owned by the Company, (ii) interests in the subordinated portion of the Company’s securitization debt, (iii) interests in wholly-owned entity subsidiaries that hold the Company’s loans held for investment, or (iv) available-for-sale debt securities.
Equity Incentive Plan On April 23, 2012, the Company adopted an equity incentive plan, which was amended and restated in June 2018 (as further amended, the “Amended and Restated 2012 Equity Incentive Plan”).
Equity Incentive Plan On April 23, 2012, the Company adopted an equity incentive plan, which was amended and restated in June 2018 and further amended in May 2022 (as further amended, the “Amended and Restated 2012 Equity Incentive Plan”).
In addition, the Company is responsible for its proportionate share of certain fees F-40 Table of Contents and expenses, including due diligence costs, as determined by ACREM and Ares Management, including legal, accounting and financial advisor fees and related costs, incurred in connection with evaluating and consummating investment opportunities, regardless of whether such transactions are ultimately consummated by the parties thereto.
In addition, the Company is responsible for its proportionate share of certain fees and expenses, including due diligence costs, as determined by ACREM and Ares Management, including legal, accounting and financial advisor fees and related costs, incurred in connection with evaluating and consummating investment opportunities, regardless of whether such transactions are ultimately consummated by the parties thereto.
Increases and decreases to expected credit losses impact earnings and are recorded within provision for current expected credit losses in the Company’s consolidated statements of operations.
Increases and decreases to expected credit losses impact earnings and are recorded within provision for (reversal of) current expected credit losses, net in the Company’s consolidated statements of operations.
Rental revenue also includes amortization of intangible assets and liabilities related to above and below-market leases. Revenue from the operation of the hotel property was recognized when guestrooms were occupied, services had been rendered or fees had been earned. Revenues were recorded net of any discounts and sales and other taxes collected from customers.
Rental revenue also includes amortization of intangible assets and liabilities related to above and below-market leases. F-15 Table of Contents Revenue from the operation of the hotel property was recognized when guestrooms were occupied, services had been rendered or fees had been earned. Revenues were recorded net of any discounts and sales and other taxes collected from customers.
The Credit and Security Agreement provides for a $105.0 million recourse note (together with the two non-recourse note agreements discussed above, the “Notes Payable”).
The Credit and Security Agreement provided for a $105.0 million recourse note (together with the two non-recourse note agreements discussed above, the “Notes Payable”).
VARIABLE INTEREST ENTITIES Consolidated VIEs As discussed in Note 2, the Company evaluates all of its investments and other interests in entities for consolidation, including its investments in the CLO Securitizations (as defined below), which are considered to be variable interests in VIEs. F-42 Table of Contents CLO Securitizations On January 11, 2019, ACRE Commercial Mortgage 2017-FL3 Ltd.
VARIABLE INTEREST ENTITIES Consolidated VIEs As discussed in Note 2, the Company evaluates all of its investments and other interests in entities for consolidation, including its investments in the CLO Securitizations (as defined below), which are considered to be variable interests in VIEs. CLO Securitizations On January 11, 2019, ACRE Commercial Mortgage 2017-FL3 Ltd.
Unless at least 75% of the CNB Facility is used on average, unused commitments under the CNB Facility accrue non-utilization fees at the rate of 0.375% per annum. For the years ended December 31, 2023, 2022 and 2021, the Company incurred a non-utilization fee of $285 thousand, $284 thousand and $146 thousand, respectively.
Unless at least 75% of the CNB Facility is used on average, unused commitments under the CNB Facility accrue non-utilization fees at the rate of 0.375% per annum. For the years ended December 31, 2024, 2023 and 2022, the Company incurred a non-utilization fee of $286 thousand, $285 thousand and $284 thousand, respectively.
In June 2022, the Company repaid the $23.5 million note in full. Advances under the $23.5 million note accrued interest at a per annum rate equal to the sum of one-month LIBOR plus a spread of 3.75%.
Advances under the $28.3 million note accrued interest at a per annum rate equal to the sum of one-month LIBOR plus a spread of 3.00%. In June 2022, the Company repaid the $23.5 million note in full.
Advances under the $24.4 million secured borrowing accrued interest at a per annum rate equal to the sum of one-month LIBOR plus a spread of 2.50%. In July 2022, the $30.5 million loan was fully repaid and thus, the $24.4 million secured borrowing liability was derecognized. 8.
Advances under the $24.4 million secured borrowing accrued interest at a per annum rate equal to the sum of one-month LIBOR plus a spread of 2.50%. In July 2022, the $30.5 million loan was fully repaid and thus, the $24.4 million secured borrowing liability was derecognized. F-35 Table of Contents 8.
(the “FL4 Issuer”) and ACRE Commercial Mortgage 2021-FL4 LLC (the “FL4 Co-Issuer”), both wholly owned indirect subsidiaries of the Company, entered into an Indenture (the “FL4 Indenture”) with ACRC Lender LLC, a wholly owned subsidiary of the Company (the “Seller”), as advancing agent, Wells Fargo Bank, National Association, as note administrator, and Wilmington Trust, National Association, as trustee, which governs the issuance of approximately $603.0 million principal balance secured floating rate notes (the “FL4 Notes”) and $64.3 million of preferred equity in the FL4 Issuer (the “FL4 CLO Securitization”).
(the “FL4 Issuer”) and ACRE Commercial Mortgage 2021-FL4 LLC (the “FL4 Co-Issuer”), both wholly owned indirect subsidiaries of the Company, entered into an Indenture (the “FL4 Indenture”) with the Seller, as advancing agent, Wells Fargo Bank, National Association, as note administrator, and Wilmington Trust, National Association, as trustee, which governs the issuance of approximately $603.0 million principal balance secured floating rate notes (the “FL4 Notes”) and $64.3 million of preferred equity in the FL4 Issuer (the “FL4 CLO Securitization”).
For such loans that the Company determines that foreclosure of the collateral is probable, the Company estimates the CECL Reserve based on the difference between the fair value of the collateral (less costs to sell the asset if repayment is expected through the sale of the collateral) and the amortized cost basis of the loan as of the measurement date.
For such loans that the Company determines that foreclosure of the collateral is probable, the Company estimates the CECL Reserve based on the difference between the fair value of the collateral (less costs to sell the asset if repayment is F-24 Table of Contents expected through the sale of the collateral) and the amortized cost basis of the loan as of the measurement date.
Interest expense on the $28.3 million note payable is included within expenses from real estate owned in the Company’s consolidated statements of operations for the years ended December 31, 2022 and 2021. (2) Represents the net interest expense recognized from the Company’s derivative financial instruments upon periodic settlement.
Interest expense on the $28.3 million note payable is included within expenses from real estate owned in the Company’s consolidated statements of operations for the year ended December 31, 2022. (2) Represents the net interest expense recognized from the Company’s derivative financial instruments upon periodic settlement.
Unleveraged Effective Yield for each loan is calculated based on SOFR as of December 31, 2023 or the SOFR floor, as applicable.
Unleveraged Effective Yield for each loan is calculated based on SOFR as of December 31, 2024 or the SOFR floor, as applicable.
The Wells Fargo Facility contains various affirmative and negative covenants and provisions regarding events of default that are applicable to the Company and certain of the Company’s subsidiaries, which are normal and customary for similar repurchase facilities, including the following: (a) limitations on the incurrence of additional indebtedness or liens, (b) limitations on how borrowed funds may be used, (c) limitations on certain distributions and dividend payments in excess of the minimum amount necessary to continue to qualify as a REIT and avoid the payment of income and excise taxes, (d) maintenance of adequate capital, (e) limitations on change of control, (f) maintaining a ratio of total debt to tangible net worth of not more than 4.50 to 1.00, (g) maintaining a ratio of recourse debt to tangible net worth of not more than 3.00 to 1.00, (h) maintaining liquidity in an amount not less than the greater of (1) $5.0 million or (2) 5% of the Company’s recourse indebtedness, not to exceed $10.0 million (provided that in the event the Company’s total liquidity equals or exceeds $5.0 million, the Company may satisfy the difference between the minimum total liquidity requirement and the Company’s total liquidity with available borrowing capacity), (i) maintaining a fixed charge coverage ratio (expressed as the ratio of EBITDA (net income before net interest expense, income tax expense, depreciation and amortization), as defined, to fixed charges) for the immediately preceding 12-month period ending on the last date of the applicable reporting period to be at least 1.25 to 1.00, (j) maintaining a tangible net worth of at least the sum of (1) approximately $135.5 million, plus (2) 80% of the net proceeds raised in all future equity issuances by the Company and (k) if certain specific debt yield, loan to value or other credit based tests are not met with respect to assets on the Wells Fargo Facility, the Company may be required to repay certain amounts under the Wells Fargo Facility.
The Wells Fargo Facility contains various affirmative and negative covenants and provisions regarding events of default that are applicable to the Company and certain of the Company’s subsidiaries, which are normal and customary for similar repurchase facilities, including the following: (a) limitations on the incurrence of additional indebtedness or liens, (b) limitations on how borrowed funds may be used, (c) limitations on certain distributions and dividend payments in excess of the minimum amount necessary to continue to qualify as a REIT and avoid the payment of income and excise taxes, (d) maintenance of adequate capital, (e) limitations on change of control, (f) maintaining a ratio of total debt to tangible net worth of not more than 4.50 to 1.00, (g) maintaining liquidity in an amount not less than the greater of (1) $5.0 million or (2) 5% of the Company’s recourse indebtedness, not to exceed $10.0 million (provided that in the event the Company’s total liquidity equals or exceeds $5.0 million, the Company may satisfy the difference between the minimum total liquidity requirement and the Company’s total liquidity with available borrowing capacity), (h) maintaining a fixed charge coverage ratio (expressed as the ratio of EBITDA (net income before net interest expense, income tax expense, depreciation and amortization), as defined, to fixed charges) for the immediately preceding 12-month period ending on the last date of the applicable reporting period to be at least 1.25 to 1.00, (i) maintaining a tangible net worth of at least the sum of (1) $500.0 million plus (2) at any time that the aggregate outstanding principal amount of total debt exceeds $1.8 billion, 80% of the net proceeds raised in all future equity issuances by the Company subsequent to August 2024 and (j) if certain specific debt yield, loan to value or other credit based tests are not met with respect to assets on the Wells Fargo Facility, the Company may be required to repay certain amounts F-31 Table of Contents under the Wells Fargo Facility.
The Company did not recognize any gain or loss on the derecognition of the senior mortgage loan as the fair value of the mixed-use property of $84.3 million and the net deficit held at the mixed-use property of $1.4 million at acquisition approximated the $82.9 million carrying value of the senior mortgage loan.
The Company did not recognize any gain or loss on the derecognition of the senior mortgage loan as the fair value of the mixed-use property of $84.3 million and the net operating assets and liabilities held at the mixed-use property of $(1.4) million at acquisition approximated the $82.9 million carrying value of the senior mortgage loan.
The Company does not have any unrecognized tax benefits and the Company does not expect that to change in the next 12 months. 13. FAIR VALUE The Company follows FASB ASC Topic 820-10, Fair Value Measurement (“ASC 820-10”), which expands the application of fair value accounting.
The Company does not have any unrecognized tax benefits and the Company does not expect that to change in the next 12 months. F-39 Table of Contents 13. FAIR VALUE The Company follows FASB ASC Topic 820-10, Fair Value Measurement (“ASC 820-10”), which expands the application of fair value accounting.
Loans held for investment are recorded at cost, net of unamortized purchase discounts, deferred loan fees and origination costs and cost-recovery proceeds. To determine the fair value of the collateral, the Company may employ different approaches depending on the type of collateral.
F-42 Table of Contents Loans held for investment are recorded at cost, net of unamortized purchase discounts, deferred loan fees and origination costs and cost-recovery proceeds. To determine the fair value of the collateral, the Company may employ different approaches depending on the type of collateral.
