Ares Commercial Real Estate Corp [ACRE] Filings

10-Q 1 acre-20240630.htm 10-Q acre-20240630

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

___________________________________________________________________

FORM 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2024

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _____ to _____

Commission File No. 001-35517

ARES COMMERCIAL REAL ESTATE CORPORATION

(Exact name of Registrant as specified in its charter)


Maryland						45-3148087
(State or other jurisdiction of						(I.R.S. Employer
incorporation or organization)						Identification Number)

245 Park Avenue, 42nd Floor, New York, NY 10167

(Address of principal executive offices) (Zip Code)

(212) 750-7300

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common stock, $0.01 par value per share	ACRE	New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes ý No o

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ý No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer

☐

Accelerated filer

☒

Non-accelerated filer

☐

Smaller reporting company

☐

Emerging growth company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.


Class						Outstanding at August 2, 2024
Common stock, $0.01 par value						54,518,727

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TABLE OF CONTENTS


						Page
Part I. Financial Information
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets as of June 30, 2024 (unaudited) and December 31, 2023						5
Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2024 and 2023 (unaudited)						6
Consolidated Statements of Comprehensive Income (Loss) for the Three and Six Months Ended June 30, 2024 and 2023 (unaudited)						7
Consolidated Statements of Stockholders’ Equity for the Three and Six Months Ended June 30, 2024 (unaudited) and the Year Ended December 31, 2023						8
Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2024 and 2023 (unaudited)						9
Notes to Consolidated Financial Statements (unaudited)						10
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations						41
Item 3. Quantitative and Qualitative Disclosures About Market Risk						53
Item 4. Controls and Procedures						56
Part II. Other Information
Item 1. Legal Proceedings						56
Item 1A. Risk Factors						57
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds						57
Item 3. Defaults Upon Senior Securities						57
Item 4. Mine Safety Disclosures						57
Item 5. Other Information						57
Item 6. Exhibits						59
Signatures						61

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FORWARD-LOOKING STATEMENTS

Some of the statements contained in this quarterly report constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and we intend such statements to be covered by the safe harbor provisions contained therein. The information contained in this section should be read in conjunction with our consolidated financial statements and notes thereto appearing elsewhere in this quarterly report on Form 10-Q. In addition, some of the statements in this quarterly report (including in the following discussion) constitute forward-looking statements, which relate to future events or the future performance or financial condition of Ares Commercial Real Estate Corporation (“ACRE” and, together with its consolidated subsidiaries, the “Company,” “we,” “us” and “our”). The forward-looking statements contained in this report involve a number of risks and uncertainties, including:

•global economic trends and economic conditions, including high inflation, slower growth or recession, changes to fiscal and monetary policy, higher interest rates and currency fluctuations, as well as geopolitical instability, including conflicts between Russia and Ukraine and between Israel and Hamas;

•changes in interest rates, credit spreads and the market value of our investments;

•our business and investment strategy;

•our projected operating results;

•the return or impact of current and future investments;

•management’s current estimate of expected credit losses and current expected credit loss reserve;

•the collectability and timing of cash flows, if any, from our investments;

•estimates relating to our ability to make distributions to our stockholders in the future;

•defaults by borrowers in paying amounts due on outstanding indebtedness and our ability to collect all amounts due according to the contractual terms of our investments;

•our ability to obtain, maintain, repay or refinance financing arrangements, including securitizations;

•market conditions and our ability to access alternative debt markets and additional debt and equity capital;

•the amount of commercial mortgage loans requiring refinancing;

•the demand for commercial real estate loans;

•our expected investment capacity and available capital;

•financing and advance rates for our target investments;

•our expected leverage;

•rates of default or decreased recovery rates on our target investments;

•rates of prepayments on our mortgage loans and the effect on our business of such prepayments;

•the degree to which our hedging strategies may or may not protect us from interest rate volatility;

•availability of investment opportunities in mortgage-related and real estate-related investments and securities;

•the ability of Ares Commercial Real Estate Management LLC (“ACREM” or our “Manager”) to locate suitable investments for us, monitor, service and administer our investments and execute our investment strategy;

•allocation of investment opportunities to us by our Manager;

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•our ability to successfully identify, complete and integrate any acquisitions;

•our ability to maintain our qualification as a real estate investment trust (“REIT”) for United States federal income tax purposes;

•our ability to maintain our exemption from registration under the Investment Company Act of 1940 (the “1940 Act”);

•our understanding of our competition;

•health pandemics or epidemics like COVID-19;

•general volatility of the securities markets in which we may invest;

•adverse changes in the real estate, real estate capital and credit markets and the impact of a protracted decline in the liquidity of credit markets on our business;

•changes in governmental regulations, tax law and rates, and similar matters (including interpretation thereof);

•authoritative or policy changes from standard-setting bodies such as the Financial Accounting Standards Board, the Securities and Exchange Commission (the “SEC”), the Internal Revenue Service, the stock exchange where we list our common stock, and other authorities that we are subject to, as well as their counterparts in any foreign jurisdictions where we might do business;

•actions and initiatives of the United States government or governments outside of the United States, and changes to United States government policies; and

•market trends in our industry, real estate values or the debt securities markets.

We use words such as “anticipates,” “believes,” “expects,” “intends,” “project,” “estimates,” “will,” “should,” “could,” “would,” “may” and similar expressions to identify forward-looking statements, although not all forward-looking statements include these words. Our actual results and financial condition could differ materially from those implied or expressed in the forward-looking statements for any reason, including the risks, uncertainties and other factors set forth in Part I, Item 1A, “Risk Factors” in our annual report on Form 10-K for the fiscal year ended December 31, 2023 (“2023 Annual Report”) and the other information included in our 2023 Annual Report and elsewhere in our subsequent quarterly reports on Form 10-Q.

We have based the forward-looking statements included in this quarterly report on information available to us on the date of this quarterly report, and we assume no obligation to update any such forward-looking statements. Although we undertake no obligation to revise or update any forward-looking statements, whether as a result of new information, future events or otherwise, you are advised to consult any additional disclosures that we may make directly to you or through reports that we have filed or in the future may file with the SEC, including annual reports on Form 10-K, registration statements on Form S-3, quarterly reports on Form 10-Q and current reports on Form 8-K.

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PART I - FINANCIAL INFORMATION

Item 1: Consolidated Financial Statements

ARES COMMERCIAL REAL ESTATE CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share data)




	As of
	June 30, 2024		December 31, 2023
	(unaudited)
ASSETS
Cash and cash equivalents	$	70,649	$	110,459

Loans held for investment ($741,218 and $892,166 related to consolidated VIEs, respectively)	1,972,551		2,126,524
Current expected credit loss reserve	(137,403)		(159,885)
Loans held for investment, net of current expected credit loss reserve	1,835,148		1,966,639

Loans held for sale ($38,981 related to consolidated VIEs as of December 31, 2023)	20,534		38,981
Investment in available-for-sale debt securities, at fair value	28,113		28,060
Real estate owned held for investment, net	81,728		83,284
Real estate owned held for sale ($14,509 related to consolidated VIEs as of June 30, 2024)	14,509		—
Other assets ($2,484 and $3,690 of interest receivable related to consolidated VIEs, respectively; $32,002 of other receivables related to consolidated VIEs as of December 31, 2023)	19,074		52,354
Total assets	$	2,069,755	$	2,279,777
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Secured funding agreements	$	625,936	$	639,817
Notes payable	104,751		104,662
Secured term loan	137,409		149,393
Collateralized loan obligation securitization debt (consolidated VIEs)	588,421		723,117

Due to affiliate	4,526		4,135
Dividends payable	13,812		18,220
Other liabilities ($1,779 and $2,263 of interest payable related to consolidated VIEs, respectively)	12,637		14,584
Total liabilities	1,487,492		1,653,928
Commitments and contingencies (Note 8)
STOCKHOLDERS' EQUITY
Common stock, par value $0.01 per share, 450,000,000 shares authorized at June 30, 2024 and December 31, 2023 and 54,518,727 and 54,149,225 shares issued and outstanding at June 30, 2024 and December 31, 2023, respectively	532		532
Additional paid-in capital	814,620		812,184
Accumulated other comprehensive income	193		153
Accumulated earnings (deficit)	(233,082)		(187,020)
Total stockholders' equity	582,263		625,849
Total liabilities and stockholders' equity	$	2,069,755	$	2,279,777

See accompanying notes to consolidated financial statements.

