# Ares Commercial Real Estate Corp: Form 10-Q for the period ended Mar 31, 2021

- Company: [Ares Commercial Real Estate Corp](/companies/acre.md) (CIK 1529377)
- Form: 10-Q
- Filed: 2021-05-04
- Accepted by EDGAR: May 3, 2021, 21:41 ET
- Period: 2021-03-31
- Accession: 0001628280-21-008723
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1529377/000162828021008723/acre-20210331.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1529377/000162828021008723/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2021-03-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2021-01-01 to 2021-03-31 | $21.2m | us-gaap:Revenues |
| Income tax | 3 months, 2021-01-01 to 2021-03-31 | $185.0k | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2021-01-01 to 2021-03-31 | $15.7m | us-gaap:NetIncomeLoss |
| Diluted shares (weighted) | 3 months, 2021-01-01 to 2021-03-31 | 34,720,950 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 3 months, 2021-01-01 to 2021-03-31 | $9.9m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Dividends paid | 3 months, 2021-01-01 to 2021-03-31 | $11.1m | us-gaap:PaymentsOfDividendsCommonStock |
| Cash and equivalents | at 2021-03-31 | $97.9m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Total assets | at 2021-03-31 | $2.09bn | us-gaap:Assets |
| Total liabilities | at 2021-03-31 | $1.51bn | us-gaap:Liabilities |
| Shareholders' equity | at 2021-03-31 | $576.0m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 44,458 characters.

### Overview

We are a specialty finance company primarily engaged in originating and investing in commercial real estate (“CRE”) loans and related investments. We are externally managed by ACREM, a subsidiary of Ares Management Corporation (NYSE: ARES) (“Ares Management”), a publicly traded, leading global alternative asset manager, pursuant to the terms of the management agreement dated April 25, 2012, as amended, between us and our Manager (the “Management Agreement”). From the commencement of our operations in late 2011, we have been primarily focused on directly originating and managing a diversified portfolio of CRE debt-related investments for our own account.

We were formed and commenced operations in late 2011. We are a Maryland corporation and completed our initial public offering in May 2012. We have elected and qualified to be taxed as a REIT for United States federal income tax purposes under the Internal Revenue Code of 1986, as amended, commencing with our taxable year ended December 31, 2012. We generally will not be subject to United States federal income taxes on our REIT taxable income as long as we annually distribute to stockholders an amount at least equal to our REIT taxable income prior to the deduction for dividends paid and comply with various other requirements as a REIT. We also operate our business in a manner that is intended to permit us to maintain our exemption from registration under the 1940 Act.

### Developments During the First Quarter of 2021:

- ACRE originated a $45.0 million senior mortgage loan and a $13.9 million mezzanine loan on a mixed-use property located in California.
- ACRE purchased a $105.5 million senior mortgage loan on an office property located in Illinois from the $200 million real estate debt warehouse investment vehicle maintained by an affiliate of the Company’s Manager (the “Ares Warehouse Vehicle”).
- ACRE purchased a $5.6 million senior mortgage loan on a self storage property located in Illinois from the Ares Warehouse Vehicle.
- ACRE purchased a $6.4 million senior mortgage loan on a self storage property located in Florida from the Ares Warehouse Vehicle.
- ACRE purchased a $4.4 million senior mortgage loan on a self storage property located in Florida from the Ares Warehouse Vehicle.
- ACRE purchased a $7.0 million senior mortgage loan on a self storage property located in Florida from the Ares Warehouse Vehicle.
- ACRE purchased a $10.8 million senior mortgage loan on a self storage property located in Florida from the Ares Warehouse Vehicle.
- ACRE purchased a $6.5 million senior mortgage loan on a self storage property located in Missouri from the Ares Warehouse Vehicle.
- ACRE Commercial Mortgage 2021-FL4 Ltd. (the “FL4 Issuer”) and ACRE Commercial Mortgage 2021-FL4 LLC, both wholly owned indirect subsidiaries of ACRE, issued approximately $603.0 million principal balance secured floating rate notes and $64.3 million of preferred equity in the FL4 Issuer. ACRE retained (through one of its wholly owned subsidiaries) approximately $62.5 million of the subordinated notes and all of the preferred equity of the FL4 Issuer (the “FL4 CLO Securitization”).
- ACRE entered into an interest rate swap (the “Swap”) with Morgan Stanley Capital Services, LLC (“Morgan Stanley Capital”) for the initial notional amount of $870.0 million, which amortizes according to an agreed upon notional schedule. The Swap requires ACRE to pay a fixed interest rate of 0.2075% and for Morgan Stanley Capital to pay a floating rate equal to one-month LIBOR, subject to a 0.00% floor. The Swap has a termination date of December 15, 2023.
- ACRE entered into an interest rate cap (the “Cap”) with Morgan Stanley Capital for the initial notional amount of $275.0 million, which amortizes according to an agreed upon notional schedule. The Cap is tied to one-month LIBOR with a strike rate of 0.50%. The Cap has a termination date of December 15, 2023.
- ACRE entered into an underwriting agreement (the “Underwriting Agreement”) in which ACRE agreed to sell an aggregate of 7,000,000 shares of ACRE’s common stock, par value $0.01 per share. The public offering generated net proceeds of approximately $100.7 million, after deducting transaction expenses.

### Factors Impacting Our Operating Results

The results of our operations are affected by a number of factors and primarily depend on, among other things, the level of our net interest income, the market value of our assets and the supply of, and demand for, commercial mortgage loans,

CRE debt and other financial assets in the marketplace. Our net interest income, which reflects the amortization of origination fees and direct costs, is recognized based on the contractual rate and the outstanding principal balance of the loans we originate. Interest rates will vary according to the type of investment, conditions in the financial markets, creditworthiness of our borrowers, competition and other factors, none of which can be predicted with any certainty. Our operating results may also be impacted by credit losses in excess of initial anticipations or unanticipated credit events experienced by borrowers.

### Loans Held for Investment Portfolio

As of March 31, 2021, our portfolio included 53 loans held for investment, excluding 101 loans that were repaid, sold or converted to real estate owned since inception. As of March 31, 2021, the aggregate originated commitment under these loans at closing was approximately $2.1 billion and outstanding principal was $1.9 billion. During the three months ended March 31, 2021, we funded approximately $223.4 million of outstanding principal and received repayments of $130.7 million of outstanding principal. As of March 31, 2021, 97.0% of our loans have LIBOR floors, with a weighted average floor of 1.56%, calculated based on loans with LIBOR floors. References to LIBOR or “L” are to 30-day LIBOR (unless otherwise specifically stated).

As of March 31, 2021, all loans held for investment were paying in accordance with their contractual terms.