The Morgan Stanley Facility contains various affirmative and negative covenants and provisions regarding events of default that are applicable to the Company and certain of the Company’s subsidiaries, which are normal and customary for similar repurchase facilities, including the following: (a) maintaining tangible net worth of at least the sum of (1) 80% of the Company’s tangible net worth as of September 30, 2013, plus (2) 80% of the total net capital raised in all future equity issuances by the Company, (b) maintaining liquidity in an amount not less than the greater of (1) $5.0 million or (2) 5% of the Company’s recourse indebtedness, not to exceed $10.0 million (provided that in the event the Company’s total liquidity equals or exceeds $5.0 million, the Company may satisfy the difference between the minimum total liquidity requirement and the Company’s total liquidity with available borrowing capacity), (c) maintaining a fixed charge coverage ratio (expressed as the ratio of EBITDA (net income before net interest expense, income tax expense, depreciation and amortization), as defined, to fixed charges) for the immediately preceding 12-month period ending on the last date of the applicable reporting period to be at least 1.25 to 1.00, (d) maintaining a ratio of total debt to tangible net worth of not more than 4.50 to 1.00 and (e) if certain specific debt yield and loan to value tests are not met with respect to assets on the Morgan Stanley Facility, the Company may be required to repay certain amounts under the Morgan Stanley Facility.
The Morgan Stanley Facility contains various affirmative and negative covenants and provisions regarding events of default that are applicable to the Company and certain of the Company’s subsidiaries, which are normal and customary for similar repurchase facilities, including the following: (a) maintaining a tangible net worth of at least $500.0 million, (b) maintaining liquidity in an amount not less than the greater of (1) $5.0 million or (2) 5% of the Company’s recourse indebtedness, not to exceed $10.0 million (provided that in the event the Company’s total liquidity equals or exceeds $5.0 million, the Company may satisfy the difference between the minimum total liquidity requirement and the Company’s total liquidity with available borrowing capacity), (c) maintaining a fixed charge coverage ratio (expressed as the ratio of EBITDA (net income before net interest expense, income tax expense, depreciation and amortization), as defined, to fixed charges) for the immediately preceding 12-month period ending on the last date of the applicable reporting period to be at least 1.25 to 1.00, (d) maintaining a ratio of total debt to tangible net worth of not more than 4.50 to 1.00 and (e) if certain specific debt yield and loan to value tests are not met with respect to assets on the Morgan Stanley Facility, the Company may be required to repay certain amounts under the Morgan Stanley Facility.
Based on a 5-point scale, the Company’s loans are rated “1” through “5,” from less risk to greater risk, which ratings are defined as follows: F-23 Table of Contents Ratings Definition 1 Very Low Risk 2 Low Risk 3 Medium Risk 4 High Risk/Potential for Loss: Asset performance is trailing underwritten expectations.
Based on a 5-point scale, the Company’s loans are rated “1” through “5,” from less risk to greater risk, which ratings are defined as follows: Ratings Definition 1 Very Low Risk 2 Low Risk 3 Medium Risk 4 High Risk/Potential for Loss: Asset performance is trailing underwritten expectations.
The Company allocates the purchase price of acquired real estate assets based on the fair value of the acquired land, buildings and improvements, furniture, fixtures and equipment, intangible assets and intangible liabilities, as applicable.
The Company allocates the purchase price of acquired real estate assets held for investment based on the fair value of the acquired land, buildings and improvements, furniture, fixtures and equipment, intangible assets and intangible liabilities, as applicable.
The Company also formed a wholly-owned subsidiary, ACRC 2017- F-15 Table of Contents FL3 TRS LLC (“FL3 TRS”), in March 2017 in order to hold a portion of the CLO Securitizations (as defined below), including the portion that generates excess inclusion income.
The Company also formed a wholly-owned subsidiary, ACRC 2017-FL3 TRS LLC (“FL3 TRS”), in March 2017 in order to hold a portion of the CLO Securitizations (as defined below), including the portion that generates excess inclusion income.
Revenues consisted of room sales, food and beverage sales and other hotel revenues. F-14 Table of Contents Net Interest Margin and Interest Expense Net interest margin in the Company’s consolidated statements of operations serves to measure the performance of the Company’s loans and debt securities as compared to its use of debt leverage.
Revenues consisted of room sales, food and beverage sales and other hotel revenues. Net Interest Margin and Interest Expense Net interest margin in the Company’s consolidated statements of operations serves to measure the performance of the Company’s loans and debt securities as compared to its use of debt leverage.
The Company’s Manager monitors and evaluates each of the Company’s loans held for investment and is maintaining regular communications with borrowers and sponsors regarding the potential impacts of current macroeconomic conditions on the Company’s loans.
The Company’s Manager monitors and evaluates each of the Company’s loans held for investment and maintains regular communications with borrowers and sponsors regarding the potential impacts of current macroeconomic conditions on the Company’s loans.
As of December 31, 2023, the Company was in compliance with all financial covenants of the Secured Term Loan.
As of December 31, 2024, the Company was in compliance with all financial covenants of the Secured Term Loan.
On July 25, 2023, the Company’s 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.
On July 31, 2024, the Company’s board of directors further renewed the Repurchase Program of up to $50.0 million, which is expected to be in effect until July 31, 2025, or until the approved dollar amount has been used to repurchase shares.
Any restricted shares of the Company’s common stock F-34 Table of Contents and RSUs will be accounted for under FASB ASC Topic 718, Compensation—Stock Compensation , resulting in stock-based compensation expense equal to the grant date fair value of the underlying restricted shares of common stock or RSUs.
Any restricted shares of the Company’s common stock and RSUs will be accounted for under FASB ASC Topic 718, Compensation—Stock Compensation , resulting in stock-based compensation expense equal to the grant date fair value of the underlying restricted shares of common stock or RSUs.
The term of the Management Agreement ends on April 25, 2024, with automatic one-year renewal terms thereafter.
The term of the Management Agreement ends on April 25, 2025, with automatic one-year renewal terms thereafter.
As of December 31, 2023, the Company’s maximum risk of loss was $238.2 million, which represents the carrying value of its investments in the CLO Securitizations. Non-consolidated VIEs The Company evaluated its senior mortgage loan investment that is collateralized by a residential condominium property located in New York, and it was determined to be an interest in a VIE.
As of December 31, 2024, the Company’s maximum risk of loss was $156.4 million, which represents the carrying value of its investments in the CLO Securitizations. Non-consolidated VIEs The Company evaluated its senior mortgage loan investment that is collateralized by a residential condominium property located in New York, and it was determined to be an interest in a VIE.
As of December 31, 2023, the FL4 Notes were collateralized by interests in a pool of 9 mortgage assets having a total principal balance of approximately $404.1 million (the “FL4 Mortgage Assets”) that were closed by a wholly-owned subsidiary of the Company and approximately $1.0 million of receivables related to repayments of outstanding principal on previous mortgage assets.
As of December 31, 2023, the FL4 Notes were collateralized by interests in a pool of nine mortgage assets having a total principal balance of $404.1 million that were closed by a wholly-owned subsidiary of the Company and $1.0 million of receivables related to repayments of outstanding principal on previous mortgage assets.
The $105.0 million note is secured by a $133.0 million senior mortgage loan held by the Company on a multifamily property located in New York and is fully and unconditionally guaranteed by the Company pursuant to a Guaranty of Recourse Obligation.
The $105.0 million note was secured by a $133.0 million senior mortgage loan held by the Company on a multifamily property located in New York and was fully and unconditionally guaranteed by the Company pursuant to a Guaranty of Recourse Obligation (the “CapOne Guaranty”).
The Citibank Facility contains various affirmative and negative covenants and provisions regarding events of default that are applicable to the Company and certain of the Company’s subsidiaries, which are normal and customary for similar repurchase facilities, including the following: (a) maintaining tangible net worth of at least the sum of (1) 80% of the Company’s tangible net worth as of September 30, 2013, plus (2) 80% of the total net capital raised in all future equity issuances by the Company, (b) maintaining liquidity in an amount not less than the greater of (1) $5.0 million or (2) 5% of the Company’s recourse indebtedness, not to exceed $10.0 million (provided that in the event the Company’s total liquidity equals or exceeds $5.0 million, the Company may satisfy the difference between the minimum total liquidity requirement and the Company’s total liquidity with available borrowing capacity), (c) maintaining a fixed charge coverage ratio (expressed as the ratio of EBITDA (net income before net interest expense, income tax expense, depreciation and amortization), as defined, to fixed charges) for the immediately preceding 12-month period ending on the last date of the applicable reporting period to be at least 1.25 to 1.00, (d) maintaining a ratio of total debt to tangible net worth of not more than 4.50 to 1.00, (e) maintaining a ratio of recourse debt to tangible net worth of not more than 3.00 to 1.00 and (f) if certain specific debt yield and loan to value tests are not met with respect to assets on the Citibank Facility, the Company may be required to repay certain amounts under the Citibank Facility.
The Citibank Facility contains various affirmative and negative covenants and provisions regarding events of default that are applicable to the Company and certain of the Company’s subsidiaries, which are normal and customary for similar repurchase facilities, including the following: (a) maintaining a tangible net worth of at least $500.0 million, (b) maintaining liquidity in an amount not less than the greater of (1) $5.0 million or (2) 5% of the Company’s recourse indebtedness, not to exceed $10.0 million (provided that in the event the Company’s total liquidity equals or exceeds $5.0 million, the Company may satisfy the difference between the minimum total liquidity requirement and the Company’s total liquidity with available borrowing capacity), (c) maintaining a fixed charge coverage ratio (expressed as the ratio of EBITDA (net income before net interest expense, income tax expense, depreciation and amortization), as defined, to fixed charges) for the immediately preceding 12-month period ending on the last date of the applicable reporting period to be at least 1.25 to 1.00, (d) maintaining a ratio of total debt to tangible net worth of not more than 4.50 to 1.00, (e) if certain specific debt yield and loan to value tests are not met with respect to assets on the Citibank Facility, the Company may be required to repay certain amounts under the Citibank Facility.
F-43 Table of Contents In connection with the FL4 CLO Securitization, the FL4 Issuer and FL4 Co-Issuer offered and issued the following classes of FL4 Notes to third party investors: Class A, Class A-S, Class B, Class C, Class D and Class E Notes (collectively, the “FL4 Offered Notes”).
In connection with the FL4 CLO Securitization, the FL4 Issuer and FL4 Co-Issuer offered and issued the following classes of FL4 Notes to third party investors: Class A, Class A-S, Class B, Class C, Class D and Class E Notes (collectively, the “FL4 Offered Notes”).
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.
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, 2024, however, uncertainty over the global economy and the Company’s business, makes any estimates and assumptions as of December 31, 2024 inherently less certain than they F-11 Table of Contents would be absent the current and potential impacts of current macroeconomic conditions.
Real Estate Owned Real estate assets are carried at their estimated fair value at acquisition and are presented net of accumulated depreciation or amortization and impairment charges.
Real Estate Owned Held for Investment Real estate assets held for investment are carried at their estimated fair value at acquisition and are presented net of accumulated depreciation or amortization and impairment charges.
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.
F-10 Table of Contents ARES COMMERCIAL REAL ESTATE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS As of December 31, 2024 (in thousands, except share and per share data, percentages and as otherwise indicated) 1.
The Company uses a specific identification method when determining the cost of a debt security sold and the amount of unrealized gain or loss reclassified from accumulated other comprehensive income (loss) into earnings.
The Company uses a specific identification method when determining the cost of a debt F-13 Table of Contents security sold and the amount of unrealized gain or loss reclassified from accumulated other comprehensive income (loss) into earnings.