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ARES COMMERCIAL REAL ESTATE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except share and per share data)

(unaudited)


	For the Three Months Ended June 30,				For the Six Months Ended June 30,
	2024		2023		2024		2023
Revenue:
Interest income	$	40,847	$	51,941	$	84,880	$	101,441
Interest expense	(27,483)		(26,951)		(56,302)		(49,950)
Net interest margin	13,364		24,990		28,578		51,491
Revenue from real estate owned	3,433		—		6,910		—
Total revenue	16,797		24,990		35,488		51,491
Expenses:
Management and incentive fees to affiliate	2,692		3,334		5,460		6,344
Professional fees	757		626		1,290		1,397
General and administrative expenses	1,957		2,038		4,038		3,723
General and administrative expenses reimbursed to affiliate	1,277		1,109		2,409		1,842
Expenses from real estate owned	2,226		—		4,262		—
Total expenses	8,909		7,107		17,459		13,306
Provision for current expected credit losses	(2,374)		20,127		(24,643)		41,146
Realized losses on loans	16,387		—		62,113		5,613
Change in unrealized losses on loans held for sale	—		—		(995)		—

Income (loss) before income taxes	(6,125)		(2,244)		(18,446)		(8,574)
Income tax expense (benefit), including excise tax	—		(46)		2		64
Net income (loss) attributable to common stockholders	$	(6,125)	$	(2,198)	$	(18,448)	$	(8,638)
Earnings (loss) per common share:
Basic earnings (loss) per common share	$	(0.11)	$	(0.04)	$	(0.34)	$	(0.16)
Diluted earnings (loss) per common share	$	(0.11)	$	(0.04)	$	(0.34)	$	(0.16)
Weighted average number of common shares outstanding:
Basic weighted average shares of common stock outstanding	54,426,112		54,347,204		54,411,255		54,468,752
Diluted weighted average shares of common stock outstanding	54,426,112		54,347,204		54,411,255		54,468,752
Dividends declared per share of common stock	$	0.25	$	0.35	$	0.50	$	0.70

See accompanying notes to consolidated financial statements.

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ARES COMMERCIAL REAL ESTATE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(in thousands)

(unaudited)


	For the Three Months Ended June 30,				For the Six Months Ended June 30,
	2024		2023		2024		2023
Net income (loss) attributable to common stockholders	$	(6,125)	$	(2,198)	$	(18,448)	$	(8,638)
Other comprehensive income (loss):
Realized and unrealized gains (losses) on derivative financial instruments	—		(2,099)		—		(6,576)
Unrealized gains (losses) on available-for-sale debt securities	(41)		(43)		40		22
Comprehensive income (loss)	$	(6,166)	$	(4,340)	$	(18,408)	$	(15,192)

See accompanying notes to consolidated financial statements.

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ARES COMMERCIAL REAL ESTATE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands, except share and per share data)

(unaudited)


	Common Stock			Additional Paid-in Capital		Accumulated Other Comprehensive Income (Loss)		Accumulated Earnings (Deficit)		Total Stockholders’ Equity
	Shares	Amount















Balance at December 31, 2022	54,443,983	$	537	$	812,788	$	7,541	$	(73,326)	$	747,540

Stock‑based compensation	162,843	—		960		—		—		960
Other comprehensive loss	—	—		—		(4,412)		—		(4,412)
Net income (loss)	—	—		—		—		(6,439)		(6,439)
Dividends declared	—	—		—		—		(19,346)		(19,346)
Balance at March 31, 2023	54,606,826	$	537	$	813,748	$	3,129	$	(99,111)	$	718,303
Offering costs	—	—		4		—		—		4
Stock‑based compensation	65,412	—		1,004		—		—		1,004
Repurchase and retirement of common stock	(535,965)	(5)		(4,595)		—		—		(4,600)
Other comprehensive loss	—	—		—		(2,142)		—		(2,142)
Net income (loss)	—	—		—		—		(2,198)		(2,198)
Dividends declared	—	—		—		—		(19,180)		(19,180)
Balance at June 30, 2023	54,136,273	$	532	$	810,161	$	987	$	(120,489)	$	691,191


Stock‑based compensation	—	—		986		—		—		986

Other comprehensive loss	—	—		—		(321)		—		(321)
Net income (loss)	—	—		—		—		9,184		9,184
Dividends declared	—	—		—		—		(18,082)		(18,082)
Balance at September 30, 2023	54,136,273	$	532	$	811,147	$	666	$	(129,387)	$	682,958
Offering costs	—	—		(4)		—		—		(4)
Stock‑based compensation	12,952	—		1,041		—		—		1,041
Other comprehensive loss	—	—		—		(513)		—		(513)
Net income (loss)	—	—		—		—		(39,414)		(39,414)
Dividends declared	—	—		—		—		(18,219)		(18,219)
Balance at December 31, 2023	54,149,225	$	532	$	812,184	$	153	$	(187,020)	$	625,849

Stock‑based compensation	273,388	—		1,284		—		—		1,284

Other comprehensive income	—	—		—		81		—		81
Net income (loss)	—	—		—		—		(12,323)		(12,323)
Dividends declared	—	—		—		—		(13,802)		(13,802)
Balance at March 31, 2024	54,422,613	$	532	$	813,468	$	234	$	(213,145)	$	601,089

Stock‑based compensation	96,114	—		1,152		—		—		1,152

Other comprehensive loss	—	—		—		(41)		—		(41)
Net income (loss)	—	—		—		—		(6,125)		(6,125)
Dividends declared	—	—		—		—		(13,812)		(13,812)
Balance at June 30, 2024	54,518,727	$	532	$	814,620	$	193	$	(233,082)	$	582,263

See accompanying notes to consolidated financial statements.

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ARES COMMERCIAL REAL ESTATE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)


	For the Six Months Ended June 30,
	2024		2023
Operating activities:
Net income (loss)	$	(18,448)	$	(8,638)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Amortization of deferred financing costs	2,379		1,901
Accretion of discounts, deferred loan origination fees and costs	(2,476)		(3,402)
Stock-based compensation	2,436		1,965
Depreciation and amortization of real estate owned	1,556		—
Provision for current expected credit losses	(24,643)		41,146
Realized losses on loans	62,113		5,613
Change in unrealized losses on loans held for sale	(995)		—
Amortization of derivative financial instruments	—		(723)

Changes in operating assets and liabilities:
Other assets	(1,448)		(15,707)
Due to affiliate	391		(774)
Other liabilities	(820)		1,775
Net cash provided by (used in) operating activities	20,045		23,156
Investing activities:
Issuance of and fundings on loans held for investment	(23,099)		(93,891)
Principal collections and cost-recovery proceeds on loans held for investment	117,180		145,335
Proceeds from sale of loans held for sale	38,981		37,200
Receipt of origination and other loan fees	659		658