Our loans held for investment are accounted for at amortized cost. The following table summarizes our loans held for investment as of March 31, 2021 ($ in thousands):

|  | As of March 31, 2021 Carrying Amount (1) | Outstanding Principal (1) | Weighted Average Unleveraged Effective Yield |  |  |  | Weighted Average Remaining Life (Years) |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Senior mortgage loans | $1,842,782 | $1,853,141 | 5.7% | (2) | 5.9% | (3) | 1.3 |
| Subordinated debt and preferred equity investments | 65,219 | 65,866 | 15.1% | (2) | 15.1% | (3) | 1.5 |
| Total loans held for investment portfolio | $1,908,001 | $1,919,007 | 6.0% | (2) | 6.2% | (3) | 1.3 |

(1) The difference between the Carrying Amount and the Outstanding Principal amount of the loans held for investment consists of unamortized purchase discount, deferred loan fees and loan origination costs.

(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 us as of March 31, 2021 as weighted by the 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 us as of March 31, 2021 as weighted by the total outstanding principal balance of each interest accruing loan (excludes loans on non-accrual status as of March 31, 2021).

### Critical Accounting Policies

Our consolidated financial statements have been prepared in accordance with generally accepted accounting principles (“GAAP”), which require management to make estimates and assumptions that affect reported amounts. The estimates and assumptions are based on historical experience and other factors management believes to be reasonable. Actual results may differ from those estimates and assumptions. There have been no significant changes to our critical accounting policies as disclosed in our Annual Report on Form 10-K. See Note 2 to our consolidated financial statements included in this quarterly report on Form 10-Q, which describes factors which may impact management’s estimates and assumptions and the recently issued accounting pronouncements that were adopted or not yet required to be adopted by us.

### RECENT DEVELOPMENTS

On April 13, 2021, ACRE Commercial Mortgage 2017-FL3 Ltd. (the “FL3 Issuer”) and ACRE Commercial Mortgage 2017-FL3 LLC (the “FL3 Co-Issuer”) entered into a First Supplement to Amended and Restated Indenture (the “2021 Amended Indenture”) with Wells Fargo Bank, National Association, as advancing agent and note administrator, and Wilmington Trust, National Association, as trustee, which governs the FL3 collateralized loan obligation securitization debt (“FL3 CLO Securitization”). The purpose of the 2021 Amended Indenture was to, among other things, extend the reinvestment period to March 31, 2024, extend the date on and after which the FL3 Issuer may redeem the Notes held by third parties to March 17, 2025 (the “Redemption Date”), and eliminate the prepayment fee due on the Redemption Date.

On April 22, 2021, we originated and fully funded a $19.5 million senior mortgage loan on a student housing property located in Alabama. The loan has a per annum interest rate of LIBOR plus 3.85%.

On April 29, 2021, we purchased a $53.3 million senior mortgage loan on a residential condominium property located in New York from a third party. At the purchase date, the outstanding principal balance was approximately $33.8 million. The loan has a per annum interest rate of LIBOR plus 6.00%. We already own the corresponding $18.3 million mezzanine loan in our loans held for investment.

On April 29, 2021, we purchased a fully funded $15.0 million mezzanine loan on a portfolio of self storage properties located in New Jersey from a third party. The loan has a per annum interest rate of LIBOR plus 6.75%.

Our Board of Directors declared a regular cash dividend of $0.33 per common share and a supplemental cash dividend of $0.02 per common share for the second quarter of 2021. The second quarter 2021 and supplemental cash dividends will be payable on July 15, 2021 to common stockholders of record as of June 30, 2021.

### RESULTS OF OPERATIONS

The following table sets forth a summary of our consolidated results of operations for the three months ended March 31, 2021 and 2020 ($ in thousands):

|  | For the three months ended March 31, 2021 | 2020 |
| --- | ---: | ---: |
| Total revenue | $21,223 | $21,134 |
| Total expenses | 8,538 | 11,271 |
| Provision for current expected credit losses | (3,240) | 27,117 |
| **Income (loss) before income taxes** | 15,925 | (17,254) |
| Income tax expense, including excise tax | 185 | 9 |
| **Net income (loss) attributable to common stockholders** | $15,740 | $(17,263) |

The following tables set forth select details of our consolidated results of operations for the three months ended March 31, 2021 and 2020 ($ in thousands):

### Net Interest Margin

|  | For the three months ended March 31, 2021 | 2020 |
| --- | ---: | ---: |
| Interest income | $30,704 | $31,448 |
| Interest expense | (12,139) | (15,534) |
| **Net interest margin** | $18,565 | $15,914 |

For the three months ended March 31, 2021 and 2020, net interest margin was approximately $18.6 million and $15.9 million, respectively. For the three months ended March 31, 2021 and 2020, interest income of $30.7 million and $31.4 million, respectively, was both generated by weighted average earning assets of $1.9 billion, offset by $12.1 million and $15.5 million, respectively, of interest expense, unused fees and amortization of deferred loan costs. The weighted average borrowings under the Wells Fargo Facility, the Citibank Facility, the CNB Facility, the MetLife Facility and the Morgan Stanley Facility

(individually defined below and collectively, the “Secured Funding Agreements”), Notes Payable (as defined below and excluding the Note Payable on the hotel property that is recognized as real estate owned in our consolidated balance sheets), the Secured Term Loan, Secured Borrowings and securitization debt (as defined below) were $1.5 billion for both the three months ended March 31, 2021 and 2020 (which included two facilities which were subsequently paid in full). The increase in net interest margin for the three months ended March 31, 2021 compared to the three months ended March 31, 2020 primarily relates to the benefit received from the impact of LIBOR floors on our loans held for investment due to a decrease in 30-day LIBOR for the three months ended March 31, 2021. As of March 31, 2021, 97.0% of our loans held for investment as measured by outstanding principal balance have LIBOR floors, with a weighted average floor of 1.56%, calculated based on loans with LIBOR floors, while 13.8% of our borrowings have LIBOR floors, with a weighted average floor of 1.18%. In addition, in January 2021, we issued $540.5 million of securitization debt, a portion of the proceeds of which were used to pay down debt with a higher cost of funds than the issued securitization debt.

### Revenue From Real Estate Owned

On March 8, 2019, we acquired legal title to a hotel property through a deed in lieu of foreclosure. Prior to March 8, 2019, the hotel property collateralized a $38.6 million senior mortgage loan that we held that was in maturity default due to the failure of the borrower to repay the outstanding principal balance of the loan by the December 2018 maturity date. In conjunction with the deed in lieu of foreclosure, we derecognized the $38.6 million senior mortgage loan and recognized the hotel property as real estate owned. For the three months ended March 31, 2021 and 2020, revenue from real estate owned was $2.7 million and $5.2 million, respectively. Revenues consist of room sales, food and beverage sales and other hotel revenues. The decrease in revenue from real estate owned for the three months ended March 31, 2021 compared to the three months ended March 31, 2020 is primarily due to the ongoing impact of the COVID-19 pandemic, which significantly reduced occupancy and overall revenue at the hotel property for the three months ended March 31, 2021.

