Ares mercial Real Estate (ACRE) - 2025 Q2 - Quarterly Report

FORM 10-Q Part I. Financial Information Item 1. Consolidated Financial Statements This section presents the unaudited consolidated financial statements and accompanying detailed notes for the period Consolidated Balance Sheets This statement shows the company's financial position, reflecting a decrease in total assets and stockholders' equity Consolidated Balance Sheets Summary | Metric | June 30, 2025 (in thousands) | December 31, 2024 (in thousands) | | :--- | :--- | :--- | | ASSETS | | | | Cash and cash equivalents | $89,985 | $63,799 | | Loans held for investment, net of CECL reserve | $1,182,975 | $1,520,464 | | Total assets | $1,438,638 | $1,751,206 | | LIABILITIES | | | | Total liabilities | $914,939 | $1,211,074 | | STOCKHOLDERS' EQUITY | | | | Total stockholders' equity | $523,699 | $540,132 | Consolidated Statements of Operations This statement details the company's financial performance, indicating a net loss for the reported periods Consolidated Statements of Operations Summary | Metric | Three Months Ended June 30, 2025 (in thousands) | Three Months Ended June 30, 2024 (in thousands) | Six Months Ended June 30, 2025 (in thousands) | Six Months Ended June 30, 2024 (in thousands) | | :--- | :--- | :--- | :--- | :--- | | Interest income | $23,117 | $40,847 | $50,597 | $84,880 | | Interest expense | $(16,101) | $(27,483) | $(34,290) | $(56,302) | | Net interest margin | $7,016 | $13,364 | $16,307 | $28,578 | | Total revenue | $12,565 | $16,797 | $27,513 | $35,488 | | Total expenses | $10,750 | $8,909 | $21,412 | $17,459 | | (Provision for) reversal of current expected credit losses, net | $20,150 | $2,374 | $25,490 | $24,643 | | Realized losses on loans | $(33,000) | $(16,387) | $(33,000) | $(62,113) | | Net income (loss) attributable to common stockholders | $(11,035) | $(6,125) | $(1,690) | $(18,448) | | Basic earnings (loss) per common share | $(0.20) | $(0.11) | $(0.03) | $(0.34) | | Diluted earnings (loss) per common share | $(0.20) | $(0.11) | $(0.03) | $(0.34) | | Dividends declared per share of common stock | $0.15 | $0.25 | $0.30 | $0.50 | Consolidated Statements of Comprehensive Income (Loss) This statement details the net income (loss) and other comprehensive income components, showing a comprehensive loss Consolidated Statements of Comprehensive Income (Loss) Summary | Metric | Three Months Ended June 30, 2025 (in thousands) | Three Months Ended June 30, 2024 (in thousands) | Six Months Ended June 30, 2025 (in thousands) | Six Months Ended June 30, 2024 (in thousands) | | :--- | :--- | :--- | :--- | :--- | | Net income (loss) attributable to common stockholders | $(11,035) | $(6,125) | $(1,690) | $(18,448) | | Unrealized gains (losses) on available-for-sale debt securities | $21 | $(41) | $(9) | $40 | | Comprehensive income (loss) | $(11,014) | $(6,166) | $(1,699) | $(18,408) | Consolidated Statements of Stockholders' Equity This statement tracks changes in equity components, reflecting impacts from compensation, income, and dividends Consolidated Statements of Stockholders' Equity Summary | Metric | Balance at December 31, 2024 (in thousands) | Balance at June 30, 2025 (in thousands) | | :--- | :--- | :--- | | Common Stock (Shares) | 54,542,178 | 55,005,353 | | Common Stock (Amount) | $532 | $532 | | Additional Paid-in Capital | $816,923 | $818,910 | | Accumulated Other Comprehensive Income (Loss) | $37 | $28 | | Accumulated Earnings (Deficit) | $(277,360) | $(295,771) | | Total Stockholders' Equity | $540,132 | $523,699 | Consolidated Statements of Cash Flows This statement presents cash flows from all activities, showing a positive change in cash for 2025 Consolidated Statements of Cash Flows Summary | Metric | Six Months Ended June 30, 2025 (in thousands) | Six Months Ended June 30, 2024 (in thousands) | | :--- | :--- | :--- | | Net cash provided by (used in) operating activities | $12,890 | $20,045 | | Net cash provided by (used in) investing activities | $324,998 | $133,721 | | Net cash provided by (used in) financing activities | $(310,047) | $(193,576) | | Change in cash, cash equivalents and restricted cash | $27,841 | $(39,810) | | Cash, cash equivalents and restricted cash, end of period | $94,135 | $70,649 | Notes to Consolidated Financial Statements These notes provide detailed explanations and disclosures supporting the consolidated financial statements 1. ORGANIZATION ACRE is a specialty finance REIT focused on CRE loans, externally managed by a subsidiary of Ares Management - ACRE is a specialty finance company primarily engaged in directly originating and investing in commercial real estate loans and related investments[22] - The company is externally managed by Ares Commercial Real Estate Management LLC (ACREM), a subsidiary of Ares Management Corporation[22] - ACRE has elected and qualified to be taxed as a real estate investment trust (REIT) for United States federal income tax purposes since December 31, 2012[24] 2. SIGNIFICANT ACCOUNTING POLICIES This section outlines key accounting policies, including the basis of presentation, use of