Net cash provided by (used in) investing activities	133,721		89,302
Financing activities:
Proceeds from secured funding agreements	12,781		14,960
Repayments of secured funding agreements	(26,661)		(38,934)


Repayments of secured term loan	(10,000)		—




Payment of secured funding costs	(2,622)		(1,001)

Repayments of debt of consolidated VIEs	(135,055)		(42,865)
Dividends paid	(32,019)		(38,693)

Repurchase of common stock	—		(4,600)

Net cash provided by (used in) financing activities	(193,576)		(111,133)
Change in cash and cash equivalents	(39,810)		1,325
Cash and cash equivalents, beginning of period	110,459		141,278
Cash and cash equivalents, end of period	$	70,649	$	142,603



Supplemental disclosure of noncash investing and financing activities:
Dividends declared, but not yet paid	$	13,812	$	19,180
Other receivables related to consolidated VIEs	$	—	$	87,950
Assumption of real estate owned	$	14,509	$	—
Assumption of other assets related to real estate owned	$	993	$	—
Assumption of other liabilities related to real estate owned	$	1,060	$	—
Transfer of senior mortgage loan to real estate owned	$	30,828	$	—

See accompanying notes to consolidated financial statements.

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ARES COMMERCIAL REAL ESTATE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of June 30, 2024

(in thousands, except share and per share data, percentages and as otherwise indicated)

(unaudited)

1. ORGANIZATION

Ares Commercial Real Estate Corporation (together with its consolidated subsidiaries, the “Company” or “ACRE”) is a specialty finance company primarily engaged in originating and investing in commercial real estate loans and related investments. Through Ares Commercial Real Estate Management LLC (“ACREM” or the Company’s “Manager”), a Securities and Exchange Commission (“SEC”) registered investment adviser and a subsidiary of Ares Management Corporation (NYSE: ARES) (“Ares Management” or “Ares”), a publicly traded, leading global alternative investment manager, it has investment professionals strategically located across the United States and Europe who directly source new loan opportunities for the Company with owners, operators and sponsors of commercial real estate (“CRE”) properties. The Company was formed and commenced operations in late 2011. The Company is a Maryland corporation and completed its initial public offering (the “IPO”) in May 2012. The Company is externally managed by its Manager, pursuant to the terms of a management agreement (the “Management Agreement”).

The Company operates as one operating segment and is primarily focused on directly originating and managing a diversified portfolio of CRE debt-related investments for the Company’s own account. The Company’s target investments include senior mortgage loans, subordinated debt, preferred equity, mezzanine loans and other CRE investments, including commercial mortgage-backed securities. These investments are generally held for investment and are secured, directly or indirectly, by office, multifamily, retail, industrial, lodging, self storage, student housing, residential and other commercial real estate properties, or by ownership interests therein.

The Company has elected and qualified to be taxed as a real estate investment trust (“REIT”) for United States federal income tax purposes under the Internal Revenue Code of 1986, as amended (the “Code”), commencing with its taxable year ended December 31, 2012. 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 prior to the deduction for dividends paid to stockholders and complies with various other requirements as a REIT.

2. SIGNIFICANT ACCOUNTING POLICIES

The accompanying unaudited consolidated interim financial statements should be read in conjunction with the audited consolidated financial statements and the related management's discussion and analysis of financial condition and results of operations included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2023 filed with the SEC.

Refer to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2023 for a description of the Company’s recurring accounting policies. The Company has included disclosure below regarding basis of presentation and other accounting policies that (i) are required to be disclosed quarterly or (ii) the Company views as critical as of the date of this report.

Basis of Presentation

The accompanying unaudited consolidated interim financial statements have been prepared on the accrual basis of accounting in conformity with United States generally accepted accounting principles (“GAAP”) and include the accounts of the Company, the consolidated variable interest entities (“VIEs”) that the Company controls and of which the Company is the primary beneficiary, and the Company’s wholly-owned subsidiaries. The unaudited consolidated interim financial statements reflect all adjustments and reclassifications that, in the opinion of management, are necessary for the fair presentation of the Company’s results of operations and financial condition as of and for the periods presented. All intercompany balances and transactions have been eliminated.

The unaudited consolidated interim financial statements are prepared in accordance with GAAP and pursuant to the requirements for reporting on Form 10-Q and Article 10 of Regulation S-X. The current period’s results of operations will not necessarily be indicative of results for any other interim period or that ultimately may be achieved for the year ending December 31, 2024.

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Use of Estimates in the Preparation of Financial Statements

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Global macroeconomic conditions, including high inflation, changes to fiscal and monetary policy, high interest rates, potential market-wide liquidity problems, currency fluctuations, labor shortages and challenges in the supply chain, have the potential to negatively impact the Company and its borrowers. These current macroeconomic conditions may continue or aggravate and could cause the United States economy or other global economies to experience an economic slowdown or recession. We anticipate our business and operations could be materially adversely affected by a prolonged recession in the United States or other major global economy.

The Company believes the estimates and assumptions underlying its consolidated financial statements are reasonable and supportable based on the information available as of June 30, 2024, however, uncertainty over the global economy and the Company’s business, makes any estimates and assumptions as of June 30, 2024 inherently less certain than they would be absent the current and potential impacts of current macroeconomic conditions. Actual results could differ from those estimates.

Variable Interest Entities

The Company evaluates all of its interests in VIEs for consolidation. When the Company’s interests are determined to be variable interests, the Company assesses whether it is deemed to be the primary beneficiary of the VIE. The primary beneficiary of a VIE is required to consolidate the VIE. Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 810, Consolidation, defines the primary beneficiary as the party that has both (i) the power to direct the activities of the VIE that most significantly impact its economic performance, and (ii) the obligation to absorb losses and the right to receive benefits from the VIE which could be potentially significant. The Company considers its variable interests, as well as any variable interests of its related parties in making this determination. Where both of these factors are present, the Company is deemed to be the primary beneficiary and it consolidates the VIE. Where either one of these factors is not present, the Company is not the primary beneficiary and it does not consolidate the VIE.

To assess whether the Company has the power to direct the activities of a VIE that most significantly impact the VIE’s economic performance, the Company considers all facts and circumstances, including its role in establishing the VIE and its ongoing rights and responsibilities. This assessment includes first, identifying the activities that most significantly impact the VIE’s economic performance; and second, identifying which party, if any, has power over those activities. In general, the parties that make the most significant decisions affecting the VIE or have the right to unilaterally remove those decision makers are deemed to have the power to direct the activities of a VIE.

To assess whether the Company has the obligation to absorb losses of the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE, the Company considers all of its economic interests, including debt and equity investments, servicing fees, and other arrangements deemed to be variable interests in the VIE. This assessment requires that the Company applies judgment in determining whether these interests, in the aggregate, are considered potentially significant to the VIE. Factors considered in assessing significance include: the design of the VIE, including its capitalization structure; subordination of interests; payment priority; relative share of interests held across various classes within the VIE’s capital structure; and the reasons why the interests are held by the Company.

For VIEs of which the Company is determined to be the primary beneficiary, all of the underlying assets, liabilities, equity, revenue and expenses of the structures are consolidated into the Company’s consolidated financial statements.

The Company performs an ongoing reassessment of: (1) whether any entities previously evaluated under the majority voting interest framework have become VIEs, based on certain events, and therefore are subject to the VIE consolidation framework, and (2) whether changes in the facts and circumstances regarding its involvement with a VIE cause the Company’s consolidation conclusion regarding the VIE to change. See Note 15 included in these consolidated financial statements for further discussion of the Company’s VIEs.

