Financial Reporting and Accounting - The unaudited consolidated interim financial statements are prepared in accordance with GAAP and reflect all necessary adjustments for fair presentation[28]. - The Company assesses the applicability and impact of all accounting standard updates (ASUs) issued by the FASB, determining minimal impact on its financial statements[60]. - Available-for-sale debt securities are carried at fair value, with unrealized holding gains and losses recorded in other comprehensive income[46]. - The Company capitalizes and amortizes debt issuance costs over the term of the respective debt instrument, impacting interest expense[49]. - Derivative financial instruments are classified at fair value in the consolidated balance sheets, with hedge relationships formally documented[51]. - The Company did not measure a CECL Reserve on accrued interest receivable, which amounted to $14.6 million as of June 30, 2023[86]. - The fair value of available-for-sale debt securities as of June 30, 2023, was estimated at $27,970, with no Level 3 inputs used[139]. - The carrying value of loans held for investment as of June 30, 2023, was $2,228,100, with a fair value of $2,127,328[143]. Loan Portfolio and Credit Losses - The Company monitors its loans held for investment portfolio through borrower review, economic review, property review, and market review[37]. - Loans are placed on non-accrual status when principal or interest payments are past due 30 days or more, impacting interest income recognition[38]. - The Company assesses current expected credit losses (CECL) on outstanding balances and unfunded commitments, impacting earnings recorded within provision for current expected credit losses[40]. - The CECL Reserve for loans held for investment is $112.5 million, representing 466 basis points of the total loans held for investment commitment balance of $2.4 billion[76]. - The Company’s current estimate of expected credit losses increased due to high inflation and interest rates impacting risk-rated "4" and "5" loans[75]. - The provision for current expected credit losses for the three months ended June 30, 2023, was $20.1 million, compared to $7.8 million for the same period in 2022[195]. - For the six months ended June 30, 2023, the provision for current expected credit losses was $41.1 million, compared to $7.2 million in the same period in 2022, representing a 470.8% increase[211]. Real Estate and Asset Management - Real estate assets are evaluated for impairment quarterly, considering factors such as significant underperformance and economic trends[44]. - Revenue from real estate owned, associated with hotel operations, was recognized when services were rendered, contributing to the overall revenue[55]. - The Company recognized a gain of $2.2 million on the sale of a hotel property, with net sales proceeds of $40.0 million compared to a net carrying value lower than this amount as of March 1, 2022[88]. - The Company recognized a realized loss of $5.6 million upon the sale of a senior mortgage loan with an outstanding principal of $14.3 million during the six months ended June 30, 2023[73]. - The Company evaluated real estate owned for impairment on a quarterly basis, with cash flows including operating cash flows and anticipated capital proceeds[140]. Financial Performance and Income - The net interest margin for the company is influenced by interest income from loans and debt securities, with interest expense for the three months ended June 30, 2023, totaling $26.951 million, compared to $13.475 million for the same period in 2022[57][58]. - Interest expense for the six months ended June 30, 2023, was $49.950 million, up from $25.488 million in the same period of 2022[57]. - For the three months ended June 30, 2023, interest income was $51.9 million, compared to $38.6 million for the same period in 2022, reflecting a 34.5% increase[194]. - The company’s net income attributable to common stockholders for the six months ended June 30, 2023, was a loss of $8.6 million, compared to a profit of $26.2 million for the same period in 2022[195]. - The total income tax expense for the three months ended June 30, 2023, was a benefit of $46 thousand, including an excise tax expense of $(55) thousand[128]. Shareholder Activities and Dividends - During the three months ended June 30, 2023, the Company repurchased 535,965 shares of common stock for approximately $4.6 million, averaging $8.58 per share[119]. - The company declared a regular cash dividend of $0.33 per common share for Q3 2023, payable on October 17, 2023[176]. - The Company has a stock repurchase program renewed for up to $50.0 million, expected to be in effect until July 31, 2024[119]. - The company may change its dividend practice, including the potential reduction or temporary suspension of future dividends[220]. Financing and Liquidity - The outstanding balance of the Financing Agreements as of June 30, 2023, is $681.3 million, with total commitments of $1,280.0 million[91]. - The Company has total commitments of $2,413.1 million as of June 30, 2023, with $2,252.1 million funded commitments, leaving $161.1 million in unfunded commitments[117]. - As of August 1, 2023, the company had approximately $193 million in liquidity, including $118 million of unrestricted cash and $75 million available under Secured Funding Agreements[222]. - The Company has the ability to access additional liquidity through reinvestment provisions in its CLO securitizations, subject to certain conditions[220]. - Macroeconomic conditions may impair the company's ability to access financing and capital markets[220]. Management and Operational Expenses - The Company incurred management fees of $3,000,000 for Q2 2023, compared to $2,801,000 in Q2 2022, reflecting an increase of 7.1%[154]. - Management and incentive fees to affiliates for Q2 2023 were $3.3 million, a decrease from $3.8 million in Q2 2022, reflecting a 13.2% decline[201]. - Total expenses for the six months ended June 30, 2023, were $13.3 million, down 25.1% from $17.8 million in the same period of 2022[198]. - General and administrative expenses for Q2 2023 were $2.0 million, up 25.0% from $1.6 million in Q2 2022[205]. - Professional fees for Q2 2023 were $0.6 million, down 45.5% from $1.1 million in Q2 2022, indicating reduced reliance on third-party professionals[205].

Financial Data and Key Metrics Changes - For Q1 2023, the company reported a GAAP net loss of $6.4 million, or $0.12 per common share, primarily due to a $21 million net increase in CECL provision, equating to about $0.38 per common share [13] - Distributable earnings for Q1 2023 were $15.1 million, or $0.27 per common share, which included a realized loss of $5.6 million on a previously defaulted residential loan [13] - The net debt to equity ratio was reduced to less than 2 to 1, with cash levels exceeding $150 million, representing about 20% of shareholder equity [7][17] Business Line Data and Key Metrics Changes - The loan portfolio consisted of 98% senior loans with an outstanding principal balance of $2.2 billion, diversified across 53 loans [13] - The company collected 99% of contractual interest during the quarter, despite five loans being on non-accrual status [14] - 78% of the loan portfolio was rated three or better, a decline from 80% in the previous quarter, primarily due to the negative migration of a mixed-use property loan [14][15] Market Data and Key Metrics Changes - The company has no direct funding relationships with regional banks, and all funding sources are with leading U.S. banks and insurance companies [17] - The company expects tighter bank lending conditions to create a wider opportunity set for lenders, which is anticipated to provide long-term investment opportunities [19] Company Strategy and Development Direction - The company aims to resolve underperforming loans and reduce exposure to the office sector while building cash and liquidity [6][7] - The management is focused on maximizing outcomes for remaining risk-rated loans through various strategies, including loan modifications and sales [9][10] - The company plans to maintain regular and supplemental quarterly cash dividends for the remainder of the year, despite industry headwinds [12] Management's Comments on Operating Environment and Future Outlook - Management acknowledged the challenges in the commercial real estate market but expressed confidence in navigating the cycle due to strong liquidity and capital position [19][20] - The company anticipates that future opportunities from loan sales and maturing bank loans will provide a runway for accretive investment opportunities [19] - Management emphasized the importance of maintaining liquidity to manage underperforming assets effectively [56] Other Important Information - The total CECL reserve at quarter-end was $92 million, or about 4% of the portfolio [12][15] - The company declared a second-quarter dividend of $0.33 per share, along with a supplemental dividend of $0.02 per share [18] Q&A Session Summary Question: Why were there no new loan commitments in Q1 despite having capacity? - Management indicated that the priority was on liquidity build, but they expect to be more active in lending as opportunities expand [24] Question: Can you describe the buyer for the troubled asset sold? - The asset had development potential, attracting an investor with a longer-term view, as the highest and best use was not as an office [27][28] Question: What does the "other" category in the portfolio mix include? - The "other" category includes self-storage and non-rent residential, making up less than 5% of the portfolio [30][31] Question: Is office the main concern in the credit outlook? - Management confirmed that office is the primary concern, with other asset classes like self-storage and multifamily performing better [35] Question: What are the similarities and differences in the problem loans? - The favorable resolution was due to significant land collateral, while the other property lacked redevelopment potential, leading to a larger reserve [38][40] Question: What is the funding strategy for the mixed-use property in Florida? - The company has various financing sources available and is optimistic about the cash flow profile of the asset [75]

Financial Performance - For the three months ended March 31, 2023, the company reported total revenue of $26.5 million, an increase from $24.0 million in the same period of 2022[191]. - The company experienced a net loss attributable to common stockholders of $6.4 million for the three months ended March 31, 2023, compared to a net income of $16.2 million in the same period of 2022[191]. - The net interest margin for the three months ended March 31, 2023, was approximately $26.5 million, compared to $21.4 million for the same period in 2022, reflecting the benefits from interest rate hedging and increased LIBOR and SOFR rates[191]. - The Company declared total cash dividends of $19,346,000 for the three months ended March 31, 2023, compared to $16,740,000 for the same period in 2022, representing an increase of approximately 15%[155]. - The Company recognized a realized gain of $2.2 million on the sale of a hotel property, which closed on March 1, 2022, with net sales proceeds exceeding the carrying value of the property[88]. Interest and Debt - The Company reported interest expense of $22.999 million for Q1 2023, an increase from $12.013 million in Q1 2022, reflecting a significant rise in secured funding agreements and securitization debt[50]. - Secured funding agreements increased to $12.311 million in Q1 2023 from $5.127 million in Q1 2022, indicating a strong growth in financing activities[50]. - The Company’s notes payable rose to $1.759 million in Q1 2023 compared to $453,000 in Q1 2022, showing an increase in borrowing[50]. - Securitization debt also saw an increase to $11.606 million in Q1 2023 from $4.351 million in Q1 2022, highlighting a growing reliance on securitization for funding[50]. - The outstanding balance of the Company's Financing Agreements as of March 31, 2023, is $953.2 million, with total commitments of $1,535.0 million[87]. Credit Losses and Reserves - Current expected credit losses (CECL) are reflected on both outstanding balances and unfunded commitments, impacting earnings and recorded within the provision for current expected credit losses[39]. - The CECL Reserve for loans held for investment increased to $92.3 million as of March 31, 2023, representing 387 basis points of the total loans held for investment commitment balance of $2.4 billion[79]. - Specific CECL reserves of $38.3 million and $5.6 million were assigned to the Illinois office loan and hotel loan, respectively, due to their downgraded risk ratings[80]. - The provision for current expected credit losses increased to $21.0 million for the three months ended March 31, 2023, compared to a provision of $(0.6) million for the same period in 2022[198]. Loan Portfolio and Investment - As of March 31, 2023, the Company held 53 loans for investment with an outstanding principal of approximately $2.2 billion, down from $2.5 billion in originated commitments[63]. - The Company funded approximately $26.4 million and received repayments of $72.8 million during the three months ended March 31, 2023[63]. - The total carrying value of loans held for investment is $2,173.2 million, with risk ratings distributed as follows: $19.1 million (Rating 1), $440.2 million (Rating 2), $1,230.1 million (Rating 3), $400.5 million (Rating 4), and $83.4 million (Rating 5)[84]. - Loans held for investment had a carrying value of $2.17 billion and a fair value of $2.09 billion as of March 31, 2023[141]. - The Company had five loans on non-accrual status with a carrying value of $173.3 million as of March 31, 2023, compared to three loans with a carrying value of $99.1 million as of December 31, 2022[76]. Risk Management - The Company is subject to macroeconomic conditions such as high inflation and interest rates, which could adversely impact its operations and borrowers[29]. - The Company actively manages various risks, including credit, interest rate, and market risks, to provide attractive risk-adjusted returns to stockholders[223]. - The Company has exposure to credit risk on its CRE loans held for investment and seeks to manage this risk through due diligence and ongoing portfolio review[224]. Facilities and Commitments - The Wells Fargo Facility allows borrowing up to $450.0 million, with a potential increase to $500.0 million, and has a funding period expiring on December 15, 2025[92]. - The Citibank Facility has an outstanding balance of $236.2 million and a total commitment of $325.0 million, with an initial maturity date of January 13, 2025[93]. - The CNB Facility has a total commitment of $75.0 million, with a maturity date extended to March 11, 2024, and incurs non-utilization fees of $70,000 for both Q1 2023 and Q1 2022[94]. - The MetLife Facility has a total commitment of $180.0 million, with an initial maturity date of August 13, 2023, and incurred a non-utilization fee of $73,000 for Q1 2023[95][97]. - The Company had total commitments of $2,388.3 million as of March 31, 2023, with total unfunded commitments amounting to $193.4 million[114]. Shareholder Returns - The company intends to maintain a debt-to-equity ratio not exceeding 4.5-to-1 to enhance potential returns to stockholders[219]. - The company anticipates distributing at least 90% of its REIT taxable income annually to stockholders, with potential tax implications for undistributed income[220]. - The Company did not conduct any stock repurchases under its $50.0 million Repurchase Program during the three months ended March 31, 2023[116]. - The company declared a regular cash dividend of $0.33 per common share and a supplemental cash dividend of $0.02 per common share for the second quarter of 2023[188].

