Ares Commercial Real Estate Corp

Previous wording

•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 and also recognized the associated assets and liabilities held at the office property.We recognized a realized loss of $16.4 million on the derecognition of the senior mortgage loan as the estimated fair value less costs to sell of the office property at acquisition and the net operating assets and liabilities held at the office property at acquisition was less than the cost basis of the senior mortgage loan.

Current wording

•We acquired legal title to an 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 and also recognized the associated assets and liabilities held at the office property. We recognized a realized loss of $5.8 million 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.

Previous wording

•We elected to terminate the MetLife Facility (as defined below) prior to its scheduled maturity on August 13, 2024 as the facility had no outstanding balance.

Current wording

•We elected to repay in full and terminate the $105.0 million note (as defined below) prior to its scheduled maturity in July 2025.

Previous wording

Federal Reserve has signaled for a potential decrease in interest rates in 2024, there is no certainty that there will be a decrease in interest rates in 2024 or the magnitude or pace of potential decreases or even if such decreases will occur, especially if inflation accelerates. Office properties continue to experience headwinds driven by the increased prevalence of remote work and elevated costs to operate, improve or repurpose office properties. These factors have largely resulted in lower demand for office space and have driven elevated levels of vacancy and default rates.

Current wording

While lower market rates and increased capital markets liquidity supports commercial real estate property transactions and values, regulated lending institutions are adjusting their business models to increase capital requirements for direct loans to real estate and thus continue to be constrained in providing capital for commercial real estate properties. Additionally, rising operating costs, such as property insurance and raw material costs for property development and improvements, have further pressured cash flow performance across many real estate property types. Although the Federal Reserve has signaled further decreases in interest rates in 2024 and 2025, there is no certainty that there will be a decrease in interest rates or the magnitude or pace of potential decreases or even if such decreases will occur, especially if inflation accelerates. Office properties in particular continue to experience challenges driven by the increased prevalence of remote work and elevated costs to operate, improve or repurpose office properties. These factors have largely resulted in lower demand for office space and have driven elevated levels of vacancy and default rates.

Previous wording

Offsetting some of these headwinds is the material decline in new commercial real estate development that unfolded throughout 2023 and has continued into 2024. Ultimately, this lack of new future inventory may result in a shortage of contemporary, in demand properties in the years to come. Alongside this burgeoning trend there is a significant amount of unspent capital targeting commercial real estate properties that could support values and elevate transaction activities.

Current wording

Offsetting some of these challenges is the significant decline in new commercial real estate development that unfolded throughout 2023 and has continued into 2024. Ultimately, this lack of new future inventory may result in a shortage of contemporary, in demand properties in the years to come. Alongside this trend there is a significant amount of unspent capital targeting commercial real estate properties that could support values and elevate transaction activities.

Previous wording

On July 25, 2023, our board of directors renewed the Repurchase Program of up to $50.0 million, which was expected to be in effect until July 31, 2024, or until the approved dollar amount had been used to repurchase shares. On July 31, 2024, our board of directors further renewed the Repurchase Program of up to $50.0 million, which is expected to be in effect until July 31, 2025, 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 six months ended June 30, 2024, we did not repurchase any shares through the Repurchase Program.

Current wording

On July 25, 2023, our board of directors renewed the Repurchase Program of up to $50.0 million, which was expected to be in effect until July 31, 2024, or until the approved dollar amount had been used to repurchase shares. On July 31, 2024, our board of directors further renewed the Repurchase Program of up to $50.0 million, which is expected to be in effect until July 31, 2025, 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, 2024, we did not repurchase any shares through the Repurchase Program.

Previous wording

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

Current wording

As of September 30, 2024, our portfolio included 40 loans held for investment, excluding 174 loans that were repaid, sold or converted to real estate owned since inception. As of September 30, 2024, the aggregate originated commitment under these loans at closing was approximately $2.0 billion and outstanding principal was $1.8 billion. During the nine months ended September 30, 2024, we funded approximately $36.8 million of outstanding principal, received repayments of $202.8 million of outstanding principal and converted two loans with outstanding principal of $101.8 million to real estate owned. As of September 30, 2024, 66.1% of our loans have SOFR floors, with a weighted average floor of 1.08%, calculated based on loans with SOFR floors. References to SOFR or “S” are to 30-day SOFR (unless otherwise specifically stated).

