Ares Commercial Real Estate Corp: Form 10-Q for the period ended Sep 30, 2025

Overview

We are a specialty finance company primarily engaged in directly 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 amended and restated management agreement dated July 26, 2022, 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 (the “Code”), 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 Third Quarter of 2025:

• We closed a $12.3 million senior mortgage loan on a self storage property located in Florida.
• We closed an $11.2 million senior mortgage loan on a self storage property located in Arizona.
• We closed a $9.9 million senior mortgage loan on a self storage property located in Florida.
• We closed a $9.1 million senior mortgage loan on a self storage property located in Pennsylvania.
• We closed a $50.0 million senior mortgage loan on a multifamily property located in Massachusetts.
• We previously held a senior A-Note loan with an outstanding principal balance of $59.0 million and a subordinated B-Note loan with an outstanding principal balance of $10.6 million, which were both collateralized by an office property located in New York. The subordinated B-Note loan was subordinate to new borrower equity related to additional capital contributions. In September 2025, we entered into a modification and extension agreement with the borrower to, among other things, (1) transfer $6.0 million of the outstanding principal balance from the subordinated B-Note loan to the senior A-Note loan, which increased the outstanding principal balance of the senior A-Note loan from $59.0 million to $65.0 million and (2) extinguish the remaining $4.6 million of outstanding principal balance of the subordinated B-Note loan. Prior to entering into the modification and extension agreement with the borrower, the subordinated B-Note loan was on non-accrual status and had a carrying value of $7.6 million. Upon the transfer of the $6.0 million of outstanding principal balance from the subordinated B-Note loan to the senior A-Note loan, the remaining outstanding principal balance of the subordinated B-Note loan was $4.6 million and the remaining carrying value was $1.6 million. In conjunction with the extinguishment of the subordinated B-Note loan, we recognized a realized loss of $1.6 million, which was equal to the remaining carrying value of the subordinated B-Note loan.

Trends Affecting Our Business

During the third quarter of 2025, the U.S. economy continued to expand supported by consumer spending. Meanwhile, macroeconomic volatility slowed, providing space for recovery in the commercial real estate sector. Individual property transaction volumes continued year-over-year increases, while broad market indices demonstrated flat to increasing commercial real estate values on a year-over-year and quarter-over-quarter basis. Aiding valuations, new construction starts across various sectors like multifamily and retail remain near 10-year lows. Lending markets continued to support improving commercial real estate activity as conduit and CMBS new issue volumes increased quarter-over-quarter.

In September and October 2025, the Federal Reserve resumed its monetary easing cycle with an aggregate 50 basis point rate reduction. While the Federal Reserve has signaled a willingness to further reduce interest rates in 2025, there is no certainty that there will be a decrease in interest rates or of the magnitude or pace of potential decreases, especially if inflation accelerates.

Rising operating costs, such as property insurance and raw material costs for property development and improvements, placed pressure on cash flow performance across many real estate property types in the third quarter of 2025. Although certain markets are showing a recovery, office properties nationally continue to experience challenges driven by remote work and elevated costs to operate, improve or repurpose these office properties. These factors have largely resulted in lower demand for office space and have driven elevated levels of vacancy rates and default rates. Offsetting some of these challenges, there has been a significant decline in new commercial real estate development that began in 2023 and has continued benefitting existing in-demand property types. Ultimately, this lack of new future inventory may result in a shortage of contemporary, in-demand properties in the years to come, furthering the disparity between supply and demand dynamics. In addition, there is a significant amount of unspent capital targeting commercial real estate properties that could support values and elevate transaction activities.

While lower market rates and increased capital markets liquidity support commercial real estate property transactions and values, uncertainty remains around proposed U.S. trade and economic policies and their potential impact to the U.S. economy. Should these economic factors become more acute, the commercial real estate market we service may be further adversely impacted.

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, including the real estate collateralizing our investments, 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 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 are also impacted by credit losses in excess of initial anticipations or unanticipated credit events experienced by borrowers.

Stock Repurchase Program

On July 31, 2024, our board of directors extended the Repurchase Program of up to $50.0 million, which was expected to be in effect until July 31, 2025, or until the approved dollar amount had been used to repurchase shares. On July 30, 2025, our board of directors further extended the Repurchase Program of up to $50.0 million, which is expected to be in effect until July 31, 2026, or until the approved dollar amount has been used to repurchase shares. Pursuant to the Repurchase Program, we may repurchase shares of our common stock in amounts, at prices and at such times as we deem appropriate, subject to market conditions and other considerations, including all applicable legal requirements. Repurchases may include purchases on the open market or privately negotiated transactions, under Rule 10b5-1 trading plans, under accelerated share repurchase programs, in tender offers and otherwise. The Repurchase Program does not obligate us to acquire any particular amount of shares of our common stock and may be modified or suspended at any time at our discretion. During the three and nine months ended September 30, 2025, we did not repurchase any shares through the Repurchase Program.