Financial Data and Key Metrics Changes - For Q4 2022, the company reported distributable earnings of $0.44 per share, marking the second highest quarterly level in its history, while annual distributable earnings matched the previous record of $1.55 per share [5][11] - GAAP net income for Q4 2022 was $2.9 million or $0.05 per share, with full year GAAP net income at $29.8 million or $0.57 per share [11] - The company fully covered its regular and supplemental dividends from distributable earnings at 110% for the year [5][11] Business Line Data and Key Metrics Changes - The loan portfolio consisted of 98% senior loans with an outstanding principal balance of $2.3 billion diversified across 60 loans [12] - The company collected 99% of its contractual interest rate during Q4 2022 [12] - The risk rating of the loan portfolio showed a decline, with 80% rated three or better, down from 90% in the previous quarter [12] Market Data and Key Metrics Changes - The commercial real estate market is facing headwinds due to higher interest rates, leading to weaker leasing and occupancy trends, particularly in the office market [6][7] - The company experienced a record of $823 million in principal loan repayments during 2022, enhancing its liquidity [8] Company Strategy and Development Direction - The company aims to navigate volatile markets by maintaining liquidity and seeking opportunistic investments [8] - A defensive posture was adopted in 2022 to better position the company for a complex real estate market [8] - The company plans to resolve certain situations to maximize outcomes while prudently deploying capital into attractive new investment opportunities [10] Management's Comments on Operating Environment and Future Outlook - Management acknowledged the challenges posed by higher interest rates on the commercial real estate market, affecting property owners' business plans [6][7] - The company remains confident in its ability to manage underperforming situations and leverage its strong balance sheet for flexibility and liquidity [14] - Management expressed gratitude for investor support and emphasized the importance of operational capability and liquidity in navigating the current environment [16] Other Important Information - The company announced a first quarter 2023 regular dividend of $0.33 per share and a supplemental quarterly dividend of $0.02 per share [15] Q&A Session Summary Question: Portfolio shrinkage in Q1 - Management noted that the recent portfolio shrinkage is not indicative of a long-term trend and emphasized their position to take advantage of market opportunities [19][20] Question: New loan in office property - Management explained that the decision to make a new loan in the office sector was based on the specific asset's cash flow profile and borrower support, despite general headwinds in the office market [21][22] Question: Credit trends and defaults - Management characterized the credit environment as challenging, with increased defaults primarily affecting borrowers impacted by interest rate movements and those with difficult business plans [24][27] Question: Non-accrual loans and defaults - Management clarified that the $150 million in maturity defaults mentioned does not include loans already on non-accrual status as of year-end 2022 [36][37] Question: Reserve allocations - Management indicated that a significant portion of the CECL reserve is tied to higher risk-rated loans, with ongoing evaluations to determine if any loans require specific reserves [45][48] Question: Office loan discussions - Management is actively engaged in discussions regarding their office loans, with each loan having a unique profile and ongoing dialogues about potential resolutions [49][50] Question: Interest rate hedging - Management discussed their strategy of match funding and the proactive hedging measures taken in the past, which have positioned them well in the current interest rate environment [54][56]

Exhibit 99.2 0 42 65 GENER AL PALET TE 155 112 42 4 94 109 127 127 127 Credit 0 42 65 Private Equit y BUSINE SS SECTOR PALETT E 2 87 133 Real Estat e 71 126 163 Strategi c Initiat ives 120 163 198 Fourth Quarter and Full Year 2022 Earnings Presentation Disclaimer Statements included herein may constitute "forward-looking statementsˮ within the meaning of the Private Securities Litigation Reform Act of 1995 and Section 21E of the Securities Exchange Act of 1934, as amended, which may relate to future events ...

Part I [Item 1. Business](index=6&type=section&id=Item%201.%20Business) Ares Commercial Real Estate Corporation (ACRE) is a specialty finance REIT focused on originating and investing in diversified commercial real estate (CRE) loans, externally managed by Ares Commercial Real Estate Management LLC - ACRE is a specialty finance company, externally managed by ACREM, a subsidiary of Ares Management, focusing on originating and investing in CRE loans and related investments, and has elected to be taxed as a REIT[13](index=13&type=chunk)[14](index=14&type=chunk) - The company's investment strategy centers on direct origination of customized financing solutions for borrowers with value-improving business plans, who often face challenges in securing capital from traditional bank and capital market sources[15](index=15&type=chunk)[17](index=17&type=chunk) Target Asset Classes | Asset Type | Description | | :--- | :--- | | **Senior Mortgage Loans** | Typically first liens on various commercial properties, may include A-Notes and B-Notes | | **Subordinated Debt** | Includes structurally subordinated first mortgage loans and junior participations (e.g., B-Notes) | | **Mezzanine Loans** | Subordinated loans secured by a pledge of the borrower's equity in the property-owning entity | | **Preferred Equity** | Subordinate to first mortgage loans, not collateralized by the property, but with covenants to protect the investment | | **Other CRE Investments** | Includes CMBS, loans to real estate companies, and other income-producing equity investments | - ACRE's financing strategy utilizes prudent leverage, with a target debt-to-equity ratio not exceeding **4.5-to-1**; primary financing sources include credit facilities, securitizations, and public or private offerings of equity or debt[31](index=31&type=chunk)[32](index=32&type=chunk) Financing and Securitization Balances as of Dec 31, 2022 | Financing Type | Outstanding Balance ($) | | :--- | :--- | | Financing Agreements | $960.2 million | | CLO Securitizations | $779.0 million | - The company operates in a highly competitive market, competing with other REITs, specialty finance companies, banks, and institutional investors, leveraging its Manager's industry expertise as a competitive advantage[39](index=39&type=chunk)[41](index=41&type=chunk) [Item 1A. Risk Factors](index=11&type=section&id=Item%201A.%20Risk%20Factors) The company faces a wide range of risks that could materially affect its business, financial condition, and results of operations [Risks Related to Our Business](index=12&type=section&id=Risks%20Related%20to%20Our%20Business) The company's business is exposed to significant macroeconomic risks, including global economic slowdowns, recessions, and declines in real estate values, which could impair investments - A global economic slowdown, recession, or declining real estate values could severely impair investments, increase the CECL Reserve, and trigger margin calls on financing agreements; the CECL Reserve increased from **$25.2 million** in 2021 to **$71.3 million** in 2022 due to macroeconomic pressures[48](index=48&type=chunk)[57](index=57&type=chunk)[58](index=58&type=chunk) - Rising interest rates, while potentially beneficial for a portfolio of **99%** floating-rate loans, could strain borrowers' ability to make debt service payments, leading to non-performance or default[59](index=59&type=chunk)[60](index=60&type=chunk) - The transition away from LIBOR, set to cease after June 30, 2023, poses risks as the company held **$1.2 billion** in LIBOR-based loans and **$1.1 billion** in LIBOR-based debt with maturities beyond this date as of December 31, 2022, creating potential mismatches and adverse effects on operating results[68](index=68&type=chunk)[71](index=71&type=chunk) - The business could be adversely affected by health pandemics, such as COVID-19, which can impact industries whose properties serve as collateral for the company's loan portfolio, potentially leading to borrower defaults[73](index=73&type=chunk)[74](index=74&type=chunk) [Risks Related to Sources of Financing and Hedging](index=15&type=section&id=Risks%20Related%20to%20Sources%20of%20Financing%20and%20Hedging) The company's use of significant debt exposes it to increased risk of loss, with substantial outstanding balances under financing agreements and CLO securitizations - The company may incur significant debt, which increases the risk of loss; as of December 31, 2022, ACRE had **$960.2 million** outstanding under Financing Agreements and **$779.0 million** under CLO Securitizations[75](index=75&type=chunk)[76](index=76&type=chunk) - Financing agreements impose restrictive covenants that can limit the ability to incur additional debt, make certain investments, and distribute income to stockholders, with failure to comply potentially leading to default and acceleration of debt[80](index=80&type=chunk) - Financing facilities may require the company to provide additional collateral or pay down debt if the value of pledged assets declines, which could reduce liquidity and force asset sales at unfavorable times[87](index=87&type=chunk)[88](index=88&type=chunk) - Access to financing is dependent on market conditions, and an inability to access capital markets could limit business growth and the ability to fund new investments[90](index=90&type=chunk)[92](index=92&type=chunk) - Hedging activities, while intended to reduce interest rate risk, can be expensive, may not be perfectly effective, and expose the company to counterparty credit risk[102](index=102&type=chunk)[103](index=103&type=chunk) [Risks Related to Our Investments](index=21&type=section&id=Risks%20Related%20to%20Our%20Investments) The company's investments carry inherent risks, including illiquidity, concentration, and higher loss potential for specialized loan types - The company's investments, particularly senior mortgage loans, subordinated debt, and mezzanine loans, are illiquid, which may make it difficult to sell them quickly without realizing significant losses, especially during turbulent market conditions[117](index=117&type=chunk) - The investment portfolio is concentrated, with **60 loans** held for investment as of December 31, 2022, making it vulnerable to poor performance by a small number of these loans that could significantly impact aggregate returns[118](index=118&type=chunk) - CRE loans are subject to delinquency and foreclosure risks, dependent on the property's net operating income, which can be affected by tenant mix, property condition, competition, and economic conditions[123](index=123&type=chunk)[124](index=124&type=chunk) - Mezzanine loans and preferred equity investments involve greater risk of loss than senior loans because they are subordinate and may not be fully secured by the underlying real estate, potentially leading to a complete loss of investment in a default scenario[143](index=143&type=chunk)[145](index=145&type=chunk) - Construction loans carry increased risks, including cost overruns, non-completion, and the borrower's inability to secure permanent financing, which could result in significant losses[139](index=139&type=chunk)[167](index=167&type=chunk) [Risks Related to Our Common Stock](index=30&type=section&id=Risks%20Related%20to%20Our%20Common%20Stock) The market price of ACRE's common stock is subject to significant fluctuation due to various factors, and future equity issuances could dilute stockholder interests - The market price of the company's common stock (NYSE: ACRE) is subject to significant volatility from factors including operating results, changes in interest rates, equity issuances, and general market conditions[171](index=171&type=chunk)[172](index=172&type=chunk) - Future sales of common stock could have an adverse effect on the share price; in 2021 and 2022, the company sold a total of **20.5 million shares** in three underwritten offerings and sold **190,369 shares** under its 'At the Market' program in 2022[175](index=175&type=chunk)[176](index=176&type=chunk) - The company has not set a minimum distribution level, and its ability to make distributions, required to maintain REIT status, depends on earnings, financial condition, and debt covenants, with no assurance they can be maintained[176](index=176&type=chunk)[177](index=177&type=chunk) [Risks Related to Our Organization and Structure](index=33&type=section&id=Risks%20Related%20to%20Our%20Organization%20and%20Structure) The company's organizational structure and Maryland corporate law present risks, including potential acquisition deterrence and operational limits from maintaining Investment Company Act exemption - Maryland's General Corporation Law (MGCL) prohibits certain business combinations with 'interested stockholders' (owners of **10%** or more), which may deter or make acquisitions of the company more difficult[184](index=184&type=chunk)[185](index=185&type=chunk) - The company's charter authorizes the issuance of up to **450 million common** and **50 million preferred shares** without stockholder approval, which could be used to prevent a change in control[190](index=190&type=chunk) - Maintaining exemption from registration under the Investment Company Act of 1940 imposes significant operational limits, with subsidiaries often relying on Section 3(c)(5)(C), requiring at least **55%** of assets to be 'qualifying real estate assets' and at least **80%** to be real estate-related, which restricts investment flexibility[191](index=191&type=chunk)[196](index=196&type=chunk) - To preserve its REIT qualification, the company's charter generally prohibits any person from owning more than **9.8%** of its outstanding stock, which could discourage takeovers or transactions that might offer a premium to stockholders[211](index=211&type=chunk) [Risks Related to Our Relationship with Our Manager and Its Affiliates](index=37&type=section&id=Risks%20Related%20to%20Our%20Relationship%20with%20Our%20Manager%20and%20Its%20Affiliates) ACRE is highly dependent on its external manager, ACREM, which presents potential conflicts of interest and a fee structure that may not fully align with stockholder interests - The company is completely reliant on its Manager, ACREM, for day-to-day operations and investment advisory services, as it has