### Operating Expenses

|  | For the three months ended March 31, 2021 | 2020 |
| --- | ---: | ---: |
| Management and incentive fees to affiliate | $2,567 | $1,773 |
| Professional fees | 785 | 903 |
| General and administrative expenses | 1,157 | 868 |
| General and administrative expenses reimbursed to affiliate | 752 | 1,051 |
| Expenses from real estate owned | 3,277 | 6,676 |
| **Total expenses** | $8,538 | $11,271 |

See the Related Party Expenses, Other Expenses and Expenses from Real Estate Owned discussions below for the cause of the decrease in operating expenses for the three months ended March 31, 2021 compared to the three months ended March 31, 2020.

### Related Party Expenses

For the three months ended March 31, 2021, related party expenses included $2.6 million in management and incentive fees due to our Manager pursuant to the Management Agreement, which consisted of $1.9 million in management fees and $0.7 million in incentive fees. For the three months ended March 31, 2021, related party expenses also included $0.8 million for our share of allocable general and administrative expenses for which we were required to reimburse our Manager pursuant to the Management Agreement. For the three months ended March 31, 2020, related party expenses included $1.8 million in management fees due to our Manager pursuant to the Management Agreement. No incentive fees were incurred for the three months ended March 31, 2020. For the three months ended March 31, 2020, related party expenses also included $1.1 million for our share of allocable general and administrative expenses for which we were required to reimburse our Manager pursuant to the Management Agreement. The increase in management fees for the three months ended March 31, 2021 compared to the three months ended March 31, 2020 primarily relates to an increase in our weighted average stockholders’ equity for the three months ended March 31, 2021 as a result of the public offering of 7,000,000 shares of our common stock in March 2021, which generated net proceeds of approximately $100.7 million. The increase in incentive fees for the three months ended March 31, 2021 compared to the three months ended March 31, 2020 primarily relates to our Core Earnings (as defined below) for the twelve months ended March 31, 2021 exceeding the 8% minimum return by a higher margin than the twelve months ended March 31, 2020. “Core Earnings” is defined in the Management Agreement as GAAP net income (loss) computed in accordance with GAAP, excluding non-cash equity compensation expense, the incentive fee, depreciation and amortization (to the extent that any of our target investments are structured as debt and we foreclose on any properties underlying such debt), any unrealized gains, losses or other non-cash items recorded in net income (loss) for the period, regardless of whether such items are included in other comprehensive income or loss, or in net income (loss), and one-time events pursuant to changes in GAAP and certain non-cash charges after discussions between our Manager and our independent directors and after approval by a majority of our independent directors. The decrease in allocable general and administrative expenses due to our Manager for the three months ended March 31, 2021 compared to the three months ended March 31, 2020 primarily relates to a decrease in the percentage of time allocated to us by employees of our Manager due to changes in transaction activity year over year.

### Other Expenses

For the three months ended March 31, 2021 and 2020, professional fees were $0.8 million and $0.9 million, respectively. The decrease in professional fees for the three months ended March 31, 2021 compared to the three months ended March 31, 2020 primarily relates to a decrease in our use of third-party professionals due to changes in transaction activity year over year. For the three months ended March 31, 2021 and 2020, general and administrative expenses were $1.2 million and $0.9 million, respectively. The increase in general and administrative expenses for the three months ended March 31, 2021 compared to the three months ended March 31, 2020 primarily relates to a decrease in stock-based compensation expense for the three months ended March 31, 2020 due to the reversal of previously recognized expense related to restricted stock forfeitures.

### Expenses From Real Estate Owned

For the three months ended March 31, 2021 and 2020, expenses from real estate owned was comprised of the following ($ in thousands):

|  | For the three months ended March 31, 2021 | 2020 |
| --- | ---: | ---: |
| Hotel operating expenses | $2,643 | $6,043 |
| Interest expense on note payable | 410 | 412 |
| Depreciation expense | 224 | 221 |
| **Expenses from real estate owned** | $3,277 | $6,676 |

For the three months ended March 31, 2021 and 2020, hotel operating expenses were $2.6 million and $6.0 million, respectively. Hotel operating expenses consist primarily of expenses incurred in the day-to-day operation of our hotel property, including room expense, food and beverage expense and other operating expenses. Room expense includes housekeeping and front office wages and payroll taxes, reservation systems, room supplies, laundry services and other costs. Food and beverage expense primarily includes the cost of food, the cost of beverages and associated labor costs. Other operating expenses include labor and other costs associated with administrative departments, sales and marketing, repairs and maintenance, real estate taxes, insurance, utility costs and management and incentive fees paid to the hotel property manager. The decrease in hotel operating expenses for the three months ended March 31, 2021 compared to the three months ended March 31, 2020 is primarily due to the ongoing impact of the COVID-19 pandemic, which has significantly reduced occupancy and forced us to implement plans to reduce overall operating expenses at the hotel property for the three months ended March 31, 2021. For both the three months ended March 31, 2021 and 2020, interest expense on our note payable was $0.4 million. For both the three months ended March 31, 2021 and 2020, depreciation expense was $0.2 million.

### Provision for Current Expected Credit Losses

For the three months ended March 31, 2021 and 2020, the provision for current expected credit losses was $(3.2) million and $27.1 million, respectively. The decrease in the provision for current expected credit losses for the three months ended March 31, 2021 compared to the three months ended March 31, 2020 is primarily due to the ongoing recovery from the impact of the COVID-19 pandemic. The provision for current expected credit losses for the three months ended March 31, 2020 was impacted by the onset of the COVID-19 pandemic, which resulted in a global recession and a significant increase in our provision for current expected credit losses.

The current expected credit loss reserve (the “CECL Reserve”) takes into consideration the macroeconomic impact of the COVID-19 pandemic on CRE properties and is not specific to any loan losses or impairments on our loans held for investment. Additionally, the CECL Reserve is not an indicator of what we expect our CECL Reserve would have been absent the current and potential future impacts of the COVID-19 pandemic.

### LIQUIDITY AND CAPITAL RESOURCES

Liquidity is a measure of our ability to meet potential cash requirements, including ongoing commitments to repay borrowings, fund and maintain our assets and operations, make distributions to our stockholders and other general business needs. We use significant cash to purchase our target investments, make principal and interest payments on our borrowings, make distributions to our stockholders and fund our operations.

Our primary sources of cash generally consist of unused borrowing capacity under our Secured Funding Agreements, the net proceeds of future offerings, payments of principal and interest we receive on our portfolio of assets and cash generated from our operating activities. Principal repayments from mortgage loans in securitizations where we retain the subordinate securities are applied sequentially, first used to pay down the senior notes, and accordingly, we will not receive any proceeds from repayment of loans in the securitizations until all senior notes are repaid in full.