Previous wording

Our board of directors declared a regular cash dividend of $0.25 per common share for the third quarter of 2024. The third quarter 2024 dividend will be payable on October 15, 2024 to common stockholders of record as of September 30, 2024.

Current wording

Our board of directors declared a regular cash dividend of $0.25 per common share for the fourth quarter of 2024. The fourth quarter 2024 dividend will be payable on January 15, 2025 to common stockholders of record as of December 31, 2024.

Previous wording

The following table sets forth a summary of our consolidated results of operations for the three and six months ended June 30, 2024 and 2023 ($ in thousands):

Current wording

The following table sets forth a summary of our consolidated results of operations for the three and nine months ended September 30, 2024 and 2023 ($ in thousands):

Previous wording

The following tables set forth select details of our consolidated results of operations for the three and six months ended June 30, 2024 and 2023 ($ in thousands):

Current wording

The following tables set forth select details of our consolidated results of operations for the three and nine months ended September 30, 2024 and 2023 ($ in thousands):

Previous wording

For the three months ended June 30, 2024 and 2023, net interest margin was approximately $13.4 million and $25.0 million, respectively. For the three months ended June 30, 2024 and 2023, interest income of $40.8 million and $51.9 million, respectively, was generated by weighted average earning assets of $2.1 billion and $2.2 billion, respectively, offset by $27.5 million and $27.0 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 were $1.5 billion for the three months ended June 30, 2024 and $1.7 billion for the three months ended June 30, 2023. The decrease in net interest margin for the three months ended June 30, 2024 compared to the three months ended June 30, 2023 relates to a decrease in our weighted average earning assets and weighted average borrowings for the three months ended June 30, 2024 as compared to the three months ended June 30, 2023, no benefit received from our interest rate hedging derivative contracts for the three months ended June 30, 2024 due to the expiration of the contracts in December 2023 and an increase in the amount of loans held for investment on non-accrual status for the three months ended June 30, 2024 as compared to the three months ended June 30, 2023. This decrease was partially offset by the benefit received from the increase in SOFR rates on our loans held for investment for the three months ended June 30, 2024 as compared to three months ended June 30, 2023.

Current wording

For the three months ended September 30, 2024 and 2023, net interest margin was approximately $11.9 million and $23.1 million, respectively. For the three months ended September 30, 2024 and 2023, interest income of $39.3 million and $52.8 million, respectively, was generated by weighted average earning assets of $2.0 billion and $2.3 billion, respectively, offset by $27.4 million and $29.7 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 were $1.4 billion for the three months ended September 30, 2024 and $1.7 billion for the three months ended September 30, 2023. The decrease in net interest margin for the three months ended September 30, 2024 compared to the three months ended September 30, 2023 relates to a decrease in our weighted average earning assets and weighted average borrowings for the three months ended September 30, 2024 as compared to the three months ended September 30, 2023, no benefit received from our interest rate hedging derivative contracts for the three months ended September 30, 2024 due to the expiration of the contracts in December 2023 and an increase in the amount of loans held for investment on non-accrual status for the three months ended September 30, 2024 as compared to the three months ended September 30, 2023.

Previous wording

For the six months ended June 30, 2024 and 2023, net interest margin was approximately $28.6 million and $51.5 million, respectively. For the six months ended June 30, 2024 and 2023, interest income of $84.9 million and $101.4 million, respectively, was generated by weighted average earning assets of $2.1 billion and $2.3 billion, respectively, offset by $56.3 million and $50.0 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, Secured Borrowings and securitization debt were $1.5 billion for the six months ended June 30, 2024 and $1.7 billion for the six months ended June 30, 2023. The decrease in net interest margin for the six months ended June 30, 2024 compared to the six months ended June 30, 2023 relates to a decrease in our weighted average earning assets and weighted average borrowings for the six months ended June 30, 2024, no benefit received from our interest rate hedging derivative contracts for the six months ended June 30, 2024 due to the expiration of the contracts in December 2023 and an increase in the amount of loans held for investment on non-accrual status for the six months ended June 30, 2024 as compared to the six months ended June 30, 2023. This decrease was partially offset by the benefit received from the increase in SOFR rates on our loans held for investment for the six months ended June 30, 2024 as compared to the six months ended June 30, 2023.