estimates, and VIE consolidation - The financial statements are prepared in conformity with United States generally accepted accounting principles (GAAP) and include the accounts of the Company, consolidated VIEs, and wholly-owned subsidiaries[28] - Management makes estimates and assumptions, particularly regarding global macroeconomic conditions (e.g., inflation, interest rates), which could negatively impact the Company and its borrowers[30][31] - The Company consolidates VIEs where it is the primary beneficiary, having both the power to direct significant activities and the obligation to absorb losses or right to receive significant benefits[32][35] 3. LOANS HELD FOR INVESTMENT The company's loan portfolio decreased in principal balance, with four loans on non-accrual status as of June 30, 2025 - During the six months ended June 30, 2025, the Company funded approximately $19.3 million of outstanding principal and received repayments of $336.9 million[52] - 70.8% of the Company's loans have SOFR floors, with a weighted average floor of 0.93%[52] Loan Portfolio Summary | Metric | As of June 30, 2025 (in thousands) | As of December 31, 2024 (in thousands) | | :--- | :--- | :--- | | Total loans held for investment portfolio (Carrying Amount) | $1,300,670 | $1,656,688 | | Total loans held for investment portfolio (Outstanding Principal) | $1,355,936 | $1,698,506 | | Weighted Average Unleveraged Effective Yield (all loans) | 6.3% | 6.9% | | Weighted Average Unleveraged Effective Yield (interest accruing loans) | 8.4% | 8.7% | | Weighted Average Remaining Life (Years) | 0.8 | 1.0 | | Number of loans on non-accrual status | 4 | 5 | 4. CURRENT EXPECTED CREDIT LOSSES The CECL Reserve decreased to $119.5 million, primarily due to a realized loss and shorter average loan terms - The CECL Reserve for loans held for investment portfolio is $119.5 million as of June 30, 2025, representing 858 basis points of the total loan commitment balance[68] - The decrease in CECL Reserve as of June 30, 2025, compared to March 31, 2025, is primarily due to a realized loss on an office (life sciences) loan, shorter average remaining loan term, and loan repayments[64] CECL Reserve Summary | Metric | Balance at December 31, 2024 (in thousands) | Balance at June 30, 2025 (in thousands) | | :--- | :--- | :--- | | CECL Reserve for Funded Loan Commitments | $136,224 | $117,695 | | CECL Reserve for Unfunded Loan Commitments | $8,757 | $1,796 | 5. REAL ESTATE OWNED The company holds two REO properties classified as held for investment, with no impairment charges recognized - On September 19, 2024, the Company acquired legal title to a multi-building office property in North Carolina through a deed in lieu of foreclosure, recognizing a realized loss of $5.8 million[77] - On September 8, 2023, the Company acquired legal title to a mixed-use property in Florida through a consensual foreclosure, with no gain or loss recognized at acquisition[79] Real Estate Owned Summary | Metric | As of June 30, 2025 (in thousands) | As of December 31, 2024 (in thousands) | | :--- | :--- | :--- | | Total real estate owned held for investment | $145,744 | $144,808 | | Less: Accumulated depreciation and amortization | $(10,276) | $(5,776) | | Real estate owned held for investment, net | $135,468 | $139,032 | | Net depreciation and amortization expense (Six Months Ended June 30, 2025) | $4,500 | $1,600 | 6. DEBT The company's total outstanding debt was $751.8 million as of June 30, 2025, with several facilities extended - The Wells Fargo Facility's initial maturity date and funding period were extended to February 10, 2028, with options for two 12-month extensions[88] - The Morgan Stanley Facility's commitment was reduced from $250.0 million to $150.0 million, and its initial maturity date was extended to July 16, 2026, with one 12-month extension option[91] - The Secured Term Loan's outstanding principal was reduced by $20.0 million through repayments in January and April 2025[93] Summary of Debt Facilities | Financing Agreement | Total Commitment (June 30, 2025, in thousands) | Outstanding Balance (June 30, 2025, in thousands) | Total Commitment (December 31, 2024, in thousands) | Outstanding Balance (December 31, 2024, in thousands) | | :--- | :--- | :--- | :--- | :--- | | Wells Fargo Facility | $450,000 | $197,822 | $450,000 | $210,216 | | Citibank Facility | $325,000 | $294,495 | $325,000 | $228,727 | | CNB Facility | $75,000 | $0 | $75,000 | $0 | | Morgan Stanley Facility | $150,000 | $149,525 | $250,000 | $149,525 | | Secured Term Loan | $110,000 | $110,000 | $130,000 | $130,000 | | Total | $1,110,000 | $751,842 | $1,230,000 | $718,468 | 7. COMMITMENTS AND CONTINGENCIES Unfunded commitments decreased to $36.5 million, and the company is not aware of any material legal claims - The impact of current macroeconomic conditions on the Company's business is uncertain, but no contingencies were recorded on the consolidated balance sheets as of June 30, 2025[95] Unfunded Commitments Summary | Metric | As of June 30, 2025 (in thousands) | As of December 31, 2024 (in thousands) | | :--- | :--- | :--- | | Total