no employees of its own[212](index=212&type=chunk) - Significant conflicts of interest exist because Ares Management affiliates manage other investment vehicles that may compete for the same assets, with investment opportunities allocated based on an internal policy, and no guarantee ACRE will participate in all suitable investments[218](index=218&type=chunk)[219](index=219&type=chunk) - The Management Agreement was not negotiated at arm's-length; the base management fee is calculated as **1.5%** of stockholders' equity, which may incentivize the Manager to increase equity rather than maximize risk-adjusted returns[227](index=227&type=chunk)[228](index=228&type=chunk) - Terminating the Management Agreement without cause is difficult and requires payment of a termination fee equal to **three times** the sum of the average annual base management fee and incentive fee during the prior 24-month period[230](index=230&type=chunk) - The incentive fee, based on 'Core Earnings', may encourage the Manager to select riskier assets to increase its compensation; for 2022, the incentive fee incurred was **$3.4 million**[231](index=231&type=chunk)[232](index=232&type=chunk) [United States Federal Income Tax Risks](index=42&type=section&id=United%20States%20Federal%20Income%20Tax%20Risks) Maintaining REIT status is critical and subject to complex tax rules, with failure resulting in corporate-level income tax and distribution requirements potentially forcing unfavorable asset sales - Failure to maintain REIT qualification would subject the company to U.S. federal income tax at corporate rates and disqualify it from REIT status for four subsequent taxable years, severely impacting operations[247](index=247&type=chunk)[251](index=251&type=chunk) - The requirement to distribute at least **90%** of REIT taxable income annually may force the company to borrow funds or sell assets, potentially at unfavorable times, to meet distribution requirements[254](index=254&type=chunk)[255](index=255&type=chunk) - The company's use of Taxable REIT Subsidiaries (TRSs) is limited, as securities of TRSs cannot exceed **20%** of the gross value of its assets, and transactions between the REIT and its TRSs that are not at arm's-length are subject to a **100%** excise tax[261](index=261&type=chunk)[262](index=262&type=chunk) - Securitization activities can create a taxable mortgage pool (TMP), resulting in 'excess inclusion income' that may be subject to increased taxes for certain stockholders (e.g., non-U.S. stockholders, tax-exempt entities)[274](index=274&type=chunk) [General Risk Factors](index=48&type=section&id=General%20Risk%20Factors) The company is subject to general business risks, including changes in laws and regulations, cybersecurity threats, and increasing scrutiny of ESG activities - Changes in laws or regulations, such as the Dodd-Frank Act, could negatively impact operations, increase costs, and affect the availability and cost of financing from lenders[287](index=287&type=chunk)[288](index=288&type=chunk) - The company faces significant cybersecurity risks from potential breaches that could disrupt operations, compromise confidential data, and lead to financial loss, litigation, and reputational damage[294](index=294&type=chunk)[295](index=295&type=chunk) - There is increasing public, investor, and regulatory scrutiny of Environmental, Social, and Governance (ESG) activities, where failure to act responsibly could damage the company's brand and relationships with investors[301](index=301&type=chunk)[302](index=302&type=chunk) [Item 1B. Unresolved Staff Comments](index=50&type=section&id=Item%201B.%20Unresolved%20Staff%20Comments) The company reports that it has no unresolved staff comments from the SEC - None[304](index=304&type=chunk) [Item 2. Properties](index=51&type=section&id=Item%202.%20Properties) The company's principal executive offices are located in New York, NY, and are leased by its Manager, with ACRE reimbursing a pro-rata portion of expenses - The principal executive offices are located in New York, NY, and are leased by the Manager or an affiliate; ACRE reimburses the Manager for its pro-rata share of rent and other office expenses as per the Management Agreement[305](index=305&type=chunk) [Item 3. Legal Proceedings](index=51&type=section&id=Item%203.%20Legal%20Proceedings) As of December 31, 2022, the company was not subject to any material pending legal proceedings - As of December 31, 2022, the company was not involved in any material pending legal proceedings[306](index=306&type=chunk) [Item 4. Mine Safety Disclosures](index=51&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) This item is not applicable to the company - Not applicable[307](index=307&type=chunk) Part II [Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities](index=52&type=section&id=Item%205.%20Market%20for%20Registrant%27s%20Common%20Equity%2C%20Related%20Stockholder%20Matters%20and%20Issuer%20Purchases%20of%20Equity%20Securities) ACRE's common stock is traded on the NYSE, and the company maintains a distribution policy consistent with REIT status, with a $50 million stock repurchase program approved in July 2022 - The company's common stock is listed on the New York Stock Exchange (NYSE) under the trading symbol 'ACRE'[309](index=309&type=chunk) - To maintain its REIT status, the company is generally required to distribute at least **90%** of its REIT taxable income annually; for the years 2022, 2021, and 2020, the company accrued excise tax of **$430 thousand**, **$272 thousand**, and **$369 thousand**, respectively, for undistributed income[311](index=311&type=chunk) - On July 26, 2022, the Board of Directors approved a stock repurchase program for up to **$50 million** of common stock, effective until July 26, 2023, with the full amount remaining available as of December 31, 2022[319](index=319&type=chunk) [Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=55&type=section&id=Item%207.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) In 2022, ACRE's net income decreased to $29.8 million, primarily due to a significant increase in the provision for current expected credit losses, despite growth in net interest margin [Investment Portfolio Analysis](index=58&type=section&id=Investment%20Portfolio%20Analysis) As of December 31, 2022, the company's investment portfolio consisted of 60 loans with an outstanding principal of $2.3 billion, predominantly senior mortgage loans with a weighted average remaining life of 1.4 years Loans Held for Investment Portfolio as of Dec 31, 2022 | Loan Type | Carrying Amount ($ thousands) | Outstanding Principal ($ thousands) | Weighted Avg. Unleveraged Effective Yield | Weighted Avg. Remaining Life (Years) | | :--- | :--- | :--- | :--- | :--- | | Senior mortgage loans | $2,225,725 | $2,243,818 | 8.4% | 1.3 | | Subordinated debt and preferred equity | $38,283 | $39,003 | 14.0% | 2.8 | | **Total Portfolio** | **$2,264,008** | **$2,282,821** | **8.5%** | **1.4** | - As of December 31, 2022, the portfolio included **60 loans** held for investment; during the year, the company funded approximately **$676.9 million** of outstanding principal and received repayments of **$823.2 million**[346](index=346&type=chunk) - As of December 31, 2022, three loans with a carrying value of **$99.1 million** were on non-accrual status, compared to two loans with a carrying value of **$45.0 million** at year-end 2021[336](index=336&type=chunk) [Critical Accounting Estimates](index=59&type=section&id=Critical%20Accounting%20Estimates) The Current Expected Credit Loss (CECL) Reserve is the most significant accounting estimate, requiring substantial judgment regarding historical loss data, loan repayment timing, and macroeconomic forecasts - The company adopted the CECL methodology, which requires estimating expected credit losses based on historical experience adjusted for current and future conditions; the CECL Reserve is recorded as a valuation account against loans held for investment and as a liability for unfunded commitments[351](index=351&type=chunk) - Estimating the CECL Reserve involves significant judgment regarding historical loan loss data, expected loan repayments, default probabilities, and the macroeconomic outlook, utilizing historical market loan loss data from a third-party service for its estimates[352](index=352&type=chunk) [Results of Operations](index=61&type=section&id=Results%20of%20Operations) For 2022, net income attributable to common stockholders significantly decreased to $29.8 million from $60.5 million in 2021, primarily due to a substantial increase in the provision for current expected credit losses Consolidated Results of Operations Summary ($ in thousands) | Metric | 2022 | 2021 | | :--- | :--- | :--- | | Total Revenue | $106,849 | $102,069 | | Total Expenses | $32,728 | $40,877 | | Provision for credit losses | $46,061 | $10 | | Gain on sale of REO | $2,197 | $— | | **Net Income** | **$29,785** | **$60,460** | - Net interest margin increased by **25%** to **$104.2 million** in 2022 from **$83.6 million** in 2021, primarily due to a larger portfolio of earning assets and the benefit of rising LIBOR and SOFR rates[359](index=359&type=chunk)[360](index=360&type=chunk) - The provision for current expected credit losses increased dramatically to **$46.1 million** in 2022 from **$10 thousand** in 2021, mainly due to new loan production and the negative impact of the macroeconomic environment, including rising inflation and interest rates[368](index=368&type=chunk) - Related party expenses, primarily management and incentive fees paid to the Manager, increased to **$14.9 million** in 2022 from **$12.1 million** in 2021, driven by higher average stockholders' equity and Core Earnings[363](index=363&type=chunk) - Expenses from real estate owned decreased to **$4.3 million** in 2022 from **$18.5 million** in 2021, as the hotel property was sold on March 1, 2022[362](index=362&type=chunk)[367](index=367&type=chunk) [Liquidity and Capital Resources](index=64&type=section&id=Liquidity%20and%20Capital%20Resources) The company's primary liquidity sources include unused borrowing capacity, equity offering proceeds, and investment portfolio cash flow, with total liquidity at approximately $216 million as of February 14, 2023 - As of February 14, 2023, the company had approximately **$216 million** in liquidity, consisting of **$141 million** in unrestricted cash and **$75 million** of availability under its Secured Funding Agreements[379](index=379&type=chunk) - In May 2022, the company closed a public offering of **7 million shares** of common stock, generating net proceeds of approximately **$103.2 million**[381](index=381&type=chunk) Summary of Financing Agreements as of Dec 31, 2022 ($ in thousands) | Facility Type | Total Commitment ($ thousands) | Outstanding Balance ($ thousands) | | :--- | :--- | :--- | | Secured Funding Agreements | $1,280,000 | $705,231 | | Notes Payable | $105,000 | $105,000 | | Secured Term Loan | $150,000 | $150,000 | | **Total** | **$1,535,000** | **$960,231** | Cash Flow Summary ($ in thousands) | Activity | 2022 | 2021 | | :--- | :--- | :--- | | Net cash from operating activities | $57,157 | $48,350 | | Net cash from (used in) investing activities | $193,173 | $(699,685) | | Net cash (used in) from financing activities | $(159,667) | $627,174 | | **Change in cash** | **$90,663** | **$(24,161)** | [Item 7A. Quantitative and Qualitative Disclosures About Market Risk](index=69&type=section&id=Item%207A.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) The company actively manages credit, interest rate, market, and financing risks, with interest rate risk mitigated by matching floating-rate assets with liabilities and using derivatives - The company is exposed to credit risk from its CRE loans, managed through comprehensive due diligence and ongoing portfolio review, though the current macroeconomic environment may increase borrower defaults[404](index=404&type=chunk)[405](index=405&type=chunk) - Interest rate risk is primarily managed by originating floating-rate assets financed with index-matched floating-rate liabilities, and the company also uses hedging instruments like interest rate swaps to mitigate exposure[406](index=406&type=chunk) Hypothetical Interest Rate Effect on Net Income ($ in millions) | Change in 30-Day LIBOR or SOFR | Increase/(Decrease) in Net Income ($ millions) | | :--- | :--- | | Up 100 basis points | $10.1 | | Up 50 basis points | $5.0 | | LIBOR or SOFR at 0 basis points | $(26.3) | - Financing risk stems from borrowings, which contain margin call provisions and restrictive covenants, and weakness in financial markets could affect lenders' willingness to provide financing[413](index=413&type=chunk) [Item 9A. Controls and Procedures](index=71&type=section&id=Item%209A.%20Controls%20and%20Procedures) Management concluded that the company's disclosure controls and procedures and internal control over financial reporting were effective as of December 31, 2022 - Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2022[418](index=418&type=chunk) - Management concluded that the company's internal control over financial reporting was effective as of December 31, 2022, based on the COSO framework, with the independent auditor, Ernst & Young LLP, concurring with this assessment[421](index=421&type=chunk) - No material changes were made to the company's internal control over financial reporting during the fourth quarter of 2022[422](index=422&type=chunk) [Item 9B. Other Information](index=73&type=section&id=Item%209B.%20Other%20Information) This section includes a disclosure regarding an affiliate's terminated contract with a designated entity and the adoption of amended bylaws to update stockholder nomination procedures - A disclosure was made regarding an affiliate's investment in Daisy Group Limited, which had a contract with Melli Bank Plc; this contract generated minimal revenue and was terminated on February 26, 2022[425](index=425&type=chunk)[426](index=426&type=chunk) - On February 15, 2023, the Board of Directors adopted Second Amended and Restated Bylaws, primarily to align stockholder nomination procedures with the SEC's new universal proxy rules (Rule 14a-19)[427](index=427&type=chunk) Part III [Item 10. Directors, Executive Officers and Corporate Governance](index=74&type=section&id=Item%2010.%20Directors%2C%20Executive%20Officers%20and%20Corporate%20Governance) Information concerning directors, executive officers, and corporate governance is incorporated by reference from the company's 2023 Proxy Statement - Information is incorporated by reference from the Company's 2023 Proxy Statement[433](index=433&type=chunk) [Item 11. Executive Compensation](index=74&type=section&id=Item%2011.