Current wording

For the nine months ended September 30, 2024 and 2023, net interest margin was approximately $40.5 million and $74.6 million, respectively. For the nine months ended September 30, 2024 and 2023, interest income of $124.2 million and $154.3 million, respectively, was generated by weighted average earning assets of $2.1 billion and $2.3 billion, respectively, offset by $83.7 million and $79.7 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, Secured Borrowings and securitization debt were $1.5 billion for the nine months ended September 30, 2024 and $1.7 billion for the nine months ended September 30, 2023. The decrease in net interest margin for the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023 relates to a decrease in our weighted average earning assets and weighted average borrowings for the nine months ended September 30, 2024, no benefit received from our interest rate hedging derivative contracts for the nine months ended September 30, 2024 due to the expiration of the contracts in December 2023 and an increase in the amount of loans held for investment on non-accrual status for the nine months ended September 30, 2024 as compared to the nine months ended September 30, 2023. This decrease was partially offset by the benefit received from the increase in SOFR rates on our loans held for investment for the nine months ended September 30, 2024 as compared to the nine months ended September 30, 2023.

Previous wording

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. For both the three and six months ended June 30, 2024, revenue from real estate owned related to this property was $0.2 million. Revenues consist primarily of rental revenue from operating leases. For both the three and six months ended June 30, 2023, we received no revenue from real estate owned related to this property.

Current wording

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 consist 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. For both the three and nine months ended September 30, 2023, we received no revenue from real estate owned related to this property as we acquired legal title to the property on June 12, 2024.

Previous wording

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. For the three and six months ended June 30, 2024, revenue from real estate owned related to this property was $3.2 million and $6.7 million, respectively. Revenues consist primarily of rental revenue from operating leases. For both the three and six months ended June 30, 2023, we received no revenue from real estate owned related to this property.

Current wording

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, 2024, revenue from real estate owned related to this property was $3.3 million and $9.9 million, respectively. For both the three and nine months ended September 30, 2023, revenue from real estate owned related to this property was $0.8 million.

Previous wording

See the Related Party Expenses, Other Expenses and Expenses from Real Estate Owned discussions below for the drivers of the increase in operating expenses for the three months ended June 30, 2024 compared to the three months ended June 30, 2023 and the cause of the increase in operating expenses for the six months ended June 30, 2024 compared to the six months ended June 30, 2023.

Current wording

See the Related Party Expenses, Other Expenses and Expenses from Real Estate Owned discussions below for the drivers of the increase in operating expenses for the three months ended September 30, 2024 compared to the three months ended September 30, 2023 and the cause of the increase in operating expenses for the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023.

Previous wording

For the six months ended June 30, 2024, related party expenses included $5.5 million in management fees due to our Manager pursuant to the Management Agreement. No incentive fees were incurred for the six months ended June 30, 2024. For the six months ended June 30, 2024, related party expenses also included $2.4 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 six months ended June 30, 2023, related party expenses included $6.3 million in management and incentive fees due to our Manager pursuant to the Management Agreement, which consisted of $6.0 million in management fees and $0.3 million in incentive fees. For the six months ended June 30, 2023, related party expenses also included $1.8 million for our share of allocable general and administrative expenses for which we were required to reimburse our Manager pursuant to the Management Agreement. The decrease in management fees for the six months ended June 30, 2024 compared to the six months ended June 30, 2023 primarily relates to a decrease in our weighted average stockholders’ equity for the six months ended June 30, 2024 as a result of realized losses on loans. The decrease in incentive fees for the six months ended June 30, 2024 compared to the six months ended June 30, 2023 primarily relates to our Core Earnings for the twelve months ended June 30, 2024 not exceeding the 8% minimum return. The increase in allocable general and administrative expenses due to our Manager for the six months ended June 30, 2024 compared to the six months ended June 30, 2023 relates to an increase in the percentage of time allocated to us by employees of our Manager due to changes in transaction activity year over year.

Current wording

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. For the three months ended September 30, 2023, related party expenses included $3.0 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, 2023. For the three months ended September 30, 2023, 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. The decrease in management fees for the three months ended September 30, 2024 compared to the three months ended September 30, 2023 primarily relates to a decrease in our weighted average stockholders’ equity for the three months ended September 30, 2024 as a result of realized losses on loans. The increase in allocable general and administrative expenses due to our Manager for the three months ended September 30, 2024 compared to the three months ended September 30, 2023 relates to an increase in the percentage of time allocated to us by employees of our Manager due to changes in transaction activity year over year.

