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]

Financial Data and Key Metrics Changes - The company reported a GAAP net income of $16.2 million or $0.34 per common share, with distributable earnings also at $16.3 million or $0.34 per common share [13] - Distributable earnings were influenced by the timing of recognizing fees associated with early repayments, with a significant difference in fee recognition between Q4 2021 and Q1 2022 [13][9] - The portfolio's outstanding principal balance increased by 27% year-over-year to $2.4 billion [15] Business Line Data and Key Metrics Changes - The company originated $263 million in new loans during Q1 2022, with an additional $123 million closed in Q2 to date [7] - The overall credit quality of the portfolio remained stable, with no new loans placed on non-accrual during Q1 2022 [15] - The weighted average loan risk rating improved from 2.8 at year-end 2021 to 2.7 as of March 31, 2022 [15] Market Data and Key Metrics Changes - The company noted robust activity in the southern and mid-Atlantic regions, driven by strong demographic growth [12] - The portfolio consists of 99% senior loans and 98% floating rate instruments, which continue to perform well [12] Company Strategy and Development Direction - The company aims to leverage its origination platform to navigate market volatility and capitalize on attractive credit spreads [7] - The focus remains on target sectors such as industrial and self-storage, while also exploring unique opportunities in hospitality and other sectors [11] - The company is positioned to benefit from rising interest rates due to its floating rate portfolio and hedges on liabilities [8][17] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in the company's ability to deliver attractive returns despite market volatility caused by inflation and geopolitical conflicts [8] - The expectation is for an increase in distributable earnings in Q2 2022, driven by a faster pace of originations and wider spreads [9] - Management remains cautious but optimistic about the market, indicating a return to normalized repayment levels [30] Other Important Information - The company announced a regular dividend of $0.33 per common share and a supplemental dividend of $0.02 per common share for Q2 2022 [18] - The company is focused on maintaining a debt-to-equity ratio of approximately three times, currently at about 2.2 [26] Q&A Session Summary Question: Thoughts on the supplemental dividend in light of rising short-term rates - Management indicated that the continuation of the supplemental dividend will depend on the performance of loans with LIBOR floors and the trajectory of short-term interest rates [22] Question: Outlook for repayments in the near term - Management expects repayments to normalize, estimating about $800 million per year based on a $2.4 billion portfolio [30] Question: Opportunities in the office sector - Management noted a bifurcation in tenant demand, with a focus on newer assets with high amenity packages, while remaining selective in adding to the office portfolio [56] Question: Yield on new originations and comparison to paid-down loans - The yield on new originations was based on the spot rate at quarter-end, with expectations for increases as rates rise [60] Question: Managing the CLO and market changes in spreads - Management discussed the successful management of their CLO and noted that while spreads have widened, the pace of that widening has slowed [64][66]

Ares Commercial Real Estate Corporation (NYSE:ACRE) Q4 2021 Earnings Conference Call February 15, 2022 12:00 PM ET Company Participants Veronica Mayer - IR Bryan Donohoe - CEO Tae-Sik Yoon - CFO Carl Drake - Head, Public Company, IR Conference Call Participants Doug Harter - Credit Suisse Rick Shane - J.P. Morgan Steve DeLaney - JMP Securities Jade Rahmani - KBW Tim Hayes - BTIG Operator Good afternoon and welcome to Ares Commercial Real Estate Corporation's Conference Call to discuss the company's Fourth Q ...