Cash and Cash Equivalents

Cash and cash equivalents include funds on deposit with financial institutions, including demand deposits with financial institutions. Cash and short‑term investments with an original maturity of three months or less when acquired are considered cash and cash equivalents for the purpose of the consolidated balance sheets and statements of cash flows.

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Loans Held for Investment

The Company originates CRE debt and related instruments generally to be held for investment. Loans that are held for investment are carried at cost, net of unamortized purchase discounts, deferred loan fees and origination costs and cost-recovery proceeds (the “carrying value”). Loans are generally collateralized by real estate. The extent of any credit deterioration associated with the performance and/or value of the underlying collateral property and the financial and operating capability of the borrower could impact the expected amounts received. The Company monitors performance of its loans held for investment portfolio under the following methodology: (1) borrower review, which analyzes the borrower’s ability to execute on its original business plan, reviews its financial condition, assesses pending litigation and considers its general level of responsiveness and cooperation; (2) economic review, which considers underlying collateral (i.e. leasing performance, unit sales and cash flow of the collateral and its ability to cover debt service, as well as the residual loan balance at maturity); (3) property review, which considers current environmental risks, changes in insurance costs or coverage, current site visibility, capital expenditures and market perception; and (4) market review, which analyzes the collateral from a supply and demand perspective of similar property types, as well as from a capital markets perspective. Such analyses are completed and reviewed by asset management and finance personnel who utilize various data sources, including periodic financial data such as property occupancy, tenant profile, rental rates, operating expenses, and the borrower’s exit plan, among other factors.

Loans are generally placed on non-accrual status when principal or interest payments are past due 30 days or more or when there is reasonable doubt that principal or interest will be collected in full. Accrued and unpaid interest is generally reversed against interest income in the period the loan is placed on non-accrual status. Interest payments received on non-accrual loans may be recognized as income or applied to reduce loan carrying value depending upon management’s judgment regarding the borrower’s ability to make pending principal and interest payments. Non-accrual loans are restored to accrual status when past due principal and interest are paid and, in management’s judgment, are likely to remain current. The Company may make exceptions to placing a loan on non-accrual status if the loan has sufficient collateral value and is in the process of collection.

Loan balances that are deemed to be uncollectible are written off as a realized loss and are deducted from the current expected credit loss reserve. The write-offs are recorded in the period in which the loan balance is deemed uncollectible based on management’s judgment.

Current Expected Credit Losses

FASB ASC Topic 326, Financial Instruments—Credit Losses (“ASC 326”), requires the Company to reflect current expected credit losses (“CECL”) on both the outstanding balances and unfunded commitments on loans held for investment and requires consideration of a broad range of historical experience adjusted for current conditions and reasonable and supportable forecast information to inform credit loss estimates (the “CECL Reserve” or “CECL Reserves”). Increases and decreases to expected credit losses impact earnings and are recorded within provision for current expected credit losses in the Company’s consolidated statements of operations. The CECL Reserve related to outstanding balances on loans held for investment required under ASC 326 is a valuation account that is deducted from the amortized cost basis of the Company’s loans held for investment in the Company’s consolidated balance sheets. The CECL Reserve related to unfunded commitments on loans held for investment is recorded within other liabilities in the Company’s consolidated balance sheets. See Note 4 included in these consolidated financial statements for CECL related disclosures.

Loans Held for Sale

Although the Company generally holds its target investments as long-term investments, the Company occasionally classifies some of its investments as held for sale if there is an intent to sell the investment prior to maturity or payoff. Investments held for sale are carried at the lower of carrying value or fair value within loans held for sale in the Company’s consolidated balance sheets, with changes in fair value recorded through earnings.

Real Estate Owned Held for Investment

Real estate assets held for investment are carried at their estimated fair value at acquisition and are presented net of accumulated depreciation or amortization and impairment charges. The Company allocates the purchase price of acquired real estate assets held for investment based on the fair value of the acquired land, buildings and improvements, furniture, fixtures and equipment, intangible assets and intangible liabilities, as applicable.

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Real estate assets held for investment are depreciated or amortized using the straight-line method over estimated useful lives of up to 40 years for buildings and improvements, up to 15 years for furniture, fixtures and equipment and over the lease terms for intangible assets and liabilities. Renovations and/or replacements that improve or extend the life of the real estate asset are capitalized and depreciated over their estimated useful lives. The cost of ordinary repairs and maintenance are expensed as incurred. Other than amortization related to intangible assets and liabilities for above-market or below-market leases, depreciation or amortization expense related to real estate assets held for investment is included within expenses from real estate owned in the Company’s consolidated statements of operations. Amortization for above-market or below-market leases is recognized as an adjustment to rental revenue and is included within revenue from real estate owned in the Company’s consolidated statements of operations.

Real estate assets held for investment are evaluated for indicators of impairment on a quarterly basis. Factors that the Company may consider in its impairment analysis include, among others: (1) significant underperformance relative to historical or anticipated operating results; (2) significant negative industry or economic trends; (3) costs necessary to extend the life or improve the real estate asset; (4) significant increase in competition; and (5) ability to hold and dispose of the real estate asset in the ordinary course of business. A real estate asset is considered impaired when the sum of estimated future undiscounted cash flows expected to be generated by the real estate asset over the estimated remaining holding period is less than the carrying amount of such real estate asset. Cash flows include operating cash flows and anticipated capital proceeds generated by the real estate asset. An impairment charge is recorded equal to the excess of the carrying value of the real estate asset over the fair value. When determining the fair value of a real estate asset, the Company makes certain assumptions including, but not limited to, consideration of projected operating cash flows, comparable selling prices and projected cash flows from the eventual disposition of the real estate asset based upon the Company’s estimate of a capitalization rate and discount rate.

Real Estate Owned Held for Sale

The Company reviews its real estate assets, from time to time, in order to determine whether to sell such assets. Real estate assets are classified as held for sale when, in accordance with FASB ASC Topic 360, Property, Plant and Equipment, the Company commits to a plan to sell the asset, when the asset is being actively marketed for sale at a reasonable price and the sale of the asset is probable and the transfer of the asset is expected to qualify for recognition as a completed sale within one year. Real estate assets that are held for sale are carried at the lower of the asset’s carrying amount or its fair value less costs to sell.

Available-for-Sale Debt Securities

The Company acquires debt securities that are collateralized by mortgages on CRE properties primarily for short-term cash management and investment purposes. On the acquisition date, the Company designates investments in CRE debt securities as available-for-sale. Investments in CRE debt securities that are classified as available-for-sale are carried at fair value. Unrealized holding gains and losses for available-for-sale debt securities are recorded each period in other comprehensive income (“OCI”). The Company uses a specific identification method when determining the cost of a debt security sold and the amount of unrealized gain or loss reclassified from accumulated other comprehensive income (loss) into earnings.

Available-for-sale debt securities that are in an unrealized loss position are evaluated on a quarterly basis to determine whether declines in the fair value below the amortized cost basis qualify as other than temporary impairment (“OTTI”). The OTTI assessment is performed at the individual security level. In assessing whether the entire amortized cost basis of each security will be recovered, the Company will compare the present value of cash flows expected to be collected from the security with the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis of the security, the entire amortized cost basis of the security will not be recovered and an OTTI shall be considered to have occurred.

Available-for-sale debt securities are generally placed on non-accrual status when principal or interest payments are past due 30 days or more or when there is reasonable doubt that principal or interest will be collected in full. Accrued and unpaid interest is generally reversed against interest income in the period the debt security is placed on non-accrual status. Interest payments received on non-accrual securities may be recognized as income or applied to reduce amortized cost basis depending upon management’s judgment regarding collectability of the debt security. Non-accrual debt securities are restored to accrual status when past due principal and interest are paid and, in management’s judgment, are likely to remain current.