Previous wording

For the three months ended June 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 June 30, 2024. For the three months ended June 30, 2024, related party expenses also included $1.3 million for our share of allocable general and administrative expenses for which we were required to reimburse our Manager pursuant to the Management Agreement. For the three months ended June 30, 2023, related party expenses included $3.3 million in management and incentive fees due to our Manager pursuant to the Management Agreement, which consisted of $3.0 million in management fees and $0.3 million in incentive fees. For the three months ended June 30, 2023, 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 decrease in management fees for the three months ended June 30, 2024 compared to the three months ended June 30, 2023 primarily relates to a decrease in our weighted average stockholders’ equity for the three months ended June 30, 2024 as a result of realized losses on loans. The decrease in incentive fees for the three months ended June 30, 2024 compared to the three months ended three months ended June 30, 2023 primarily relates to our Core Earnings (defined below) for the twelve months ended June 30, 2024 not exceeding the 8% minimum return. “Core Earnings” is defined in the Management Agreement as 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 ACREM and our independent directors and after approval by a majority of our independent directors. The increase in allocable general and administrative expenses due to our Manager for the three months ended June 30, 2024 compared to the three months ended June 30, 2023 relates to an increase in the percentage of time allocated to us by employees of our Manager due to changes in transaction activity year over year.

Current wording

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. For the nine months ended September 30, 2023, related party expenses included $9.3 million in management and incentive fees due to our Manager pursuant to the Management Agreement, which consisted of $9.0 million in management fees and $0.3 million in incentive fees. For the nine months ended September 30, 2023, related party expenses also included $2.6 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, 2024 compared to the nine months ended September 30, 2023 primarily relates to a decrease in our weighted average stockholders’ equity for the nine months ended September 30, 2024 as a result of realized losses on loans. The decrease in incentive fees for the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023 primarily relates to our Core Earnings (defined below) for the twelve months ended September 30, 2024 not exceeding the 8% minimum return. “Core Earnings” is defined in the Management Agreement as 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 ACREM and our independent directors and after approval by a majority of our independent directors. The increase in allocable general and administrative expenses due to our Manager for the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023 relates to an increase in the percentage of time allocated to us by employees of our Manager due to changes in transaction activity year over year.

Previous wording

For the three months ended June 30, 2024 and 2023, professional fees were $0.8 million and $0.6 million, respectively. The increase in professional fees for the three months ended June 30, 2024 compared to the three months ended June 30, 2023 relates to an increase in our use of third-party professionals due to changes in transaction activity year over year. For both the three months ended June 30, 2024 and 2023, general and administrative expenses were $2.0 million.

Current wording

For both the three months ended September 30, 2024 and 2023, professional fees were $0.7 million. For the three months ended September 30, 2024 and 2023, general and administrative expenses were $1.9 million and $1.7 million, respectively. The increase in general and administrative expenses for the three months ended September 30, 2024 compared to the three months ended September 30, 2023 relates to an increase in stock-based compensation expense due to restricted stock and restricted stock unit awards granted after September 30, 2023.

Previous wording

For the six months ended June 30, 2024 and 2023, professional fees were $1.3 million and $1.4 million, respectively, which was relatively consistent year over year. For the six months ended June 30, 2024 and 2023, general and administrative expenses were $4.0 million and $3.7 million, respectively. The increase in general and administrative expenses for the six months ended June 30, 2024 compared to the six months ended June 30, 2023 relates to an increase in stock-based compensation expense due to restricted stock and restricted stock unit awards granted after June 30, 2023.

Current wording

For the nine months ended September 30, 2024 and 2023, professional fees were $2.0 million and $2.1 million, respectively, which was relatively consistent year over year. For the nine months ended September 30, 2024 and 2023, general and administrative expenses were $6.0 million and $5.4 million, respectively. The increase in general and administrative expenses for the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023 relates to an increase in stock-based compensation expense due to restricted stock and restricted stock unit awards granted after September 30, 2023.

Previous wording

For the three and six months ended June 30, 2024, expenses from real estate owned was comprised of the following ($ in thousands):

Current wording

For thethree and nine months ended September 30, 2024 and 2023, expenses from real estate owned was comprised of the following ($ in thousands):

Previous wording

For the three and six months ended June 30, 2024, mixed-use property operating expenses were $1.1 million and $2.1 million, respectively. For the three and six months ended June 30, 2023, there were no mixed-use property operating expenses incurred as we acquired legal title to the mixed-use property on September 8, 2023. 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.