Loans Held for Investment Portfolio

As of September 30, 2025, our portfolio included 27 loans held for investment, excluding 193 loans that were repaid, sold, converted to real estate owned or written-off since inception. As of September 30, 2025, the aggregate originated commitment under these loans at closing was approximately $1.4 billion and outstanding principal was $1.3 billion. During the nine months ended September 30, 2025, we funded approximately $114.8 million of outstanding principal, received repayments of $498.4 million of outstanding principal and wrote-off one loan with $4.6 million of outstanding principal. As of September 30, 2025, 80.5% of our loans have SOFR floors, with a weighted average floor of 1.04%, calculated based on loans with SOFR floors. References to SOFR or “S” are to 30-day SOFR (unless otherwise specifically stated).

Other than as set forth in Note 3 to our consolidated financial statements included in this quarterly report on Form 10-Q, as of September 30, 2025, 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 September 30, 2025 ($ in thousands):

(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.

(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 September 30, 2025 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 September 30, 2025 as weighted by the total outstanding principal balance of each interest accruing loan (excludes loans on non-accrual status as of September 30, 2025).

(4) Remaining Life is based on contractual maturity date and does not include contractual extension options not yet exercised.

Critical Accounting Estimates

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. These 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. For a description of our critical accounting estimates, please see Part II, “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2024 Annual Report on Form 10-K.

RECENT DEVELOPMENTS

On October 1, 2025, we closed a $50.0 million senior mortgage loan on a multifamily property located in North Carolina. At closing, the outstanding principal balance was $50.0 million. The loan has a per annum interest rate of SOFR plus 2.40%.

On October 20, 2025, we closed a $7.3 million senior mortgage loan on a self storage property located in Florida. At closing, the outstanding principal balance was $6.8 million. The loan has a per annum interest rate of SOFR plus 3.50%.

On October 22, 2025, we closed a $58.0 million senior mortgage loan on a hotel property located in South Carolina. At closing, the outstanding principal balance was $48.3 million. The loan has a per annum interest rate of SOFR plus 3.50%.

On October 28, 2025, we closed a $100.0 million senior mortgage loan on a portfolio of industrial properties located in Georgia. At closing, the outstanding principal balance was $96.4 million. The loan has a per annum interest rate of SOFR plus 2.25%.

On October 31, 2025, we closed a $55.3 million senior mortgage loan on an industrial property located in California. At closing, the outstanding principal balance was $50.4 million. The loan has a per annum interest rate of SOFR plus 3.00%.

Our board of directors declared a regular cash dividend of $0.15 per common share for the fourth quarter of 2025. The fourth quarter 2025 dividend will be payable on January 15, 2026 to common stockholders of record as of December 31, 2025.

RESULTS OF OPERATIONS

The following table sets forth a summary of our consolidated results of operations for the three and nine months ended September 30, 2025 and 2024 ($ in thousands):

The following tables set forth select details of our consolidated results of operations for the three and nine months ended September 30, 2025 and 2024 ($ in thousands):

Net Interest Margin

For the three months ended September 30, 2025 and 2024, net interest margin was approximately $8.5 million and $11.9 million, respectively. For the three months ended September 30, 2025 and 2024, interest income of $23.3 million and $39.3 million, respectively, was generated by weighted average earning assets of $1.3 billion and $2.0 billion, respectively, offset by $14.8 million and $27.4 million, respectively, of interest expense, unused fees and amortization of deferred loan costs. The weighted average borrowings under the Secured Funding Agreements, Notes Payable, the Secured Term Loan and securitization debt, as applicable, were $0.8 billion for the three months ended September 30, 2025 and $1.4 billion for the three months ended September 30, 2024. The decrease in net interest margin for the three months ended September 30, 2025 compared to the three months ended September 30, 2024 is due to a decrease in our weighted average earning assets and weighted average borrowings for the three months ended September 30, 2025 and a decrease in SOFR rates on our loans held for investment for the three months ended September 30, 2025 as compared to the three months ended September 30, 2024.

For the nine months ended September 30, 2025 and 2024, net interest margin was approximately $24.8 million and $40.5 million, respectively. For the nine months ended September 30, 2025 and 2024, interest income of $73.9 million and $124.2 million, respectively, was generated by weighted average earning assets of $1.4 billion and $2.1 billion, respectively, offset by $49.1 million and $83.7 million, respectively, of interest expense, unused fees and amortization of deferred loan costs. The weighted average borrowings under the Secured Funding Agreements, Notes Payable, the Secured Term Loan and securitization debt, as applicable, were $0.9 billion for the nine months ended September 30, 2025 and $1.5 billion for the nine months ended September 30, 2024. The decrease in net interest margin for the nine months ended September 30, 2025 compared to the nine months ended September 30, 2024 is due to a decrease in our weighted average earning assets and weighted average borrowings for the nine months ended September 30, 2025 and a decrease in SOFR rates on our loans held for investment for the nine months ended September 30, 2025 as compared to the nine months ended September 30, 2024.