%20Executive%20Compensation) Information concerning executive compensation is incorporated by reference from the company's 2023 Proxy Statement - Information is incorporated by reference from the Company's 2023 Proxy Statement[434](index=434&type=chunk) [Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters](index=74&type=section&id=Item%2012.%20Security%20Ownership%20of%20Certain%20Beneficial%20Owners%20and%20Management%20and%20Related%20Stockholder%20Matters) The company provides details on its equity compensation plan, with 901,060 shares remaining available for future issuance as of December 31, 2022 - The company's Amended and Restated 2012 Equity Incentive Plan was amended in May 2022 to increase the total number of shares available for grant to **2,490,000**[436](index=436&type=chunk) Equity Compensation Plan Information as of Dec 31, 2022 | Plan Category | Number of securities to be issued upon exercise | Weighted-average exercise price | Number of securities remaining available for future issuance | | :--- | :--- | :--- | :--- | | Equity compensation plans approved by stockholders | — | $ — | 901,060 | | **Total** | **—** | **$ —** | **901,060** | [Item 13. Certain Relationships and Related Party Transactions, and Director Independence](index=75&type=section&id=Item%2013.%20Certain%20Relationships%20and%20Related%20Party%20Transactions%2C%20and%20Director%20Independence) Information concerning related party transactions and director independence is incorporated by reference from the company's 2023 Proxy Statement - Information is incorporated by reference from the Company's 2023 Proxy Statement[440](index=440&type=chunk) [Item 14. Principal Accountant Fees and Services](index=75&type=section&id=Item%2014.%20Principal%20Accountant%20Fees%20and%20Services) Information concerning principal accountant fees and services is incorporated by reference from the company's 2023 Proxy Statement - Information is incorporated by reference from the Company's 2023 Proxy Statement[441](index=441&type=chunk) Part IV [Item 15. Exhibits and Financial Statement Schedules](index=76&type=section&id=Item%2015.%20Exhibits%20and%20Financial%20Statement%20Schedules) This section lists the documents filed as part of the annual report, including financial statements and various exhibits, with financial statement schedules omitted as not required - This section provides an index of all exhibits filed with the Form 10-K, including corporate governance documents, financing agreements, the management agreement, and executive certifications[443](index=443&type=chunk)[444](index=444&type=chunk) [Item 16. Form 10-K Summary](index=81&type=section&id=Item%2016.%20Form%2010-K%20Summary) No Form 10-K summary is provided - None[455](index=455&type=chunk) Financial Statements and Supplementary Data [Report of Independent Registered Public Accounting Firm](index=83&type=section&id=Report%20of%20Independent%20Registered%20Public%20Accounting%20Firm) Ernst & Young LLP issued an unqualified opinion on the company's consolidated financial statements and internal control over financial reporting, identifying the CECL Reserve as a critical audit matter - Ernst & Young LLP provided an unqualified opinion on both the consolidated financial statements and the effectiveness of internal control over financial reporting as of December 31, 2022[459](index=459&type=chunk)[466](index=466&type=chunk) - The estimation of the Current Expected Credit Loss (CECL) Reserve was identified as a critical audit matter because it involved especially challenging, subjective, or complex judgments regarding historical loss data, loan repayment timing, and macroeconomic forecasts[470](index=470&type=chunk)[473](index=473&type=chunk) [Consolidated Financial Statements](index=86&type=section&id=Consolidated%20Financial%20Statements) The consolidated financial statements show a decrease in total assets and liabilities, an increase in stockholders' equity, and a significant decline in net income for 2022 Consolidated Balance Sheet Summary ($ in thousands) | Account | Dec 31, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | Loans held for investment, net | $2,198,039 | $2,390,444 | | Total Assets | $2,523,002 | $2,631,838 | | Total Liabilities | $1,775,462 | $1,953,210 | | Total Stockholders' Equity | $747,540 | $678,628 | Consolidated Statement of Operations Summary ($ in thousands) | Account | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Net Interest Margin | $104,177 | $83,551 | $69,103 | | Total Revenue | $106,849 | $102,069 | $82,696 | | Provision for credit losses | $46,061 | $10 | $20,185 | | **Net Income** | **$29,785** | **$60,460** | **$21,840** | Earnings Per Share | Metric | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Basic EPS | $0.58 | $1.43 | $0.66 | | Diluted EPS | $0.57 | $1.42 | $0.66 | [Notes to Consolidated Financial Statements](index=91&type=section&id=Notes%20to%20Consolidated%20Financial%20Statements) The notes provide detailed information on accounting policies, including the CECL reserve, loan portfolio specifics, debt structure, related party transactions, and subsequent loan defaults - The total CECL Reserve as of December 31, 2022, was **$71.3 million**, comprising **$66.0 million** for funded loan commitments and **$5.3 million** for unfunded commitments, representing a significant increase from the prior year driven by macroeconomic factors[550](index=550&type=chunk)[551](index=551&type=chunk)[554](index=554&type=chunk) - As of December 31, 2022, the company had **$227.5 million** in unfunded loan commitments[605](index=605&type=chunk) - The company's financing agreements contain various financial covenants, including maintaining a maximum total debt to tangible net worth ratio of **4.50 to 1.00** and a minimum tangible net worth[573](index=573&type=chunk)[575](index=575&type=chunk)[579](index=579&type=chunk) Related Party Payments to Manager ($ in thousands) | Expense Type | 2022 ($ thousands) | 2021 ($ thousands) | 2020 ($ thousands) | | :--- | :--- | :--- | :--- | | Management fees | $11,456 | $9,384 | $7,323 | | Incentive fees | $3,442 | $2,752 | $836 | | G&A expenses | $3,777 | $3,016 | $3,653 | | **Total** | **$18,840** | **$15,161** | **$11,912** | - Subsequent to year-end, in January and February 2023, three senior mortgage loans with a combined outstanding principal balance of **$149.1 million** entered into default; additionally, a defaulted loan with a principal of **$14.3 million** was sold for net proceeds of **$9.8 million**[668](index=668&type=chunk)[669](index=669&type=chunk)

Financial Data and Key Metrics Changes - The company reported third quarter distributable earnings of $0.39 per share, a 5% increase from the same quarter last year, exceeding the quarterly dividends paid of $0.35 per share [5] - GAAP net income for the third quarter was $644,000 or $0.01 per share, with a significant difference attributed to a CECL provision of approximately $19.5 million [11] - The total CECL reserve increased to $51.9 million, representing about 1.9% of total loan commitments [13] Business Line Data and Key Metrics Changes - The loan portfolio consisted of 98% senior loans with an outstanding principal balance of $2.5 billion across 70 loans, with 99% of contractual interest collected [12] - Three loans were on non-accrual status, representing about 4% of the overall portfolio, with a decline in loans rated three or better from 94% to 90% [12] Market Data and Key Metrics Changes - The company noted that rising interest rates and tightening monetary policy by the Federal Reserve are creating volatility in commercial real estate markets, impacting capital formation and increasing risk premiums [6][7] - The company closed $50 million of floating rate investments in multifamily and self-storage properties during the third quarter [8] Company Strategy and Development Direction - The company is focusing on property types such as multifamily, industrial, and self-storage that exhibit strong rent growth dynamics, which have outpaced recent market interest rate increases [7] - The company plans to remain selective in new investments while maintaining a strong liquidity position amid uncertain market conditions [10][14] Management's Comments on Operating Environment and Future Outlook - Management expressed concerns about the likelihood of a recession due to the Federal Reserve's aggressive rate hikes and the resulting volatility in asset classes [6] - The company believes it is well-positioned to navigate the changing economic landscape, with a strong balance sheet and moderate leverage [17] Other Important Information - The company announced a fourth quarter 2022 regular dividend of $0.33 per common share and a supplemental quarterly dividend of $0.02 per common share [16] - The company has approximately $156 million of available capital as of November 1, which includes cash and amounts available for draw under various debt facilities [14] Q&A Session Summary Question: Inquiry about securities purchases and CLOs - Management indicated that they see compelling structural features in both CMBS and CLO markets, but have not sought to leverage these investments due to market volatility [21] Question: Discussion on office space and CECL reserves - Management acknowledged that there are cross currents in the office space, with some assets experiencing less demand while others maintain high cash flow [26] Question: Clarification on CECL reserve composition - Management confirmed that the majority of the $19.5 million increase in CECL reserves was general, with only a small portion being loan-specific [28] Question: Concerns about upcoming loan maturities - Management stated that they are actively managing loans with near-term maturities and are in close dialogue with borrowers to ensure business plans are met [31] Question: Discussion on capital allocation to AAA CMBS - Management explained that the decision to allocate capital to AAA CMBS was based on balancing risk and liquidity, given the slowdown in transaction activity [45]

[FORM 10-Q Filing Information](index=1&type=section&id=FORM%2010-Q) The document is a Quarterly Report on Form 10-Q for the period ended September 30, 2022, filed by Ares Commercial Real Estate Corporation (ACRE) - The document is a Quarterly Report on Form 10-Q for the period ended September 30, 2022, filed by Ares Commercial Real Estate Corporation (ACRE)[2](index=2&type=chunk) Outstanding Common Stock at November 1, 2022 | Class | Outstanding at November 1, 2022 | | :-------------------------- | :------------------------------ | | Common stock, $0.01 par value | 54,442,649 shares | - ACRE is an accelerated filer and has filed all required reports and interactive data files during the preceding 12 months[2](index=2&type=chunk) [Forward-Looking Statements](index=3&type=section&id=FORWARD-LOOKING%20STATEMENTS) This report contains forward-looking statements subject to risks and uncertainties, including those related to business strategy, operating results, investment returns, global economic trends, and financing arrangements - This report contains forward-looking statements subject to risks and uncertainties, including those related to business strategy, operating results, investment returns, global economic trends (inflation, interest rates, recession), the COVID-19 pandemic, the Russia-Ukraine conflict, credit losses, and financing arrangements[5](index=5&type=chunk)[6](index=6&type=chunk)[7](index=7&type=chunk) - Actual results may differ materially from these statements due to factors detailed in the 'Risk Factors' section of the 2021 Annual Report on Form 10-K and other disclosures[5](index=5&type=chunk)[8](index=8&type=chunk) - The company assumes no obligation to update any forward-looking statements, advising readers to consult additional SEC filings[9](index=9&type=chunk)[10](index=10&type=chunk) [Part I. Financial Information](index=6&type=section&id=Part%20I.%20Financial%20Information) This section presents the unaudited consolidated financial statements of Ares Commercial Real Estate Corporation, detailing its financial position, performance, and cash flows, along with explanatory notes [Item 1. Consolidated Financial Statements](index=6&type=section&id=Item%201.%20Consolidated%20Financial%20Statements) This section provides the unaudited consolidated financial statements, including balance sheets, statements of operations, comprehensive income, stockholders' equity, and cash flows, with accompanying notes [Consolidated Balance Sheets](index=6&type=section&id=Consolidated%20Balance%20Sheets%20as%20of%20September%2030,%202022%20(unaudited)%20and%20December%2031,%202021) This section presents the unaudited consolidated balance sheets as of September 30, 2022, and December 31, 2021, detailing assets, liabilities, and stockholders' equity Consolidated Balance Sheet Highlights (in thousands) | Metric | Sep 30, 2022 (unaudited) | Dec 31, 2021 | | :------------------------------------------------ | :----------------------- | :----------- | | Cash and cash equivalents | $77,297 | $50,615 | | Loans held for investment, net | $2,462,549 | $2,390,444 | | Total assets | $2,727,186 | $2,631,838 | | Total liabilities | $1,960,109 | $1,953,210 | | Total stockholders' equity | $767,077 | $678,628 | - Total assets increased by **$95.3 million (3.6%)** from December 31, 2021, to September 30, 2022, primarily driven by an increase in loans held for investment[13](index=13&type=chunk) - The current expected credit loss reserve increased significantly from **$23.9 million** at December 31, 2021, to **$46.1 million** at September 30, 2022[13](index=13&type=chunk) [Consolidated Statements of Operations](index=7&type=section&id=Consolidated%20Statements%20of%20Operations%20for%20the%20three%20and%20nine%20months%20ended%20September%2030,%202022%20and%202021%20(unaudited)) This section presents the unaudited consolidated statements of operations for the three and nine months ended September 30, 2022, and 2021, detailing revenues, expenses, and net income Consolidated Statements of Operations Highlights (in thousands, except per share data) | Metric | 3 Months Ended Sep 30, 2022 | 3 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2021 | | :----------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Total revenue | $27,271 | $27,204 | $76,440 | $71,958 | | Net interest margin | $27,271 | $21,354 | $73,768 | $59,687 | | Total expenses | $7,137 | $10,886 | $24,895 | $28,814 | | Provision for current expected credit losses | $19,485 | $6,367 | $26,659 | $(756) | | Net income attributable to common stockholders | $644 | $9,951 | $26,875 | $43,307 | | Basic earnings per common share | $0.01 | $0.21 | $0.53 | $1.06 | | Diluted earnings per common share | $0.01 | $0.21 | $0.52 | $1.05 | | Dividends declared per share | $0.35 | $0.35 | $1.05 | $1.05 | - Net income attributable to common stockholders **decreased significantly** for both the three-month (from **$9.95 million** to **$0.64 million**) and nine-month periods (from **$43.31 million** to **$26.88 million**) year-over-year, primarily due to a substantial increase in the provision for current expected credit losses[16](index=16&type=chunk) - The provision for current expected credit losses **increased** from **$6.37 million** to **$19.49 million** for the three months ended September 30, 2022, and from a **$(0.76) million recovery** to a **$26.66 million expense** for the nine months ended September 30, 2022[16](index=16&type=chunk) [Consolidated Statements of Comprehensive Income](index=8&type=section&id=Consolidated%20Statements%20of%20Comprehensive%20Income%20for%20the%20three%20and%20nine%20months%20ended%20September%2030,%202022%20and%202021%20(unaudited)) This section presents the unaudited consolidated statements of comprehensive income for the three and nine months ended September 30, 2022, and 2021, including net income and other comprehensive income items Consolidated Statements of Comprehensive Income Highlights (in thousands) | Metric | 3 Months Ended Sep 30, 2022 | 3 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2021 | | :--------------------------------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Net income attributable to common stockholders | $644 | $9,951 | $26,875 | $43,307 | | Realized and unrealized gains (losses) on derivative financial instruments | $(866) | $(98) | $8,679 | $19 | | Unrealized gains (losses) on available-for-sale debt securities | $(144) | — | $(144) | — | | Comprehensive income | $(366) | $9,853 | $35,410 | $43,326 | - Comprehensive income **decreased significantly** for the three months ended September 30, 2022, to **$(366) thousand** from **$9.85 million** in the prior year, primarily due to net income decline and unrealized losses on derivatives and available-for-sale debt securities[19](index=19&type=chunk) - For the nine months ended September 30, 2022, comprehensive income was **$35.41 million**, supported by realized and unrealized gains on derivative financial instruments, despite a lower net income compared to the prior year[19](index=19&type=chunk) [Consolidated Statements of Stockholders' Equity](index=9&type=section&id=Consolidated%20Statements%20of%20Stockholders'%20Equity%20for%20the%20three%20and%20nine%20months%20ended%20September%2030,%202022%20(unaudited)%20and%20the%20year%20ended%20December%2031,%202021) This section presents the unaudited consolidated statements of stockholders' equity for the nine months ended September 30, 2022, and the year ended December 31, 2021, detailing changes in equity components Stockholders' Equity Changes (in thousands) | Metric | Dec 31, 2021 | Sep 30, 2022 | | :-------------------------- | :----------- | :----------- | | Common Shares | 47,144,058 | 54,438,363 | | Common Stock Amount | $465 | $537 | | Additional Paid-in Capital | $703,950 | $812,050 | | Accumulated Other Comprehensive Income | $2,844 | $11,379 | | Accumulated Earnings (Deficit) | $(28,631) | $(56,889) | | Total Stockholders' Equity | $678,628 | $767,077 | - Total stockholders' equity **increased by $88.45 million** from December 31, 2021, to September 30, 2022, primarily due to sales of common stock and an increase in accumulated other comprehensive income, partially offset by accumulated earnings deficit[22](index=22&type=chunk) - The company issued **7,000,000 common shares** in May 2022, contributing to a significant increase in additional paid-in capital[22](index=22&type=chunk) [Consolidated Statements of Cash Flows](index=10&type=section&id=Consolidated%20Statements%20of%20Cash%20Flows%20for%20the%20nine%20months%20ended%20September%2030,%202022%20and%202021%20(unaudited)) This section presents the unaudited consolidated statements of cash flows for the nine months ended September 30, 2022, and 2021, categorizing cash movements from operating, investing, and financing activities Consolidated Statements of Cash Flows Highlights (in thousands) | Activity | 9 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2021 | | :------------------------------------------ | :-------------------------- | :-------------------------- | | Net cash provided by operating activities | $42,067 | $30,280 | | Net cash provided by (used in) investing activities | $(63,954) | $(575,079) | | Net cash provided by (used in) financing activities | $48,569 | $485,810 | | Change in cash and cash equivalents | $26,682 | $(58,989) | | Cash and cash equivalents, end of period | $77,297 | $15,787 | - Net cash provided by operating activities **increased to $42.07 million** for the nine months ended September 30, 2022, from **$30.28 million** in the prior year[23](index=23&type=chunk) - Net cash used in investing activities **significantly decreased from $(575.08) million** in 2021 to **$(63.95) million** in 2022, while net cash provided by financing activities **decreased from $485.81 million** to **$48.57 million**[23](index=23&type=chunk) [Notes to Consolidated Financial Statements](index=11&type=section&id=Notes%20to%20Consolidated%20Financial%20Statements%20(unaudited)) This section provides detailed notes explaining the company's organization, significant accounting policies, and specific financial line items presented in the consolidated financial statements [1. Organization](index=11&type=section&id=1.%20ORGANIZATION) Ares Commercial Real Estate Corporation (ACRE) is a specialty finance company focused on originating and investing in commercial real estate (CRE) loans, externally managed by ACREM, and operates as a REIT - ACRE is a specialty finance company primarily engaged in originating and investing in commercial real estate loans and related investments[26](index=26&type=chunk) - The company is externally managed by ACREM, a subsidiary of Ares Management Corporation, and has elected to be taxed as a **REIT** for U.S. federal income tax purposes since December 31, 2012[26](index=26&type=chunk)[28](index=28&type=chunk) - ACRE operates as **one segment**, focusing on a diversified portfolio of CRE debt-related investments including senior mortgage loans, subordinated debt, preferred equity, and mezzanine loans[27](index=27&type=chunk) [2. Significant Accounting Policies](index=11&type=section&id=2.%20SIGNIFICANT%20ACCOUNTING%20POLICIES) This section outlines the company's significant accounting policies, including the basis of presentation under GAAP, the use of estimates, consolidation of Variable Interest Entities (VIEs), and accounting for various financial instruments and assets - Financial statements are prepared in conformity with **GAAP**, requiring management to make estimates and assumptions, which are subject to uncertainty due to global macroeconomic conditions, inflation, interest rates, and the COVID-19 pandemic[30](index=30&type=chunk)[33](index=33&type=chunk)[34](index=34&type=chunk) - The company consolidates **Variable Interest Entities (VIEs)** where it is determined to be the primary beneficiary, possessing both the power to direct significant activities and the obligation to absorb losses or right to receive significant benefits[35](index=35&type=chunk)[38](index=38&type=chunk) - The company adopted **ASU No. 2020-04 (Reference Rate Reform)** and **ASU 2022-02 (Troubled Debt Restructurings)**, with no material impact from the former and prospective application for the latter[63](index=63&type=chunk)[64](index=64&type=chunk) [3. Loans Held for Investment](index=16&type=section&id=3.%20LOANS%20HELD%20FOR%20INVESTMENT) This note details the company's portfolio of loans held for investment, including their carrying amounts, outstanding principal, effective yields, remaining life, and a breakdown by loan type and location - As of September 30, 2022, the company's portfolio included **70 loans** held for investment with an aggregate originated commitment of approximately **$2.9 billion** and outstanding principal of **$2.5 billion**[65](index=65&type=chunk) Loans Held for Investment Portfolio Summary (in thousands) | Metric | Sep 30, 2022 | Dec 31, 2021 | | :------------------------------------ | :----------- | :----------- | | Total Carrying Amount | $2,508,609 | $2,414,383 | | Total Outstanding Principal | $2,527,033 | $2,429,112 | | Weighted Average Unleveraged Effective Yield | 7.4% | 5.4% | | Weighted Average Remaining Life (Years) | 1.4 | 1.6 | - During the nine months ended September 30, 2022, the company funded **$601.8 million** and received repayments of **$503.9 million** in outstanding principal[65](index=65&type=chunk) - As of September 30, 2022, **three loans** with a carrying value of **$100.8 million** were on non-accrual status[79](index=79&type=chunk) [4. Current Expected Credit Losses](index=20&type=section&id=4.%20CURRENT%20EXPECTED%20CREDIT%20LOSSES) This note details the methodology for estimating the Current Expected Credit Loss (CECL) Reserve, which considers macroeconomic conditions and loan-specific factors, and provides reserve amounts for funded and unfunded commitments - The **CECL Reserve** is estimated using a probability-weighted model considering default likelihood, loss given default, loan-specific data, and macroeconomic conditions (recession, inflation, rising interest rates, COVID-19)[80](index=80&type=chunk) CECL Reserve for Funded and Unfunded Loan Commitments (in thousands) | Metric | Sep 30, 2022 | | :---------------------------------------------------------------- | :----------- | | CECL Reserve for outstanding balances on loans held for investment | $46,060 | | CECL Reserve for unfunded commitments on loans held for investment | $5,846 | | Total CECL Reserve | $51,906 | - A specific CECL reserve of **$2.4 million** was assigned to a **$14.3 million** senior mortgage loan on a California residential property, which was downgraded to a **risk rating of '5' (Impaired/Loss Likely)** during Q3 2022[82](index=82&type=chunk)[84](index=84&type=chunk)[91](index=91&type=chunk) [5. Real Estate Owned](index=22&type=section&id=5.%20REAL%20ESTATE%20OWNED) This note describes the company's acquisition of a hotel property through foreclosure, its classification as held for sale, and its subsequent sale in March 2022, resulting in a $2.2 million gain - The company acquired a hotel property in New York via deed in lieu of foreclosure in **March 2019**, which was subsequently classified as real estate owned held for sale as of **December 31, 2021**[93](index=93&type=chunk)[94](index=94&type=chunk) - The hotel property was sold on **March 1, 2022**, for **$40.0 million**, resulting in a **$2.2 million gain** on sale recognized in the first quarter of 2022[94](index=94&type=chunk) Real Estate Owned, Net (in thousands) | Component | Dec 31, 2021 | | :-------------------------- | :----------- | | Land | $10,200 | | Buildings and improvements | $24,281 | | Furniture, fixtures and equipment | $4,506 | | Less: Accumulated depreciation | $(2,385) | | Real estate owned, net | $36,602 | [6. Debt](index=23&type=section&id=6.%20DEBT) This note provides a detailed overview of the company's financing agreements, including Secured Funding Agreements, Notes Payable, and a Secured Term Loan, outlining their commitments, outstanding balances, interest rates, and maturity dates Financing Agreements Summary (in thousands) | Agreement Type | Sep 30, 2022 Outstanding Balance | Sep 30, 2022 Total Commitment | Dec 31, 2021 Outstanding Balance | Dec 31, 2021 Total Commitment | | :-------------------------- | :------------------------------- | :---------------------------- | :------------------------------- | :---------------------------- | | Secured Funding Agreements | $847,697 | $1,280,000 | $840,047 | $1,280,000 | | Notes Payable | $105,000 | $105,000 | $51,110 | $51,755 | | Secured Term Loan | $150,000 | $150,000 | $150,000 | $150,000 | | Total | $1,102,697 | $1,535,000 | $1,041,157 | $1,481,755 | - The company entered into a new **$105.0 million** recourse note in **July 2022**, secured by a multifamily property loan, with an initial maturity date of **July 28, 2025**, accruing interest at **one-month SOFR plus 2.00%**[110](index=110&type=chunk)[112](index=112&type=chunk) - The Secured Term Loan was amended in **November 2021**, increasing the commitment to **$150.0 million** and extending the maturity date to **November 12, 2026**, with fixed interest rates starting at **4.50% per annum**[113](index=113&type=chunk) [7. Secured Borrowings](index=26&type=section&id=7.%20SECURED%20BORROWINGS) This note describes a secured borrowing arrangement related to a transferred senior mortgage loan that did not qualify as a sale, which was fully repaid in July 2022 - A **$24.4 million** secured borrowing, originating from a transferred senior mortgage loan in **February 2020**, was fully repaid in **July 2022**[115](index=115&type=chunk) - The transfer of the senior mortgage loan was treated as a **financing transaction** because it did not meet the criteria for sale accounting under FASB ASC Topic 860[115](index=115&type=chunk) [8. Derivative Financial Instruments](index=26&type=section&id=8.%20DERIVATIVE%20FINANCIAL%20INSTRUMENTS) This note outlines the company's use of derivative financial instruments, specifically interest rate swaps and caps, to manage interest rate risk, detailing their notional amounts, rates, and maturities - The company uses **interest rate swaps** and **interest rate caps** to manage net exposure to interest rate changes and reduce borrowing costs, without engaging in speculative trading[116](index=116&type=chunk)[117](index=117&type=chunk) Outstanding Interest Rate Derivatives (Notional Amount in thousands) | Derivative Type | Sep 30, 2022 Notional Amount | Sep 30, 2022 Fixed/Strike Rate | Dec 31, 2021 Notional Amount | Dec 31, 2021 Fixed/Strike Rate | | :-------------------- | :--------------------------- | :----------------------------- | :--------------------------- | :----------------------------- | | Interest rate swaps | $460,000 | 0.2075% | $700,000 | 0.2075% | | Interest rate caps | — | — | $220,000 | 0.5000% | - In **March 2022**, the company terminated an interest rate cap derivative, recognizing a **$2.0 million realized gain** within OCI, which will be recognized in current earnings over the original term[119](index=119&type=chunk) [9. Commitments and Contingencies](index=27&type=section&id=9.