Debt Issuance Costs

Debt issuance costs under the Company’s indebtedness are capitalized and amortized over the term of the respective debt instrument. Unamortized debt issuance costs are expensed when the associated debt is repaid prior to maturity. Debt

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issuance costs related to debt securitizations are capitalized and amortized over the term of the underlying loans using the effective interest method. When an underlying loan is prepaid in a debt securitization and the outstanding principal balance of the securitization debt is reduced, the related unamortized debt issuance costs are charged to expense based on a pro‑rata share of the debt issuance costs being allocated to the specific loans that were prepaid. Amortization of debt issuance costs is included within interest expense, except as noted below, in the Company’s consolidated statements of operations while the unamortized balance on the (i) Secured Funding Agreements (each individually defined in Note 6 included in these consolidated financial statements) is included within other assets and (ii) Notes Payable, the Secured Term Loan (each defined in Note 6 included in these consolidated financial statements) and debt securitizations are each included as a reduction to the carrying amount of the liability, in the Company’s consolidated balance sheets.

Derivative Financial Instruments

Derivative financial instruments are classified as either other assets (gain positions) or other liabilities (loss positions) in the Company’s consolidated balance sheets at fair value. These amounts may be offset to the extent that there is a legal right to offset and if elected by management.

On the date the Company enters into a derivative contract, the Company designates each contract as a hedge of a forecasted transaction or of the variability of cash flows to be received or paid related to a recognized asset or liability, or cash flow hedge, or as a derivative instrument not to be designated as a hedging derivative, or non-designated hedge. For all derivatives other than those designated as non-designated hedges, the Company formally documents the hedge relationships and designation at the contract’s inception. This documentation includes the identification of the hedging instruments and the hedged items, its risk management objectives, strategy for undertaking the hedge transaction and an evaluation of the effectiveness of its hedged transaction.

The Company performs a formal assessment on a quarterly basis on whether the derivative designated in each hedging relationship is expected to be, and has been, highly effective in offsetting changes in the value or cash flows of the hedged items. Changes in the fair value of derivative contracts are recorded each period in either current earnings or OCI, depending on whether the derivative is designated as part of a hedge transaction and, if so, the type of hedge transaction. For derivatives that are designated as cash flow hedges, the effective portion of the unrealized gains or losses on these contracts is recorded in OCI. If it is determined that a derivative is not highly effective at hedging the designated exposure, hedge accounting is discontinued and the changes in fair value of the instrument are included in current earnings prospectively. The Company does not enter into derivatives for trading or speculative purposes.

Revenue Recognition

Interest income is accrued based on the outstanding principal amount and the contractual terms of each loan or debt security. For loans held for investment, the origination fees, contractual exit fees and direct origination costs are also recognized in interest income over the initial loan term as a yield adjustment using the effective interest method. For available-for-sale debt securities, premiums or discounts are amortized or accreted into interest income as a yield adjustment using the effective interest method.

Revenue from real estate owned represents revenue associated with the operations of a mixed-use property and an office property, which are both classified as real estate owned and were acquired in September 2023 and June 2024, respectively.

Revenue from the operation of the mixed-use and office properties consists primarily of rental revenue from operating leases. For each operating lease with scheduled rent increases over the term of the lease, the Company recognizes rental revenue on a straight-line basis over the lease term when collectability of the lease payment is probable. Variable lease payments are recognized as rental revenue in the period when the changes in facts and circumstances on which the variable lease payments are based occur. Certain of the Company’s mixed-use and office property leases also contain provisions for tenants to reimburse the Company for property operating expenses. Such reimbursements are included in rental revenue on a gross basis. Rental revenue also includes amortization of intangible assets and liabilities related to above- and below-market leases.

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Net Interest Margin and Interest Expense

Net interest margin in the Company’s consolidated statements of operations serves to measure the performance of the Company’s loans and debt securities as compared to its use of debt leverage. The Company includes interest income from its loans and debt securities and interest expense related to its Secured Funding Agreements, Notes Payable, securitization debt and the Secured Term Loan (each individually defined in Note 6 included in these consolidated financial statements) in net interest margin. For the three and six months ended June 30, 2024 and 2023, interest expense is comprised of the following ($ in thousands):


	For the Three Months Ended June 30,				For the Six Months Ended June 30,
	2024		2023		2024		2023
Secured funding agreements	$	12,743	$	13,081	$	25,620	$	25,392
Notes payable	1,997		1,904		3,996		3,663
Securitization debt	10,897		12,428		23,084		24,034
Secured term loan	1,846		1,754		3,602		3,488

Other (1)	—		(2,216)		—		(6,627)
Interest expense	$	27,483	$	26,951	$	56,302	$	49,950

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(1) Represents the net interest expense recognized from the Company’s derivative financial instruments upon periodic settlement.

Comprehensive Income (Loss)

Comprehensive income (loss) consists of net income (loss) and OCI that are excluded from net income (loss).

3. LOANS HELD FOR INVESTMENT

As of June 30, 2024, the Company’s portfolio included 42 loans held for investment, excluding 172 loans that were repaid, sold, converted to real estate owned or transferred to held for sale since inception. The aggregate originated commitment under these loans at closing was approximately $2.2 billion and outstanding principal was $2.0 billion as of June 30, 2024. During the six months ended June 30, 2024, the Company funded approximately $25.3 million of outstanding principal, received repayments of $79.3 million of outstanding principal, converted one loan with outstanding principal of $33.2 million to real estate owned and transferred one loan with outstanding principal of $20.6 million to held for sale. As of June 30, 2024, 69.1% of the Company’s loans have Secured Overnight Financing Rate (“SOFR”) floors, with a weighted average floor of 1.17%, calculated based on loans with SOFR floors. References to SOFR or “S” are to 30-day SOFR (unless otherwise specifically stated).

The Company’s investments in loans held for investment are accounted for at amortized cost. The following tables summarize the Company’s loans held for investment as of June 30, 2024 and December 31, 2023 ($ in thousands):


	As of June 30, 2024
	Carrying Amount (1)		Outstanding Principal (1)		Weighted Average Unleveraged Effective Yield						Weighted Average Remaining Life (Years)
Senior mortgage loans	$	1,949,312	$	1,979,070	7.7	%	(2)	9.3	%	(3)	1.0
Subordinated debt and preferred equity investments	23,239		28,365		—	%	(2)	—	%	(3)	2.0
Total loans held for investment portfolio	$	1,972,551	$	2,007,435	7.6	%	(2)	9.3	%	(3)	1.0

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	As of December 31, 2023
	Carrying Amount (1)		Outstanding Principal (1)		Weighted Average Unleveraged Effective Yield						Weighted Average Remaining Life (Years)
Senior mortgage loans	$	2,090,146	$	2,118,947	7.5	%	(2)	9.3	%	(3)	1.1
Subordinated debt and preferred equity investments	36,378		39,098		8.1	%	(2)	15.3	%	(3)	1.8
Total loans held for investment portfolio	$	2,126,524	$	2,158,045	7.5	%	(2)	9.4	%	(3)	1.1

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(2)Unleveraged Effective Yield is the compounded effective rate of return that would be earned over the life of the investment based on the contractual interest rate (adjusted for any deferred loan fees, costs, premiums or discounts) and assumes no dispositions, early prepayments or defaults. The total Weighted Average Unleveraged Effective Yield is calculated based on the average of Unleveraged Effective Yield of all loans held by the Company as of June 30, 2024 and December 31, 2023 as weighted by the total outstanding principal balance of each loan.