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Item 1A. Risk Factors

Risk Factors — what could go wrong, per management

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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.
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 or further 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 and may continue to result in increases to our CECL Reserve and could have an adverse effect on our financial results; • Changes in interest rates and credit spreads 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; • 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 investments are subject to risks particular to real property; • Our portfolio is concentrated in a limited number of loans and has a higher exposure to the office and mixed-use sectors compared to the other property types, which subjects us to a risk of significant loss if any of these loans default; • The lack of liquidity in our investments may adversely affect our business; • We allocate our available capital without input from our stockholders; • We are subject to various risks related to the ownership of real property; • We may experience a decline in the fair value of our assets; • We incur significant debt, which subjects us to increased risk of loss and reduces cash available for distributions to our stockholders; • Security incidents or cyber-attacks could adversely affect our business or the business of our borrowers by causing a disruption to our operations or the operations of our borrowers, a compromise or corruption of our or our borrowers’ confidential, personal or other sensitive information and/or damage to our or our borrowers’ business relationships or reputation; • 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; and • Complying with REIT requirements may cause us to forgo otherwise attractive investment opportunities or borrow funds during unfavorable market conditions. 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.
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.
See “Risk Factors—Risks Relating to Sources of Financing and Hedging— 11 Table of Contents The Financing Agreements and any bank 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.
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.
Such structures 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.
Even if opportunities are available, there can be no assurance that our Manager’s due diligence processes will uncover all relevant facts or that any investment will be successful.
Even if opportunities are available, there can be no assurance that our Manager’s due diligence processes uncover all relevant facts or that any investment will be successful.
The market price and liquidity of the market for shares of our common stock may be significantly affected by numerous factors, some of which are beyond our control and may not be directly related to our operating performance.
The market price and liquidity of the market for shares of our common stock are significantly affected by numerous factors, some of which are beyond our control and may not be directly related to our operating performance.
“Core Earnings” is defined in our 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 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 our 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 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 (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.
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.
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; • 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; 31 Table of Contents • 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 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.
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.
All of these factors could have a material adverse effect on the income we generate, if any, or expenses we 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.
UNITED STATES FEDERAL INCOME TAX RISKS 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.
RISKS RELATED TO UNITED STATES FEDERAL INCOME TAX 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.
Any failure to manage increases in size effectively could adversely affect our results of operations and financial condition. We operate in a competitive market for investment opportunities and loan originations and competition may limit our ability to originate or acquire our target investments on attractive terms.
Any failure to manage increases in size or type effectively could adversely affect our results of operations and financial condition. We operate in a competitive market for investment opportunities and loan originations and competition may limit our ability to originate or acquire our target investments on attractive terms.
We will pay our Manager substantial base management fees regardless of the performance of our portfolio. Pursuant to the terms of the Management Agreement, our Manager receives a base management fee that is calculated as 1.5% of our stockholders’ equity per annum, which is calculated and payable quarterly in arrears in cash, subject to certain adjustments.
We pay our Manager substantial base management fees regardless of the performance of our portfolio. Pursuant to the terms of the Management Agreement, our Manager receives a base management fee that is calculated as 1.5% of our stockholders’ equity per annum, which is calculated and payable quarterly in arrears in cash, subject to certain adjustments.
Legal proceedings or governmental investigations may adversely affect our financial results and reputation. A major public health crisis, like the COVID-19 pandemic, could disrupt the U.S. and global economy and industries in which we operate and negatively impact us. A major public health crisis could impact the U.S. and global economy.
Legal proceedings or governmental investigations may adversely affect our financial results and reputation. A major public health crisis, pandemic or epidemic, like the COVID-19 pandemic, could disrupt the U.S. and global economy and industries in which we operate and negatively impact us. A major public health crisis, pandemic or epidemic could impact the U.S. and global economy.
If there is a further deterioration of credit in our existing loan portfolio secured by office properties, as a result of increased vacancy rates, volatility or liquidity, we may need to further increase our CECL Reserve to account for such conditions.
If there is a further deterioration of credit in our existing loan portfolio secured by office properties, as a result of increased vacancy rates, volatility, liquidity or otherwise, we may need to increase our CECL Reserve to account for such conditions.
Foreclosure of a mortgage loan can be an expensive and lengthy process, which could have a substantial negative effect on our anticipated return on the foreclosed mortgage loan. We are subject to various risks related to the ownership of certain real property.
Foreclosure of a mortgage loan can be an expensive and lengthy process, which could have a substantial negative effect on our anticipated return on the foreclosed mortgage loan. We are subject to various risks related to the ownership of real property.
For purposes of construction loans, the loan value of the real property is generally the fair value of the land plus the reasonably estimated cost of the improvements or developments (other than personal property) that secure the loan and that are to be constructed from the proceeds of the loan.
For purposes of construction loans, the loan value of the real property securing the loan is generally the fair value of the land plus the reasonably estimated cost of the improvements or developments (other than personal property) that secure the loan and that are to be constructed from the proceeds of the loan.
Significant fluctuations in interest rates and credit spreads as well as protracted periods of increases or decreases in interest rates and credit spreads could adversely affect the operation and income of multifamily and other CRE properties, as well as the demand from investors for CRE debt in the secondary market.
Fluctuations in interest rates and credit spreads as well as protracted periods of increases or decreases in interest rates and credit spreads could adversely affect the operation and income of multifamily and other CRE properties, as well as the demand from investors for CRE debt in the secondary market.
Our Manager values our potential investments based on yields and risks, taking into account estimated future losses on the mortgage loans and the collateral underlying our mortgage loans and included in securitization pools, and the estimated impact of these losses on expected future cash flows and returns.
Our Manager values our investments based on yields and risks, taking into account estimated future losses on the mortgage loans and the collateral underlying our mortgage loans and included in securitization pools, and the estimated impact of these losses on expected future cash flows and returns.
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.
Incurring substantial debt subjects 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 increases our vulnerability to adverse economic and industry conditions with no assurance that investment yields will increase with higher financing costs; • we are 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; 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.
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. 20 Table of Contents In addition, we may fail to recalculate, readjust and execute hedges in an efficient manner.
Certain properties that secure a portion of our mortgage loan portfolio, such as those for offices, hospitality and/or residential tenants, are especially vulnerable to various macroeconomic and other pressures. Office properties, in particular, continue to experience particular headwinds driven by the increased prevalence of remote work and elevated costs to operate, improve or repurpose such properties.
Certain properties that secure a portion of our mortgage loan portfolio, such as those for offices, hospitality and/or residential tenants, are especially vulnerable to various macroeconomic and other pressures. Office properties, in particular, continue to experience particular challenges driven by the increased prevalence of remote work and elevated costs to operate, improve or repurpose such properties.
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.
Conversely, 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.
Under our charter and the MGCL, our stockholders generally have a right to vote only on the following matters: • the election or removal of directors; • the amendment of our charter, except that our board of directors may amend our charter without stockholder approval to: • change our name; • change the name or other designation or the par value of any class or series of stock and the aggregate par value of our stock; • increase or decrease the aggregate number of shares of stock that we have the authority to issue; • increase or decrease the number of shares of any class or series of stock that we have the authority to issue; and • effect certain reverse stock splits; • our dissolution; and • our being a party to a merger, consolidation, conversion, sale or other disposition of all or substantially all of our assets or statutory share exchange.
Under our charter and the MGCL, our stockholders generally have a right to vote only on the following matters: • the election or removal of directors; • the amendment of our charter, except that our board of directors may amend our charter without stockholder approval to: • change our name; • change the name or other designation or the par value of any class or series of stock and the aggregate par value of our stock; • increase or decrease the aggregate number of shares of stock that we have the authority to issue; 34 Table of Contents • increase or decrease the number of shares of any class or series of stock that we have the authority to issue; and • effect certain reverse stock splits; • our dissolution; and • our being a party to a merger, consolidation, conversion, sale or other disposition of all or substantially all of our assets or statutory share exchange.
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.
We conduct our operations in a manner designed so that we do not come within the definition of 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.
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.
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 specifically identifiable reserve is warranted for a select asset.
If macroeconomic conditions worsen, we may need to continue to increase our CECL Reserve, which would impact our financial results. Moreover, we estimate our CECL Reserve primarily using a probability-weighted model that considers the likelihood of default and expected loss given default for each individual loan.
If macroeconomic conditions worsen, we may need to increase our CECL Reserve, which would impact our financial results. We estimate our CECL Reserve primarily using a probability-weighted model that considers the likelihood of default and expected loss given default for each individual loan.
Insurance on mortgage loans and real estate securities collateral may not cover all losses. There are certain types of losses, generally of a catastrophic nature, such as earthquakes, floods, hurricanes, terrorism or acts of war, which may be uninsurable or not economically insurable.
Insurance on mortgage loans and real estate securities collateral may not cover all losses. There are certain types of losses, generally of a catastrophic nature, such as earthquakes, droughts, floods, hurricanes, fires, terrorism or acts of war, which may be uninsurable or not economically insurable.
If we foreclose on any properties underlying our investments, such as the mixed-use property we currently own, the presence of hazardous substances on a property may adversely affect our ability to sell the property and we may incur substantial remediation costs, thus harming our financial condition.
If we foreclose on any properties underlying our investments, such as the office or mixed-use properties we currently own, the presence of hazardous substances on a property may adversely affect our ability to sell the property and we may incur substantial remediation costs, thus harming our financial condition.
In addition, if we and such other Ares managed investment vehicles invest in different classes or types of debt or investments relating to the same underlying property or properties, actions may be taken by such other Ares managed investment vehicles that are adverse to our interests, including, but not limited to, during a work-out, restructuring or insolvency proceeding or similar matter occurring with respect to such investment.
In addition, if we and such other Ares managed 39 Table of Contents investment vehicles invest in different classes or types of debt or investments relating to the same underlying property or properties, actions may be taken by such other Ares managed investment vehicles that are adverse to our interests, including, but not limited to, during a work-out, restructuring or insolvency proceeding or similar matter occurring with respect to such investment.
Changes in interest rates and credit spreads may affect our net interest margin, which is the difference between the interest income we earn on our interest-earning investments and the interest expense we incur in financing these investments. Fluctuations in interest rates and credit spreads resulting in our interest expense exceeding interest income would result in operating losses for us.
Changes in interest rates and credit spreads affect our net interest margin, which is the difference between the interest income we earn on our interest-earning investments and the interest expense we incur in financing these investments. Fluctuations in interest rates and credit spreads resulting in our interest expense exceeding interest income result in operating losses for us.
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 market interest rates 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.
In addition, our interest income and expense will generally change directionally with index rates. The impact of rising interest rates may be mitigated by certain hedging transactions that our borrowers may enter into or that we have entered into or may enter into in the future.
In addition, our interest income and expense will generally change directionally with index rates. The impact of higher interest rates may be mitigated by certain hedging transactions that our borrowers may enter into or that we have entered into or may enter into in the future.
Subject to maintaining our qualification as a REIT, part of our investment strategy will involve entering into hedging transactions that could require us to fund cash payments in certain circumstances (such as the early termination of the hedging instrument caused by an event of default or other early termination event, or the decision by a counterparty to request margin securities it is contractually owed under the terms of the hedging instrument).
Subject to maintaining our qualification as a REIT, part of our investment strategy involves entering into hedging transactions that could require us to fund cash payments in certain circumstances (such as the early termination of the hedging instrument caused by an event of default or other early termination event, or the decision by a counterparty to request margin securities it is contractually owed under the terms of the hedging instrument).
In such an instance, we may be liable to a governmental authority for fines or penalties associated with a lapse in the integrity and security of our customers’ information, which could materially adversely affect us.
In such an instance, we may be liable to a governmental authority for fines or penalties associated with a lapse in the integrity and security of our borrowers’ information, which could materially adversely affect us.
Changes in the level of interest rates and credit spreads also may affect our ability to make investments, the value of our investments and our ability to realize gains from the disposition of assets. Changes in interest rates and credit spreads may also negatively affect demand for loans and could result in higher borrower default rates.
Changes in the level of interest rates and credit spreads also affect our ability to make investments, the value of our investments and our ability to realize gains from the disposition of assets. Changes in interest rates and credit spreads also negatively affect demand for loans and result in higher borrower default rates.
We cannot assure you that we will replicate Ares Management’s historical performance, and we caution you that our investment returns could be substantially lower than the returns achieved by other entities managed by Ares Management or its affiliates.
We may not replicate Ares Management’s historical performance. We cannot assure you that we will replicate Ares Management’s historical performance, and we caution you that our investment returns could be substantially lower than the returns achieved by other entities managed by Ares Management or its affiliates.
Our qualification as a REIT and exemption from United States federal income tax with respect to certain assets may be dependent on the accuracy of legal opinions or advice rendered or given or statements by the issuers of assets that we acquire, and the inaccuracy of any such opinions, advice or statements may adversely affect our REIT qualification and result in corporate-level tax.