Current wording

For the three and nine months ended September 30, 2024, mixed-use property operating expenses were $1.2 million and $3.4 million, respectively. For both the three and nine months ended September 30, 2023, mixed-use property operating expenses were $0.2 million. 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.

Previous wording

For both the three and six months ended June 30, 2024, office property operating expenses were $0.1 million, which consists of operating expenses for the period from June 12, 2024, the date on which we acquired the office property, to June 30, 2024. For both the three and six months ended June 30, 2023, there were no office property operating expenses incurred as we did not acquire legal title to the office property until June 12, 2024. Office property operating expenses consisted primarily of expenses incurred in the day-to-day operation of our office 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.

Current wording

For the three and nine months ended September 30, 2024, office property operating expenses were $0.8 million and $0.9 million, respectively, which consists of operating expenses for two office properties, which were acquired on June 12, 2024 and September 19, 2024, respectively. For both the three and nine months ended September 30, 2023, there were no office property operating expenses incurred as we did not acquire legal title to the two office properties until June 12, 2024 and September 19, 2024, respectively. Office property operating expenses consisted primarily of expenses incurred in the day-to-day operation of our two 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.

Previous wording

For the three and six months ended June 30, 2024, depreciation and amortization expense was $1.0 million and $2.0 million, respectively, and relates primarily to our mixed-use property that was acquired on September 8, 2023. As the office property is classified as real estate owned held for sale, we are not depreciating or amortizing the carrying value of the office property. We had no depreciation and amortization expense for both the three and six months ended June 30, 2023.

Current wording

For the three and nine months ended September 30, 2024, depreciation and amortization expense was $1.2 million and $3.2 million, respectively, and relates primarily to our mixed-use property that was acquired on September 8, 2023 and our office property acquired on September 19, 2024. As the office property acquired on June 12, 2024 is classified as real estate owned held for sale, we are not depreciating or amortizing the carrying value of the office property. For both the three and nine months ended September 30, 2023, depreciation and amortization expense was $0.3 million and related primarily to our mixed-use property that was acquired on September 8, 2023.

Previous wording

For the three months ended June 30, 2024 and 2023, the provision for current expected credit losses was $(2.4) million and $20.1 million, respectively. The decrease in the provision for current expected credit losses for the three months ended June 30, 2024 is primarily due to a realized loss on a risk rated “5” loan, resulting in a reversal of the associated CECL Reserve, and shorter average remaining loan term during the three months ended June 30, 2024. These factors were partially offset by an increase in the CECL Reserves for risk rated “4” and “5” loans in the portfolio as a result of the impact of the current macroeconomic environment, including high inflation and interest rates, volatility and reduced liquidity in the office sector and other loan-specific factors during the three months ended June 30, 2024. The increase in the provision for current expected credit losses for the three months ended June 30, 2023 was primarily due an increase in the CECL reserves for risk rated “4” and “5” loans in the portfolio as a result of the impact of the current macroeconomic environment, including high inflation and interest rates, volatility and reduced liquidity in the office sector and other loan-specific factors, partially offset by shorter average remaining loan term and loan repayments during the three months ended June 30, 2023.

Current wording

For the three months ended September 30, 2024 and 2023, the provision for current expected credit losses was $7.5 million and $3.2 million, respectively. The increase in the provision for current expected credit losses for the three months ended September 30, 2024 is primarily due to an increase in the CECL Reserves for risk rated “5” loans in the portfolio as a result of the impact of the current macroeconomic environment, including high inflation and interest rates, and more particularly, volatility and reduced liquidity in the office sector and other loan-specific factors 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. The increase in the provision for current expected credit losses for the three months ended September 30, 2023 was primarily due an increase in the CECL reserves for risk rated “4” and “5” loans in the portfolio as a result of the impact of the current macroeconomic environment, including high inflation and interest rates, volatility and reduced liquidity in the office sector and other loan-specific factors, partially offset by shorter average remaining loan term and loan repayments during the three months ended September 30, 2023.