Revenue From Real Estate Owned

On September 19, 2024, we acquired legal title to a multi-building office property located in North Carolina through a deed in lieu of foreclosure. Prior to September 19, 2024, the office property collateralized a $68.6 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 May 2024 maturity date. In conjunction with the deed in lieu of foreclosure, we derecognized the $68.6 million senior mortgage loan and recognized the office property as real estate owned. Revenues from this property consist primarily of rental revenue from operating leases. For the three and nine months ended September 30, 2025, revenue from real estate owned related to this property was $2.4 million and $7.1 million, respectively. For both the three and nine months ended September 30, 2024, revenue from real estate owned related to this property was $0.3 million.

On June 12, 2024, we acquired legal title to an office property located in California through a foreclosure. Prior to June 12, 2024, the office property collateralized a $33.2 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 2023 maturity date. In conjunction with the foreclosure, we derecognized the $33.2 million senior mortgage loan and recognized the office property as real estate owned. Revenues from this property consisted primarily of rental revenue from operating leases. For the three and nine months ended September 30, 2024, revenue from real estate owned related to this property was $1.1 million and $1.4 million, respectively. On November 15, 2024, we closed the sale of the office property to a third party.

On September 8, 2023, we acquired legal title to a mixed-use property located in Florida through a consensual foreclosure. Prior to September 8, 2023, the mixed-use property collateralized an $82.9 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 February 2023 maturity date. In conjunction with the consensual foreclosure, we derecognized the $82.9 million senior mortgage loan and recognized the mixed-use property as real estate owned. Revenues from this property consist primarily of rental revenue from operating leases. For the three and nine months ended September 30, 2025, revenue from real estate owned related to this property was $3.3 million and $9.8 million, respectively. For the three and nine months ended September 30, 2024, revenue from real estate owned related to this property was $3.3 million and $9.9 million, respectively.

Operating Expenses

See the Related Party Expenses, Other Expenses and Expenses from Real Estate Owned discussions below for the cause of the changes in operating expenses for the three and nine months ended September 30, 2025 compared to the three and nine months ended September 30, 2024, respectively.

Related Party Expenses

For the three months ended September 30, 2025, related party expenses included $2.4 million in management fees due to our Manager pursuant to the Management Agreement. No incentive fees were incurred for the three months ended September 30, 2025. For the three months ended September 30, 2025, 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 September 30, 2024, related party expenses included $2.7 million in management fees due to our Manager pursuant to the Management Agreement. No incentive fees were incurred for the three months ended September 30, 2024. For the three months ended September 30, 2024, related party expenses also included $0.9 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 decrease in management fees for the three months ended September 30, 2025 compared to the three months ended September 30, 2024 primarily relates to a decrease in our weighted average stockholders’ equity for the three months ended September 30, 2025 as a result of realized losses on loans and the sale of real estate owned. The decrease in allocable general and administrative expenses due to our Manager for the three months ended September 30,

2025 compared to the three months ended September 30, 2024 relates to changes in the mix of employees of our Manager that allocated time to us year-over-year.

For the nine months ended September 30, 2025, related party expenses included $7.4 million in management fees due to our Manager pursuant to the Management Agreement. No incentive fees were incurred for the nine months ended September 30, 2025. For the nine months ended September 30, 2025, related party expenses also included $2.8 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 nine months ended September 30, 2024, related party expenses included $8.1 million in management fees due to our Manager pursuant to the Management Agreement. No incentive fees were incurred for the nine months ended September 30, 2024. For the nine months ended September 30, 2024, related party expenses also included $3.3 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 decrease in management fees for the nine months ended September 30, 2025 compared to the nine months ended September 30, 2024 primarily relates to a decrease in our weighted average stockholders’ equity for the nine months ended September 30, 2025 as a result of realized losses on loans and the sale of real estate owned. The decrease in allocable general and administrative expenses due to our Manager for the nine months ended September 30, 2025 compared to the nine months ended September 30, 2024 relates to changes in the mix of employees of our Manager that allocated time to us year-over-year.

Other Expenses

For the three months ended September 30, 2025 and 2024, professional fees were $0.5 million and $0.7 million, respectively. The decrease in professional fees for the three months ended September 30, 2025 compared to the three months ended September 30, 2024 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 September 30, 2025 and 2024, general and administrative expenses were $1.7 million and $1.9 million, respectively. The decrease in general and administrative expenses for the three months ended September 30, 2025 compared to the three months ended September 30, 2024 primarily relates to a decrease in stock-based compensation expense due to a reduction in the weighted average grant date fair value for restricted stock and restricted stock unit awards granted after September 30, 2024.