Due to the impact of the COVID-19 pandemic, we may experience borrowers who are unable to pay interest and principal payments timely, including at the maturity date of the borrower’s loan, if at all, and expected prepayments by our borrowers may not occur, which could impact our liquidity. Our Secured Funding Agreements contains margin call provisions following the occurrence of certain mortgage loan credit events. If we are unable to make the required payment or if we fail to meet or satisfy any of the covenants in our Financing Agreements, we would be in default under these agreements, and our lenders could elect to declare outstanding amounts due and payable, terminate their commitments, require the posting of additional collateral, including cash to satisfy margin calls, and enforce their interests against existing collateral. We are also subject to cross-default and acceleration rights with respect to our Financing Agreements. Given the impact of the COVID-19 pandemic on the real estate industry and the potential impact on our borrowers, to mitigate the risk of future margin calls, we proactively engaged in discussions with certain of our lenders to modify the terms of our borrowings on certain assets within these facilities, in order to, among other things, reduce the amounts we are borrowing against such assets and/or increase the borrowing spreads. We may not receive financing from our Secured Funding Agreements with respect to our commitments to fund our loans held for investment in the future. See “Summary of Financing Agreements” below for a description of our Financing Agreements.

We are focused on preserving our liquidity in order to satisfy our cash requirements, including future commitments to fund on our loans, make interest, principal and other payments pursuant to our financing obligations and to potentially originate new loans and make opportunistic new investments. Subject to maintaining our qualification as a REIT and our exemption from the 1940 Act, we expect that our primary sources of enhancing our liquidity will be financing, to the extent available to us, through credit, secured funding and other lending facilities, other sources of private financing, including warehouse and repurchase facilities, and public or private offerings of our equity or debt securities. On July 19, 2019, we filed a registration statement on Form S-3 with the SEC, which became effective on August 2, 2019, in order to permit us to offer, from time to time, in one or more offerings or series of offerings up to $1.25 billion of our common stock, preferred stock, debt securities, subscription rights to purchase shares of our common stock, warrants representing rights to purchase shares of our common stock, preferred stock or debt securities, or units. The specifics of any future offerings, along with the use of proceeds of any securities offered, will be described in detail in a prospectus supplement, or other offering materials, at the time of any offering. We may also access liquidity through our “At the Market Stock Offering Program” which was established in November 2019 pursuant to which we may sell, from time to time, up to $100.0 million of shares of our common stock. Furthermore, we have sold, and may continue to sell certain of our mortgage loans, or interests therein, in order to manage liquidity needs. Subject to maintaining our qualification as a REIT, we may also change our dividend practice, including by reducing the amount of, or temporarily suspending, our future dividends or making dividends that are payable in cash and shares of our common stock for some period of time. We are also able to access additional liquidity through the (i) reinvestment provisions in our FL3 CLO Securitization, which allows us to replace mortgage assets in our FL3 CLO Securitization which have repaid and (ii) future funding acquisition provisions in our FL4 collateralized loan obligation securitization debt (“FL4 CLO Securitization”, together with our FL3 CLO Securitization, our “CLO Securitizations”), which allows us to use mortgage asset repayment funds to acquire additional funded pari-passu participations related to the mortgage assets then-remaining in our FL4 CLO Securitization; each subject to the satisfaction of certain reinvestment or acquisition conditions, which may include receipt of Rating Agency Confirmation and investor approval. There can be no assurance that the conditions for reinvestment or acquisition will be satisfied and whether our CLO Securitizations will acquire any additional mortgage assets or funded pari-passu participations. In addition, our CLO Securitizations contains certain senior note overcollateralization ratio tests. To the extent we fail to meet these tests, amounts that would otherwise be used to make payments on the subordinate securities that we hold will be used to repay principal on the more senior securities to the extent necessary to satisfy any senior note overcollateralization ratio and we may incur significant losses. Our sources of liquidity may be impacted to the extent we do not receive cash payments that we would otherwise expect to receive from the CLO Securitizations if these tests were met.

Ares Management or one of its investment vehicles, including the Ares Warehouse Vehicle, may originate mortgage loans and we may have the opportunity to purchase such loans that are determined by our Manager in good faith to be appropriate for us, once we have sufficient available liquidity. Ares Management or one of its investment vehicles may also acquire mortgage loans from us.

As of May 3, 2021, we had approximately $36 million in liquidity including $4 million of unrestricted cash and $32 million of availability under secured funding agreements.

### Equity Offerings

On March 15, 2021, we entered into an underwriting agreement (the “Underwriting Agreement”), by and among us, ACREM, and Wells Fargo Securities, LLC, BofA Securities, Inc. and Morgan Stanley & Co. LLC, as representatives of the several underwriters listed therein (collectively, the “Underwriters”). Pursuant to the terms of the Underwriting Agreement, we agreed to sell, and the Underwriters agreed to purchase, subject to the terms and conditions set forth in the Underwriting Agreement, an aggregate of 7,000,000 shares of our common stock, par value $0.01 per share. The public offering closed on March 18, 2021 and generated net proceeds of approximately $100.7 million, after deducting transaction expenses. We used the net proceeds from the public offering to repay indebtedness and to invest in mortgage loans and other target assets and investments consistent with our investment strategies and investment guidelines.

### Cash Flows

The following table sets forth changes in cash, cash equivalents and restricted cash for the three months ended March 31, 2021 and 2020 ($ in thousands):

|  | For the three months ended March 31, 2021 | 2020 |
| --- | ---: | ---: |
| Net income (loss) | $15,740 | $(17,263) |
| Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | (5,816) | 25,530 |
| Net cash provided by (used in) operating activities | 9,924 | 8,267 |
| Net cash provided by (used in) investing activities | (131,354) | (273,951) |
| Net cash provided by (used in) financing activities | 144,598 | 334,926 |
| Change in cash, cash equivalents and restricted cash | $23,168 | $69,242 |

During the three months ended March 31, 2021 and 2020, cash, cash equivalents and restricted cash increased by $23.2 million and $69.2 million, respectively.

### Operating Activities

For the three months ended March 31, 2021 and 2020, net cash provided by operating activities totaled $9.9 million and $8.3 million, respectively. For the three months ended March 31, 2021, adjustments to net income related to operating activities primarily included the provision for current expected credit losses of $3.2 million, accretion of deferred loan origination fees and costs of $2.0 million, amortization of deferred financing costs of $2.2 million and change in other assets of $2.7 million. For the three months ended March 31, 2020, adjustments to net loss related to operating activities primarily included the provision for current expected credit losses of $27.1 million, accretion of deferred loan origination fees and costs of $2.0 million and amortization of deferred financing costs of $1.6 million.

### Investing Activities

For the three months ended March 31, 2021 and 2020, net cash used in investing activities totaled $131.4 million and $274.0 million, respectively. This change in net cash used in investing activities was primarily as a result of the cash used for the origination and funding of loans held for investment exceeding the cash received from principal repayment of loans held for investment for the three months ended March 31, 2021.