unfunded commitments | $36,514 | $74,577 | 8. STOCKHOLDERS' EQUITY The stock repurchase program was extended to 2026, and authorized shares under the equity incentive plan increased - The stock repurchase program of up to $50.0 million was extended to July 31, 2026[98] - No shares were repurchased under the program during the three and six months ended June 30, 2025 and 2024[98] - The total number of shares of common stock authorized for grant under the Amended and Restated 2012 Equity Incentive Plan was increased to 5,015,000 shares[100] 9. EARNINGS PER SHARE This section provides the computation of basic and diluted earnings (loss) per common share for the reported periods Earnings Per Share Calculation | Metric | Three Months Ended June 30, 2025 | Three Months Ended June 30, 2024 | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | | :--- | :--- | :--- | :--- | :--- | | Net income (loss) attributable to common stockholders (in thousands) | $(11,035) | $(6,125) | $(1,690) | $(18,448) | | Basic weighted average shares of common stock outstanding | 54,856,949 | 54,426,112 | 54,842,959 | 54,411,255 | | Basic earnings (loss) per common share | $(0.20) | $(0.11) | $(0.03) | $(0.34) | | Diluted earnings (loss) per common share | $(0.20) | $(0.11) | $(0.03) | $(0.34) | 10. INCOME TAX The company's income tax provision relates to its taxable REIT subsidiaries, as it generally avoids federal tax as a REIT - The Company generally will not be subject to United States federal income taxes on its REIT taxable income as long as it annually distributes all of its REIT taxable income and complies with other REIT requirements[24] Income Tax Expense Summary | Metric | Three Months Ended June 30, 2025 (in thousands) | Three Months Ended June 30, 2024 (in thousands) | Six Months Ended June 30, 2025 (in thousands) | Six Months Ended June 30, 2024 (in thousands) | | :--- | :--- | :--- | :--- | :--- | | Current | $0 | $0 | $282 | $0 | | Deferred | $0 | $0 | $(1) | $2 | | Excise tax | $0 | $0 | $0 | $0 | | Total income tax expense (benefit), including excise tax | $0 | $0 | $281 | $2 | 11. FAIR VALUE This section details fair value measurements, categorizing assets and liabilities based on input observability - Fair value measurements are categorized into three levels: Level 1 (quoted prices in active markets), Level 2 (significant observable inputs), and Level 3 (significant unobservable inputs)[110] - Real estate owned is recorded at fair value at acquisition using Level 3 inputs and is evaluated for impairment quarterly[114] Fair Value of Financial Instruments | Financial Assets | As of June 30, 2025 (in thousands) | As of December 31, 2024 (in thousands) | | :--- | :--- | :--- | | Available-for-sale debt securities (Fair Value) | $7,808 (Level 2) | $8,684 (Level 2) | | Loans held for investment (Carrying Value) | $1,300,670 | $1,656,688 | | Loans held for investment (Fair Value) | $1,180,527 (Level 3) | $1,510,670 (Level 3) | | Secured funding agreements (Carrying Value & Fair Value) | $641,842 (Level 2) | $588,468 (Level 2) | | Secured term loan (Carrying Value) | $108,780 | $128,062 | | Secured term loan (Fair Value) | $107,020 (Level 3) | $125,260 (Level 3) | | Collateralized loan obligation securitization debt (Carrying Value) | $137,587 | $455,839 | | Collateralized loan obligation securitization debt (Fair Value) | $132,393 (Level 2) | $447,356 (Level 2) | 12. RELATED PARTY TRANSACTIONS The company has significant transactions with its Manager, ACREM, including management fees and expense reimbursements - The Management Agreement with ACREM outlines base management fees (1.5% of stockholders' equity per annum), incentive fees, and expense reimbursements[121][122][124] - No incentive fees were incurred for the three and six months ended June 30, 2025, and 2024[123] Related Party Costs Summary | Related Party Costs | Three Months Ended June 30, 2025 (in thousands) | Three Months Ended June 30, 2024 (in thousands) | Six Months Ended June 30, 2025 (in thousands) | Six Months Ended June 30, 2024 (in thousands) | | :--- | :--- | :--- | :--- | :--- | | Management fees | $2,430 | $2,692 | $4,997 | $5,460 | | General and administrative expenses reimbursed to affiliate | $1,024 | $1,277 | $2,027 | $2,409 | | Total payable to Manager (June 30, 2025) | $4,145 | | | | | Total payable to Manager (December 31, 2024) | | | | $3,790 | 13. DIVIDENDS AND DISTRIBUTIONS The company declared cash dividends of $0.15 per common share for Q1 and Q2 2025, a decrease from 2024 Dividends Declared Summary | Date Declared | Per Share Amount (2025) | Total Amount (2025, in thousands) | Per Share Amount (2024) | Total Amount (2024, in thousands) | | :--- | :--- | :--- | :--- | :--- | | May 7, 2025 / May 9, 2024 | $0.15 | $8,368 | $0.25 | $13,812 | | February 12, 2025 / February 22, 2024 | $0.15 | $8,353 | $0.25 | $13,802 | | Total cash dividends declared for the six months ended June 30 | $0.30 | $16,721 | $0.50 | $27,614 | 14. VARIABLE INTEREST ENTITIES The company consolidates its CLO Securitizations as the primary beneficiary, with one CLO terminated in March 2025 - The