Previous wording

For the six months ended June 30, 2024 and 2023, the provision for current expected credit losses was $(24.6) million and $41.1 million, respectively. The decrease in the provision for current expected credit losses for the six months ended June 30, 2024 is primarily due to realized losses on three risk rated “5” loans, resulting in a reversal of associated CECL Reserves, shorter average remaining loan term and loan repayments during the six months ended June 30, 2024. These factors were partially offset by an increase in the CECL Reserves for risk rated “4” and “5” loans in the portfolio as a result of the impact of the current macroeconomic environment, including high inflation and interest rates, volatility and reduced liquidity in the office sector and other loan-specific factors during the six months ended June 30, 2024. The increase in the provision for current expected credit losses for the six months ended June 30, 2023 was primarily due to an increase in the CECL reserves for risk rated “4” and “5” loans in the portfolio as a result of the impact of the current macroeconomic environment, including high inflation and interest rates, volatility and reduced liquidity in the office sector and other loan-specific factors partially offset by shorter average remaining loan term and loan repayments during the six months ended June 30, 2023.

Current wording

For the nine months ended September 30, 2024 and 2023, the provision for current expected credit losses was $(17.2) million and $44.4 million, respectively. The decrease in the provision for current expected credit losses for the nine months ended September 30, 2024 is primarily due to realized losses on four risk rated “5” loans, resulting in a reversal of associated CECL Reserves, 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 Reserves for risk rated “4” and “5” loans in the portfolio as a result of the impact of the current macroeconomic environment, including high inflation and interest rates, and more particularly, volatility and reduced liquidity in the office sector and other loan-specific factors during the nine months ended September 30, 2024. The increase in the provision for current expected credit losses for the nine months ended September 30, 2023 was primarily due to an increase in the CECL reserves for risk rated “4” and “5” loans in the portfolio as a result of the impact of the current macroeconomic environment, including high inflation and interest rates, volatility and reduced liquidity in the office sector and other loan-specific factors partially offset by shorter average remaining loan term and loan repayments during the nine months ended September 30, 2023.

Previous wording

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 six months ended June 30, 2024.

Current wording

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.

Previous wording

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 short sale of the multifamily property by the borrower to a third party. At the time of the discounted payoff, the senior mortgage loan was in default due to the failure of the borrower to repay the outstanding principal balance of the loan by the September 2023 maturity date. For the six months ended June 30, 2024, 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.

Current wording

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 short sale of the multifamily property by the borrower to a third party. At the time of the discounted payoff, the senior mortgage loan was in default due to the failure of the borrower to repay the outstanding principal balance of the loan by the September 2023 maturity date. For the 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.

Previous wording

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 short sale of the office property by the borrower to a third party. At the time of the discounted payoff, the senior mortgage loan was in default due to the failure of the borrower to repay the outstanding principal balance of the loan by the

Current wording

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 short sale of the office property by the borrower to a third party. At the time of the discounted payoff, the senior mortgage loan was in default due to the failure of the borrower to repay the outstanding principal balance of the loan by the February 2024 maturity date. For the 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.

Previous wording

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 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 expect to complete a sale of the office property within the next twelve months, the office property is classified as real estate owned held for sale and is carried at its estimated fair value at acquisition, less costs to sell. For both the three and six months ended June 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.

Current wording

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 expect to complete a sale of the office property within the next twelve months, the office property is classified as real estate owned held for sale and is 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.

Previous wording

In January 2023, we closed the sale of a senior mortgage loan with outstanding principal of $14.3 million, which was collateralized by a residential property located in California, to a third party. 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 May 2021 maturity date. For the six months ended June 30, 2023, we recognized a realized loss of $5.6 million in our consolidated statements of operations upon the sale of the senior mortgage loan as the carrying value exceeded the sale price of the loan.

Current wording

In January 2023, we closed the sale of a senior mortgage loan with outstanding principal of $14.3 million, which was collateralized by a residential property located in California, to a third party. 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 May 2021 maturity date. For the nine months ended September 30, 2023, we recognized a realized loss of $5.6 million in our consolidated statements of operations upon the sale of the senior mortgage loan as the carrying value exceeded the sale price of the loan.

Previous wording

In January 2024, we closed the sale of the senior mortgage loan that was classified as held for sale as of December 31, 2023 and the $1.0 million unrealized loss related to this senior mortgage loan for the year ended December 31, 2023 was realized during the six months ended June 30, 2024.