(3)Unleveraged Effective Yield is the compounded effective rate of return that would be earned over the life of the investment based on the contractual interest rate (adjusted for any deferred loan fees, costs, premiums or discounts) and assumes no dispositions, early prepayments or defaults. The total Weighted Average Unleveraged Effective Yield is calculated based on the average of Unleveraged Effective Yield of all interest accruing loans held by the Company as of June 30, 2024 and December 31, 2023 as weighted by the total outstanding principal balance of each interest accruing loan (excludes loans on non-accrual status as of June 30, 2024 and December 31, 2023).

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A more detailed listing of the Company’s loans held for investment portfolio based on information available as of June 30, 2024 is as follows ($ in millions):


Loan Type	Location	Outstanding Principal (1)	Carrying Amount (1)	Interest Rate		Unleveraged Effective Yield (2)		Maturity Date (3)		Payment Terms (4)
Senior Mortgage Loans:
Office	IL	$161.4	$154.0	(5)		7.6%	(5)	Mar 2025		I/O
Multifamily	NY	132.2	131.6	S+3.90%		9.7%		Jun 2025		I/O
Office	Diversified	108.9	108.7	S+3.75%		9.3%		Jan 2025		P/I	(6)
Residential/Condo	NY	101.7	90.2	S+8.95%		—%	(7)	Dec 2025	(7)	I/O
Industrial	IL	100.7	100.7	S+4.65%		11.6%		Nov 2024	(8)	I/O
Multifamily	TX	97.5	95.4	S+3.00%	(9)	—%	(9)	Jul 2025		I/O
Mixed-use	NY	77.2	77.2	S+3.75%		9.5%		Jul 2024		I/O
Residential/Condo	FL	75.0	75.0	S+5.35%		10.7%		Jul 2024		I/O
Office	AZ	73.2	73.1	S+3.61%		9.4%		Oct 2024		I/O
Office	NC	70.6	70.5	S+3.65%		9.0%		Aug 2028	(10)	I/O
Office	NC	68.6	64.9	S+4.35%		—%	(11)	May 2024	(11)	P/I	(6)
Multifamily	TX	68.4	68.3	S+2.95%		8.7%		Dec 2024		I/O
Multifamily/Office	SC	67.0	67.0	S+3.00%		8.6%		Nov 2024		I/O
Office	NY	59.0	59.0	S+2.65%		8.0%	(12)	Jul 2027	(12)	I/O
Multifamily	OH	57.0	56.6	S+3.05%		8.8%		Oct 2026		I/O
Office	IL	56.0	55.9	S+4.25%		10.1%		Jan 2025		I/O
Hotel	CA	55.0	54.8	S+4.20%		10.0%		Mar 2025		I/O
Hotel	NY	53.6	53.3	S+4.40%		10.1%		Mar 2026		I/O
Office	MA	51.4	51.0	S+3.75%		9.7%		Apr 2026	(13)	I/O
Office	GA	48.3	48.2	S+3.15%		8.8%		Dec 2024		P/I	(6)
Industrial	MA	47.4	47.2	S+2.90%		8.4%		Jun 2028		I/O
Mixed-use	TX	35.3	35.3	S+3.85%		9.5%		Sep 2024		I/O
Multifamily	CA	31.7	31.6	S+3.00%		8.6%		Dec 2025		I/O
Multifamily	PA	28.2	28.2	S+2.50%		7.8%		Dec 2025		I/O
Industrial	NJ	27.8	27.7	S+3.85%		11.3%		Aug 2024	(14)	I/O
Industrial	FL	25.5	25.4	S+3.00%		8.6%		Dec 2025		I/O
Multifamily	WA	23.1	23.0	S+3.00%		8.5%		Nov 2025		I/O
Multifamily	TX	23.1	23.1	S+2.60%		8.3%		Oct 2024		I/O
Office	CA	20.3	20.3	S+3.50%		9.1%		Nov 2025		P/I	(6)
Industrial	CA	19.6	18.2	S+3.85%		—%	(15)	Sep 2024		I/O
Student Housing	AL	19.5	19.4	S+3.95%		10.6%		Dec 2024	(16)	P/I	(6)
Self Storage	PA	18.2	18.1	S+3.00%		8.6%		Dec 2025		I/O
Self Storage	NJ	17.6	17.5	S+2.90%		9.0%		Apr 2025		I/O
Self Storage	WA	11.5	11.5	S+2.90%		9.0%		Mar 2025		I/O
Self Storage	IN	10.7	10.7	S+3.60%		9.1%		Jun 2026		I/O
Industrial	TX	10.0	10.0	S+5.35%		11.1%		Dec 2024		I/O
Self Storage	MA	7.7	7.7	S+3.00%		8.5%		Nov 2024		I/O
Self Storage	MA	6.8	6.7	S+3.00%		8.5%		Oct 2024		I/O
Industrial	TN	6.4	6.4	S+5.60%		11.3%		Nov 2024		I/O
Self Storage	NJ	5.9	5.9	S+3.00%		8.8%		Jul 2025	(17)	I/O




Subordinated Debt and Preferred Equity Investments:

Office	NJ	18.5	15.7	12.00%		—%	(18)	Jan 2026		I/O
Office	NY	9.9	7.6	5.50%		—%	(12)	Jul 2027	(12)	I/O
Total/Weighted Average		$2,007.4	$1,972.6			7.6%

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(1)The difference between the Carrying Amount and the Outstanding Principal amount of the loans held for investment consists of unamortized purchase discounts, deferred loan fees and origination costs and cost-recovery proceeds. For the loans held for investment that represent co-investments with other investment vehicles managed by Ares Management (see Note 13 included in these consolidated financial statements for additional information on co-investments), only the portion of Carrying Amount and Outstanding Principal held by the Company is reflected.

(2)Unleveraged Effective Yield is the compounded effective rate of return that would be earned over the life of the investment based on the contractual interest rate (adjusted for any deferred loan fees, costs, premiums or discounts) and assumes no dispositions, early prepayments or defaults. Unleveraged Effective Yield for each loan is calculated based on SOFR as of June 30, 2024 or the SOFR floor, as applicable. The total Weighted Average Unleveraged

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Effective Yield is calculated based on the average of Unleveraged Effective Yield of all loans held by the Company as of June 30, 2024 as weighted by the outstanding principal balance of each loan.

(3)Reflects the initial loan maturity date excluding any contractual extension options. Certain loans are subject to contractual extension options that generally vary between one and two 12-month extensions and may be subject to performance based or other conditions as stipulated in the loan agreement. Actual maturities may differ from contractual maturities stated herein as certain borrowers may have the right to prepay with or without paying a prepayment penalty. The Company may also extend contractual maturities and amend other terms of the loans in connection with loan modifications.

(4)I/O = interest only, P/I = principal and interest.

(5)The Illinois loan is structured as both a senior and mezzanine loan with the Company holding both positions. The senior position has a per annum interest rate of S + 2.25% and the mezzanine position has a fixed per annum interest rate of 10.00%. The mezzanine position of this loan, which had an outstanding principal balance of $47.4 million as of June 30, 2024, was on non-accrual status as of June 30, 2024 and therefore, the Unleveraged Effective Yield presented is for the senior position only as the mezzanine position is non-interest accruing. As of June 30, 2024, the borrower is current on all contractual interest payments.

(6)In April 2022, amortization began on the senior North Carolina loan, which had an outstanding principal balance of $68.6 million as of June 30, 2024. In January 2023, amortization began on the senior Georgia loan, which had an outstanding principal balance of $48.3 million as of June 30, 2024. In February 2023, amortization began on the senior diversified loan, which had an outstanding principal balance of $108.9 million as of June 30, 2024. In December 2023, amortization began on the senior California loan, which had an outstanding principal balance of $20.3 million as of June 30, 2024. In June 2024, amortization began on the senior Alabama loan, which had an outstanding principal balance of $19.5 million as of June 30, 2024. The remainder of the loans in the Company’s portfolio are non-amortizing through their primary terms.