FL3 CLO Securitization was terminated on March 17, 2025, with all FL3 Notes held by third parties repaid in full[136] - The FL4 CLO Securitization's notes were collateralized by interests in a pool of four mortgage assets ($172.2 million principal balance) and $56.8 million of real estate owned as of June 30, 2025[138] - The Company is the primary beneficiary of the CLO Securitizations, and its maximum risk of loss is limited to its $96.0 million investment in these entities[141][143] 15. SEGMENT INFORMATION The company operates as a single reportable segment focused on originating and managing CRE debt investments - The Company operates as a single reportable segment, deriving revenue from originating and managing CRE debt-related investments[146] Segment Performance Summary | Metric | Three Months Ended June 30, 2025 (in thousands) | Three Months Ended June 30, 2024 (in thousands) | Six Months Ended June 30, 2025 (in thousands) | Six Months Ended June 30, 2024 (in thousands) | | :--- | :--- | :--- | :--- | :--- | | Total revenue | $12,565 | $16,797 | $27,513 | $35,488 | | Expenses from real estate owned | $(4,628) | $(2,226) | $(9,123) | $(4,262) | | (Provision for) reversal of current expected credit losses, net | $20,150 | $2,374 | $25,490 | $24,643 | | Realized losses on loans | $(33,000) | $(16,387) | $(33,000) | $(62,113) | | Segment net income (loss) | $(11,035) | $(6,125) | $(1,690) | $(18,448) | 16. SUBSEQUENT EVENTS Post-quarter end, the company closed four senior mortgage loans and declared a Q3 2025 dividend - On July 23, 2025, the Company closed four senior mortgage loans on self-storage properties in Florida, Arizona, and Pennsylvania, with total commitments of $42.5 million[149][150] - The board of directors declared a regular cash dividend of $0.15 per common share for the third quarter of 2025, payable on October 15, 2025[152] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on financial condition, operating results, and market trends Overview ACRE is a specialty finance REIT that originates and invests in CRE loans, externally managed by ACREM - ACRE is a specialty finance company primarily engaged in directly originating and investing in commercial real estate (CRE) loans and related investments[153] - The company is externally managed by ACREM, a subsidiary of Ares Management Corporation, and has qualified as a REIT since December 31, 2012[153][154] Developments During the Second Quarter of 2025 Key Q2 developments include an amended financing facility and a significant realized loss on a loan payoff - The Morgan Stanley Facility commitment was reduced from $250.0 million to $150.0 million, and its initial maturity date was extended to July 16, 2026[159] - A $33.0 million realized loss was recognized from a discounted payoff of a $51.5 million senior mortgage loan on an office (life sciences) property[159] Trends Affecting Our Business The CRE market faces uncertainty from trade policies and rising costs, though declining development may benefit existing properties - The U.S. economy expanded in Q2 2025, supported by steady unemployment and consumer spending, despite increased uncertainty from trade policies and tariffs[156] - Rising operating costs and challenges in the office sector continue to pressure cash flow performance across real estate property types[157] - A significant decline in new commercial real estate development since 2023 could lead to a shortage of contemporary, in-demand properties, potentially supporting values and transaction activities[157] Factors Impacting Our Operating Results Operating results are primarily influenced by net interest income, asset market values, and credit losses - Operating results are primarily affected by net interest income, market value of assets, and the supply/demand for commercial mortgage loans and other financial assets[160] - Credit losses in excess of initial anticipations or unanticipated credit events experienced by borrowers also impact operating results[160] Stock Repurchase Program The company's $50.0 million stock repurchase program was extended until July 31, 2026, with no shares repurchased - The stock repurchase program of up to $50.0 million was extended until July 31, 2026[161] - No shares were repurchased under the program during the three and six months ended June 30, 2025[161] Loans Held for Investment Portfolio The portfolio comprised 26 loans with an outstanding principal of $1.4 billion and a weighted average yield of 6.3% - The portfolio includes 26 loans held for investment, with 70.8% having SOFR floors (weighted average floor of 0.93%)[162] - During the six months ended June 30, 2025, the company funded $19.3 million and received $336.9 million in principal repayments[162] Loan Portfolio Summary (June 30, 2025) | Metric | As of June 30, 2025 (in thousands) | | :--- | :--- | | Total loans held for investment portfolio (Carrying Amount) | $1,300,670 | | Total loans held for investment portfolio (Outstanding Principal) | $1,355,936 | | Weighted Average Unleveraged Effective Yield (all loans) | 6.3% | | Weighted Average Unleveraged Effective Yield (interest accruing loans) | 8.4% | | Weighted Average Remaining Life (Years) | 0.8 | Critical Accounting Estimates Financial statements rely on management's estimates and assumptions, with actual results subject to macroeconomic uncertainty - Consolidated financial statements are prepared in accordance with GAAP, requiring management to make estimates and assumptions[166] - These estimates are based on historical experience and other reasonable factors, but actual results may differ due to macroeconomic conditions[166] Recent Developments Subsequent to the quarter, the company closed four loans totaling $42.5 million and declared a Q3 dividend - On July 23, 2025, the company closed four senior mortgage loans on self-storage properties in Florida, Arizona, and Pennsylvania, with total commitments of $42.5 million[167][168] - A regular cash dividend of $0.15 per common share was declared for the third quarter of 2025, payable on October 15, 2025[169] Results of Operations The company reported a net loss, driven by lower net interest margin, higher expenses, and significant realized loan losses Results of Operations Summary | Metric | Three Months Ended June 30, 2025 (in thousands) | Three Months Ended June 30, 2024 (in thousands) | Six Months Ended June 30, 2025 (in thousands) | Six Months Ended June 30, 2024 (in thousands) | | :--- | :--- | :--- | :--- | :--- | | Total revenue | $12,565 | $16,797 | $27,513 | $35,488 | | Total expenses | $10,750 | $8,909 | $21,412 | $17,459 | | (Provision for) reversal of current expected credit losses, net | $20,150 | $2,374 | $25,490 | $24,643 | | Realized losses on loans | $(33,000) | $(16,387) | $(33,000) | $(62,113) | | Net income (loss) attributable to common stockholders | $(11,035) | $(6,125) | $(1,690) | $(18,448) | Net Interest Margin Net interest margin decreased significantly due to lower average earning assets and borrowings - The decrease in net interest margin is attributed to lower weighted average earning assets, reduced weighted average borrowings, and a decrease in SOFR rates on loans held for investment[172][173] Net Interest Margin Analysis | Metric | Three Months Ended June 30, 2025 (in thousands) | Three Months Ended June 30, 2024 (in thousands) | Six Months Ended June 30, 2025 (in thousands) | Six Months Ended June 30, 2024 (in thousands) | | :--- | :--- | :--- | :--- | :--- | | Net interest margin | $7,016 | $13,364 | $16,307 | $28,578 | | Weighted average earning assets | $1.4 billion | $2.1 billion | $1.5 billion | $2.1 billion | | Weighted average borrowings | $0.9 billion | $1.5 billion | $1.0 billion | $1.5 billion | Revenue From Real Estate Owned Revenue from real estate owned increased due to the acquisition of an office property in September 2024 - Revenue from real estate owned for the three and six months ended June 30, 2025, was $5.5 million and $11.2 million, respectively, up from $3.4 million and $6.9 million in 2024[15] - The increase is largely due to rental revenue from an office property acquired in September 2024 ($2.3 million for Q2 2025, $4.7 million for H1 2025)[174] - Mixed-use property revenue contributed $3.3 million for Q2 2025 and $6.5 million for H1 2025[176] Operating Expenses Total operating expenses increased, driven mainly by higher expenses from real estate owned Operating Expenses Summary | Metric | Three Months Ended June 30, 2025 (in thousands) | Three Months Ended June 30, 2024 (in thousands) | Six Months Ended June 30, 2025 (in thousands) | Six Months Ended June 30, 2024 (in thousands) | | :--- | :--- | :--- | :--- | :--- | | Management and incentive fees to affiliate | $2,430 | $2,692 | $4,997 | $5,460 | | Professional fees | $673 | $757 | $1,550 | $1,290 | | General and administrative expenses | $1,995 | $1,957 | $3,715 | $4,038 | | General and administrative expenses reimbursed to affiliate | $1,024 | $1,277 | $2,027 | $2,409 | | Expenses from real estate owned | $4,628 | $2,226 | $9,123 | $4,262 | | Total expenses | $10,750 | $8,909 | $21,412 | $17,459 | Related Party Expenses Related party expenses decreased due to lower weighted average stockholders' equity and changes in employee allocation - Management fees decreased due to a reduction in weighted average stockholders' equity[178][179] - Allocable general and administrative expenses reimbursed to the Manager decreased due to changes in the mix of employees allocating time to the company[178][179] - No incentive fees were incurred for the three and six months ended June 30, 2025, and 2024[178][179] Other Expenses Professional fees varied with transaction activity, while G&A expenses decreased due to lower stock-based compensation - Professional fees decreased by $0.1 million for the three months ended June 30, 2025, but increased by $0.3 million for the six months ended June 30, 2025, due to changes in transaction activity[180][181] - General and administrative expenses decreased by $0.3 million for the six months ended June 30, 2025, primarily due to a reduction in weighted average grant date fair value for stock-based compensation[181] Expenses From Real Estate Owned Expenses from real estate