Our qualification as a REIT and exemption from United States federal income tax with respect to certain assets may be dependent on the accuracy of legal opinions or advice rendered or given or statements by the issuers of assets that we 46 Table of Contents acquire, and the inaccuracy of any such opinions, advice or statements may adversely affect our REIT qualification and result in corporate-level tax.
In addition, losses in a TRS generally will not provide any tax benefit, except for being carried forward against future taxable income of such TRS. 48 Table of Contents We may be subject to adverse legislative or regulatory tax changes that could increase our tax liability, reduce our operating flexibility and reduce the price of our common stock.
In addition, losses in a TRS generally will not provide any tax benefit, except for being carried forward against future taxable income of such TRS. We may be subject to adverse legislative or regulatory tax changes that could increase our tax liability, reduce our operating flexibility and reduce the price of our common stock.
We are also subject to cross-default and acceleration provisions and, with respect to collateralized debt, the posting of additional collateral, including cash to satisfy margin calls, and foreclosure rights upon default. Further, these restrictions could also make it difficult for us to satisfy the qualification requirements necessary to maintain our status as a REIT.
We are also subject to cross-default and acceleration provisions and, with respect to collateralized debt, the posting of additional 17 Table of Contents collateral, including cash to satisfy margin calls, and foreclosure rights upon default. Further, these restrictions could also make it difficult for us to satisfy the qualification requirements necessary to maintain our status as a REIT.
The Financing Agreements and any bank 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. We borrow funds under the Financing Agreements.
The Financing Agreements and any bank credit facilities and repurchase agreements that we may use in the future to finance our investments may require us to provide additional collateral or pay down debt. We borrow funds under the Financing Agreements.
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.
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.
RISKS RELATED TO OUR BUSINESS 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.
RISKS RELATED TO OUR BUSINESS A global economic slowdown or further declines in real estate values, could impair our investments and have a significant adverse effect on our business, financial condition and results of operations.
The technology and other controls and processes designed to secure our customer information and to prevent, detect and remedy any unauthorized access to that information were designed to obtain reasonable, not absolute, assurance that such information is secure and that any unauthorized access is identified and addressed appropriately.
The technology and other controls and processes designed to secure our borrower information and to prevent, detect and remedy any unauthorized access to that information were designed to obtain reasonable, not absolute, assurance that such information is secure and that any unauthorized access is identified and addressed appropriately.
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.
The business combination statute may discourage others from trying to acquire control of us and increase the difficulty of consummating any offer. 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 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.
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 and 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 24 Table of Contents 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 debtor-in-possession to the extent the lien is unenforceable under state law.
Also, as a result of this competition, desirable investments in our target investments may be limited in the future and we may not be able to take advantage of attractive investment opportunities from time to time, as we can provide no assurance that we will be able to identify and make investments that are consistent with our investment objectives.
Also, as a result of this competition, desirable investments in our target investments may be limited in the future and we may not be able to take advantage of 25 Table of Contents attractive investment opportunities from time to time, as we can provide no assurance that we will be able to identify and make investments that are consistent with our investment objectives.
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.
This could result in increased risk to the value of our investment portfolio. 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.
These requirements could inhibit our ability to finance our growth and cause us to distribute amounts that otherwise would be spent on investments in real estate assets and it is possible that we might be required to borrow funds, possibly at unfavorable rates, or sell assets to fund these distributions.
These requirements could inhibit our ability to finance our growth and cause us to distribute amounts that otherwise would be spent on investments in real estate assets and it is possible that we might be required to borrow funds, possibly at unfavorable rates, or sell assets in adverse market conditions to fund these distributions.
You also should note that our counsel’s tax opinion is based upon existing law, applicable as of the date of its opinion, all of which will be subject to change, either prospectively or retroactively. On August 16, 2022, President Biden signed into law the Inflation Reduction Act of 2022, or the IRA.
You also should note that our counsel’s tax opinion is based upon existing law, applicable as of the date of its opinion, all of which will be subject to change, either prospectively or retroactively. On August 16, 2022, the Inflation Reduction Act of 2022, or the IRA, was signed into law.
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.
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.
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.
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.
The 1940 Act further defines voting securities as any security presently entitling the owner or holder thereof to vote for the election of directors of a company. We treat entities in which we own at least a majority of the outstanding voting securities as majority-owned subsidiaries for purposes of the 40% test.
The 1940 Act further defines voting securities as any security presently entitling the owner or holder thereof to vote for the election of directors of a company. We treat entities in which we own at least a majority of the outstanding voting securities as majority-owned subsidiaries for purposes of the 40% 35 Table of Contents test.
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.
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.
These requirements make it more difficult to change our management by removing and replacing directors and may prevent a change in control that is in the best interests of our stockholders. Pursuant to our charter, our board of directors is divided into three classes of directors serving staggered three year terms.
These requirements make it more difficult to change our management by removing and replacing directors and may prevent a change in control that is in the best interests of our stockholders. Pursuant to our charter, our board of directors is 37 Table of Contents divided into three classes of directors serving staggered three year terms.
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.
Although as a holder of preferred equity we may seek to 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.
As a result of the dislocation of the credit markets, and in anticipation of more extensive regulation, including regulations promulgated pursuant to the Dodd-Frank Act, the securitization industry crafted and continues to craft changes to securitization practices, including changes to representations and warranties in securitization transaction documents, new underwriting guidelines and disclosure guidelines.
As a result of the dislocation of the credit markets, and in anticipation of more extensive regulation, including regulations promulgated pursuant to the Dodd-Frank Act, the 19 Table of Contents securitization industry crafted and continues to craft changes to securitization practices, including changes to representations and warranties in securitization transaction documents, new underwriting guidelines and disclosure guidelines.
From time to time, capital markets may experience periods of disruption and instability, which may also adversely affect our ability to refinance our financing arrangements. There can be no assurance that current market conditions will not worsen in the future.
From time to time, capital markets may experience periods of disruption and instability, which may also adversely affect our ability to refinance our financing arrangements. There can be no assurance that current market conditions will not 18 Table of Contents worsen in the future.
We have not established a minimum distribution payment level and our ability to pay distributions at a certain level has been and may continue to be adversely affected by a number of factors, including the risk factors described in this annual report.
We have not established a minimum distribution payment level and our ability to pay 32 Table of Contents distributions at a certain level has been and may continue to be adversely affected by a number of factors, including the risk factors described in this annual report.
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.
In addition, many of the securities we invest in are not 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.
Any uninsured loss could result in the loss of cash flow from, and the asset value of, the affected property and the value of our investment related to such property. Liability relating to environmental matters may impact the value of properties that we may acquire upon foreclosure of the properties underlying our investments.
Any uninsured loss could result in the loss of cash flow from, and the asset value of, the affected property and the value of our investment related to such property. 29 Table of Contents Liability relating to environmental matters may impact the value of properties that we may acquire upon foreclosure of the properties underlying our investments.
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.
With the approval of our board of directors, we may provide 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. 39 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. Co-investments.
Accordingly, United States stockholders receiving a distribution of our shares may be required to sell shares received in such distribution or may be required to sell other stock or assets owned by them, at a time that may be disadvantageous, in order to satisfy any tax imposed on such distribution.
Accordingly, United States stockholders receiving a distribution of our shares may be 47 Table of Contents required to sell shares received in such distribution or may be required to sell other stock or assets owned by them, at a time that may be disadvantageous, in order to satisfy any tax imposed on such distribution.
If prepayment rates decrease in a rising interest rate environment, such as the current environment, and borrowers exercise extension options on CRE loans or we extend the term of CRE loans, the life of the loans could extend beyond the term of the Financing Agreements that we borrow on to fund our CRE loans.
If prepayment rates decrease in a rising interest rate environment, and borrowers exercise extension options on CRE loans or we extend the term of CRE loans, the life of the loans could extend beyond the term of the Financing Agreements that we borrow on to fund our CRE loans.
There are no limits on the percentage of unrated or non-investment grade rated assets we may hold in our investment portfolio. The B-Notes that we have originated or may originate or acquire in the future may be subject to additional risks related to the privately negotiated structure and terms of the transaction, which may result in losses to us.
There are no limits on the percentage of unrated or non-investment grade rated assets we may hold in our investment portfolio. 26 Table of Contents The B-Notes and C-Notes that we have originated or may originate or acquire in the future may be subject to additional risks related to the privately negotiated structure and terms of the transaction, which may result in losses to us.
These investments are expected to provide a lower net return than we seek to achieve from investments in our target investments. Our Manager intends to conduct due diligence with respect to each investment and suitable investment opportunities may not be immediately available.
These investments are expected to provide a lower net return than we seek to achieve from investments in our target investments. Our Manager conducts due diligence with respect to each investment and suitable investment opportunities may not be immediately available.
Moreover, certain of our loan investments may become less liquid as a result of turbulent market conditions, which may make it more difficult for us to dispose of such assets at advantageous times or in a timely manner.
Moreover, certain of our loan investments have become less liquid as a result of current market conditions, which may make it more difficult for us to dispose of such assets at advantageous times or in a timely manner.
The CRE loans we originate and the mortgage loans underlying any commercial mortgage-backed securities investments that we may make will be subject to the ability of the commercial property owner to generate net income from operating the property, as well as the risks of delinquency and foreclosure.
The CRE loans we originate and the mortgage loans underlying any commercial mortgage-backed securities investments that we may make are subject to the ability of the commercial property owner to generate net income from operating the property, as well as the risks of delinquency and foreclosure.
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.
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.
All distributions will be made at the discretion of our board of directors and will depend on our earnings, our financial condition, debt covenants, maintenance of our REIT qualification and other factors as our board of directors may deem relevant from time to time.
All distributions will be made at the discretion of our board of directors and will depend on our earnings, our financial condition, liquidity, debt covenants, maintenance of our REIT qualification, applicable law and other factors as our board of directors may deem relevant from time to time.
You are urged to consult with your tax advisor with respect to the impact of recent legislation on your investment in our shares and the status of legislative, regulatory or administrative developments and proposals and their potential effect on an investment in our shares.
You are urged to consult with your tax advisor with respect to the impact of recent legislation on your investment in our shares and the status of legislative, regulatory or administrative developments and proposals and their potential effect on an 48 Table of Contents investment in our shares.
We may not have the funds available to repay our debt at that time, which would likely result in defaults unless we are able to raise the funds from alternative sources, which we may not be able to achieve on favorable terms or at all. Posting additional collateral would reduce our liquidity and limit our ability to leverage our assets.
We may not have the funds available to repay our debt at that time, which would likely result in defaults unless we are able to raise the funds from alternative sources, which we may not be able to do on favorable terms or at all. Posting additional collateral would reduce our liquidity and limit our ability to leverage our investments.
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.
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.
We do not have fixed guidelines for diversification, and our investments could be concentrated in relatively few loans. While we intend to continue to diversify our portfolio of investments in the manner described in our filings with the SEC, we do not have fixed guidelines for diversification.
While we intend to continue to diversify our portfolio of investments in the manner described in our filings with the SEC, we do not have fixed guidelines for diversification, and our investments could be concentrated in relatively few loans and/or relatively few property types.
A consequence of this limited number of investments is that the aggregate returns we realize may be significantly adversely affected if a small number of investments perform poorly, if we need to write down the value of any one investment or if an investment is repaid prior to maturity and we are not able to promptly redeploy the proceeds.
A consequence of this limited number of investments is that the aggregate returns we realize are significantly adversely affected even if only a small number of investments perform poorly, if we need to write down the value of any one investment or if an investment is repaid prior to maturity and we are not able to promptly redeploy the proceeds.
Our investment model may be adversely affected by prolonged economic downturns or recessions where declining real estate values reduce the level of new mortgage and other real estate-related loan originations, since borrowers often use appreciation in the value of their existing properties to support the purchase or investment in additional properties.
Our investment model is adversely affected by prolonged economic downturns where declining real estate values reduce the level of new mortgage and other real estate-related loan originations, since borrowers often use appreciation in the value of their existing properties to support the purchase or investment in additional properties.
As a result, no assurance can be given that we will be able to make distributions to our stockholders at any time in the future or that the level of any distributions we do make to our stockholders will achieve a market yield or increase or even be maintained over time, any of which could materially and adversely affect us.
As a result, no assurance can be given that we will be able to make distributions to our stockholders at any time in the future or that the level of any distributions we do make to our stockholders will achieve a market yield or increase or even be maintained over time, any of which could materially and adversely affect the market price of our common stock.
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.
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.
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.
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.
Further, the management fee structure gives our Manager the incentive to maximize stockholders’ equity raised by the issuance of new equity securities or the retention of existing equity, regardless of the effect of these actions on existing stockholders.
Further, the management fee structure gives our Manager the incentive to maximize stockholders’ equity raised by the issuance 40 Table of Contents of new equity securities or the retention of existing equity, regardless of the effect of these actions on existing stockholders.