For the nine months ended September 30, 2025 and 2024, professional fees were $2.1 million and $2.0 million, respectively, which was relatively consistent year-over-year. For the nine months ended September 30, 2025 and 2024, general and administrative expenses were $5.4 million and $6.0 million, respectively. The decrease in general and administrative expenses for the nine months ended September 30, 2025 compared to the nine months ended September 30, 2024 primarily relates to a decrease in stock-based compensation expense due to a reduction in the weighted average grant date fair value for restricted stock and restricted stock unit awards granted after September 30, 2024.

Expenses From Real Estate Owned

For the three and nine months ended September 30, 2025 and 2024, expenses from real estate owned were comprised of the following ($ in thousands):

For both the three months ended September 30, 2025 and 2024, mixed-use property operating expenses were $1.2 million. For the nine months ended September 30, 2025 and 2024, mixed-use property operating expenses were $3.5 million and $3.4 million, respectively, which was relatively consistent year-over-year. Mixed-use property operating expenses consisted primarily of expenses incurred in the day-to-day operation of our mixed-use property, including common area maintenance costs, property taxes and insurance. Common area maintenance costs include items such as maintenance and repairs, utilities, janitorial services, security and property management fees.

For the three and nine months ended September 30, 2025, office property operating expenses were $1.3 million and $3.7 million, respectively, which consisted of operating expenses for our multi-building office property that was acquired on September 19, 2024. For the three and nine months ended September 30, 2024, office property operating expenses were $0.8 million and $0.9 million, respectively, which consisted of operating expenses for our office property that was acquired on June 12, 2024 and sold on November 15, 2024 and our multi-building office property that was acquired on September 19, 2024. Office property operating expenses consisted primarily of expenses incurred in the day-to-day operation of our office properties, including common area maintenance costs, property taxes and insurance. Common area maintenance costs include items such as maintenance and repairs, utilities, janitorial services, security and property management fees. The increase in office property operating expenses for the three and nine months ended September 30, 2025 compared to the three and nine months ended September 30, 2024 is primarily due to the three and nine months ended September 30, 2024 only including operating expenses related to the multi-building office property for the period September 19, 2024 to September 30, 2024 as we did not acquire legal title to the multi-building office property until September 19, 2024.

For the three and nine months ended September 30, 2025, depreciation and amortization expense was $2.0 million and $6.4 million, respectively, and relate primarily to our mixed-use property acquired on September 8, 2023 and our multi-building office property acquired on September 19, 2024. For the three and nine months ended September 30, 2024, depreciation and amortization expense was $1.2 million and $3.2 million, respectively, and relate primarily to our mixed-use property acquired on September 8, 2023 and our multi-building office property acquired on September 19, 2024. The increase in depreciation and amortization expense for the three and nine months ended September 30, 2025 compared to the three and nine months ended September 30, 2024 is primarily due to the three and nine months ended September 30, 2024 only including depreciation and amortization expense related to the multi-building office property for the period September 19, 2024 to September 30, 2024 as we did not acquire legal title to the multi-building office property until September 19, 2024.

(Provision for) Reversal of Current Expected Credit Losses, Net

For the three months ended September 30, 2025 and 2024, the (provision for) reversal of current expected credit losses, net was $2.2 million and $(7.5) million, respectively. For the three months ended September 30, 2025, the net reversal of current expected credit losses is primarily due to a realized loss on an office loan, resulting in a reversal of the associated CECL Reserve, shorter average remaining loan term, loan repayments, a relative improvement in the near-term macroeconomic forecasts and other loan-specific attributes during the three months ended September 30, 2025. These factors were partially offset by new loan closings and other loan-specific attributes during the three months ended September 30, 2025. For the three months ended September 30, 2024, the provision for current expected credit losses was primarily due to an increase in the CECL Reserve for risk rated “5” loans in the portfolio as a result of the impact of the current macroeconomic environment, including higher inflation and interest rates, and more particularly, volatility and reduced liquidity in the office sector and other loan-specific attributes during the three months ended September 30, 2024. These factors were partially offset by a realized loss on a risk rated “5” loan, resulting in a reversal of the associated CECL Reserve, shorter average remaining loan term and loan repayments during the three months ended September 30, 2024.

For the nine months ended September 30, 2025 and 2024, the (provision for) reversal of current expected credit losses, net was $27.7 million and $17.2 million, respectively. For the nine months ended September 30, 2025, the net reversal of current expected credit losses is primarily due to realized losses on two office loans, resulting in a reversal of the associated CECL Reserve, shorter average remaining loan term, loan repayments, a relative improvement in the near-term macroeconomic forecasts and other loan-specific attributes during the nine months ended September 30, 2025. These factors were partially offset by new loan closings and other loan-specific attributes during the nine months ended September 30, 2025. For the nine months ended September 30, 2024, the net reversal of current expected credit losses was primarily due to realized losses on four risk rated “5” loans, resulting in a reversal of the associated CECL Reserve, shorter average remaining loan term and loan repayments during the nine months ended September 30, 2024. These factors were partially offset by an increase in the CECL Reserve for risk rated “4” and “5” loans in the portfolio as a result of the impact of the current macroeconomic environment, including higher inflation and interest rates, and more particularly, volatility and reduced liquidity in the office sector and other loan-specific attributes during the nine months ended September 30, 2024.