owned increased significantly due to the acquisition of an office property in September 2024 - The increase in office property operating expenses and depreciation/amortization is mainly due to the acquisition of a multi-building office property in September 2024[183][184] Expenses From Real Estate Owned Breakdown | Metric | Three Months Ended June 30, 2025 (in thousands) | Three Months Ended June 30, 2024 (in thousands) | Six Months Ended June 30, 2025 (in thousands) | Six Months Ended June 30, 2024 (in thousands) | | :--- | :--- | :--- | :--- | :--- | | Mixed-use property operating expenses | $1,069 | $1,119 | $2,296 | $2,140 | | Office property operating expenses | $1,322 | $108 | $2,417 | $108 | | Depreciation and amortization expense | $2,237 | $999 | $4,410 | $2,014 | | Total expenses from real estate owned | $4,628 | $2,226 | $9,123 | $4,262 | (Provision for) Reversal of Current Expected Credit Losses, Net The company recorded a net reversal of CECL, driven by a realized loss, shorter loan terms, and repayments - Net reversal of current expected credit losses was $20.2 million for Q2 2025 and $25.5 million for H1 2025[185][186] - The reversal was primarily due to a realized loss on an office (life sciences) loan, shorter average remaining loan term, and loan repayments[185][186] - These factors were partially offset by a relative decline in near-term macroeconomic forecasts, including higher tariffs, inflation, and interest rates[185][186] Realized Losses on Loans A realized loss of $33.0 million was recognized from a discounted payoff of a senior mortgage loan - A realized loss of $33.0 million was recognized for the three and six months ended June 30, 2025, from a discounted payoff of a $51.5 million senior mortgage loan on an office (life sciences) property[192] - In 2024, the company recognized realized losses of $1.7 million from a multifamily loan payoff, $43.1 million from an office loan payoff, and $16.4 million from an office property foreclosure[189][190][191] Change in Unrealized Losses on Loans Held for Sale A previously recognized unrealized loss of $1.0 million was realized upon the sale of the loan in H1 2024 - An unrealized loss of $1.0 million on a senior mortgage loan reclassified as held for sale in 2023 was realized during the six months ended June 30, 2024, upon its sale[193] Liquidity and Capital Resources The company expects sufficient liquidity for operations, with total liquidity at $129 million as of July 31, 2025 - Primary sources of cash include unused borrowing capacity under Secured Funding Agreements, principal and interest payments on assets, cash from operating activities, and future equity offerings[195] - As of July 31, 2025, the company had approximately $129 million in liquidity, comprising $45 million in cash and $84 million in availability under Secured Funding Agreements[200] - Financing agreements contain margin call provisions and various covenants that, if breached, could lead to default and accelerated repayment[196] Cash Flows Cash, cash equivalents, and restricted cash increased by $27.8 million in H1 2025, a significant improvement from 2024 Cash Flow Summary | Metric | Six Months Ended June 30, 2025 (in thousands) | Six Months Ended June 30, 2024 (in thousands) | | :--- | :--- | :--- | | Net cash provided by (used in) operating activities | $12,890 | $20,045 | | Net cash provided by (used in) investing activities | $324,998 | $133,721 | | Net cash provided by (used in) financing activities | $(310,047) | $(193,576) | | Change in cash, cash equivalents and restricted cash | $27,841 | $(39,810) | Operating Activities Net cash from operating activities decreased to $12.9 million, influenced by a net reversal of CECL and realized losses - Net cash provided by operating activities was $12.9 million for the six months ended June 30, 2025, compared to $20.0 million in 2024[202] - Adjustments to net income included a $25.5 million net reversal of current expected credit losses and $33.0 million in realized losses on loans for H1 2025[202] Investing Activities Net cash from investing activities increased to $325.0 million, driven by higher principal collections on loans - Net cash provided by investing activities totaled $325.0 million for the six months ended June 30, 2025, up from $133.7 million in 2024[203] - This increase was primarily due to cash received from principal collections and cost-recovery proceeds on loans held for investment exceeding cash used for origination and funding[203] Financing Activities Net cash used in financing activities increased to $310.0 million due to substantial debt repayments - Net cash used in financing activities was $310.0 million for the six months ended June 30, 2025, compared to $193.6 million in 2024[204] - Key outflows included repayments of debt of consolidated VIEs ($318.4 million), Secured Funding Agreements ($61.4 million), and Secured Term Loan ($20.0 million)[204] - Proceeds from Secured Funding Agreements partially offset these outflows, totaling $114.8 million[204] Summary of Financing Agreements The company's financing agreements total $751.8 