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Item 1C. Cybersecurity

Cybersecurity — threats and controls disclosure

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Biggest changeItem 1C. Cybersecurity Assessment, Identification and Management of Material Risks from Cybersecurity We rely on the cybersecurity strategy and policies implemented by Ares Management, the parent company of our Manager. Ares Management’s cybersecurity strategy prioritizes detection and analysis of and response to known, anticipated or unexpected threats, effective management of security risks and resilience against cyber incidents.
Biggest changeItem 1C. Cybersecurity 51 Table of Contents Assessment, Identification and Management of Material Risks from Cybersecurity Threats We rely on the cybersecurity strategy and policies implemented by Ares Management, the parent company of our Manager.
Material Impact of Cybersecurity Risks In the last three fiscal years, we have not experienced a material information security breach incident and the expenses we have incurred from information security breach incidents have been immaterial, and we are not aware of any cybersecurity risks that are reasonably likely to materially affect our business.
Material Impact of Risks from Cybersecurity Threats In the last three fiscal years, we have not experienced a material information security breach incident and the expenses we have incurred from information security breach incidents have been immaterial, and we are not aware of any cybersecurity risks that are reasonably likely to materially affect our business.
The Ares Management ERC, through regular consultation with the Ares Management internal cybersecurity team and representatives from our Manager, assesses, discusses, and prioritizes Ares Management’s approach to high-level risks, mitigative controls, and ongoing cybersecurity efforts. Our audit committee has primary responsibility for oversight and review of guidelines and policies with respect to risk assessment and risk management, including cybersecurity.
The Ares Management ERC, through regular consultation with the Ares Management internal cybersecurity team and representatives from our Manager, assesses, discusses, and prioritizes Ares Management’s approach to high-level risks, mitigating controls, and ongoing cybersecurity efforts. Our audit committee has primary responsibility for oversight and review of guidelines and policies with respect to risk assessment and risk management, including cybersecurity.
The assessment of cybersecurity risks, including those which may impact us, our Manager or Ares Management, is integrated into Ares Management’s Enterprise Risk Management program, which is overseen by the Ares Enterprise Risk Committee (the “Ares Management ERC”), as discussed below.
The assessment of cybersecurity threats, including those which may impact us, our Manager or Ares Management, is integrated into Ares Management’s Enterprise Risk Management program, which is overseen by the Ares Enterprise Risk Committee (the “Ares Management ERC”), as discussed below.
The team is led by Ares Management’s CISO who has a Master’s degree in Cybersecurity from Brown University and over 25 years of experience advising on, and managing risks from cybersecurity threats as well as developing and implementing cybersecurity policies and procedures. The Ares Management CISO is also a member of the Ares Management ERC.
The team is led by Ares Management’s CISO who has a Master’s degree in Cybersecurity from Brown University and over 25 years of experience advising on, and managing risks from cybersecurity threats as well as developing and implementing cybersecurity 52 Table of Contents policies and procedures. The Ares Management CISO is also a member of the Ares Management ERC.
Such reporting includes updates on Ares Management’s cybersecurity program as it impacts us, the external threat environment, and Ares Management’s programs to address and mitigate the risks associated with the evolving cybersecurity threat environment. These reports also include updates on our and Ares Management’s preparedness, prevention, detection, responsiveness, and recovery with respect to cyber incidents. 53 Table of Contents
Such reporting includes updates on Ares Management’s cybersecurity program as it impacts us, the external threat environment, and Ares Management’s programs to address and mitigate the risks associated with the evolving cybersecurity threat environment. These reports also include updates on our and Ares Management’s preparedness, prevention, detection, responsiveness, and recovery with respect to cyber incidents.
Ares Management’s cybersecurity risk management process seeks to monitor cybersecurity vulnerabilities and potential attack vectors, evaluate the 52 Table of Contents potential operational and financial effects of any threat and mitigate such threats.
Ares Management’s cybersecurity risk management process seeks to monitor cybersecurity vulnerabilities and potential attack vectors, evaluate the potential operational and financial effects of any threat and mitigate such threats.
Risk Factors—General Risk Factors— Cybersecurity risks and cyber incidents may adversely affect our business or the business of our borrowers by causing a disruption to our operations or the operations of our borrowers, a compromise or corruption of our confidential information or the confidential information of our borrowers and/or damage to our business relationships or the business relationships of our borrowers, all of which could negatively impact the business, financial condition and operating results of us or our borrowers.” Oversight of Cybersecurity Risks Our cybersecurity program is managed by Ares Management’s dedicated internal cybersecurity team, which is responsible for enterprise-wide cybersecurity strategy, policies, standards, engineering, architecture and processes.
Risk Factors—General Risk Factors— Security incidents or cyber-attacks could adversely affect our business or the business of our borrowers by causing a disruption to our operations or the operations of our borrowers, a compromise or corruption of our confidential, personal or other sensitive information or the confidential, personal or other sensitive information of our borrowers and/or damage to our business relationships or reputation or the business relationships or reputations of our borrowers, all of which could negatively impact the business, financial condition and operating results of us or our borrowers.” Oversight of Cybersecurity Risks Our cybersecurity program is managed by Ares Management’s dedicated internal cybersecurity team, which is responsible for enterprise-wide cybersecurity strategy, policies, standards, engineering, architecture and processes.
Ares Management’s enterprise-wide cybersecurity program is aligned to the National Institute of Standards and Technology Cybersecurity Framework. Ares Management’s cybersecurity risk management processes include technical security controls, policy enforcement mechanisms, monitoring systems, tools and related services, which include tools and services from third-party providers, and management oversight to assess, identify and manage risks from cybersecurity threats.
Ares Management’s cybersecurity risk management processes include technical security controls, policy enforcement mechanisms, monitoring systems, tools and related services, which include tools and services from third-party providers, and management oversight to assess, identify and manage risks from cybersecurity threats.
Added
Ares Management’s cybersecurity strategy prioritizes detection and analysis of and response to known, anticipated or unexpected threats, effective management of security risks and resilience against cyber incidents. Ares Management’s enterprise-wide cybersecurity program is aligned to the National Institute of Standards and Technology Cybersecurity Framework.

Item 2. Properties

Properties — owned and leased real estate

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Added
During the year ended December 31, 2024, we acquired legal title to an office property located in North Carolina through a deed in lieu of foreclosure.
Added
Prior to our acquisition date, the office property collateralized a $68.6 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 May 2024 maturity date.
Added
In conjunction with the deed in lieu of foreclosure, we derecognized the $68.6 million senior mortgage loan and recognized the office property as real estate owned and also recognized the associated assets and liabilities held at the office property.

Item 3. Legal Proceedings

Legal Proceedings — active lawsuits and investigations

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Biggest changeWe 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.
Biggest changeLegal 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, including those arising from our loans and 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 legal or regulatory proceedings or investigations against us or our Manager, respectively.
Removed
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 incur significant costs and expenses in connection with any such proceedings, information requests and investigations.
Removed
Legal 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.

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 (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 — $— — $50,000 November 1, 2023 to November 30, 2023 — — — 50,000 December 1, 2023 to December 31, 2023 — — — 50,000 Total — — _____________________________ (1) Represents purchase price including expenses paid.
Biggest changeISSUERS PURCHASES OF EQUITY SECURITIES Purchases of Equity Securities by the Issuer and Affiliated Purchasers Period Total Number of Shares Purchased Average Price Paid Per Share Total Number of Shares Purchased as Part of Publicly Announced Program (1) Maximum Approximate Dollar Value of Shares that May Yet Be Purchased Under the Program (1) ($ in thousands) October 1, 2024 to October 31, 2024 — $— — $50,000 November 1, 2024 to November 30, 2024 — — — 50,000 December 1, 2024 to December 31, 2024 — — — 50,000 Total — — _____________________________ (1) On July 31, 2024, our board of directors renewed our program to repurchase up to $50.0 million of our common stock (the “Repurchase Program”), which is expected to be in effect until July 31, 2025, or until the approved dollar amount has been used to repurchase shares.
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.
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, 2024, we plan to satisfy the REIT distribution requirement with dividends paid in 2024.
Distributions that stockholders receive (not designated as capital gain dividends or qualified dividend income) will be taxed as ordinary income to the extent they are paid from our earnings and profits (as determined for United States federal income tax purposes), but may be eligible for a 20% deduction under section 199A of the Code.
Distributions that stockholders receive (not designated as capital gain dividends or qualified dividend income) will be taxed as ordinary income to the extent they are paid from our earnings and profits (as determined for United States federal 54 Table of Contents income tax purposes), but may be eligible for a 20% deduction under section 199A of the Code.
For the year ended December 31, 2022, we elected to satisfy the REIT distribution requirement in part with dividends paid in 2023.
For the year ended December 31, 2023, we elected to satisfy the REIT distribution requirement in part with dividends paid in 2024.
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.
This deduction is available to 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.
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.
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 10, 2025, the closing price of our common stock, as reported on the NYSE, was $5.95 per share.
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.
HOLDERS As of February 10, 2025, there were 183 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.
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.
Any of these taxes would decrease cash available for distribution to our stockholders. For the year ended December 31, 2024, we did not incur any expense for U.S. federal excise tax. For the years ended December 31, 2023 and 2022, we accrued an excise tax expense (benefit) of $(73) thousand and $430 thousand, respectively.
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.
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. 55 Table of Contents STOCK PERFORMANCE GRAPH Comparison of Cumulative Total Return (1) The Bloomberg Mortgage REIT Index was discontinued in February 2024.
Assumes all dividends are reinvested on the respective dividend payment dates without commissions. Item 6. [Reserved] 57 Table of Contents
Assumes all dividends are reinvested on the respective dividend payment dates without commissions.
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.
As of December 31, 2024, $50.0 million remained available for future purchases of our common stock under the Repurchase Program.
Removed
(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”).
Added
SOURCE: Bloomberg NOTES: Assumes $100 invested on December 31, 2019 in ACRE, the S&P 500 Index, the Bloomberg Mortgage REIT Index and the FTSE NAREIT All Mortgage Capped Index. We have replaced the Bloomberg Mortgage REIT Index following its discontinuation with FTSE NAREIT All Mortgage Capped Index, which we believe is representative of companies similar to ours.