### Financing Activities

For the three months ended March 31, 2021, net cash provided by financing activities totaled $144.6 million and primarily related to proceeds from our Secured Funding Agreements of $77.3 million, proceeds from the issuance of debt of consolidated VIEs of $540.5 million and proceeds from the sale of our common stock of $100.9 million, partially offset by repayments of our Secured Funding Agreements of $483.2 million, repayments of our Notes Payable of $27.9 million, repayments of our Secured Term Loan of $50.0 million and dividends paid of $11.1 million. For the three months ended March 31, 2020, net cash provided by financing activities totaled $334.9 million and primarily related to proceeds from our Secured Funding Agreements of $355.1 million, proceeds from Secured Borrowings of $10.6 million, proceeds from the sale of our common stock of $73.2 million, partially offset by repayments of our Secured Funding Agreements of $93.1 million and dividends paid of $9.6 million.

### Summary of Financing Agreements

The sources of financing, as applicable in a given period, under our Secured Funding Agreements, Notes Payable and the Secured Term Loan (collectively, the “Financing Agreements”) are described in the following table ($ in thousands):

| Secured Funding Agreements: | As of March 31, 2021 Total Commitment | Outstanding Balance | Interest Rate | Maturity Date |  | December 31, 2020 Total Commitment | Outstanding Balance | Interest Rate | Maturity Date |  |
| --- | ---: | ---: | --- | --- | ---: | ---: | ---: | --- | --- | ---: |
| Wells Fargo Facility | $350,000 | $227,280 | LIBOR+1.50 to 2.75% | December 14, 2022 | (1) | $350,000 | $336,001 | LIBOR+1.45 to 2.75% | December 14, 2022 | (1) |
| Citibank Facility | 325,000 | 44,730 | LIBOR+1.50 to 2.25% | December 13, 2021 | (2) | 325,000 | 117,506 | LIBOR+1.50 to 2.25% | December 13, 2021 | (2) |
| CNB Facility | 50,000 | — | LIBOR+2.65% | March 10, 2022 | (3) | 50,000 | 50,000 | LIBOR+2.65% | March 10, 2021 | (3) |
| MetLife Facility | 180,000 | 20,648 | LIBOR+2.10 to 2.50% | August 13, 2022 | (4) | 180,000 | 104,124 | LIBOR+2.10 to 2.50% | August 13, 2022 | (4) |
| Morgan Stanley Facility | 150,000 | 56,924 | LIBOR+1.75 to 2.85% | January 16, 2023 | (5) | 150,000 | 147,921 | LIBOR+1.75 to 2.85% | January 16, 2023 | (5) |
| Subtotal | $1,055,000 | $349,582 |  |  |  | $1,055,000 | $755,552 |  |  |  |
| Notes Payable | $51,755 | $41,447 | LIBOR+3.00 to 3.75% | (6) |  | $84,155 | $63,122 | LIBOR+2.50 to 3.75% | (6) |  |
| Secured Term Loan | $60,000 | $60,000 | LIBOR+5.13% | December 22, 2021 | (7) | $110,000 | $110,000 | LIBOR+5.00% | December 22, 2021 | (7) |
| Total | $1,166,755 | $451,029 |  |  |  | $1,249,155 | $928,674 |  |  |  |

(1) The maturity date of the master repurchase funding facility with Wells Fargo Bank, National Association (the “Wells Fargo Facility”) is subject to three 12-month extensions at our option provided that certain conditions are met and applicable extension fees are paid. The maximum commitment may be increased to up to $500.0 million at our option, subject to the satisfaction of certain conditions, including payment of an upsize fee.

(2) The maturity date of the master repurchase facility with Citibank, N.A. (the “Citibank Facility”) is subject to two 12-month extensions at our option provided that certain conditions are met and applicable extension fees are paid.

(3) In March 2021, we exercised a 12-month extension option on the secured revolving funding facility with City National Bank (the “CNB Facility”). The CNB Facility has an accordion feature that provides for, subject to approval by City National Bank in its sole discretion, an increase in the commitment amount from $50.0 million to $75.0 million for up to a period of 120 days once per calendar year.

(4) The maturity date of the revolving master repurchase facility with Metropolitan Life Insurance Company (the “MetLife Facility”) is subject to two 12-month extensions at our option provided that certain conditions are met and applicable extension fees are paid.

(5) The maturity date of the master repurchase and securities contract with Morgan Stanley (the “Morgan Stanley Facility”) is subject to two 12-month extensions at our option provided that certain conditions are met and applicable extension fees are paid.

(6) Certain of our consolidated subsidiaries are party to two separate note agreements (the “Notes Payable”) with the lenders referred to therein, consisting of (1) a $28.3 million note that has a maturity date of June 10, 2024 and (2) a $23.5 million note that has an initial maturity date of September 5, 2022, subject to two 12-month extensions at our option provided that certain conditions are met and applicable extension fees are paid. In March 2021, the $32.4 million note, which was secured by a $40.5 million senior mortgage loan held by us on an industrial property located in North Carolina, was repaid in full and not extended. The outstanding principal on the note at the time of repayment was $27.9 million.

(7) In December 2020, we exercised the 12-month extension option on the Credit and Guaranty Agreement with the lenders referred to therein and Cortland Capital Market Services LLC, as administrative agent and collateral agent for the lenders (the “Secured Term Loan”). During the extension period, the spread on advances under the Secured Term Loan increases every three months by 0.125%, 0.375% and 0.750% per annum, respectively, beginning after the third-month of the extension period. In March 2021, we voluntarily elected to repay $50.0 million of outstanding principal at par on the Secured Term Loan prior to the scheduled maturity as permitted by the contractual terms of the Secured Term Loan.

Our Financing Agreements contain various affirmative and negative covenants, including negative pledges, and provisions related to events of default that are normal and customary for similar financing agreements. As of March 31, 2021, we were in compliance with all financial covenants of each respective Financing Agreement. We may be required to fund commitments on our loans held for investment in the future and we may not receive funding from our Secured Funding Agreements with respect to these commitments. See Note 6 to our consolidated financial statements included in this quarterly report on Form 10-Q for more information on our Financing Agreements.

### Securitizations

As of March 31, 2021, the carrying amount and outstanding principal of our CLO Securitizations was $979.3 million and $986.1 million, respectively. See Note 16 to our consolidated financial statements included in this quarterly report on Form 10-Q for additional terms and details of our CLO Securitizations.

### Secured Borrowings

As of March 31, 2021, the carrying amount and outstanding principal of our secured borrowings was $59.8 million and $60.2 million, respectively. See Note 7 to our consolidated financial statements included in this quarterly report on Form 10-Q for additional terms and details of our secured borrowings.

### Leverage Policies

We intend to use prudent amounts of leverage to increase potential returns to our stockholders. To that end, subject to maintaining our qualification as a REIT and our exemption from registration under the 1940 Act, we intend to continue to use borrowings to fund the origination or acquisition of our target investments. Given current market conditions and our focus on first or senior mortgages, we currently expect that such leverage would not exceed, on a debt-to-equity basis, a 4-to-1 ratio. Our charter and bylaws do not restrict the amount of leverage that we may use. The amount of leverage we will deploy for particular investments in our target investments will depend upon our Manager’s assessment of a variety of factors, which may include, among others, our liquidity position, the anticipated liquidity and price volatility of the assets in our loans held for investment portfolio, the potential for losses and extension risk in our portfolio, the gap between the duration of our assets and liabilities, including hedges, the availability and cost of financing the assets, our opinion of the creditworthiness of our financing counterparties, the impact of the COVID-19 pandemic on the United States economy generally or in specific geographic regions and commercial mortgage markets, our outlook for the level and volatility of interest rates, the slope of the yield curve, the credit quality of our assets, the collateral underlying our assets, and our outlook for asset spreads relative to the LIBOR curve.