million outstanding, with several facilities recently amended - The Wells Fargo Facility was amended to extend its maturity to February 10, 2028, with two 12-month extension options[205] - The Morgan Stanley Facility's commitment was reduced to $150.0 million, and its maturity extended to July 16, 2026, with one 12-month extension option[205] Financing Agreements Summary (June 30, 2025) | Financing Agreement | Total Commitment (June 30, 2025, in thousands) | Outstanding Balance (June 30, 2025, in thousands) | Maturity Date (June 30, 2025) | | :--- | :--- | :--- | :--- | | Wells Fargo Facility | $450,000 | $197,822 | February 10, 2028 | | Citibank Facility | $325,000 | $294,495 | January 13, 2027 | | CNB Facility | $75,000 | $0 | March 10, 2026 | | Morgan Stanley Facility | $150,000 | $149,525 | July 16, 2026 | | Secured Term Loan | $110,000 | $110,000 | November 12, 2026 | | Total | $1,110,000 | $751,842 | | Securitizations The FL4 CLO Securitization had an outstanding principal of $137.6 million, while the FL3 CLO was terminated - As of June 30, 2025, the FL4 CLO Securitization had a carrying amount and outstanding principal of $137.6 million[207] - The FL3 CLO Securitization was terminated on March 17, 2025[136] Leverage Policies The company intends to use prudent leverage, not exceeding a 4.5-to-1 debt-to-equity ratio, to enhance returns - The company intends to use leverage, not exceeding a 4.5-to-1 debt-to-equity ratio, to increase potential returns to stockholders[208] - Leverage deployment considers liquidity, asset volatility, potential losses, duration gap, financing costs, creditworthiness of counterparties, and macroeconomic environment[208] Dividends As a REIT, the company anticipates distributing at least 90% of its taxable income annually to maintain its status - As a REIT, the company anticipates annually distributing at least 90% of its REIT taxable income to stockholders[209] - Failure to meet distribution requirements could result in corporate income tax or a 4% non-deductible excise tax[209] - If cash available for distribution is less than REIT taxable income, the company may need to sell assets, borrow funds, or make taxable stock distributions[210] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section details the company's exposure to and management of various market risks, including credit and interest rate risk Credit Risk The company faces credit risk on its CRE loans, which is exacerbated by current macroeconomic conditions - The company is subject to credit risk on its CRE loans held for investment and available-for-sale debt securities[212] - Credit risk is managed through due diligence, non-recourse financing, and ongoing review of the loan portfolio by the Manager[212] - Current macroeconomic conditions, leading to borrower defaults and inability to qualify for loan extensions, increase credit risk[213] Interest Rate Risk The company is exposed to interest rate risk from its floating-rate assets and liabilities, managed through matching and hedging - The company is subject to interest rate risk due to its floating-rate mortgage assets and related financing obligations[214] - Interest rate risk is managed by matching interest indices of assets and liabilities and using hedging transactions, such as interest rate floors[214][215] - Significant increases in interest rates could strain borrower operating cash flows, potentially leading to non-performance or default[216] Interest Rate Effect on Net Income Net income is sensitive to SOFR changes, with a 100 basis point increase projected to raise net income by $2.6 million Interest Rate Sensitivity Analysis | Change in 30-Day SOFR | Increase/(Decrease) in Net Income (in millions) | | :--- | :--- | | Up 100 basis points | $2.6 | | Up 50 basis points | $1.3 | | Down 50 basis points | $(1.3) | | Down 100 basis points | $(2.6) | | SOFR at 0 basis points | $(4.6) | Interest Rate Floor Risk In a decreasing rate environment, asset yields may decline while borrowing costs remain fixed at higher floors, reducing net income - In a period of decreasing interest rates, yields on floating-rate mortgage assets could decrease, while borrowing costs on certain liabilities might be fixed at higher floors[218] - A decrease in interest rates or tightening credit spreads increases the likelihood of investments being refinanced at lower rates[218] - These factors could lower net interest income or cause a net loss during periods of decreasing interest rates[218] Market Risk Investment fair values fluctuate with changes in index rates, credit spreads, and market volatility - Estimated fair values of investments fluctuate due to changes in index rates, credit spreads, and other factors[219] - Rising interest rates or widening credit spreads generally decrease the fair value of fixed-rate and floating-rate investments, respectively[219] - Increased market volatility or decreased liquidity can adversely impact the fair value of investments and liabilities[219] Prepayment and Securitizations Repayment Risk Prepayment rates on CRE loans can affect net income, while CLO repayments are