Item 7. Management's Discussion & Analysis

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

99 edited+73 added−27 removed73 unchanged
Biggest changeSummary 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.
Biggest changeManagement's Discussion and Analysis of Financial Condition and Results of Operations, which is incorporated by reference herein. 70 Table of Contents 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, 2024 December 31, 2023 Total Commitment Outstanding Balance Interest Rate Maturity Date Total Commitment Outstanding Balance Interest Rate Maturity Date Secured Funding Agreements: Wells Fargo Facility $ 450,000 $ 210,216 SOFR+1.50 to 3.75% December 15, 2025 (1) $ 450,000 $ 208,540 SOFR+1.50 to 3.75% December 15, 2025 (1) Citibank Facility 325,000 228,727 SOFR+1.50 to 2.60% January 13, 2027 (2) 325,000 221,604 SOFR+1.50 to 2.10% January 13, 2025 (2) CNB Facility 75,000 — SOFR+3.25% March 10, 2025 (3) 75,000 — SOFR+2.65% March 11, 2024 (3) MetLife Facility — — — — (4) 180,000 — SOFR+2.50% August 13, 2024 Morgan Stanley Facility 250,000 149,525 SOFR+1.60 to 3.50% July 16, 2025 (5) 250,000 209,673 SOFR+1.60 to 3.10% July 16, 2025 (5) Subtotal $ 1,100,000 $ 588,468 $ 1,280,000 $ 639,817 Notes Payable $ — $ — — — (6) $ 105,000 $ 105,000 SOFR+2.00% July 28, 2025 (6) Secured Term Loan $ 130,000 $ 130,000 4.50% November 12, 2026 (7) $ 150,000 $ 150,000 4.50% November 12, 2026 (7) Total $ 1,230,000 $ 718,468 $ 1,535,000 $ 894,817 _____________________________ (1) 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.
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”).
Current Expected Credit Losses 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”).
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.
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.
Financing Activities For the year ended December 31, 2023, net cash used in financing activities totaled $205.1 million and was primarily related to repayments of our Secured Funding Agreements of $109.1 million, repayments of debt of consolidated VIEs of $55.1 million, dividends paid of $76.0 million and repurchases of our common stock of $4.6 million, partially offset by proceeds from our Secured Funding Agreements of $43.7 million.
For the year ended December 31, 2023, net cash used in financing activities totaled $205.1 million and was primarily related to repayments of our Secured Funding Agreements of $109.1 million, repayments of debt of consolidated VIEs of $55.1 million, dividends paid of $76.0 million and repurchases of our common stock of $4.6 million, partially offset by proceeds from our Secured Funding Agreements of $43.7 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.
For the year ended December 31, 2023, adjustments to net income (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.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations We are a specialty finance company primarily engaged in originating and investing in CRE loans and related investments. We are externally managed by ACREM, a subsidiary of Ares Management, a publicly traded, leading global alternative asset manager, pursuant to the terms of the Management Agreement.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations We are a specialty finance company primarily engaged in directly originating and investing in CRE loans and related investments. We are externally managed by ACREM, a subsidiary of Ares Management, a publicly traded, leading global alternative asset manager, pursuant to the terms of the Management Agreement.
We consider loans to be collateral dependent if both of the following criteria are met: (i) loan is expected to be substantially repaid through the operation or sale of the underlying collateral, and (ii) the borrower or sponsor is experiencing financial difficulty.
We consider loans to be collateral dependent if both of the following criteria are met: (i) loan is expected to be substantially repaid through the operation or sale of the underlying collateral, and (ii) the borrower is experiencing financial difficulty.
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.
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 68 Table of Contents 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.
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.
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, 2024, 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, 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.
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, 2024 and 2023, all loans held for investment were paying in accordance with their contractual terms.
Additionally, the table above does not include extension options, as applicable, under the Secured Funding Agreements, Notes Payable and the Secured Term Loan. We may enter into certain contracts that may contain a variety of indemnification obligations, principally with underwriters and counterparties to repurchase agreements.
Additionally, the table above does not include extension options, as applicable, under the Secured Funding Agreements and the Secured Term Loan. We may enter into certain contracts that may contain a variety of indemnification obligations, principally with underwriters and counterparties to repurchase agreements.
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 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, 2024, we were in compliance with all financial covenants of each respective Financing Agreement.
(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.
(5) 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.
Our primary sources of cash generally consist of unused borrowing capacity under our Secured Funding Agreements, the net proceeds of future equity offerings, payments of principal and interest we receive on our portfolio of assets and cash generated from our operating activities.
Our primary sources of cash generally consist of unused borrowing capacity under our Secured Funding Agreements, payments of principal and interest we receive on our portfolio of assets, cash generated from our operating activities and the net proceeds of future equity offerings, if any.
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).
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, 2024 as weighted by the total outstanding principal balance of each interest accruing loan (excludes loans on non-accrual status as of December 31, 2024).
For the year ended December 31, 2022, related party expenses also included $3.8 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, 2024, related party expenses also included $3.8 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 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.
For the years ended December 31, 2023 and 2022 The comparison of our results of operations for the fiscal years ended December 31, 2023 and 2022 can be found in our annual report on Form 10-K for the fiscal year ended December 31, 2023 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.
For the years ended December 31, 2023 and 2022 The comparison of our cash flows for the fiscal years ended December 31, 2023 and 2022 can be found in our annual report on Form 10-K for the fiscal year ended December 31, 2023 located within Part II, Item 7.
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.
The amount of leverage we deploy for particular investments in our target investments depends upon our Manager’s assessment of a variety of factors, which includes, 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.
(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.
(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.
“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.
“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 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 (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 our independent directors and after approval by a majority of our independent directors.
Determining the appropriate valuation method and selecting the appropriate key unobservable inputs and assumptions requires significant judgment and consideration of factors specific to the underlying collateral being assessed. Additionally, the key unobservable inputs and assumptions used may vary depending on the information available and market conditions as of the valuation date.
Determining the appropriate valuation method and selecting the appropriate key unobservable inputs and assumptions requires significant judgment and consideration of factors specific to the underlying collateral being assessed. Additionally, the key unobservable inputs and 62 Table of Contents assumptions used may vary depending on the information available and market conditions as of the valuation date.
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.
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 73 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.
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.
Stock Repurchase Program On July 31, 2024, our board of directors renewed the Repurchase Program of up to $50.0 million, which is expected to be in effect until July 31, 2025, or until the approved dollar amount has been used to repurchase shares.
As such, the fair value that is used in calculating the CECL Reserve is subject to uncertainty and any actual losses, if incurred, could differ materially from our CECL Reserve. 62 Table of Contents See Note 4 to our consolidated financial statements included in this annual report on Form 10-K for more information regarding CECL.
As such, the fair value that is used in calculating the CECL Reserve is subject to uncertainty and any actual losses, if incurred, could differ materially from our CECL Reserve. See Note 4 to our consolidated financial statements included in this annual report on Form 10-K for more information regarding CECL.
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 (reversal of) current expected credit losses, net in our consolidated statements of operations.
In 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.
(3) In January 2024, we amended 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.
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.
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 and real estate owned held for sale exceeding the cash used for the origination and funding of loans held for investment for the year ended December 31, 2024.
As of December 31, 2023, the sale had not yet closed and the loan was reclassified from held for investment to held for sale and is carried at fair value in our consolidated balance sheets.
As of December 31, 2023, the sale had not yet closed and the loan was reclassified from held for investment to held for sale and was carried at the lower of carrying value or fair value 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 purchase discounts, deferred loan fees and origination costs and cost-recovery proceeds (the “carrying value”). Loans are generally collateralized by real estate.
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.
Interest rates will vary according to the type of investment, conditions in the financial markets, creditworthiness of our borrowers, competition and other factors, none of which can be predicted with any certainty. Our operating results may also be impacted by credit losses in excess of initial anticipations or unanticipated credit events experienced by borrowers.
Interest rates vary according to the type of investment, conditions in the financial markets, creditworthiness of our borrowers, competition and other factors, none of which can be predicted with any certainty. Our operating results are also impacted by credit losses in excess of initial anticipations or unanticipated credit events experienced by borrowers. Changes in Fair Value of Our Assets.
In conjunction with the deed in lieu of foreclosure, we derecognized the $38.6 million senior mortgage loan and recognized the hotel property as real estate owned.
In conjunction with the deed in lieu of foreclosure, we derecognized the $68.6 million senior mortgage loan and recognized the office property as real estate owned.
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.
For the years ended December 31, 2024 and 2023, interest income of $157.7 million and $198.6 million, respectively, was generated by weighted average earning assets of $2.0 billion and $2.3 billion, respectively, offset by $106.0 million and $109.7 million, respectively, of interest expense, unused fees and amortization of deferred loan costs.
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.
The total Weighted Average Unleveraged Effective Yield 61 Table of Contents is calculated based on the average of Unleveraged Effective Yield of all loans held by us as of December 31, 2024 as weighted by the outstanding principal balance of each loan.
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.
The decrease in net interest margin for the year ended December 31, 2024 compared to the year ended December 31, 2023 relates to a decrease in our weighted average earning assets and weighted average borrowings for the year ended December 31, 2024, no benefit received from our interest rate hedging derivative contracts for the year ended December 31, 2024 due to the expiration of the contracts in December 2023 and an increase in the amount of loans held for investment on non-accrual status for the year ended December 31, 2024 as compared to the year ended December 31, 2023.
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 increase in general and administrative expenses for the year ended December 31, 2024 compared to the year 65 Table of Contents ended December 31, 2023 primarily relates to an increase in stock-based compensation expense due to restricted stock and restricted stock unit awards granted after December 31, 2023.
We recognized an unrealized loss of $995 thousand in our consolidated statements of operations upon reclassifying the loan to held for sale as the carrying value of the senior mortgage loan exceeded fair value as determined by the agreed upon sale price of the loan and loan reserves.
We recognized an unrealized loss of $1.0 million in our consolidated statements of operations upon reclassifying the loan to held for sale as the carrying value of the senior mortgage loan exceeded fair value as determined by the agreed upon sale price of the loan and loan reserves. In January 2024, we closed the sale of the senior mortgage loan.
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.
Securitizations As of December 31, 2024, the carrying amount and outstanding principal of our CLO Securitizations was $455.8 million and $456.0 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.
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.
Other Expenses For the years ended December 31, 2024 and 2023, professional fees were $2.6 million and $3.1 million, respectively. The decrease in professional fees for the year ended December 31, 2024 compared to the year ended December 31, 2023 primarily relates to a decrease in our use of third-party professionals due to changes in transaction activity year over year.
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).
As of December 31, 2024, 64.5% of our loans have SOFR floors, with a weighted average floor of 1.01%, calculated based on loans with SOFR floors. References to SOFR or “S” are to 30-day SOFR (unless otherwise specifically stated).
The maximum commitment may be increased to up to $500.0 million at our option, subject to the satisfaction of certain conditions, including payment of an upsize fee. (3) The maturity date of the master repurchase facility with Citibank, N.A.
The maximum commitment may be increased to up to $500.0 million at our option, subject to the satisfaction of certain conditions, including payment of an upsize fee. (2) In December 2024, we amended the master repurchase facility with Citibank, N.A.
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.
The decrease in incentive fees for the year ended December 31, 2024 compared to the year ended December 31, 2023 primarily relates to our Core Earnings (defined below) for the twelve months ended December 31, 2024 not exceeding the 8% minimum return.
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.
Investing Activities For the years ended December 31, 2024 and 2023, net cash provided by investing activities totaled $427.9 million and $127.5 million, respectively.
Below are significant developments during the year ended December 31, 2023 presented by quarter: Developments During the First Quarter of 2023: • We closed the sale of the senior mortgage loan collateralized by a residential property in California that was in maturity default due to the failure of the borrower to repay the outstanding principal balance of the loan by the May 2021 maturity date.
Below are significant developments during the year ended December 31, 2024 presented by quarter: Developments During the First Quarter of 2024: • We closed the sale of a senior mortgage loan with outstanding principal of $37.9 million, which was collateralized by a mixed-use property located in California that was in maturity default due to the failure of the borrower to repay the outstanding principal balance of the loan by the March 2023 maturity date.
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.
As of December 31, 2024, the Company had five loans held for investment on non-accrual status with a carrying value of $318.4 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, 2023, the aggregate originated commitment under these loans at closing was approximately $2.4 billion and outstanding principal was $2.2 billion.
As of December 31, 2024, the aggregate originated commitment under these loans at closing was approximately $1.9 billion and outstanding principal was $1.7 billion.
The mixed-use property previously collateralized an $82.9 million senior mortgage loan held by us 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.
The office property previously collateralized a $33.2 million senior mortgage loan held by us that was in maturity default due to the failure of the borrower to repay the outstanding principal balance of the loan by the December 2023 maturity date.
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.
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.
Prior to March 8, 2019, the hotel property collateralized a $38.6 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 December 2018 maturity date.
Prior to September 19, 2024, the office property collateralized a $68.6 million senior mortgage loan that we held that was in maturity default due to the failure of the borrower to repay the outstanding principal balance of the loan by the May 2024 maturity date.
The following table summarizes our loans held for investment as of December 31, 2023 ($ 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.
The following table summarizes our loans held for investment as of December 31, 2024 ($ in thousands): As of December 31, 2024 Carrying Amount (1) Outstanding Principal (1) Weighted Average Unleveraged Effective Yield Weighted Average Remaining Life (Years) (4) Senior mortgage loans $ 1,617,835 $ 1,655,141 6.8 % (2) 8.6 % (3) 0.9 Subordinated debt and preferred equity investments 38,853 43,365 7.5 % (2) 15.7 % (3) 1.5 Total loans held for investment portfolio $ 1,656,688 $ 1,698,506 6.9 % (2) 8.7 % (3) 1.0 _______________________________ (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.