### DIVIDENDS

We elected to be taxed as a REIT for United States federal income tax purposes and, as such, anticipate annually distributing to our stockholders at least 90% of our REIT taxable income, prior to the deduction for dividends paid. If we distribute less than 100% of our REIT taxable income in any tax year (taking into account any distributions made in a subsequent tax year under Sections 857(b)(9) or 858 of the Code), we will pay tax at regular corporate rates on that undistributed portion. Furthermore, if we distribute less than the sum of 1) 85% of our ordinary income for the calendar year, 2) 95% of our capital gain net income for the calendar year and 3) any undistributed shortfall from our prior calendar year (the “Required Distribution”) to our stockholders during any calendar year (including any distributions declared by the last day of the calendar year but paid in the subsequent year), then we are required to pay non-deductible excise tax equal to 4% of any shortfall between the Required Distribution and the amount that was actually distributed. Any of these taxes would decrease cash available for distribution to our stockholders. The 90% distribution requirement does not require the distribution of net capital gains. However, if we elect to retain any of our net capital gain for any tax year, we must notify our stockholders and pay tax at regular corporate rates on the retained net capital gain. The stockholders must include their proportionate share of the retained net capital gain in their taxable income for the tax year, and they are deemed to have paid the REIT’s tax on their proportionate share of the retained capital gain. Furthermore, such retained capital gain may be subject to the nondeductible 4% excise tax. If we determine that our estimated current year taxable income (including net capital gain) will be in excess of estimated dividend distributions (including capital gains dividends) for the current year from such income, we accrue excise tax on a portion of the estimated excess taxable income as such taxable income is earned.

Before we make any distributions, whether for United States federal income tax purposes or otherwise, we must first meet both our operating requirements and debt service on our Financing Agreements and other debt payable. If our cash available for distribution is less than our REIT taxable income, we could be required to sell assets or borrow funds to make cash distributions or we may make a portion of the Required Distribution in the form of a taxable stock distribution or distribution of debt securities.

### OFF-BALANCE SHEET ARRANGEMENTS

We have commitments to fund various senior mortgage loans, as well as subordinated debt and preferred equity investments in our portfolio. As a result of the COVID-19 pandemic, the progress of capital expenditures, construction and leasing is anticipated to be slower than otherwise expected, and the pace of the funding of our unfunded commitments may be slower.

Other than as set forth in this quarterly report on Form 10-Q, we do not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured investment vehicles, special purpose entities or variable interest entities, established to facilitate off-balance sheet arrangements or other contractually narrow or limited purposes. Further, we have not guaranteed any obligations of unconsolidated entities or entered into any commitment or intend to provide additional funding to any such entities.

## Market risk

As filed, 13,540 characters.

As part of our risk management strategy, our Manager closely monitors our portfolio and actively manages the credit, interest rate, market, prepayment, real estate inflation and financing risks associated with holding a portfolio of our target investments. We manage our portfolio through an interactive process with our Manager and Ares Management. Our Manager has an Investment Committee that oversees compliance with our investment strategy and guidelines, loans held for investment portfolio holdings and financing strategy.

### Credit Risk

We are subject to varying degrees of credit risk in connection with holding our target investments. We have exposure to credit risk on our CRE loans and other target investments in our business. Our Manager seeks to manage credit risk by performing our due diligence process prior to origination or acquisition and through the use of non-recourse financing, when and where available and appropriate. Credit risk is also addressed through our Manager’s ongoing review of our loans held for investment portfolio. In addition, with respect to any particular target investment, our Manager’s investment team evaluates, among other things, relative valuation, comparable analysis, supply and demand trends, shape of yield curves, delinquency and default rates, recovery of various sectors and vintage of collateral.

In this current environment, prepayments may slow down, borrowers may not be able to repay principal upon the loan maturity or qualify for loan extensions. Additionally, if tenants are not able to pay rent to their landlords, property owners may not be able to make payments to their lenders. We have been in regular dialogue with our borrowers and our financing providers to assess this credit risk. See Note 3 to our consolidated financial statements included in this quarterly report on Form 10-Q for a more detailed description of the potential impacts of the COVID-19 pandemic on our loan investments.

### Interest Rate Risk

Interest rates are highly sensitive to many factors, including fiscal and monetary policies and domestic and international economic and political considerations, as well as other factors beyond our control. We are subject to interest rate risk in connection with our assets and our related financing obligations, including our borrowings under the Financing Agreements. We primarily originate or acquire floating rate mortgage assets and finance those assets with index-matched floating rate liabilities. As a result, we significantly reduce our exposure to changes in portfolio value and cash flow variability related to changes in interest rates. However, we regularly measure our exposure to interest rate risk and assess interest rate risk and manage our interest rate exposure on an ongoing basis by comparing our interest rate sensitive assets to our interest rate sensitive liabilities. Based on that review, we determine whether or not we should enter into hedging transactions and derivative financial instruments, such as forward sale commitments and interest rate floors in order to mitigate our exposure to changes in interest rates.

While hedging activities may mitigate our exposure to adverse fluctuations in interest rates, certain hedging transactions that we have entered into or may enter into in the future, such as interest rate swap agreements, may also limit our ability to participate in the benefits of lower interest rates with respect to our investments. In addition, there can be no assurance that we will be able to effectively hedge our interest rate risk.

In addition to the risks related to fluctuations in asset values and cash flows associated with movements in interest rates, there is also the risk of non-performance on floating rate assets. In the case of a significant increase in interest rates, the additional debt service payments due from our borrowers may strain the operating cash flows of the real estate assets underlying our mortgages and, potentially, contribute to non-performance or, in severe cases, default.

### Interest Rate Effect on Net Income

Our operating results depend in large part on differences between the income earned on our assets and our cost of borrowing. The cost of our borrowings generally is based on prevailing market interest rates. During a period of rising interest rates, our borrowing costs generally increase while the yields earned on our leveraged fixed-rate mortgage assets remain static, which could result in a decline in our net interest spread and net interest margin. During a period of declining interest rates, our borrowing costs generally decrease while the yields earned on our leveraged fixed-rate mortgage assets remain static, which could result in an increase in our net interest spread and net interest margin. The impact of rising or declining interest rates may be mitigated by certain hedging transactions that we have entered into or may enter into in the future.