%20COMMITMENTS%20AND%20CONTINGENCIES) This note details the company's unfunded loan commitments and addresses potential impacts from macroeconomic and geopolitical conditions, as well as legal proceedings Total Unfunded Commitments (in thousands) | Metric | Sep 30, 2022 | Dec 31, 2021 | | :-------------------------- | :----------- | :----------- | | Total commitments | $2,784,902 | $2,662,853 | | Less: funded commitments | $(2,527,033) | $(2,429,112) | | Total unfunded commitments | $257,869 | $233,741 | - The company's unfunded commitments **increased by $24.1 million** from December 31, 2021, to September 30, 2022[123](index=123&type=chunk) - As of September 30, 2022, there were **no material legal claims**, but the company acknowledges that worsening global market conditions could adversely affect its business and potentially increase litigation[121](index=121&type=chunk)[123](index=123&type=chunk) [10. Stockholders' Equity](index=28&type=section&id=10.%20STOCKHOLDERS'%20EQUITY) This note details changes in stockholders' equity, including the 'at the market' stock offering program, a new $50.0 million stock repurchase program, and the equity incentive plan - During the nine months ended September 30, 2022, the company sold **190,369 shares** of common stock under its 'at the market' offering program, generating approximately **$2.9 million** in net proceeds[124](index=124&type=chunk) - A **$50.0 million stock repurchase program** was approved on **July 26, 2022**, effective until **July 26, 2023**, but **no repurchases** were conducted during the three months ended September 30, 2022[125](index=125&type=chunk) - The Amended and Restated 2012 Equity Incentive Plan was amended in **February 2022** to increase the total number of authorized common stock shares for grants to **2,490,000**[127](index=127&type=chunk) [11. Earnings Per Share](index=29&type=section&id=11.%20EARNINGS%20PER%20SHARE) This note provides the computation of basic and diluted earnings per common share for the three and nine months ended September 30, 2022 and 2021, detailing net income and weighted average shares outstanding Earnings Per Common Share (in thousands, except per share data) | Metric | 3 Months Ended Sep 30, 2022 | 3 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2021 | | :------------------------------------------ | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Net income attributable to common stockholders | $644 | $9,951 | $26,875 | $43,307 | | Basic earnings per common share | $0.01 | $0.21 | $0.53 | $1.06 | | Diluted earnings per common share | $0.01 | $0.21 | $0.52 | $1.05 | | Basic weighted average shares outstanding | 54,415,545 | 46,957,339 | 50,753,915 | 40,840,453 | | Diluted weighted average shares outstanding | 54,846,756 | 47,209,469 | 51,193,238 | 41,120,751 | - Basic and diluted EPS **significantly decreased** for the three months ended September 30, 2022, to **$0.01** from **$0.21** in the prior year, reflecting the lower net income[132](index=132&type=chunk) - For the nine months ended September 30, 2022, **basic EPS was $0.53** and **diluted EPS was $0.52**, **down from $1.06** and **$1.05** respectively in the prior year[132](index=132&type=chunk) [12. Income Tax](index=29&type=section&id=12.%20INCOME%20TAX) This note details the company's income tax provision, including excise tax, for its taxable REIT subsidiaries (TRSs), highlighting its REIT status and tax examination status - The company wholly owns several **Taxable REIT Subsidiaries (TRSs)** for specific activities, such as holding loans for sale, managing CLO securitizations, and operating real estate owned[133](index=133&type=chunk)[134](index=134&type=chunk) Income Tax Expense, Including Excise Tax (in thousands) | Metric | 3 Months Ended Sep 30, 2022 | 3 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2021 | | :----------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Current | $5 | $(35) | $28 | $437 | | Deferred | — | — | — | — | | Excise tax | — | $35 | $180 | $156 | | Total income tax expense, including excise tax | $5 | — | $208 | $593 | - The company incurred **$180 thousand** in U.S. federal excise tax for the nine months ended September 30, 2022, a **4% tax** on undistributed REIT taxable income[135](index=135&type=chunk) [13. Fair Value](index=30&type=section&id=13.%20FAIR%20VALUE) This note describes the company's fair value measurement practices, categorizing inputs into Level 1, 2, and 3, and detailing recurring and nonrecurring fair value measurements for financial instruments and assets - The company categorizes fair value measurements into a **three-level hierarchy: Level 1** (quoted prices in active markets), **Level 2** (significant observable inputs), and **Level 3** (significant unobservable inputs)[137](index=137&type=chunk)[138](index=138&type=chunk) Fair Value of Financial Assets (in thousands) | Financial Asset | Sep 30, 2022 Fair Value | Dec 31, 2021 Fair Value | | :-------------------------------- | :---------------------- | :---------------------- | | Interest rate derivatives | $10,181 | $2,979 | | Available-for-sale debt securities | $27,730 | — | - Loans held for investment, notes payable, secured term loan, and collateralized loan obligation securitization debt are not measured at fair value on a recurring basis but have fair value estimates determined using discounted cash flow methodologies (**Level 3 inputs**)[148](index=148&type=chunk)[149](index=149&type=chunk) [14. Related Party Transactions](index=33&type=section&id=14.%20RELATED%20PARTY%20TRANSACTIONS) This note details the company's related party transactions, primarily with its Manager, ACREM, under the Management Agreement, outlining base management fees, incentive fees, and expense reimbursements - The company pays ACREM a base management fee (**1.5% of stockholders' equity per annum**) and an incentive fee (**20% of Core Earnings exceeding an 8% minimum return**)[153](index=153&type=chunk) Related Party Costs Incurred (in thousands) | Metric | 3 Months Ended Sep 30, 2022 | 3 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2021 | | :-------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Management fees | $3,013 | $2,602 | $8,430 | $6,770 | | Incentive fees | $855 | $572 | $2,178 | $1,923 | | General and administrative expenses | $1,011 | $773 | $2,641 | $2,313 | | Total | $4,880 | $3,951 | $13,289 | $11,003 | - The company co-invests with other Ares Management vehicles on a pari-passu basis, with total outstanding principal for co-investments at **$209.0 million** as of September 30, 2022[161](index=161&type=chunk) [15. Dividends and Distributions](index=35&type=section&id=15.%20DIVIDENDS%20AND%20DISTRIBUTIONS) This note summarizes the cash dividends declared by the company during the nine months ended September 30, 2022 and 2021, including regular and supplemental dividends Cash Dividends Declared (in thousands, except per share data) | Period | Per Share Amount | Total Amount | | :--------------------------------------------------- | :--------------- | :----------- | | 9 Months Ended Sep 30, 2022 | $1.05 | $55,134 | | 9 Months Ended Sep 30, 2021 | $1.05 | $47,299 | - The company declared a total of **$1.05 per common share** in cash dividends for both the nine months ended September 30, 2022, and 2021, consisting of regular and supplemental dividends[164](index=164&type=chunk) [16. Variable Interest Entities](index=35&type=section&id=16.%20VARIABLE%20INTEREST%20ENTITIES) This note details the company's involvement with Consolidated Variable Interest Entities (VIEs), specifically the FL3 and FL4 CLO Securitizations, explaining the basis for consolidation and limited risk exposure - The company consolidates the **FL3 and FL4 CLO Securitizations** because it is deemed the **primary beneficiary**, holding subordinated notes and preferred equity, giving it a **first-loss position** and the ability to direct significant activities[169](index=169&type=chunk)[174](index=174&type=chunk)[175](index=175&type=chunk) - As of September 30, 2022, the FL3 Notes were collateralized by **15 mortgage assets totaling $427.2 million**, and the FL4 Notes by **13 mortgage assets totaling $503.4 million**[167](index=167&type=chunk)[171](index=171&type=chunk) - The company's maximum risk of loss from its involvement in the CLO Securitizations is limited to the carrying value of its investments in these entities, which was **$238.2 million** as of September 30, 2022[177](index=177&type=chunk) [17. Subsequent Events](index=37&type=section&id=17.%20SUBSEQUENT%20EVENTS) This note discloses subsequent events, specifically the declaration of fourth-quarter 2022 dividends by the Board of Directors - The Board of Directors declared a regular cash dividend of **$0.33 per common share** and a supplemental cash dividend of **$0.02 per common share** for **Q4 2022**, payable on **January 18, 2023**[178](index=178&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=38&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) This section provides an overview of the company's business, recent developments, and trends affecting its operations, including detailed analysis of financial results, liquidity, and capital resources [Overview](index=38&type=section&id=Overview) ACRE is a specialty finance company focused on originating and investing in CRE loans, externally managed by ACREM, and operates as a REIT - ACRE is a specialty finance company focused on originating and investing in CRE loans, externally managed by ACREM, and operates as a **REIT**[181](index=181&type=chunk)[182](index=182&type=chunk) - Key developments in Q3 2022 included purchasing **$29.1 million** in senior mortgage loans and **$18.0 million** in AAA-rated CRE debt securities, originating a **$20.6 million** mezzanine loan, closing a **$105.0 million** note financing, and approving a **$50.0 million** stock repurchase program[183](index=183&type=chunk) [Trends Affecting Our Business](index=38&type=section&id=Trends%20Affecting%20Our%20Business) Global markets experienced volatility in Q3 2022 due to monetary policy tightening and geopolitical uncertainty, with the Federal Reserve raising interest rates in response to heightened inflation - Global markets experienced volatility in **Q3 2022** due to **monetary policy tightening** and geopolitical uncertainty, with the Federal Reserve raising interest rates in response to **heightened inflation**[184](index=184&type=chunk) - These macroeconomic conditions could lead to an **economic slowdown or recession**, with the full impact on the company's business remaining uncertain[184](index=184&type=chunk) [Factors Impacting Our Operating Results](index=38&type=section&id=Factors%20Impacting%20Our%20Operating%20Results) Operating results are primarily influenced by net interest income, the market value of assets, and the supply/demand for commercial mortgage loans and other financial assets - Operating results are primarily influenced by **net interest income**, the market value of assets, and the supply/demand for commercial mortgage loans and other financial assets[185](index=185&type=chunk) - **Net interest income** is recognized based on contractual rates and outstanding principal, with interest rates varying due to market conditions, borrower creditworthiness, and competition[185](index=185&type=chunk) - Operating results can also be impacted by **credit losses** exceeding initial expectations or unanticipated credit events[185](index=185&type=chunk) [Stock Repurchase Program](index=39&type=section&id=Stock%20Repurchase%20Program) The Board of Directors approved a $50.0 million stock repurchase program on July 26, 2022, effective until July 26, 2023, with no repurchases conducted during Q3 2022 - The Board of Directors approved a **$50.0 million stock repurchase program** on **July 26, 2022**, effective until **July 26, 2023**[187](index=187&type=chunk) - **No repurchases** were conducted under this program during the three months ended September 30, 2022[187](index=187&type=chunk) [Loans Held for Investment Portfolio](index=39&type=section&id=Loans%20Held%20for%20Investment%20Portfolio) As of September 30, 2022, the portfolio comprised 70 loans with an outstanding principal of $2.5 billion, having funded $601.8 million and received $503.9 million in repayments during the nine months ended September 30, 2022 - As of September 30, 2022, the portfolio comprised **70 loans** with an outstanding principal of **$2.5 billion**, having funded **$601.8 million** and received **$503.9 million** in repayments during the nine months ended September 30, 2022[188](index=188&type=chunk) - **90.8%** of the loans have LIBOR or SOFR floors, with a weighted average floor of **0.92%**[188](index=188&type=chunk) Loans Held for Investment Portfolio Summary (in thousands) | Metric | Sep 30, 2022 | | :------------------------------------ | :----------- | | Senior mortgage loans (Carrying Amount) | $2,470,545 | | Subordinated debt and preferred equity investments (Carrying Amount) | $38,064 | | Total loans held for investment portfolio (Carrying Amount) | $2,508,609 | | Weighted Average Unleveraged Effective Yield | 7.4% | | Weighted Average Remaining Life (Years) | 1.4 | [Critical Accounting Estimates](index=39&type=section&id=Critical%20Accounting%20Estimates) The company's financial statements rely on management's estimates and assumptions, which are subject to uncertainty from global macroeconomic conditions, including inflation and interest rate changes - The company's financial statements rely on management's estimates and assumptions, which are subject to uncertainty from global macroeconomic conditions, including inflation and interest rate changes[191](index=191&type=chunk)[192](index=192&type=chunk) - **No significant changes** to critical accounting estimates were reported since the 2021 Annual Report on Form 10-K, but management continues to monitor factors impacting these estimates[192](index=192&type=chunk) [Recent Developments](index=40&type=section&id=RECENT%20DEVELOPMENTS) The Board of Directors declared a regular cash dividend of $0.33 per common share and a supplemental cash dividend of $0.02 per common share for Q4 2022, payable on January 18, 2023 - The Board of Directors declared a regular cash dividend of **$0.33 per common share** and a supplemental cash dividend of **$0.02 per common share** for **Q4 2022**, payable on **January 18, 2023**[193](index=193&type=chunk) [Results of Operations](index=41&type=section&id=RESULTS%20OF%20OPERATIONS) This section analyzes the company's financial performance, focusing on net interest margin, revenue and expenses from real estate owned, provision for credit losses, and gain on sale of real estate [Net Interest Margin](index=41&type=section&id=Net%20Interest%20Margin) Net interest margin increased for both the three-month and nine-month periods ended September 30, 2022, primarily due to higher earning assets, hedging benefits, and