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Ares mercial Real Estate (ACRE) - 2023 Q2 - Quarterly Report

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