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.
Operating Expenses For the Years Ended December 31, 2024 2023 Management and incentive fees to affiliate $ 10,685 $ 12,263 Professional fees 2,634 3,054 General and administrative expenses 7,822 7,244 General and administrative expenses reimbursed to affiliate 3,825 3,434 Expenses from real estate owned 12,964 2,518 Total expenses $ 37,930 $ 28,513 See the Related Party Expenses, Other Expenses and Expenses from Real Estate Owned discussions below for the cause of the changes in operating expenses for the year ended December 31, 2024 compared to the year ended December 31, 2023.
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.
Loan balances that are deemed to be uncollectible are written off as a realized loss and are deducted from the CECL Reserve. The write-offs are recorded in the period in which the loan balance is deemed uncollectible based on management’s judgment.
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.
Provision for (Reversal of) Current Expected Credit Losses, Net For the years ended December 31, 2024 and 2023, the provision for (reversal of) current expected credit losses, net was $(18.2) million and $91.8 million, respectively.
In January 2024, we closed the sale of the senior mortgage loan collateralized by a mixed-use property located in California that was in maturity default due to the failure of the borrower to repay the outstanding principal balance of the loan by the maturity date.
On January 6, 2025, the senior mortgage loan collateralized by a mixed-use property located in Texas, which was in maturity default as of December 31, 2024 due to the failure of the borrower to repay the outstanding principal balance of the loan by the December 2024 maturity date, was fully repaid.
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. For the period from September 8, 2023 to December 31, 2023, revenue from real estate owned related to this property was $4.0 million.
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. Revenues from this property consist primarily of rental revenue from operating leases. For the year ended December 31, 2024, revenue from real estate owned related to this property was $13.2 million.
For the year ended December 31, 2022, adjustments to net income related to operating activities primarily included the provision for current expected credit losses of $46.1 million, accretion of discounts, deferred loan origination fees and costs of $10.3 million, amortization of deferred financing costs of $7.1 million, change in other assets of $17.7 million and gain on sale of real estate owned of $2.2 million.
For the year ended December 31, 2024, adjustments to net income (loss) related to operating activities primarily included the net reversal of current expected credit losses of $18.2 million, accretion of discounts, deferred loan origination fees and costs of $5.0 million, amortization of deferred financing costs of $5.1 million, change in other assets of $1.9 million and realized losses on loans of $83.6 million.
The increase in the provision for current expected credit losses for both the years ended December 31, 2023 and 2022 is primarily due to an increase in the CECL Reserves for risk rated “4” and “5” loans in the portfolio as a result of the impact of the current macroeconomic environment, including high inflation and interest rates, volatility and reduced liquidity in the office sector and other loan specific factors partially offset by shorter average remaining loan term and loan repayments during the years ended December 31, 2023 and 2022. 66 Table of Contents The CECL Reserve takes into consideration our estimates relating to the impact of macroeconomic conditions on CRE properties and is not specific to any loan losses or impairments on our loans held for investment, unless the Company determines that a specific reserve is warranted for a select asset.
The increase in the provision for (reversal of) current expected credit losses, net for the year ended December 31, 2023 was primarily due to an increase in the CECL Reserves for risk rated “4” and “5” loans in the portfolio as a result of the impact of the current macroeconomic environment, including high inflation and interest rates, volatility and reduced liquidity in the office sector and other loan-specific factors partially offset by shorter average remaining loan term and loan repayments during the year ended December 31, 2023.
Expenses From Real Estate Owned For the years ended December 31, 2023 and 2022, expenses from real estate owned was comprised of the following ($ 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 $1.2 million.
Expenses From Real Estate Owned For the years ended December 31, 2024 and 2023 , expenses from real estate owned were comprised of the following ($ in thousands): For the Years Ended December 31, 2024 2023 Mixed-use property operating expenses $ 4,672 $ 1,215 Office property operating expenses 2,885 — Depreciation and amortization expense 5,407 1,303 Expenses from real estate owned $ 12,964 $ 2,518 For the years ended December 31, 2024 and 2023, mixed-use property operating expenses were $4.7 million and $1.2 million, respectively.
Unrealized Losses on Loans Held for Sale In December 2023, we entered into a sale agreement with a third party to sell a senior mortgage loan with outstanding principal of $37.9 million, which is collateralized by a mixed-use property located in California.
Change in Unrealized Losses on Loans Held for Sale As described above, the sale of the senior mortgage loan with outstanding principal of $37.9 million, which was collateralized by a mixed-use property located in California, had not yet closed as of December 31, 2023.
(“Citibank”) (the “Citibank Facility”) 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. (4) In February 2023, we exercised a 12-month extension option on the CNB Facility.
("Citibank") (the “Citibank Facility”) to, among other things, extend the initial maturity date of the Citibank Facility to January 13, 2027, 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.
Gain on Sale of Real Estate Owned For the year ended December 31, 2022, we recognized a $2.2 million gain on the sale of the hotel property that was recognized as real estate owned as the net carrying value of the hotel property as of the March 1, 2022 sale date was lower than the net sales proceeds received by the Company.
Realized Loss on Sale of Real Estate Owned For the year ended December 31, 2024, we recognized a $2.3 million realized loss on the sale of the office property that was recognized as real estate owned held for sale as the net sale proceeds were less than the net carrying value of the office property as of the sale closing date.
Cash Flows The following table sets forth changes in cash and cash equivalents for the years ended December 31, 2023 and 2022 ($ 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 $90.7 million, respectively.
Cash Flows The following table sets forth changes in cash, cash equivalents and restricted cash for the years ended December 31, 2024 and 2023 ($ in thousands): For the Years Ended December 31, 2024 2023 Net income (loss) $ (34,993) $ (38,867) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities 70,542 85,656 Net cash provided by (used in) operating activities 35,549 46,789 Net cash provided by (used in) investing activities 427,914 127,460 Net cash provided by (used in) financing activities (507,628) (205,068) Change in cash, cash equivalents and restricted cash $ (44,165) $ (30,819) During the years ended December 31, 2024 and 2023, cash, cash equivalents and restricted cash decreased by $44.2 million and $30.8 million, respectively. 69 Table of Contents Operating Activities For the years ended December 31, 2024 and 2023, net cash provided by operating activities totaled $35.5 million and $46.8 million, respectively.
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.
As a result of the current macroeconomic environment, certain borrowers have been unable to make interest and principal payments timely, including at the maturity date of the borrower’s loan. We increase our CECL Reserve from time to time, as necessary, to reflect this risk.
Developments During the Second Quarter of 2023: • We closed the sale of the senior mortgage loan collateralized by an office property located in Illinois that was in maturity default due to the failure of the borrower to repay the outstanding principal balance of the loan by the January 2023 maturity date.
Prior to June 12, 2024, the office property collateralized a $33.2 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 December 2023 maturity date.
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.
The weighted average borrowings under the Secured Funding Agreements, Notes Payable, the Secured Term Loan and securitization debt were $1.4 billion for the year ended December 31, 2024 and $1.7 billion for the year ended December 31, 2023.
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.
Related Party Expenses For the year ended December 31, 2024, related party expenses included $10.7 million in management fees due to our Manager pursuant to the Management Agreement. No incentive fees were incurred for the year ended December 31, 2024.
Developments During the Third Quarter of 2023: • We originated a $57.8 million senior mortgage loan on a multifamily property located in Ohio. • We purchased an $11.4 million senior mortgage loan on a self storage property located in Indiana. • We received a discounted payoff of the senior mortgage loan collateralized by a hotel property in Illinois in conjunction with a short sale of the hotel property by the borrower to a third party.
Developments During the Third Quarter of 2024: • We received a discounted payoff of a $97.5 million senior mortgage loan, which was collateralized by a multifamily property in Texas, in conjunction with a short sale of the multifamily property by the borrower to a third party.
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.
Financing Activities For the year ended December 31, 2024, net cash used in financing activities totaled $507.6 million and was primarily related to repayments of our Secured Funding Agreements of $188.1 million, repayment in full and termination of our $105.0 million recourse note, repayments of debt of consolidated VIEs of $267.9 million, repayments of our Secured Term Loan of $20.0 million and dividends paid of $59.6 million, partially offset by proceeds from our Secured Funding Agreements of $136.8 million.
At the time of the discounted payoff, the senior mortgage loan was in default due to the failure of the borrower to make certain contractual reserve deposits by the May 2022 due date and due to the borrower not making its contractual interest payments due subsequent to the January 2023 interest payment date.
At the time of the write-off, the mezzanine loan was in default due to the borrower not making its contractual interest payments due subsequent to the December 2023 interest payment date.
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.
The $105.0 million note was subject to two 12-month extensions, each of which may have been exercised at our option provided that certain conditions were met and applicable extension fees 71 Table of Contents were paid. In September 2024, we elected to repay in full and terminate the $105.0 million note prior to its scheduled maturity on July 28, 2025.
Realized Losses on Loans In January 2023, we closed the sale of a senior mortgage loan with outstanding principal of $14.3 million, which was collateralized by a residential property located in California, to a third party.
For the year ended December 31, 2024, we recognized a realized loss of $15.7 million in our consolidated statements of operations upon the write-off, which was equal to the carrying value of the mezzanine loan. 67 Table of Contents In January 2023, we closed the sale of a senior mortgage loan with outstanding principal of $14.3 million, which was collateralized by a residential property located in California, to a third party.
Loans Held for Investment Portfolio As of December 31, 2023, our portfolio included 46 loans held for investment, excluding 167 loans that were repaid, sold, converted to real estate owned or transferred to held for sale since inception.
During the year ended December 31, 2024, we did not repurchase any shares through the Repurchase Program. Loans Held for Investment Portfolio As of December 31, 2024, our portfolio included 36 loans held for investment, excluding 179 loans that were repaid, sold, converted to real estate owned or written off since inception.
CONTRACTUAL OBLIGATIONS AND COMMITMENTS Our contractual obligations as of December 31, 2023 are described in the following table ($ 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.
CONTRACTUAL OBLIGATIONS AND COMMITMENTS Our contractual obligations as of December 31, 2024 are described in the following table ($ in thousands): 72 Table of Contents Total Less than 1 year 1 to 3 years 3 to 5 years More than 5 years Wells Fargo Facility $ 210,216 $ 210,216 $ — $ — $ — Citibank Facility 228,727 — 228,727 — — CNB Facility — — — — — Morgan Stanley Facility 149,525 149,525 — — — Secured Term Loan 130,000 — 130,000 — — Future Loan Funding Commitments 74,577 26,412 32,190 15,975 — Total $ 793,045 $ 386,153 $ 390,917 $ 15,975 $ — The table above does not include the related interest expense under the Secured Funding Agreements and the Secured Term Loan, as all our interest is variable.
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.
For the years ended December 31, 2024 and 2023, depreciation and amortization expense were $5.4 million and $1.3 million, respectively, and relates primarily to our mixed-use property that was acquired on September 8, 2023 and our office property acquired on September 19, 2024.
During the year ended December 31, 2023, we funded approximately $215.9 million of outstanding principal, received repayments of $181.1 million of outstanding principal, sold two loans with aggregate outstanding principal of $41.5 million to third parties, converted one loan with outstanding principal of $82.9 million to real estate owned and transferred one loan to loans held for sale with outstanding principal of $37.9 million.
During the year ended December 31, 2024, we funded approximately $46.8 million of outstanding principal, received repayments of $349.6 million of outstanding principal, converted two loans with outstanding principal of $101.8 million to real estate owned and wrote-off one loan with outstanding principal of $18.5 million.
This was partially offset by the benefit received from the increase in SOFR rates on our loans held for investment for the year ended December 31, 2023. Revenue From Real Estate Owned On September 8, 2023, we acquired legal title to a mixed-use property located in Florida through a consensual foreclosure.
For the period from June 12, 2024 to November 15, 2024, revenue from real estate owned related to this property was $1.9 million. On September 8, 2023, we acquired legal title to a mixed-use property located in Florida through a consensual foreclosure.
The decrease in allocable general and administrative expenses due to our Manager for the year ended December 31, 2023 compared to the year ended December 31, 2022 primarily relates to a decrease in the percentage of time allocated to us by employees of our Manager due to changes in transaction activity year over year. 65 Table of Contents Other Expenses For the years ended December 31, 2023 and 2022, professional fees were $3.1 million and $3.4 million, respectively.
The increase in allocable general and administrative expenses due to our Manager for the year ended December 31, 2024 compared to the year ended December 31, 2023 relates to changes in the mix of employees of our Manager that allocated time to us year over year.
Critical Accounting Estimates Our consolidated financial statements have been prepared in accordance with generally accepted accounting principles (“GAAP”), which require management to make estimates and assumptions that affect reported amounts. These estimates and assumptions are based on historical experience and other factors management believes to be reasonable. Actual results may differ from those estimates and assumptions.
(4) Remaining Life is based on contractual maturity date and does not include contractual extension options not yet exercised. Critical Accounting Estimates Our consolidated financial statements have been prepared in accordance with generally accepted accounting principles (“GAAP”), which require management to make estimates and assumptions that affect reported amounts.
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 $104.2 million, respectively.
The maturity date of the Wells Fargo Facility continues to be subject to two 12-month extensions, each of which may be exercised at ACRC Lender W’s option, subject to the satisfaction of certain conditions and applicable extension fees being paid, which, if both were exercised, would extend the maturity date of the Wells Fargo Facility to February 10, 2030. 63 Table of Contents RESULTS OF OPERATIONS For the years ended December 31, 2024 and 2023 The following table sets forth a summary of our consolidated results of operations for the years ended December 31, 2024 and 2023 ($ in thousands): For the Years Ended December 31, 2024 2023 Total revenue $ 69,650 $ 92,926 Total expenses 37,930 28,513 Provision for (reversal of) current expected credit losses, net (18,152) 91,825 Realized losses on loans 83,591 10,499 Change in unrealized losses on loans held for sale (995) 995 Realized loss on sale of real estate owned 2,287 — Income (loss) before income taxes (35,011) (38,906) Income tax expense (benefit), including excise tax (18) (39) Net income (loss) attributable to common stockholders $ (34,993) $ (38,867) The following tables set forth select details of our consolidated results of operations for the years ended December 31, 2024 and 2023 ($ in thousands): Net Interest Margin For the Years Ended December 31, 2024 2023 Interest income $ 157,717 $ 198,608 Interest expense (105,985) (109,652) Net interest margin $ 51,732 $ 88,956 For the years ended December 31, 2024 and 2023, net interest margin was approximately $51.7 million and $89.0 million, respectively.
Further, we have not guaranteed any obligations of unconsolidated entities or entered into any commitment or intend to provide additional funding to any such entities.
Further, we have not guaranteed any obligations of unconsolidated entities or entered into any commitment or intend to provide additional funding to any such entities. As of February 10, 2025, we had approximately $201 million in liquidity including $139 million of cash and $62 million of availability under our Secured Funding Agreements.