applied sequentially to senior notes - Faster-than-expected prepayments on CRE loans may prevent replacement with new loans generating comparable yields[220] - Decreased prepayment rates or loan extensions can extend loan lives beyond financing agreement terms, potentially requiring additional cash collateral or asset sales[220] - In CLO securitizations, principal repayments are applied sequentially to senior notes, meaning the company receives no proceeds until all senior notes are fully repaid[220] Financing Risk The company relies on financing agreements with covenants and margin call provisions that pose default risk - Secured Funding Agreements contain margin call provisions and covenants; failure to meet these could result in default, accelerated debt, or termination of commitments[222] - Covenants include maintaining tangible net worth, asset coverage ratio, total net leverage ratio, and loan concentration limits[222] - Weakness or volatility in financial markets could adversely affect lenders' willingness or ability to provide financing or increase its cost[223] Real Estate Risk Real estate investment values are subject to volatility from economic conditions and industry-specific challenges - Real estate investments are subject to volatility from national, regional, and local economic conditions, local real estate conditions, and industry slowdowns[225] - Increased demand for remote work and elevated operating costs have impacted office properties and pressured cash flow performance[225] - Decreases in property values reduce collateral value and potential loan repayment proceeds, which could cause losses[225] Inflation Risk The company's assets and liabilities are more sensitive to interest rates than inflation, but high inflation can lower returns - The company's assets and liabilities are sensitive to interest rates, which influence performance more than inflation[226] - Adverse changes in inflation or inflation expectations can lead to lower returns on investments, a risk exacerbated by current inflation levels[226] Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were effective, with no material changes in internal controls - The company's disclosure controls and procedures were evaluated as effective as of June 30, 2025[227] - No material changes in internal control over financial reporting occurred during the quarter ended June 30, 2025[228] Part II. Other Information Item 1. Legal Proceedings The company is not aware of any legal claims that could materially impact its business as of June 30, 2025 - The company and its affiliates are subject to legal proceedings and regulatory investigations, incurring significant costs[229] - As of June 30, 2025, no legal claims are known that could materially impact the business, financial condition, or results of operations[97] Item 1A. Risk Factors Investors should consider the risk factors detailed in the company's 2024 Annual Report on Form 10-K - Investors should carefully consider risk factors discussed in Part I, Item 1A of the 2024 Annual Report on Form 10-K[230] - Additional unknown or currently immaterial risks may also materially and adversely affect the company's business, financial condition, and operating results[230] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds No shares were repurchased during the quarter, with $50.0 million remaining available under the repurchase program - No shares were purchased by the issuer or affiliated purchasers during the quarter ended June 30, 2025[234] - As of June 30, 2025, $50.0 million remained available for future common stock repurchases under the program, which was extended to July 31, 2026[234] Item 3. Defaults Upon Senior Securities There were no defaults upon senior securities during the reporting period - No defaults upon senior securities occurred[232] Item 4. Mine Safety Disclosures This item is not applicable to the company - Mine Safety Disclosures are not applicable[233] Item 5. Other Information No directors or executive officers adopted or terminated any Rule 10b5-1 trading plans during the quarter - No directors or executive officers adopted or terminated Rule 10b5-1 trading plans or non-Rule 10b5-1 trading arrangements during the quarter ended June 30, 2025[234] Item 6. Exhibits This section lists all exhibits filed with the Form 10-Q, including organizational documents and certifications - Exhibits include Articles of Amendment and Restatement, Second Amended and Restated Bylaws, and the Sixth Amendment to Master Repurchase and Securities Contract with Morgan Stanley Bank, N.A.[235] - Certifications from the Chief Executive Officer and Chief Financial Officer (pursuant to Sections 302 and 906 of Sarbanes-Oxley Act) are filed herewith[235] - XBRL Instance Document and Taxonomy Extension Documents are included for interactive data filing[235] Signatures The report is duly signed by the Chief Executive Officer and Chief Financial Officer on August 5, 2025 - The report was signed on August 5, 2025, by Bryan P. Donohoe, Chief Executive Officer and Director, and Jeffrey M. Gonzales, Chief Financial Officer and Treasurer[241]