The CECL Reserve takes into consideration our estimates relating to the impact of macroeconomic conditions on CRE properties and is not specific to any loan losses or impairments on our loans held for investment, unless the Company determines that a specifically identifiable reserve is warranted for a select asset. 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 macroeconomic conditions.

Realized Losses on Loans

In December 2023, we entered into a sale agreement with a third party to sell a senior mortgage loan with outstanding principal of $37.9 million, which was collateralized by a mixed-use property located in California. As of December 31, 2023, the sale had not yet closed and the loan was reclassified from held for investment to held for sale and was carried at the lower of carrying value or fair value in our consolidated balance sheets. We recognized an unrealized loss of $1.0 million in our consolidated statements of operations upon reclassifying the loan to held for sale as the carrying value of the senior mortgage loan exceeded fair value as determined by the agreed upon sale price of the loan and loan reserves. In January 2024, we closed the sale of the senior mortgage loan. At the time of the sale, the senior mortgage loan was in maturity default due to the failure of the borrower to repay the outstanding principal balance of the loan by the March 2023 maturity date. This $1.0 million unrealized loss was realized during the nine months ended September 30, 2024.

In February 2024, we 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. The discounted payoff was received in conjunction with a sale of the multifamily property by the borrower. 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 nine months ended September 30, 2024, we recognized a realized loss of $1.7 million in our consolidated statements of operations upon the payoff of the senior mortgage loan as the carrying value exceeded the net proceeds from the payoff of the loan.

In March 2024, we 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. The discounted payoff was received in conjunction with a sale of the office property by the borrower. 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 nine months ended September 30, 2024, we recognized a realized loss of $43.1 million in our consolidated statements of operations upon the payoff of the senior mortgage loan as the carrying value exceeded the net proceeds from the payoff of the loan.

In June 2024, we acquired legal title to an office property located in California through a foreclosure. The office property previously collateralized a $33.2 million senior mortgage loan held by us that was in maturity default due to the failure of the borrower to repay the outstanding principal balance of the loan by the December 2023 maturity date. In conjunction with the foreclosure, we derecognized the $33.2 million senior mortgage loan and recognized the office property as real estate owned. As we expected to complete a sale of the office property within the next twelve months, the office property was classified as real estate owned held for sale and was carried at its estimated fair value at acquisition, less costs to sell. For the nine months ended September 30, 2024, we recognized a realized loss of $16.4 million in our consolidated statements of operations on the derecognition of the senior mortgage loan as the estimated fair value less costs to sell of the office property of $14.5 million and the net operating assets and liabilities held at the office property of $(0.1) million at acquisition was less than the $30.8 million cost basis of the senior mortgage loan.

On September 19, 2024, we acquired legal title to a multi-building office property located in North Carolina through a deed in lieu of foreclosure. The office property previously collateralized a $68.6 million senior mortgage loan held by us that was 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. In conjunction with the deed in lieu of foreclosure, we derecognized the $68.6 million senior mortgage loan and recognized the office property as real estate owned. As we do not expect to complete a sale of the office property within the next twelve months, the office property is classified as held for investment, and is carried at its estimated fair value at acquisition and is presented net of accumulated depreciation or amortization and impairment charges. For both the three and nine months ended September 30, 2024, we recognized a realized loss of $5.8 million in our consolidated statements of operations on the derecognition of the senior mortgage loan as the fair value of the office property at acquisition of $60.2 million and the net operating assets and liabilities held at the office property of $(0.2) million at acquisition was less than the $65.8 million cost basis of the senior mortgage loan.

In June 2025, we received a discounted payoff on a senior mortgage loan with outstanding principal of $51.5 million, which was collateralized by an office (life sciences) property located in Massachusetts. The discounted payoff was received in conjunction with a sale of the office (life sciences) property by the borrower. For the nine months ended September 30, 2025, we recognized a realized loss of $33.0 million in our consolidated statements of operations upon the payoff of the senior mortgage loan as the carrying value exceeded the net proceeds from the payoff of the loan.

We previously held a senior A-Note loan with an outstanding principal balance of $59.0 million and a subordinated B-Note loan with an outstanding principal balance of $10.6 million, which were both collateralized by an office property located in New York. The subordinated B-Note loan was subordinate to new borrower equity related to additional capital contributions. In September 2025, we entered into a modification and extension agreement with the borrower to, among other things, (1) transfer $6.0 million of the outstanding principal balance from the subordinated B-Note loan to the senior A-Note loan, which increased the outstanding principal balance of the senior A-Note loan from $59.0 million to $65.0 million and (2) extinguish the remaining $4.6 million of outstanding principal balance of the subordinated B-Note loan. Upon the transfer of the $6.0 million of outstanding principal balance from the subordinated B-Note loan to the senior A-Note loan, the remaining outstanding principal balance of the subordinated B-Note loan was $4.6 million and the remaining carrying value was $1.6 million. In conjunction with the extinguishment of the remaining subordinated B-Note loan, we recognized a realized loss of $1.6 million in our consolidated statements of operations, which was equal to the remaining carrying value of the subordinated B-Note loan.