The following table estimates the hypothetical increases/(decreases) in net income for a twelve month period, assuming (1) an immediate increase or decrease in 30-day LIBOR as of March 31, 2021, (2) no change in the outstanding principal balance of our loans held for investment portfolio and borrowings as of March 31, 2021 and (3) no changes in the notional amount of the interest rate swap and interest rate cap agreements entered into as of March 31, 2021 ($ in millions):

| Change in 30-Day LIBOR | Increase/(Decrease) in Net Income |
| --- | ---: |
| Up 100 basis points | $(1.9) |
| Up 50 basis points | $(2.2) |
| LIBOR at 0 basis points | $(0.4) |

The severity of any such impact depends on our asset/liability composition at the time as well as the magnitude and duration of the interest rate increase and any applicable floors and caps. Further, an increase in short-term interest rates could also have a negative impact on the market value of our target investments. If any of these events happen, we could experience a decrease in net income or incur a net loss during these periods, which could adversely affect our liquidity and results of operations.

### Interest Rate Cap and Floor Risk

We primarily originate or acquire floating rate mortgage assets. These are assets in which the mortgages may be subject to periodic and lifetime interest rate caps and floors, which limit the amount by which the asset’s interest yield changes during any given period. However, our borrowing costs pursuant to our Financing Agreements sometimes are not subject to similar restrictions or have different floors and caps. As a result, in a period of increasing interest rates, interest rate costs on our borrowings could increase without limitation by caps, while the interest rate yields on our floating rate mortgage assets could be limited if we do not implement effective caps. In addition, floating rate mortgage assets may be subject to periodic payment caps that result in some portion of the interest being deferred and added to the principal outstanding. This could result in our receipt of less cash income on such assets than we would need to pay the interest cost on our related borrowings. In addition, in a period of decreasing interest rates, the interest rate yields on our floating rate mortgage assets could decrease, while the interest rate costs on certain of our borrowings could be fixed at a higher floor. These factors could lower our net interest income or cause a net loss during periods of decreasing interest rates, which would harm our financial condition, cash flows and results of operations. The impact of rising or declining interest rates may be mitigated by certain hedging transactions that we have entered into or may enter into in the future.

### Market Risk

The estimated fair values of our investments fluctuate primarily due to changes in interest rates, changes in credit and other factors. Generally, in a rising interest rate environment, the estimated fair value of the fixed-rate securities would be expected to decrease; conversely, in a decreasing interest rate environment, the estimated fair value of the fixed-rate securities would be expected to increase. As market volatility increases or liquidity decreases, the fair value of our investments may be adversely impacted.

### Prepayment and Securitizations Repayment Risk

Our net income and earnings may be affected by prepayment rates on our existing CRE loans. When we originate our CRE loans, we anticipate that we will generate an expected yield. When borrowers prepay their CRE loans faster than we expect, we may be unable to replace these CRE loans with new CRE loans that will generate yields which are as high as the prepaid CRE loans. If prepayment rates decrease in a rising interest rate environment, borrowers exercise extension options on CRE loans or we extend the term of CRE loans, the life of the loans could extend beyond the term of the Financing Agreements that we borrow on to fund our CRE loans. This could have a negative impact on our results of operations. In some situations, we may be forced to fund additional cash collateral in connection with the Financing Agreements or sell assets to maintain adequate liquidity, which could cause us to incur losses. Additionally, principal repayment proceeds from mortgage loans in the CLO Securitizations are applied sequentially, first used to pay down the senior notes in the CLO Securitizations. We will not receive any proceeds from the repayment of loans in the CLO Securitizations until all senior notes are repaid in full.

### Financing Risk

We borrow funds under our Financing Agreements to finance our target assets. The COVID-19 pandemic has resulted in extreme volatility in a variety of global markets, including the real estate-related debt markets. In reaction to market conditions, banks and other lenders have generally restricted lending activity and, in some cases, have requested margin posting or repayments where applicable for secured loans collateralized by assets with depressed valuations. Our Secured Funding Agreements contain margin call provisions following the occurrence of certain mortgage loan credit events. If we are unable to make the required payment or if we fail to meet or satisfy any of the covenants in our Financing Agreements, we would be in default under these agreements, and our lenders could elect to declare outstanding amounts due and payable, terminate their commitments, require the posting of additional collateral, including cash to satisfy margin calls, and enforce their interests against existing collateral. We are also subject to cross-default and acceleration rights with respect to our Financing Agreements. Given the impact of the COVID-19 pandemic on the real estate industry and the potential impact on our borrowers, to mitigate the risk of future margin calls, we have proactively engaged in discussions with certain of our lenders to modify the terms of our borrowings on certain assets within these facilities, including reducing the amounts we are borrowing against such assets and/or increasing the borrowing spreads. In addition, our CLO Securitizations contain certain senior note overcollateralization ratio tests. To the extent we fail to meet these tests, amounts that would otherwise be used to make payments on the subordinate securities that we hold will be used to repay principal on the more senior securities to the extent necessary to satisfy any senior note overcollateralization ratio and we may incur significant losses. Our sources of liquidity may be impacted to the extent we do not receive cash payments that we would otherwise expect to receive from the CLO Securitizations if these tests were met. Weakness or volatility in the financial markets, the commercial real estate and mortgage markets and the economy generally could adversely affect one or more of our potential lenders and could cause one or more of our potential lenders to be unwilling or unable to provide us with financing or to increase the costs of that financing.

### Real Estate Risk

Our real estate investments are subject to volatility and may be affected adversely by a number of factors, including, but not limited to, national, regional and local economic conditions (which may be adversely affected by industry slowdowns and other factors); local real estate conditions; changes or continued weakness in specific industry segments; local markets with a significant exposure to the energy sector; construction quality, age and design; demographic factors; and retroactive changes to building or similar codes. The COVID-19 pandemic is having a particularly adverse impact on industries whose properties serve as collateral for some of our portfolio of loan investments. Decreases in property values reduce the value of the collateral and the potential proceeds available to a borrower to repay the underlying loan or loans, as the case may be, which could also cause us to suffer losses. We seek to manage these risks through our underwriting and asset management processes.

### Inflation Risk

Virtually all of our assets and liabilities are sensitive to interest rates. As a result, interest rates and other factors influence our performance far more so than does inflation. Changes in interest rates do not necessarily correlate with inflation rates or changes in inflation rates. In each case, in general, our activities and balance sheet are measured with reference to historical cost and/or fair market value without considering inflation.

## Controls and procedures

As filed, 1,690 characters.

### Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures (as that term is defined in Rules 13a‑15(e) and 15d‑15(e) under the Exchange Act) that are designed to ensure that information required to be disclosed in our reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosures. Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. Our management, with the participation of our principal executive officer and principal financial officer, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of March 31, 2021. Based upon that evaluation and subject to the foregoing, our principal executive officer and principal financial officer concluded that, as of March 31, 2021, the design and operation of our disclosure controls and procedures were effective to accomplish their objectives at the reasonable assurance level.

### Changes in Internal Control over Financial Reporting

There have been no changes in our internal control over financial reporting (as defined in Rules 13a‑15(f) and 15d‑15(f) under the Exchange Act) during the quarter ended March 31, 2021 that have materially affected, or that are reasonably likely to materially affect, our internal control over financial reporting.