increased LIBOR/SOFR rates Net Interest Margin (in thousands) | Metric | 3 Months Ended Sep 30, 2022 | 3 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2021 | | :---------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Interest income | $45,633 | $34,023 | $117,619 | $95,587 | | Interest expense | $(18,362) | $(12,669) | $(43,851) | $(35,900) | | Net interest margin | $27,271 | $21,354 | $73,768 | $59,687 | - Net interest margin **increased by $5.9 million (27.7%)** for the three months ended September 30, 2022, and by **$14.08 million (23.6%)** for the nine months ended September 30, 2022, compared to the prior year periods[196](index=196&type=chunk)[197](index=197&type=chunk) - The increase was primarily driven by **higher weighted average earning assets**, benefits from **interest rate hedging**, and **increased LIBOR and SOFR rates** on loans, along with accelerated recognition of deferred fees and prepayment penalties[196](index=196&type=chunk)[197](index=197&type=chunk) [Revenue From Real Estate Owned](index=42&type=section&id=Revenue%20From%20Real%20Estate%20Owned) No revenue from real estate owned was recognized for the three months ended September 30, 2022, due to the sale of the hotel property on March 1, 2022, leading to a significant decrease year-over-year - **No revenue** from real estate owned was recognized for the three months ended September 30, 2022, due to the sale of the hotel property on March 1, 2022[198](index=198&type=chunk) - Revenue from real estate owned **decreased from $12.3 million** for the nine months ended September 30, 2021, to **$2.7 million** for the same period in 2022, reflecting only two months of hotel operations prior to the sale[198](index=198&type=chunk) [Operating Expenses](index=42&type=section&id=Operating%20Expenses) This section details the company's operating expenses, including related party expenses, professional fees, general and administrative expenses, and expenses from real estate owned [Related Party Expenses](index=42&type=section&id=Related%20Party%20Expenses) Management and incentive fees to affiliates, along with general and administrative expenses reimbursed to the Manager, increased due to higher equity, core earnings, and allocated employee time Related Party Expenses (in thousands) | Expense Type | 3 Months Ended Sep 30, 2022 | 3 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2021 | | :------------------------------------------ | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Management and incentive fees to affiliate | $3,868 | $3,175 | $10,608 | $8,693 | | General and administrative expenses reimbursed to affiliate | $1,011 | $773 | $2,641 | $2,313 | - Management fees **increased** due to higher weighted average stockholders' equity from public offerings, while incentive fees rose as Core Earnings exceeded the **8% minimum return** by a greater margin[200](index=200&type=chunk)[203](index=203&type=chunk) - Allocable general and administrative expenses reimbursed to the Manager **increased** due to higher allocated employee time and additional eligible expense reimbursements under the amended Management Agreement[202](index=202&type=chunk)[203](index=203&type=chunk) [Other Expenses](index=43&type=section&id=Other%20Expenses) Professional fees and general and administrative expenses increased due to higher use of third-party professionals and increased stock-based compensation expense Other Expenses (in thousands) | Expense Type | 3 Months Ended Sep 30, 2022 | 3 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2021 | | :-------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Professional fees | $842 | $480 | $2,720 | $1,880 | | General and administrative expenses | $1,416 | $1,119 | $4,617 | $3,470 | - Professional fees **increased** for both periods due to higher use of third-party professionals driven by changes in transaction activity[204](index=204&type=chunk)[205](index=205&type=chunk) - General and administrative expenses **increased** primarily due to higher stock-based compensation expense from new restricted stock and RSU grants[204](index=204&type=chunk)[205](index=205&type=chunk) [Expenses From Real Estate Owned](index=44&type=section&id=Expenses%20From%20Real%20Estate%20Owned) No expenses from real estate owned were incurred for the three months ended September 30, 2022, due to the sale of the hotel property in March 2022, resulting in a significant decrease for the nine-month period Expenses From Real Estate Owned (in thousands) | Expense Type | 3 Months Ended Sep 30, 2022 | 3 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2021 | | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Hotel operating expenses | — | $4,694 | $3,631 | $10,539 | | Interest expense on note payable | — | $420 | $678 | $1,245 | | Depreciation expense | — | $225 | — | $674 | | Total expenses from real estate owned | — | $5,339 | $4,309 | $12,458 | - **No expenses** from real estate owned were incurred for the three months ended September 30, 2022, due to the sale of the hotel property in March 2022[209](index=209&type=chunk) - For the nine months ended September 30, 2022, expenses from real estate owned **decreased significantly** due to only two months of hotel operations prior to the sale[209](index=209&type=chunk) [Provision for Current Expected Credit Losses](index=44&type=section&id=Provision%20for%20Current%20Expected%20Credit%20Losses) The provision for current expected credit losses increased significantly year-over-year, primarily due to changes in the loan portfolio and the impact of the current macroeconomic environment Provision for Current Expected Credit Losses (in thousands) | Period | Provision for Current Expected Credit Losses | | :-------------------------- | :----------------------------------------- | | 3 Months Ended Sep 30, 2022 | $19,485 | | 3 Months Ended Sep 30, 2021 | $6,367 | | 9 Months Ended Sep 30, 2022 | $26,659 | | 9 Months Ended Sep 30, 2021 | $(756) | - The provision for current expected credit losses **increased significantly** for both the three-month (from **$6.4 million** to **$19.5 million**) and nine-month periods (from a **$(0.8) million recovery** to a **$26.7 million expense**) year-over-year[210](index=210&type=chunk)[211](index=211&type=chunk) - This increase is primarily attributed to changes in the loan portfolio and the impact of the current macroeconomic environment, including **rising inflation**, geopolitical uncertainty, **rapidly rising interest rates**, and ongoing effects of the COVID-19 pandemic[210](index=210&type=chunk)[211](index=211&type=chunk) [Gain on Sale of Real Estate Owned](index=45&type=section&id=Gain%20on%20Sale%20of%20Real%20Estate%20Owned) For the nine months ended September 30, 2022, the company recognized a $2.2 million gain on the sale of the hotel property, as its net carrying value was lower than the net sales proceeds - For the nine months ended September 30, 2022, the company recognized a **$2.2 million gain** on the sale of the hotel property, as its net carrying value was lower than the net sales proceeds[213](index=213&type=chunk) [Liquidity and Capital Resources](index=45&type=section&id=LIQUIDITY%20AND%20CAPITAL%20RESOURCES) This section discusses the company's sources and uses of cash, including stock offerings, cash flow activities, financing agreements, securitizations, leverage policies, and dividend distributions [At the Market Stock Offering Program](index=46&type=section&id=At%20the%20Market%20Stock%20Offering%20Program) During the nine months ended September 30, 2022, the company sold 190,369 shares of common stock under its 'at the market' program, generating approximately $2.9 million in net proceeds - During the nine months ended September 30, 2022, the company sold **190,369 shares** of common stock under its 'at the market' program, generating approximately **$2.9 million** in net proceeds[124](index=124&type=chunk)[221](index=221&type=chunk) - The 'at the market' offering program is **currently unavailable** following the filing of a new registration statement on Form S-3 in June 2022[221](index=221&type=chunk) [Equity Offerings](index=46&type=section&id=Equity%20Offerings) In May 2022, the company completed a public offering of 7,000,000 shares of common stock, generating approximately $103.2 million in net proceeds - In May 2022, the company completed a public offering of **7,000,000 shares** of common stock, generating approximately **$103.2 million** in net proceeds[222](index=222&type=chunk) [Cash Flows](index=46&type=section&id=Cash%20Flows) This section analyzes the company's cash flows from operating, investing, and financing activities for the nine months ended September 30, 2022, and 2021 [Operating Activities](index=47&type=section&id=Operating%20Activities) Net cash provided by operating activities increased to $42.1 million for the nine months ended September 30, 2022, from $30.3 million in the prior year, driven by various adjustments Net Cash Provided by Operating Activities (in thousands) | Period | Net Cash Provided by Operating Activities | | :-------------------------- | :---------------------------------------- | | 9 Months Ended Sep 30, 2022 | $42,067 | | 9 Months Ended Sep 30, 2021 | $30,280 | - Net cash provided by operating activities **increased to $42.1 million** for the nine months ended September 30, 2022, from **$30.3 million** in the prior year[224](index=224&type=chunk) - Key adjustments included a **$26.7 million** provision for current expected credit losses, **$7.9 million** accretion of discounts, and **$5.7 million** amortization of deferred financing costs[224](index=224&type=chunk) [Investing Activities](index=47&type=section&id=Investing%20Activities) Net cash used in investing activities significantly decreased to $64.0 million for the nine months ended September 30, 2022, from $575.1 million in the prior year, primarily due to loan originations and repayments Net Cash Used in Investing Activities (in thousands) | Period | Net Cash Used in Investing Activities | | :-------------------------- | :------------------------------------ | | 9 Months Ended Sep 30, 2022 | $(63,954) | | 9 Months Ended Sep 30, 2021 | $(575,079) | - Net cash used in investing activities **significantly decreased to $64.0 million** for the nine months ended September 30, 2022, from **$575.1 million** in the prior year[225](index=225&type=chunk) - This change was primarily due to cash used for loan originations and available-for-sale debt security purchases exceeding cash received from loan principal repayments and real estate sales[225](index=225&type=chunk) [Financing Activities](index=47&type=section&id=Financing%20Activities) Net cash provided by financing activities decreased to $48.6 million for the nine months ended September 30, 2022, from $485.8 million in the prior year, influenced by various debt and equity transactions Net Cash Provided by Financing Activities (in thousands) | Period | Net Cash Provided by Financing Activities | | :-------------------------- | :---------------------------------------- | | 9 Months Ended Sep 30, 2022 | $48,569 | | 9 Months Ended Sep 30, 2021 | $485,810 | - Net cash provided by financing activities **decreased to $48.6 million** for the nine months ended September 30, 2022, from **$485.8 million** in the prior year[226](index=226&type=chunk) - Major sources included proceeds from Secured Funding Agreements (**$225.2 million**), Notes Payable (**$105.0 million**), and common stock sales (**$106.3 million**), offset by repayments of Secured Funding Agreements (**$217.5 million**), Notes Payable (**$51.1 million**), and dividends paid (**$52.6 million**)[226](index=226&type=chunk) [Summary of Financing Agreements](index=47&type=section&id=Summary%20of%20Financing%20Agreements) This section summarizes the company's financing agreements, including Secured Funding Agreements, Notes Payable, and a Secured Term Loan, detailing outstanding balances, commitments, and compliance with covenants Financing Agreements Summary (in thousands) | Agreement Type | Sep 30, 2022 Outstanding Balance | Sep 30, 2022 Total Commitment | Dec 31, 2021 Outstanding Balance | Dec 31, 2021 Total Commitment | | :-------------------------- | :------------------------------- | :---------------------------- | :------------------------------- | :---------------------------- | | Secured Funding Agreements | $847,697 | $1,280,000 | $840,047 | $1,280,000 | | Notes Payable | $105,000 | $105,000 | $51,110 | $51,755 | | Secured Term Loan | $150,000 | $150,000 | $150,000 | $150,000 | | Total | $1,102,697 | $1,535,000 | $1,041,157 | $1,481,755 | - The company was **in compliance** with all financial covenants of its Financing Agreements as of September 30, 2022[230](index=230&type=chunk) - Financing agreements include Wells Fargo, Citibank, CNB, MetLife, and Morgan Stanley Facilities, with various interest rates (LIBOR/SOFR plus spread) and maturity dates, some with extension options[227](index=227&type=chunk)[229](index=229&type=chunk) [Securitizations](index=48&type=section&id=Securitizations) As of September 30, 2022, the carrying amount of the company's CLO Securitizations was $822.3 million, with an outstanding principal of $824.1 million - As of September 30, 2022, the carrying amount of the company's CLO Securitizations was **$822.3 million**, with an outstanding principal of **$824.1 million**[231](index=231&type=chunk) [Leverage Policies](index=48&type=section&id=Leverage%20Policies) The company intends to use prudent leverage, not exceeding a 4.5-to-1 debt-to-equity ratio, to enhance stockholder returns, subject to REIT qualification and 1940 Act exemption - The company intends to use prudent leverage, not exceeding a **4.5-to-1 debt-to-equity ratio**, to enhance stockholder returns, subject to REIT qualification and 1940 Act exemption[232](index=232&type=chunk) - Leverage deployment depends on factors like liquidity, asset volatility, potential losses, asset/liability duration, financing costs, creditworthiness of counterparties, macroeconomic conditions, and interest rate outlook[232](index=232&type=chunk)[233](index=233&type=chunk) [Dividends](index=49&type=section&id=Dividends) As a REIT, the company anticipates distributing at least 90% of its REIT taxable income annually to stockholders, with potential tax implications for insufficient distributions - As a REIT, the company anticipates distributing **at least 90%** of its REIT taxable income annually to stockholders[235](index=235&type=chunk) - Failure to distribute the required amount could result in corporate income tax and a **4% non-deductible excise tax**[235](index=235&type=chunk) - If cash for distribution is insufficient, the company may need to sell assets, borrow funds, or