Change in Unrealized Losses on Loans Held for Sale

As described above, the sale of the senior mortgage loan with outstanding principal of $37.9 million, which was collateralized by a mixed-use property located in California, had not yet closed as of December 31, 2023. As such, we recognized an unrealized loss of $1.0 million in our consolidated statements of operations upon reclassifying the loan to held for sale for the year ended December 31, 2023. In January 2024, we closed the sale of the senior mortgage loan and the $1.0 million unrealized loss related to this senior mortgage loan for the year ended December 31, 2023 was realized during the nine months ended September 30, 2024.

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, repurchase shares 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, payments of principal and interest we receive on our portfolio of assets, cash generated from our operating activities and the net proceeds of future equity offerings, if any. 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.

We expect our primary sources of cash to continue to be sufficient to fund our operating activities and cash commitments for investing and financing activities for at least the next 12 months and thereafter for the foreseeable future. As a result of the current macroeconomic environment, certain borrowers have been unable to make interest and principal payments timely, including at the maturity date of the borrower’s loan. We increase our CECL Reserve from time to time, as necessary, to reflect this risk. 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. For example, certain of our Financing Agreements contain (i) negative covenants that limit, among other things, our ability to repurchase our common stock, make distributions to our stockholders, employ leverage beyond certain amounts, sell assets, engage in mergers or consolidations, grant liens, and enter into transactions with affiliates (including amending the Management Agreement in a material respect) and (ii) operating and financial covenants, including those requiring us to maintain a certain tangible net worth, asset coverage ratio, total net leverage ratio and loan concentration. We are also subject to cross-default and acceleration rights with respect to our Financing Agreements. If we experience borrower default as a result of the current macroeconomic conditions or otherwise, we may not be able to negotiate modifications to our borrowings with our lenders or 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.

Subject to maintaining our qualification as a REIT and our exemption from registration under the 1940 Act, we expect that our primary sources of 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. Macroeconomic conditions may impair our ability to access the financing and capital markets. 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 may also continue or discontinue share repurchases under the Repurchase Program. In addition, our FL4 CLO Securitization 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 FL4 CLO Securitization if these tests were met.

Ares Management or one of its investment vehicles may originate mortgage loans. We have had and may continue to have the opportunity to purchase such loans that are determined by our Manager in good faith to be appropriate for us, depending on our available liquidity. Ares Management or one of its investment vehicles may also acquire mortgage loans from us.

We have commitments to fund various senior mortgage loans, as well as subordinated debt and preferred equity investments in our portfolio. 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.

As of November 4, 2025, we had approximately $131 million in liquidity including $76 million of cash, which includes restricted amounts that are available to repay collateralized loan obligation securitization debt, and $55 million of availability under our Secured Funding Agreements.

Cash Flows

The following table sets forth changes in cash, cash equivalents and restricted cash for the nine months ended September 30, 2025 and 2024 ($ in thousands):

During the nine months ended September 30, 2025 and 2024, cash, cash equivalents and restricted cash increased (decreased) by $57.6 million and $(38.1) million, respectively.

Operating Activities

For the nine months ended September 30, 2025 and 2024, net cash provided by operating activities totaled $16.7 million and $28.5 million, respectively. For the nine months ended September 30, 2025, adjustments to net income (loss) related to operating activities primarily included the net reversal of current expected credit losses of $27.7 million, accretion of discounts, deferred loan origination fees and costs of $3.2 million, amortization of deferred financing costs of $3.6 million, depreciation and amortization of real estate owned of $6.5 million and realized losses on loans of $34.6 million. For the nine months ended September 30, 2024, adjustments to net income (loss) related to operating activities primarily included the net reversal of current expected credit losses of $17.2 million, accretion of discounts, deferred loan origination fees and costs of $3.7 million, amortization of deferred financing costs of $4.0 million and realized losses on loans of $67.9 million.

Investing Activities

For the nine months ended September 30, 2025, net cash provided by investing activities totaled $438.2 million and was primarily related to cash received from principal collections and cost-recovery proceeds on loans held for investment exceeding the cash used for the origination and funding of loans held for investment. For the nine months ended September 30, 2024, net cash provided by investing activities totaled $255.2 million and was primarily related to cash received from principal collections and cost-recovery proceeds on loans held for investment and from the sale of loans held for sale exceeding the cash used for the origination and funding of loans held for investment.