Financial Position and Debt - As of December 31, 2021, the outstanding balance under the Financing Agreements was $1.0 billion[34] - The company had $150.0 million outstanding under its Credit and Guaranty Agreement as of December 31, 2021[34] - The outstanding balance of CLO Securitizations was $864.8 million as of December 31, 2021[35] - The company expects leverage not to exceed a 4.5-to-1 debt-to-equity ratio[31] - The company had approximately $1.0 billion of outstanding borrowings under Financing Agreements and $864.8 million under CLO Securitizations as of December 31, 2021[79] - The company is subject to restrictive covenants in its Financing Agreements that may limit its ability to incur additional debt or make distributions to stockholders[82] - The company may be required to provide additional collateral or pay down debt under its Financing Agreements and future credit facilities[92] - The company anticipates utilizing additional bank credit facilities or repurchase agreements to finance its assets, which may involve risks related to collateral value and liquidity[93] - Access to financing sources may be limited, adversely affecting the company's ability to grow and maximize returns[94] - The company may incur significant additional debt through various financing arrangements, including bank credit facilities and structured financing arrangements[95] Market Conditions and Economic Impact - Market conditions are favorable for disciplined direct lenders, with expected strong demand for shorter duration and floating rate loans[29] - The COVID-19 pandemic has caused significant disruptions in global commercial activity, leading to increased volatility in equity and debt markets[49] - The pandemic has adversely impacted industries that serve as collateral for the company's loan investments, affecting borrowers' ability to meet loan covenants[50] - Changes in fiscal and monetary policies, including interest rate fluctuations, could adversely affect the company's financial condition and the demand for loans[84] - Significant fluctuations in interest rates and credit spreads could lead to increased financing costs and reduced income generation on investments[85] - Higher interest rates and widening credit spreads may decrease the number of loans originated and make refinancing less attractive[91] Investment Strategy and Risks - The company relies on its Manager for investment advisory services, with no employees of its own[28] - The company competes with various financial entities, including public and private REITs, banks, and institutional investors[38] - The company has formed subsidiaries to hold certain loans and engage in activities that could jeopardize its REIT status[37] - The company is subject to risks related to competition, interest rate changes, and potential conflicts of interest[45] - The company’s investments are subject to various risks, including economic downturns and declining real estate values, which could adversely affect its ability to pay dividends to stockholders[128] - The company may incur substantial losses if it cannot successfully restructure loans during workouts or foreclosures[170] - The company may invest in commercial mortgage-backed securities (CMBS) and collateralized loan obligations (CLO), which carry additional risks including potential losses from the securitization process[163] Regulatory Environment and Compliance - Changes in laws or regulations could require adjustments to business practices, negatively impacting operations and financial condition[59] - The implementation of Basel III standards may increase capital requirements and constrain financing options for the company[65] - The evolving regulatory environment surrounding securitizations may increase costs and risks associated with the company's business operations[105] - The company is currently exempt from being regulated as a commodity pool operator, but failure to comply with certain restrictions could result in additional regulations that may adversely affect its financial condition[117] - The company has submitted a claim for relief from registration requirements for mortgage REITs, which imposes limitations on its use of swaps, including that annual income from commodity interest trading must be less than 5% of gross annual income[119] Stockholder and Dividend Considerations - The company is required to distribute at least 90% of its REIT taxable income to maintain its REIT status, limiting available funds for investment[99] - The company has not established a minimum distribution payment level and may be unable to generate sufficient cash flows to make distributions to stockholders in the future[189] - Distributions for the years ended December 31, 2021, 2020, and 2019 exceeded cash flow from operating activities[193] - The company may use other sources of funds, such as offering proceeds and borrowings, to fund portions of future distributions[193] Asset Valuation and Concentration Risks - The fair value of certain portfolio investments may fluctuate significantly, leading to uncertainty in asset valuations and potential adverse effects on common stock value[160] - The valuation of real estate collateral is subjective and may lead to inaccuracies, potentially resulting in losses for the company[168] - The company may invest in non-performing real estate loans, which are subject to higher credit and market risks during economic downturns[169] - Concentration in specific property types or geographic locations may increase the risk of defaults and negatively affect net income and stock value[180] - The company does not have fixed guidelines for diversification, which may lead to a concentration in relatively few loans or property types, increasing the risk of defaults[126] Operational and Management Risks - The company has instituted a hybrid work-from-home arrangement, which may introduce operational risks, including heightened cybersecurity risks[57] - The board of directors has the authority to change investment strategies without stockholder consent, potentially altering the risk profile of the investment portfolio[58] - The company’s board of directors has the discretion to amend policies without stockholder approval, limiting stockholder control over major decisions[202] - The company conducts operations to maintain its exemption from registration under the 1940 Act, which imposes significant limits on its operations[205] Shareholder Structure and Changes - As of December 31, 2021, the company had 47,144,058 shares of common stock outstanding, an increase from 33,442,332 shares in 2020[187] - In 2021, the company conducted two registered underwritten offerings, selling a total of 13.5 million shares[188] - The company sold 137,237 shares under its "At the Market Stock Offering Program" during the year ended December 31, 2021, which allows for the sale of up to $100 million of shares[188] - The company is authorized to issue up to 450 million shares of common stock and 50 million shares of preferred stock without stockholder approval, which may prevent changes in control[204]