make taxable stock distributions[236](index=236&type=chunk) [Item 3. Quantitative and Qualitative Disclosures About Market Risk](index=49&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) This section details the company's risk management strategy and its exposure to various market risks, including credit risk, interest rate risk, market risk, prepayment and securitization repayment risk, financing risk, real estate risk, and inflation risk [Credit Risk](index=49&type=section&id=Credit%20Risk) The company manages credit risk through due diligence, non-recourse financing, and ongoing portfolio review, while macroeconomic conditions may increase default risk - The company manages credit risk through due diligence, non-recourse financing, and ongoing portfolio review by its Manager[238](index=238&type=chunk) - Macroeconomic and geopolitical conditions, including **rising interest rates** and the COVID-19 pandemic, may slow prepayments or lead to **borrower defaults**, increasing credit risk[239](index=239&type=chunk) [Interest Rate Risk](index=49&type=section&id=Interest%20Rate%20Risk) This section analyzes the company's exposure to interest rate fluctuations, including the hypothetical impact on net income and the risks associated with interest rate floors [Interest Rate Effect on Net Income](index=50&type=section&id=Interest%20Rate%20Effect%20on%20Net%20Income) Net income is sensitive to changes in index rates, with a hypothetical 100 basis point increase in LIBOR or SOFR estimated to increase net income by $11.0 million over twelve months Hypothetical Impact of 30-Day LIBOR or SOFR Change on Net Income (in millions) | Change in 30-Day LIBOR or SOFR | Increase/(Decrease) in Net Income | | :------------------------------ | :-------------------------------- | | Up 100 basis points | $11.0 | | Up 50 basis points | $5.5 | | LIBOR or SOFR at 0 basis points | $(14.9) | - Net income is sensitive to changes in index rates, with a hypothetical **100 basis point increase** in LIBOR or SOFR estimated to **increase net income by $11.0 million** over twelve months[244](index=244&type=chunk)[245](index=245&type=chunk) [Interest Rate Floor Risk](index=50&type=section&id=Interest%20Rate%20Floor%20Risk) In a decreasing interest rate environment, interest rate floors on floating rate mortgage assets could lead to lower net interest income or a net loss if borrowing costs are fixed at a higher floor - In a decreasing interest rate environment, interest rate floors on floating rate mortgage assets could lead to **lower net interest income or a net loss** if borrowing costs are fixed at a higher floor[246](index=246&type=chunk) [Market Risk](index=50&type=section&id=Market%20Risk) The fair values of investments fluctuate due to changes in index rates, credit spreads, and market volatility, with rising interest rates generally decreasing fixed-rate investment values - The fair values of investments fluctuate due to changes in index rates, credit spreads, and market volatility[247](index=247&type=chunk)[249](index=249&type=chunk) - Rising interest rates generally **decrease the fair value of fixed-rate investments**, while widening credit spreads generally **decrease the fair value of floating-rate investments**[247](index=247&type=chunk) [Prepayment and Securitizations Repayment Risk](index=51&type=section&id=Prepayment%20and%20Securitizations%20Repayment%20Risk) Prepayment rates on CRE loans can affect net income, and decreased prepayment rates or loan extensions could extend loan lives beyond financing terms, impacting CLO securitizations - Prepayment rates on CRE loans can affect net income; faster prepayments may lead to **lower yields** if new loans cannot match prior returns[250](index=250&type=chunk) - Decreased prepayment rates or loan extensions in a rising interest rate environment could extend loan lives beyond financing terms, potentially requiring additional collateral or asset sales[250](index=250&type=chunk) - In CLO Securitizations, principal repayments are applied sequentially to senior notes first, delaying proceeds to the company's subordinate securities[250](index=250&type=chunk) [Financing Risk](index=51&type=section&id=Financing%20Risk) Secured Funding Agreements contain margin call provisions and covenants, and failure to meet CLO overcollateralization tests could divert payments, while weak financial markets may impact financing availability - Secured Funding Agreements contain **margin call provisions and covenants**; default could lead to accelerated payments, termination of commitments, or demands for additional collateral[251](index=251&type=chunk) - CLO Securitizations have senior note overcollateralization ratio tests; failure to meet these could divert payments from subordinate securities to repay senior notes, leading to **significant losses**[251](index=251&type=chunk) - Weakness in financial markets could impact lenders' willingness or ability to provide financing or increase its cost[251](index=251&type=chunk) [Real Estate Risk](index=51&type=section&id=Real%20Estate%20Risk) Real estate investments are subject to volatility from national, regional, and local economic conditions, with the COVID-19 pandemic particularly impacting office properties due to work-from-home trends - Real estate investments are subject to volatility from national, regional, and local economic conditions, including industry slowdowns, local market dynamics, and demographic shifts[252](index=252&type=chunk) - The **COVID-19 pandemic** has particularly impacted industries like **office properties** due to increased **work-from-home trends**, potentially reducing property values and borrower repayment capacity[252](index=252&type=chunk) [Inflation Risk](index=51&type=section&id=Inflation%20Risk) The company's performance is more influenced by interest rates than inflation, though adverse changes in inflation or expectations can lead to lower investment returns - The company's performance is more influenced by interest rates than inflation, though adverse changes in inflation or expectations can lead to **lower investment returns**[253](index=253&type=chunk) [Item 4. Controls and Procedures](index=52&type=section&id=Item%204.%20Controls%20and%20Procedures) This section confirms the effectiveness of the company's disclosure controls and procedures and reports no material changes in internal control over financial reporting during the quarter ended September 30, 2022 [Evaluation of Disclosure Controls and Procedures](index=52&type=section&id=Evaluation%20of%20Disclosure%20Controls%20and%20Procedures) Management concluded that the company's disclosure controls and procedures were effective as of September 30, 2022 - Management, including the principal executive and financial officers, concluded that the company's disclosure controls and procedures were **effective** as of September 30, 2022[255](index=255&type=chunk) [Changes in Internal Control over Financial Reporting](index=52&type=section&id=Changes%20in%20Internal%20Control%20over%20Financial%20Reporting) There have been no material changes in the company's internal control over financial reporting during the quarter ended September 30, 2022 - There have been **no material changes** in the company's internal control over financial reporting during the quarter ended September 30, 2022[256](index=256&type=chunk) [Part II. Other Information](index=52&type=section&id=Part%20II.%20Other%20Information) This section covers other information, including legal proceedings, risk factors, unregistered sales of equity securities, defaults upon senior securities, mine safety disclosures, and a list of exhibits [Item 1. Legal Proceedings](index=52&type=section&id=Item%201.%20Legal%20Proceedings) This section states that the company is not currently subject to any material pending legal proceedings, but acknowledges the potential for increased litigation if macroeconomic conditions worsen - As of September 30, 2022, the company was **not subject to any material pending legal proceedings**[257](index=257&type=chunk) - Worsening macroeconomic and geopolitical conditions could lead to **increased litigation** related to loan defaults and enforcement of remedies[257](index=257&type=chunk) [Item 1A. Risk Factors](index=52&type=section&id=Item%201A.%20Risk%20Factors) This section indicates that there have been no material changes to the risk factors previously disclosed in the company's Annual Report on Form 10-K for the year ended December 31, 2021, and advises readers to consult that report for a comprehensive understanding of potential risks - **No material changes** to the risk factors previously disclosed in the Annual Report on Form 10-K for the year ended December 31, 2021, were identified[258](index=258&type=chunk) - Readers are advised to carefully consider the risk factors in the 2021 Annual Report on Form 10-K, as additional unknown or immaterial risks could also adversely affect the business[258](index=258&type=chunk) [Item 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=52&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) This section reports on the company's stock repurchase program, noting that no shares were repurchased during the three months ended September 30, 2022, and the full $50.0 million authorized amount remains available - The company's Board of Directors approved a **$50.0 million stock repurchase program** on **July 26, 2022**, which is expected to be in effect until **July 26, 2023**[259](index=259&type=chunk) - **No shares were purchased** under the repurchase program during the three months ended September 30, 2022, leaving the full **$50.0 million available** for future purchases[259](index=259&type=chunk)[260](index=260&type=chunk) [Item 3. Defaults Upon Senior Securities](index=53&type=section&id=Item%203.%20Defaults%20Upon%20Senior%20Securities) This section states that there were no defaults upon senior securities - There were **no defaults** upon senior securities[261](index=261&type=chunk) [Item 4. Mine Safety Disclosures](index=53&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) This section indicates that mine safety disclosures are not applicable to the company - Mine safety disclosures are **not applicable** to the company[261](index=261&type=chunk) [Item 5. Other Information](index=53&type=section&id=Item%205.%20Other%20Information) This section states that there is no other information to report - **No other information** is reported in this section[261](index=261&type=chunk) [Item 6. Exhibits](index=54&type=section&id=Item%206.%20Exhibits) This section provides a comprehensive list of exhibits filed as part of the Form 10-Q, including organizational documents, management agreements, credit agreements, certifications, and XBRL data files - The exhibit index includes Articles of Amendment and Restatement, Amended and Restated Bylaws, Amended and Restated Management Agreement, Credit and Security Agreement, Guaranty of Recourse Obligations, CEO/CFO Certifications, and various XBRL documents[264](index=264&type=chunk)

Financial Data and Key Metrics Changes - The company reported second quarter distributable earnings of $0.38 per share, a 12% increase from the first quarter, exceeding the combined regular and supplemental dividends of $0.35 per share [5] - GAAP net income was $10 million or $0.20 per share, with distributable earnings of $19.2 million or $0.38 per share, supported by rising interest rates and a net increase of $200 million in the loan portfolio [9][12] - The company collected 99% of contractual interest due, with only two loans on nonaccrual status, representing less than 2% of the overall portfolio [10] Business Line Data and Key Metrics Changes - During the second quarter, the company closed $356 million of senior floating rate loan commitments across eight transactions, with approximately 80% collateralized by multifamily and self-storage properties [7] - Spreads on multifamily loans originated this quarter were approximately 90 basis points higher than the post-pandemic average spreads for multifamily transactions [7] Market Data and Key Metrics Changes - Overall property-level fundamentals remain stable, but rising interest rates and economic uncertainty have led to diverging views on property values, resulting in a cooling of commercial real estate transaction activity [6] - The company noted that the current market conditions favor institutional borrowers and different parts of the credit curve, indicating a more rapid adjustment compared to past cycles [29] Company Strategy and Development Direction - The company is well-positioned to navigate the changing economic landscape, with a strong balance sheet, low leverage, and a robust level of available capital to invest in higher-yielding opportunities [15] - The company has authorized a new $50 million share buyback plan to repurchase stock where it is accretive to earnings and book value [8] Management's Comments on Operating Environment and Future Outlook - Management expects earnings potential to benefit from further increases in interest rates due to the floating rate loan portfolio and hedges in place [5] - The company recognizes challenges posed by rising rates and economic uncertainty but remains committed to a disciplined approach in capital deployment [15] Other Important Information - The company increased its general reserve by $7.8 million to $32.4 million, reflecting changes in the outlook of select properties [10] - The company announced a third quarter 2022 regular dividend of $0.33 per common share and a continuation of the supplemental quarterly dividend of $0.02 per common share [14] Q&A Session Summary Question: Impact of asset sensitivity and hedge on duration and balance sheet capacity - Management emphasized the importance of dialogue with borrowers and the expectation of more duration on individual assets due to rising rates [19][20] Question: Sponsor behavior and liquidity concerns - Management noted that responses from sponsors vary, but many are positioning defensively to navigate rising rates [22][23] Question: Speed of market adjustment compared to past cycles - Management agreed that the current cycle is unfolding more quickly than previous downturns, with sound fundamentals in the real estate market [29] Question: Multifamily sector outlook amidst housing market turmoil - Management continues to favor industrial and multifamily sectors, noting strong rent growth but cautioning about rapid increases in certain markets [31][32] Question: Dividend structure and strength of earnings - Management discussed the rationale behind the supplemental dividend, reflecting excess earnings from interest rate hedges, while remaining cautious about market volatility [36][38]