Financing Activities

For the nine months ended September 30, 2025, net cash used in financing activities totaled $397.3 million and was primarily related to repayments of our Secured Funding Agreements of $195.6 million, repayments of debt of consolidated VIEs of $338.3 million, repayments of our Secured Term Loan of $30.0 million and dividends paid of $30.6 million, partially offset by proceeds from our Secured Funding Agreements of $200.1 million. For the nine months ended September 30, 2024, net cash used in financing activities totaled $321.8 million and was primarily related to repayments of our Secured Funding Agreements of $113.7 million, repayments of our Notes Payable of $105.0 million, repayments of debt of consolidated VIEs of $148.7 million, repayments of our Secured Term Loan of $20.0 million and dividends paid of $45.8 million, partially offset by proceeds from our Secured Funding Agreements of $114.5 million.

Summary of Financing Agreements

The sources of financing, as applicable in a given period, under our Financing Agreements are described in the following table ($ in thousands):

(1) In February 2025, we amended the master repurchase funding facility with Wells Fargo Bank, National Association (the “Wells Fargo Facility”) to, among other things, extend the initial maturity date and funding period of the Wells Fargo Facility to February 10, 2028, subject to two 12-month extensions, each of which may be exercised 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, each of which may be exercised at our option provided that certain conditions are met and applicable extension fees are paid. The Citibank Facility has an accordion provision such that the maximum commitment may be increased to up to $425.0 million by up to two increments of $50.0 million with the consent of Citibank, subject to the satisfaction of certain conditions, including payment of an upsize fee.

(3) In February 2025, we exercised our 12-month extension option to extend the maturity date of the secured revolving funding facility with City National Bank (the "CNB Facility") to March 10, 2026. The interest rate on advances under the CNB Facility is a per annum rate equal to the sum of, at our option, either (a) a SOFR-based rate plus 3.25% or (b) a base rate plus 2.25%, in each case, subject to an interest rate floor. The amount immediately available under the CNB Facility at any given time can fluctuate based on the fair value of the collateral in the borrowing base that secures the CNB Facility. As of September 30, 2025, there was no immediate availability under the CNB Facility based on the fair value of the collateral in the borrowing base at such time. The amount immediately available under the CNB Facility may be increased to up to $75.0 million by the pledge of additional collateral into the borrowing base in accordance with the CNB Facility agreement.

(4) In June 2025, we amended the master repurchase and securities contract with Morgan Stanley (the “Morgan Stanley Facility”) to, among other things, (1) extend the initial maturity date to July 16, 2026, subject to one 12-month extension, which may be exercised at our option provided that certain conditions are met and the applicable extension fee is paid and (2) reduce the commitment from $250.0 million to $150.0 million, which includes an accordion provision such that the maximum commitment may be increased to up to $250.0 million at our option, subject to the satisfaction of certain conditions, including payment of an upsize fee.

(5) The maturity date of 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”) is November 12, 2026. Advances under the Secured Term Loan are set to the following fixed rates: (i) 4.50% per annum until May 1, 2025 and (ii) after May 1, 2025 through November 12, 2026, the interest rate increases 0.25% every three months. The Secured Term Loan has a contingent interest rate increase of 4.00% if the outstanding principal amount of the Secured Term Loan is not paid down to the following amounts on specific dates as follows: (i) $120.0 million as of February 1, 2025, (ii) $110.0 million as of May 1, 2025, (iii) $100.0 million as of August 1, 2025 and (iv) $90.0 million as of November 1, 2025. In each of January 2025, April 2025 and July 2025, we elected to repay $10.0 million of outstanding principal on the Secured Term Loan at par.

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 September 30, 2025, 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 September 30, 2025, both the carrying amount and outstanding principal of our FL4 CLO Securitization was $117.8 million. See Note 14 to our consolidated financial statements included in this quarterly report on Form 10-Q for additional terms and details of our FL4 CLO Securitization.

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 macroeconomic 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 4.5-to-1 ratio. Our charter and bylaws do not restrict the amount of leverage that we may use. The amount of leverage we deploy for particular investments in our target investments depends upon our Manager’s assessment of a variety of factors, which includes, 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 macroeconomic environment 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 SOFR curve or another alternative interest index rate commonly used for floating rate loans.

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, receive a credit for their share of the tax paid by such REIT, and 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 and debt service requirements under 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 elect to make a portion of the Required Distribution in the form of a taxable stock distribution or distribution of debt securities.

As part of our risk management strategy, our Manager closely monitors our portfolio and actively manages the credit, interest rate, market, prepayment, financing, real estate and inflation 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. We seek to manage our risks related to the credit quality of our assets, interest rates, liquidity, prepayment rates and market value while, at the same time, seeking to provide an opportunity to stockholders to realize attractive risk-adjusted returns through ownership of our capital stock. While we do not seek to avoid risk completely, we believe the risks can be quantified from historical experience and seek to actively manage those risks, to earn sufficient compensation to justify taking those risks and to maintain capital levels consistent with the risks we undertake.

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 held for investment. Our Manager seeks to manage credit risk by performing a 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 the current macroeconomic environment, certain borrowers have not been able to repay principal upon the loan maturity and may not be able to 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 continued regular dialogue with our borrowers and our financing providers to assess this credit risk.