(7)The New York loan is structured as both a senior and mezzanine loan with the Company holding both positions. The senior and mezzanine positions each have a per annum interest rate of S + 8.95%. The senior and mezzanine loans were both on non-accrual status as of June 30, 2024 and the Unleveraged Effective Yield is not applicable. In March 2024, the Company and the borrower entered into a modification and extension agreement to, among other things, extend the maturity date on the New York loan from April 2024 to December 2025.

(8)In May 2024, the Company and the borrower entered into a modification and extension agreement to, among other things, extend the maturity date on the senior Illinois loan from May 2024 to November 2024.

(9)Loan was on non-accrual status as of June 30, 2024 and the Unleveraged Effective Yield is not applicable. In March 2024, the Company and the borrower entered into a modification agreement to, among other things, reduce the interest rate on the senior Texas loan from S+3.50% to S+3.00%. For both the three and six months ended June 30, 2024, the Company received $1.7 million of interest payments in cash on the senior Texas loan that was recognized as a reduction to the carrying value of the loan and the borrower is current on all contractual interest payments.

(10)In June 2024, the Company and the borrower entered into a modification and extension agreement to, among other things, extend the maturity date on the senior North Carolina loan from August 2024 to August 2028.

(11)Loan was on non-accrual status as of June 30, 2024 and the Unleveraged Effective Yield is not applicable. In March 2024, the Company and the borrower entered into a modification and extension agreement to, among other things, extend the maturity date on the senior North Carolina loan from March 2024 to May 2024. As of June 30, 2024, the senior North Carolina loan, which is collateralized by an office property, is in maturity default due to the failure of the borrower to repay the outstanding principal balance of the loan by the May 2024 maturity date. The Company is in the process of acquiring legal title to the property. Once legal title of the property is acquired, the Company will derecognize the senior North Carolina loan and recognize the office property as real estate owned. For the three and six months ended June 30, 2024, the Company received $572 thousand and $2.3 million, respectively, of interest payments in cash on the senior North Carolina loan that was recognized as a reduction to the carrying value of the loan.

(12)In March 2024, the Company and the borrower entered into a modification and extension agreement to, among other things, split the existing senior New York loan, which was on non-accrual status and had an outstanding principal balance of $73.8 million at the time of the modification, into a senior A-Note with an outstanding principal balance of $60.0 million and a subordinated B-Note with an outstanding principal balance of $13.8 million. In conjunction with the modification, the borrower repaid the outstanding principal of the senior A-Note down to $59.0 million and the subordinated B-Note down to $9.8 million. The subordinated B-Note is subordinate to new sponsor equity related to the loan paydown and additional capital contributions. In addition, the maturity date of the senior A-Note and the subordinated B-Note was extended from August 2025 to July 2027. The senior A-Note has a per annum interest rate of S + 2.65% and the subordinated B-Note has a fixed per annum interest rate of 5.50%. During the six months ended June 30, 2024, the senior A-Note, which had an outstanding principal balance of $59.0 million as of June 30, 2024, was restored to accrual status. As of June 30, 2024, the subordinated B-Note, which had an outstanding principal balance of $9.9 million, was on non-accrual status and therefore, the Unleveraged Effective Yield is not applicable. As of June 30, 2024, the borrower is current on all contractual interest payments for the senior A-Note and the subordinated B-Note.

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(13)In June 2024, the Company and the borrower entered into a modification and extension agreement to, among other things, extend the maturity date on the senior Massachusetts loan from April 2025 to April 2026.

(14)In May 2024, the Company and the borrower entered into a modification and extension agreement to, among other things, extend the maturity date on the senior New Jersey loan from May 2024 to August 2024.

(15)Loan was on non-accrual status as of June 30, 2024 and the Unleveraged Effective Yield is not applicable. For the three and six months ended June 30, 2024, the Company received $459 thousand and $913 thousand, respectively, of interest payments in cash on the senior California loan that was recognized as a reduction to the carrying value of the loan and the borrower is current on all contractual interest payments.

(16)In May 2024, the Company and the borrower entered into a modification and extension agreement to, among other things, extend the maturity date on the senior Alabama loan from May 2024 to December 2024.

(17)In May 2024, the borrower exercised a 12-month extension option in accordance with the loan agreement, which extended the maturity date on the senior New Jersey loan to July 2025.

(18)Loan was on non-accrual status as of June 30, 2024 and the Unleveraged Effective Yield is not applicable. The mezzanine New Jersey loan is currently in default due to the borrower not making its contractual interest payments due subsequent to the December 2023 interest payment date. For the three and six months ended June 30, 2024, the Company received $185 thousand and $222 thousand, respectively, of interest payments in cash on the mezzanine New Jersey loan that was recognized as a reduction to the carrying value of the loan.

The Company has made, and may continue to make, modifications to loans, including loans that are in default. Loan terms that may be modified include interest rates, required prepayments, asset release prices, maturity dates, covenants, principal amounts and other loan terms. The terms and conditions of each modification vary based on individual circumstances and will be determined on a case by case basis. The Company’s Manager monitors and evaluates each of the Company’s loans held for investment and is maintaining regular communications with borrowers and sponsors regarding the potential impacts of current macroeconomic conditions on the Company’s loans.

For the six months ended June 30, 2024, the activity in the Company’s loan portfolio was as follows ($ in thousands):









Balance at December 31, 2023	$	2,126,524
Initial funding	—
Origination and other loan fees and discounts, net of costs	(659)
Additional funding	25,313
Amortizing payments	(6,644)
Loan payoffs (1)	(123,265)

Loans transferred to held for sale (2)	(20,534)
Loans converted to real estate owned (see Note 5)	(30,647)
Origination and other loan fees and discount accretion	2,463
Balance at June 30, 2024	$	1,972,551

_________________________

(1) Amount includes the carrying value of certain loans where the carrying value exceeded the net proceeds received from the payoff of the loan. In February 2024, the Company received a discounted payoff on a senior mortgage loan with outstanding principal of $18.8 million, which was collateralized by a multifamily property located in Washington, in conjunction with a short sale of the multifamily property by the borrower to a third party. At the time of the discounted payoff, the senior mortgage loan was in default due to the failure of the borrower to repay the outstanding principal balance of the loan by the September 2023 maturity date. For the six months ended June 30, 2024, the Company recognized a realized loss of $1.7 million in the Company’s consolidated statements of operations as the carrying value of the senior mortgage loan exceeded the net proceeds from the payoff of the loan. In addition, in March 2024, the Company received a discounted payoff on a senior mortgage loan with outstanding principal of $56.9 million, which was collateralized by an office property located in Illinois, in conjunction with a short sale of the office property by the borrower to a third party. At the time of the discounted payoff, the senior mortgage loan was in default due to the failure of the borrower to repay the outstanding principal balance of the loan by the February 2024 maturity date. For the six months ended June 30, 2024, the Company recognized a realized loss of $43.1 million in the Company’s consolidated statements of operations as the carrying value of the senior mortgage loan exceeded the net proceeds from the payoff of the loan.

(2) As of June 30, 2024, the Company intended to sell a mezzanine loan on a multifamily property located in South Carolina with outstanding principal of $20.6 million to a third party and the loan was reclassified from held for investment to held for sale and is carried at the lower of carrying value or fair value in the Company’s consolidated balance sheets. As of June 30, 2024, the sale had not yet closed. The Company did not recognize any gain or loss upon

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reclassifying the loan to held for sale as the carrying value was equal to fair value as determined by the anticipated transaction price with the third party. The mezzanine loan was previously classified as held for investment and is being sold in order to rebalance and optimize the Company’s loan portfolio.