## Risk factors

As filed, 9,456 characters.

In addition to the other information set forth in this report, you should carefully consider the risk factors described below and in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2020, which could materially affect our business, financial condition and/or operating results. The risks described below and in our Annual Report on Form 10-K for the year ended December 31, 2020 are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially and adversely affect our business, financial condition and/or operating results. The fluidity of the ongoing COVID-19 pandemic precludes any prediction as to the ultimate adverse impact of COVID-19 on economic and market conditions. In addition to the foregoing, COVID-19 may exacerbate the potential adverse effects on our business, financial performance, operating results, cash flows and financial condition described in the risk factors in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020 filed with the Securities and Exchange Commission.

**The COVID-19 pandemic has caused severe disruptions in the global economy, which has had, and may continue to have, a negative impact on our business and operations.**

As of the filing date of this Quarterly Report, there is a continued outbreak of the COVID-19 pandemic, which the World Health Organization has declared a global pandemic, the United States has declared a national emergency and every state in the United States is under a federal disaster declaration. The COVID-19 pandemic has resulted in numerous deaths, adversely impacted global commercial activity and contributed to significant volatility in equity and debt markets. Many states, including those in which we and our borrowers operate, have issued orders requiring the closure of, or certain restrictions on the operation of, non-essential businesses and/or requiring residents to stay at home. The COVID-19 pandemic and preventative measures taken to contain or mitigate its spread have caused, and are continuing to cause, business shutdowns, the re-introduction of business shutdowns, cancellations of events and restrictions on travel, significant reductions in demand for certain goods and services, reductions in business activity and financial transactions, supply chain interruptions and overall economic and financial market instability both globally and in the United States. Such effects will likely continue for the duration of the pandemic, which is uncertain, and for some period thereafter. While several countries, as well as certain states in the United States, relaxed the early public health restrictions with a view to partially or fully reopen their economies, recurring COVID-19 outbreaks led to the re-introduction of such restrictions in certain states in the United States and globally and could continue to lead to such restrictions elsewhere. Additionally, in December 2020, the U.S. Food and Drug Administration authorized certain vaccines for emergency use, which are currently being distributed nationwide and globally. However, it remains unclear how quickly “herd immunity” will be achieved and the restrictions that were imposed to slow the spread of the virus will be lifted entirely. These uncertainties could lead the public to continue to refrain from participating in the economy at pre-pandemic levels for a prolonged period of time. Even after the COVID-19 pandemic subsides, the U.S. economy and most other major global economies may continue to experience the lingering effects of the economic shock caused by COVID-19 containment measures including a prolonged recessionary environment in the United States.

The COVID-19 pandemic is having a particularly adverse impact on industries whose properties serve as collateral for some of our portfolio of loan investments. Certain of our investments in loans collateralized by properties within other industries have also been significantly impacted by the COVID-19 pandemic. The inability of our borrowers’ tenants to pay rent on their leases, or our borrowers’ inability to re-lease space that becomes vacant, may adversely impact the ability of the borrowers to which we lend to continue to meet loan covenants or to make payments on their loans on a timely basis or at all. We may seek to restructure our loan investments and amend the terms, including the payment terms, which could cause us to incur losses. Potential declines in value and net operating income at properties that serve as collateral for our portfolio of loan investments significantly increase the likelihood that we will incur losses on our loans in the event of default because the value of our collateral may be insufficient to cover our cost on the loan. Although the U.S. government enacted the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) on March 27, 2020, which contains provisions intended to mitigate the adverse economic effects of the COVID-19 pandemic, and a second and third stimulus package on December 27, 2020 and March 11, 2021, respectively, which provided $900 billion and $1.9 trillion, respectively, in resources to small businesses and individuals as well as certain industries and state and local governments that have been adversely affected by the COVID-19 pandemic, it is uncertain whether, or how much, we or certain of our borrowers have benefited or may benefit from such legislation or any other subsequent legislation intended to provide financial relief or assistance.

The impact of the COVID-19 pandemic on our borrowers may reduce the availability of our liquidity sources, but our requirements for liquidity, future commitments to fund on our loans, make interest, principal and other payments pursuant to our financing obligations, including potential margin calls, likely will not be reduced. If we do not have funds available to meet our obligations, we will have to raise capital from alternative sources, which may be on unfavorable terms or may not be available to us due to the impacts of the COVID-19 pandemic. We expect that the adverse impact of the COVID-19 pandemic may adversely affect our liquidity position and the execution of our business strategy. We are focused on preserving our liquidity in order to satisfy our cash requirements and we expect that our primary sources of enhancing our liquidity will be financing, to the extent available to us, public or private offerings of our equity or debt securities, asset sales and changes in our dividend practice, including by reducing the amount of, or temporarily suspending, our future dividends or making dividends that are payable in cash and shares of our common stock for some period of time.

Provisions in our financing agreements require us to pay margin call provisions following the occurrence of certain mortgage loan credit events. We may not have the funds available to satisfy such margin calls or repay our debt at that time, which would likely result in defaults unless we are able to raise the funds from alternative sources, which we may not be able to achieve on favorable terms or at all. Posting additional collateral would reduce our liquidity. If we are unable to make the required payment or if we fail to meet or satisfy any of the covenants in our financing agreements, we would be in default under these agreements, and our lenders could elect to declare outstanding amounts due and payable, terminate their commitments and enforce their interests against existing collateral. We are also subject to cross-default and acceleration rights, which could materially and adversely affect our financial condition and ability to implement our investment strategy. See “Risk Factors—The Financing Agreements and any bank credit facilities and repurchase agreements that we may use in the future to finance our assets may require us to provide additional collateral or pay down debt” included in our Annual Report on Form 10-K for the year ended December 31, 2020.

The effects on our portfolio of loan investments described above may require us to increase the CECL Reserve in our consolidated balance sheets related to certain of our investments. Our loans held for investment are carried at cost, net of unamortized loan fees and origination costs, however, under the CECL methodology we adopted pursuant to Accounting Standards Update No. 2016-13, we are required to estimate expected credit losses on such loans using a range of historical experience adjusted for current and future conditions. Based on certain factors, our current estimate of expected credit losses has decreased from December 31, 2020 to March 31, 2021 and may continue to fluctuate as the impact of the COVID-19 pandemic develops and we receive additional collateral financial data.

In response to the COVID-19 pandemic, Ares Management Corporation instituted a work from home policy until it is deemed safe to return to the office. Such policy of an extended period of remote working by our Manager’s and/or its affiliate’s employees could strain our technology resources and introduce operational risks, including heightened cybersecurity risk. Remote working environments may be less secure and more susceptible to hacking attacks, including phishing and social engineering attempts that seek to exploit the COVID-19 pandemic.

Filed May 4, 2021.
Source: SEC EDGAR, the filing index for accession 0001628280-21-008723. Last ingested by Listed: Nov 6, 2026, 10:59 ET. No prices; not investment advice.