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Market Risk — interest-rate, FX, commodity exposure

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Biggest changeThese factors could lower our net interest income or cause a net loss during periods of decreasing interest rates, which would harm our financial condition, cash flows and results of operations. Market Risk The estimated fair values of our investments fluctuate primarily due to changes in index rates, changes in credit spreads and other factors.
Biggest changeIn addition, a decrease in interest rates or tightening credit spreads increases the likelihood that certain of our investments will be refinanced at lower rates. These factors could lower our net interest income or cause a net loss during periods of decreasing interest rates, which would harm our financial condition, cash flows and results of operations.
We seek to manage our risks related to the credit quality of our assets, interest rates, liquidity, prepayment speeds and market value while, at the same time, seeking to provide an opportunity to stockholders to realize attractive risk-adjusted returns through ownership of our capital stock.
We seek to manage our risks related to the credit quality of our assets, interest rates, liquidity, prepayment rates and market value while, at the same time, seeking to provide an opportunity to stockholders to realize attractive risk-adjusted returns through ownership of our capital stock.
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.
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; insurance costs; and retroactive changes to building or similar codes.
If prepayment rates decrease in a rising interest rate environment, borrowers exercise extension options on CRE loans or we extend the term of CRE loans, the life of the loans could extend beyond the term of the Financing Agreements that we borrow on to fund our CRE loans. This could have a negative impact on our results of operations.
If prepayment rates decrease in a high interest rate environment, borrowers exercise extension options on CRE loans or we extend the term of CRE loans, the life of the loans could extend beyond the term of the Financing Agreements that we borrow on to fund our CRE loans. This could have a negative impact on our results of operations.
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 $(3.5) The severity of any such impact depends on our asset/liability composition at the time as well as the magnitude and duration of the interest rate increase and any applicable floors or hedging transactions.
The following table estimates the hypothetical increases/(decreases) in net income for a twelve month period, assuming (1) an immediate increase or decrease in 30-day SOFR as of December 31, 2024 and (2) no change in the outstanding principal balance of our loans held for investment portfolio, available-for-sale debt securities and borrowings as of December 31, 2024 ($ in millions): Change in 30-Day SOFR Increase/(Decrease) in Net Income Up 100 basis points $3.1 Up 50 basis points $1.5 Down 50 basis points $(1.5) Down 100 basis points $(3.1) SOFR at 0 basis points $(3.2) 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.
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.
As market volatility increases or liquidity decreases, the fair value of our investments and liabilities may be adversely impacted. 75 Table of Contents 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.
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.
Our Manager seeks to manage credit 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.
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.
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 lenders or potential lenders to be unwilling or unable to provide us with financing or to increase the costs of that financing.
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.
We seek to manage these risks through our underwriting and asset management processes. 76 Table of Contents 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.
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.
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.
In the current macroeconomic environment, prepayments may slow down, borrowers may not be able to repay principal upon the loan maturity or qualify for loan extensions. Additionally, if tenants are not able to pay rent to their landlords, property owners may not be able to make payments to their lenders.
In the current macroeconomic environment, certain borrowers have not been able to repay principal upon the loan maturity and may not be able to qualify for loan extensions. Additionally, if tenants are not able to pay rent to their landlords, property owners may not be able to make payments to their lenders.
In the case of a significant increase in interest rates, the additional debt service payments due from our borrowers may strain the operating cash flows of the real estate assets underlying our mortgages and, potentially, contribute to non-performance or, in severe cases, default, which may be mitigated by borrower purchased interest rate caps.
In the case of a significant increase in interest rates, the additional debt service payments due from our borrowers may strain the operating cash flows of the real estate assets underlying our mortgages and, potentially, contribute to non-performance or, in severe cases, default, which may be mitigated by borrower purchased interest rate caps. 74 Table of Contents Interest Rate Effect on Net Income Our interest income and expense will generally change directionally with index rates.
In addition, there can be no assurance that we will be able to effectively hedge our interest rate risk. In addition to the risks discussed above, there is also the risk of non-performance on floating rate assets.
In addition, there can be no assurance that we will be able to effectively hedge our interest rate risk. As of December 31, 2024, we did not have hedging or derivative financial instruments in place. In addition to the risks discussed above, there is also the risk of non-performance on floating rate assets.
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.
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 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.
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.
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.
Similarly, increased demand for work-from-home arrangements and elevated costs to operate, improve or repurpose office properties have impacted the operations of office properties and rising operating costs, such as property insurance, have further pressured cash flow performance of commercial real estate.
Added
Market Risk The estimated fair values of our investments fluctuate primarily due to changes in index rates, changes in credit spreads and other factors.
Added
Higher 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.

Other ACRE 10-K year-over-year comparisons