Ares mercial Real Estate (ACRE) - 2020 Q4 - Annual Report

Financial Position and Debt - As of December 31, 2020, the outstanding balance under the Financing Agreements was $928.7 million[35] - The company had $110.0 million outstanding under its Credit and Guaranty Agreement as of December 31, 2020[35] - The outstanding balance of the CLO Securitization was $445.6 million as of December 31, 2020[36] - The company expects to maintain a debt-to-equity ratio not exceeding 4-to-1 for its leverage strategy[32] - As of December 31, 2020, the company had approximately $928.7 million of outstanding borrowings under Financing Agreements and $445.6 million under CLO Securitization[82] Market Conditions and Economic Impact - The company anticipates continued strong demand for shorter duration and floating rate loans due to favorable market conditions[30] - The COVID-19 pandemic has caused significant disruptions in the global economy, adversely impacting business operations and financial transactions[50] - The company is subject to risks related to COVID-19 and other economic conditions that could adversely affect its operations[46] - Market conditions may hinder the company's ability to refinance existing debt or access new debt, potentially at higher costs and less favorable terms[57] - The company may face increased funding costs and limited access to capital markets due to unfavorable economic conditions, which could hinder business growth[101] Investment Strategy and Risks - The company relies on Ares Management for investment advisory services, which has over 1,450 employees across more than 10 countries[26] - The company competes with various financial entities, including public and private REITs, banks, and institutional investors, which may limit its ability to acquire assets on attractive terms[39] - The company has formed several wholly-owned subsidiaries to manage specific loans and investments, including ACRC W TRS and FL3 TRS[38] - The company may need to restructure loan investments due to borrowers' inability to meet payment obligations, increasing the likelihood of incurring losses[52] - The company may experience significant volatility in equity and debt markets, affecting the potential for liquidity events involving loan investments[58] Regulatory and Compliance Issues - The company has elected to be taxed as a REIT, which requires it to distribute all REIT taxable income to stockholders to avoid federal income taxes[37] - Changes in laws and regulations could require adjustments to business practices, negatively impacting operations and financial condition[64] - The adoption of Basel III standards may increase capital requirements and constrain financing access for the company[71] - 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[86] - The company has submitted a claim for relief from registration requirements under CFTC rules, allowing it to use swaps as long as annual income from commodity interest trading is less than 5% of gross annual income[119] Credit and Investment Risks - The company may incur significant expenses if it needs to renegotiate credit agreements that utilize LIBOR beyond 2021[78] - Changes in interest rates and credit spreads could significantly affect the company's financing costs and net interest margin[89] - The company may face increased risk of loss due to significant debt, which could reduce cash available for distributions to stockholders[81] - The company may experience losses if its Manager overestimates yields or incorrectly prices risks associated with investments, particularly in transitional loans[145] - Investments in non-investment grade rated commercial real estate loans or securities carry a higher risk of default and loss, which could significantly impact distributions to stockholders[150] Liquidity and Cash Flow - The company is focused on preserving liquidity to meet cash requirements, with potential strategies including financing, public or private offerings, asset sales, and changes in dividend practices[53] - The company must maintain its REIT status by distributing at least 90% of its taxable income, limiting available funds for new investments[101] - The company's distributions for the years ended December 31, 2020 and 2019 exceeded its cash flow from operating activities, while for the year ended December 31, 2018, distributions did not exceed cash flow from operations[194] - The company has not established a minimum distribution payment level, and its ability to pay distributions may be adversely affected by various factors[191] - The company may incur significant losses if the underlying mortgage portfolio has been overvalued or if values decline, impacting collateral value for interest and principal payments[166] Operational Risks - The pandemic has led to increased operational risks, including cybersecurity threats due to extended remote working policies[60] - The company is highly dependent on information systems, and any failures could adversely affect its operating results and stock price[79] - The management and resolution of commercial real estate (CRE) properties may increase costs and detract from management's focus on other responsibilities[137] - The company faces significant liquidity risks as principal repayments from mortgage loans in commercial mortgage-backed securities and collateralized loan obligations will not be received until all senior notes are repaid in full[140] - The company may struggle to efficiently integrate newly acquired assets into its existing portfolio, which could adversely affect its financial condition[141] Stockholder and Equity Considerations - The company may issue additional restricted common stock and other equity-based awards under its Amended and Restated 2012 Equity Incentive Plan, and has established an "At the Market Stock Offering Program" to sell up to $100.0 million of shares of common stock[189] - Future offerings of securities may dilute the interests of existing stockholders and adversely affect the market price of the company's common stock[196] - The board of directors has significant discretion over major policies, including financing and distributions, with limited control from stockholders[202] - The rights of stockholders to recover claims against directors and officers are limited, potentially reducing recovery in cases of negligence[218] - The company's charter limits liability for directors and officers unless there is evidence of active and deliberate dishonesty[219]