Except as described in the table above listing the Company’s loans held for investment portfolio, as of June 30, 2024, all loans held for investment were paying in accordance with their contractual terms. As of June 30, 2024, the Company had seven loans held for investment on non-accrual status with a carrying value of $331.9 million. As of December 31, 2023, the Company had nine loans held for investment on non-accrual status with a carrying value of $399.3 million.

4. CURRENT EXPECTED CREDIT LOSSES

The Company estimates its CECL Reserve primarily using a probability-weighted model that considers the likelihood of default and expected loss given default for each individual loan. Calculation of the CECL Reserve requires loan-specific data, which includes capital senior to the Company when the Company is the subordinate lender, changes in net operating income, debt service coverage ratio, loan-to-value, occupancy, property type and geographic location. Estimating the CECL Reserve also requires significant judgment with respect to various factors, including (i) the appropriate historical loan loss reference data, (ii) the expected timing of loan repayments, (iii) calibration of the likelihood of default to reflect the risk characteristics of the Company’s floating rate loan portfolio and (iv) the Company’s current and future view of the macroeconomic environment. The Company may consider loan-specific qualitative factors on certain loans to estimate its CECL Reserve. In order to estimate the future expected loan losses relevant to the Company’s portfolio, the Company utilizes historical market loan loss data licensed from a third party data service. The third party’s loan database includes historical loss data for commercial mortgage-backed securities, or CMBS, issued dating back to 1998, which the Company believes is a reasonably comparable and available data set to its type of loans. The Company utilized macroeconomic data that reflects weak economic growth in the near term given current macroeconomic conditions; however, the actual financial impact on the Company of the current environment is highly uncertain. For periods beyond the reasonable and supportable forecast period, the Company reverts back to historical loss data. Management’s current estimate of expected credit losses as of June 30, 2024 decreased compared to the current estimate of expected credit losses as of March 31, 2024 primarily due to a realized loss on a risk rated “5” loan and shorter average remaining loan term during the three months ended June 30, 2024. These factors were partially offset by an increase in the CECL Reserves for risk rated “4” and “5” loans in the portfolio as a result of the impact of the current macroeconomic environment, including high inflation and interest rates, volatility and reduced liquidity in the office sector and other loan-specific factors during the three months ended June 30, 2024. The CECL Reserve also takes into consideration the assumed impact of macroeconomic conditions on CRE properties and is not specific to any loan losses or impairments on the Company’s loans held for investment, unless the Company determines that a specifically identifiable reserve is warranted for a select asset.

In certain instances, the Company may identify specific loans to be collateral dependent. The Company considers loans to be collateral dependent if both of the following criteria are met: (i) loan is expected to be substantially repaid through the operation or sale of the underlying collateral, and (ii) the borrower is experiencing financial difficulty. The determination of whether these criteria are met for an individual loan requires the use of significant judgment and can be based on several factors subject to uncertainty.

For such loans that the Company determines that foreclosure of the collateral is probable, the Company estimates the CECL Reserve based on the difference between the fair value of the collateral (less costs to sell the asset if repayment is expected through the sale of the collateral) and the amortized cost basis of the loan as of the measurement date. For collateral dependent loans that the Company determines foreclosure is not probable, the Company applies a practical expedient to estimate the CECL Reserve using the difference between the collateral’s fair value (less costs to sell the asset if repayment is expected through the sale of the collateral) and the amortized cost basis of the loan. To determine the fair value of the collateral, the Company may employ different approaches depending on the type of collateral, including methods such as the income approach, the market approach or the direct capitalization approach. These methods require the use of key unobservable inputs, which are inherently uncertain and subjective. Determining the appropriate valuation method and selecting the appropriate key unobservable inputs and assumptions requires significant judgment and consideration of factors specific to the underlying collateral being assessed. Additionally, the key unobservable inputs and assumptions used may vary depending on the information available and market conditions as of the valuation date. As such, the fair value that is used in calculating the CECL Reserve is subject to uncertainty and any actual losses, if incurred, could differ materially from the CECL Reserve.

As of June 30, 2024, the Company’s CECL Reserve for its loans held for investment portfolio is $138.5 million or 661 basis points of the Company’s total loans held for investment commitment balance of $2.1 billion and is bifurcated between the CECL Reserve (contra-asset) related to outstanding balances on loans held for investment of $137.4 million and a liability for unfunded commitments of $1.1 million. The liability was based on the unfunded portion of the loan commitment over the full contractual period over which the Company is exposed to credit risk through a current obligation to extend credit. Management considered the likelihood that funding will occur, and if funded, the expected credit loss on the funded portion.

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As of June 30, 2024, the mezzanine loan on an office property located in New Jersey with a principal balance of $18.5 million, the senior mortgage loan on an industrial property located in California with a principal balance of $19.6 million, the senior mortgage loan on a multifamily property located in Texas with a principal balance of $97.5 million and the senior mortgage loan on an office property located in North Carolina with a principal balance of $68.6 million each had a risk rating of “5.” As of June 30, 2024, each of these loans were assessed individually and the Company elected to assign CECL Reserves of $15.7 million on the New Jersey office loan, $10.9 million on the California industrial loan, $6.5 million on the Texas multifamily loan and $5.6 million on the North Carolina office loan. The CECL Reserves for each of these loans were based on the Company’s estimate of proceeds available from the potential sale of the collateral property less the estimated costs to sell the property and such CECL Reserves are included in the Company’s total CECL Reserve.

Current Expected Credit Loss Reserve for Funded Loan Commitments

Activity related to the CECL Reserve for outstanding balances on the Company’s loans held for investment as of and for the three and six months ended June 30, 2024 was as follows ($ in thousands):



Balance at March 31, 2024 (1)	$	139,763

Provision for current expected credit losses	(2,360)
Write-offs	—
Recoveries	—
Balance at June 30, 2024 (1)	$	137,403

Balance at December 31, 2023 (1)	$	159,885

Provision for current expected credit losses	(22,482)
Write-offs	—
Recoveries	—
Balance at June 30, 2024 (1)	$	137,403

__________________________

(1) The CECL Reserve related to outstanding balances on loans held for investment is recorded within current expected credit loss reserve in the Company’s consolidated balance sheets.

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Current Expected Credit Loss Reserve for Unfunded Loan Commitments

Activity related to the CECL Reserve for unfunded commitments on the Company’s loans held for investment as of and for the three and six months ended June 30, 2024 was as follows ($ in thousands):



Balance at March 31, 2024 (1)	$	1,101
Provision for current expected credit losses	(14)

Write-offs	—
Recoveries	—
Balance at June 30, 2024 (1)	$	1,087

Balance at December 31, 2023 (1)	$	3,248

Provision for current expected credit losses	(2,161)
Write-offs	—
Recoveries	—
Balance at June 30, 2024 (1)	$	1,087

__________________________

(1) The CECL Reserve related to unfunded commitments on loans held for investment is recorded within other liabilities in the Company’s consolidated balance sheets.

The Company continuously evaluates the credit quality of each loan by assessing the risk factors of each loan and assigning a risk rating based on a variety of factors. Risk factors include property type, geographic and local market dynamics, physical condition, leasing and tenant profile, projected cash flow, loan structure and exit plan, loan-to-value ratio, debt service coverage ratio, project sponsorship, and other factors deemed necessary. Based on a 5-point scale, the Company’s loans are rated “1” through “5,” from less risk to greater risk, which ratings are defined as follows:


Ratings						Definition