Interest Rate Risk

Interest rates are highly sensitive to many factors, including fiscal, monetary and trade 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. As of September 30, 2025, we did not have hedging or derivative financial instruments in place.

In addition to the risks discussed above, 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, which may be mitigated by borrower purchased interest rate caps.

Interest Rate Effect on Net Income

Our interest income and expense will generally change directionally with index rates. The impact of declining interest rates may be mitigated by interest rate floors and 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 SOFR as of September 30, 2025 and (2) no change in the outstanding principal balance of our loans held for investment portfolio and borrowings as of September 30, 2025 ($ in millions):

54

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 or hedging transactions. 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 Floor Risk

We primarily originate or acquire floating rate mortgage and mortgage-related assets. Some of these mortgage assets may be subject to interest rate floors. Similarly, some of our borrowing costs may be subject to interest rate floors. 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. In addition, a decrease in interest rates or tightening credit spreads increases the likelihood that certain of our investments will be refinanced at lower rates. 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.

Market Risk

The estimated fair values of our investments fluctuate primarily due to changes in index rates, changes in credit spreads and other factors. In general, in a rising interest rate environment, whether due to increases in index rates or credit spreads, the estimated fair value of our fixed-rate investments would generally be expected to decrease; conversely, in a decreasing interest rate environment, whether due to decreases in index rates or credit spreads, the estimated fair value of our fixed-rate investments would generally be expected to increase. Also, in general, in a widening credit spread environment, the estimated fair value of our floating rate investments would generally be expected to decrease. However, in a compressing credit spread environment, the estimated fair value of our floating rate investments may not increase, particularly if prepayment restrictions are not in place and our floating rate investments are fully prepayable. As market volatility increases or liquidity decreases, the fair value of our investments and liabilities may be adversely impacted.

Prepayment and Securitizations Repayment Risk

Our net income (loss) 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 high 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 FL4 CLO Securitization are applied sequentially, first used to pay down the senior notes in the FL4 CLO Securitization. We will not receive any proceeds from the repayment of loans in the FL4 CLO Securitization until all senior notes are repaid in full.

Financing Risk

We borrow funds under our Financing Agreements to finance our target assets. We may be subject to risk arising from a default by one of several large banking institutions that are dependent on one another to meet their liquidity or operational needs, so that a default by one institution may cause a series of defaults by the other institutions, and may impact the liquidity of our lenders and their willingness to provide us with borrowings to finance our target assets and other needs.

In addition, 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. For example, certain of our Financing Agreements contain (i) negative covenants that limit, among other things, our ability to repurchase our common stock, make distributions to our stockholders, employ leverage beyond certain amounts, sell assets, engage in mergers or consolidations, grant liens, and enter into transactions with affiliates (including amending the Management Agreement in a material respect) and (ii) operating and financial covenants, including those requiring us to maintain a certain tangible net worth, asset coverage ratio, total net leverage ratio and loan concentration. We are also subject to cross-default and acceleration rights with respect to our Financing Agreements. In addition, our FL4 CLO Securitization 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 FL4 CLO Securitization if these tests were met. Additionally, in such a case, interest income may continue to accrue for the holders of subordinate securities within the FL4 CLO Securitization notwithstanding the cash being used to repay principal on the more senior securities. This would cause us to recognize income but not have a corresponding amount of cash available for operations or for distribution to our stockholders.

Continued 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 lenders or potential lenders and could cause one or more of our lenders or potential lenders to be unwilling or unable to provide us with financing or to increase the costs of that financing. From time to time, capital markets may also experience periods of disruption and instability, which may adversely affect our ability to refinance our financing arrangements.

Real Estate Risk

Our real estate investments and the value of real estate owned 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; insurance costs; and retroactive changes to building or similar codes. Higher interest rates and persistent inflation have had, and continue to have, an adverse impact on industries whose properties serve as collateral for some of our portfolio investments. Similarly, increased demand for work-from-home arrangements and elevated costs to operate, improve or repurpose office properties have impacted the operations of office properties and rising operating costs, such as property insurance, have further pressured cash flow performance of commercial real estate. 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, and reduce the value of properties that we own as a result of default on the underlying loan, each of which could 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 but adverse changes in inflation or changes in inflation expectations can lead to lower returns on our investments than originally anticipated. Current levels of inflation could exacerbate this possibility. 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.

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 September 30, 2025. Based upon that evaluation and subject to the foregoing, our principal executive officer and principal financial officer concluded that, as of September 30, 2025, 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 September 30, 2025 that have materially affected, or that are reasonably likely to materially affect, our internal control over financial reporting.

You should carefully consider the risk factors discussed in Part I, “Item 1A. Risk Factors” in our 2024 Annual Report, which could materially affect our business, financial condition and/or operating results. The risks described in our 2024 Annual Report 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.