Current wording

In January 2024, we closed the sale of the senior mortgage loan that was classified as held for sale as of December 31, 2023 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.

Previous wording

As of August 2, 2024, we had approximately $110 million in liquidity including $60 million of unrestricted cash and $50 million of availability under our Secured Funding Agreements.

Current wording

As of November 5, 2024, we had approximately $134 million in liquidity including $92 million of unrestricted cash and $42 million of availability under our Secured Funding Agreements.

Previous wording

The following table sets forth changes in cash and cash equivalents for the six months ended June 30, 2024 and 2023 ($ in thousands):

Current wording

The following table sets forth changes in cash, cash equivalents and restricted cash for the nine months ended September 30, 2024 and 2023 ($ in thousands):

Previous wording

For the six months ended June 30, 2024 and 2023, net cash provided by operating activities totaled $20.0 million and $23.2 million, respectively. For the six months ended June 30, 2024, adjustments to net loss related to operating activities included the provision for current expected credit losses of $24.6 million, accretion of discounts, deferred loan origination fees and costs of $2.5 million, amortization of deferred financing costs of $2.4 million, change in other assets of $1.4 million and realized losses on loans of $62.1 million. For the six months ended June 30, 2023, adjustments to net loss related to operating activities primarily included the provision for current expected credit losses of $41.1 million, accretion of discounts, deferred loan origination fees and costs of $3.4 million, amortization of deferred financing costs of $1.9 million, change in other assets of $15.7 million and realized losses on loans of $5.6 million.

Current wording

For the nine months ended September 30, 2024 and 2023, net cash provided by operating activities totaled $28.5 million and $36.7 million, respectively. For the nine months ended September 30, 2024, adjustments to net loss related to operating activities included the provision for 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, change in other assets of $1.6 million and realized losses on loans of $67.9 million. For the nine months ended September 30, 2023, adjustments to net income related to operating activities primarily included the provision for current expected credit losses of $44.4 million, accretion of discounts, deferred loan origination fees and costs of $4.9 million, amortization of deferred financing costs of $2.9 million, change in other assets of $18.9 million and realized losses on loans of $10.5 million.

Previous wording

For the six months ended June 30, 2024 and 2023, net cash provided by investing activities totaled $133.7 million and $89.3 million, respectively. This change in net cash provided by investing activities was a result of the 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 for the six months ended June 30, 2024.

Current wording

For the nine months ended September 30, 2024 and 2023, net cash provided by investing activities totaled $255.2 million and $41.6 million, respectively. This change in net cash provided by investing activities was primarily a result of the 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 for the nine months ended September 30, 2024.

Previous wording

For the six months ended June 30, 2024, net cash used in financing activities totaled $193.6 million and was related to repayments of our Secured Funding Agreements of $26.7 million, repayments of debt of consolidated VIEs of $135.1 million, repayments of our Secured Term Loan of $10.0 million and dividends paid of $32.0 million, partially offset by proceeds from our Secured Funding Agreements of $12.8 million. For the six months ended June 30, 2023, net cash used in financing activities totaled $111.1 million and related to repayments of our Secured Funding Agreements of $38.9 million, repayments of debt of consolidated VIEs of $42.9 million, dividends paid of $38.7 million and repurchases of our common stock of $4.6 million, partially offset by proceeds from our Secured Funding Agreements of $15.0 million.

Current wording

For the nine months ended September 30, 2024, net cash used in financing activities totaled $321.8 million and was 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. For the nine months ended September 30, 2023, net cash used in financing activities totaled $158.6 million and related to repayments of our Secured Funding Agreements of $94.1 million, repayments of debt of consolidated VIEs of $43.0 million, dividends paid of $57.9 million and repurchases of our common stock of $4.6 million, partially offset by proceeds from our Secured Funding Agreements of $43.3 million.

Previous wording

(3)In January 2024, we amended the CNB Facility to, among other things: (1) extend the initial maturity date of the CNB Facility to March 10, 2025, subject to one 12-month extension, which may be exercised at our option if certain conditions described in the CNB Facility are met, including applicable extension fees being paid, which, if exercised, would extend the maturity date to March 10, 2026 and (2) set the interest rate on advances under the CNB Facility to 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

Current wording

(3)In January 2024, we amended the CNB Facility to, among other things: (1) extend the initial maturity date of the CNB Facility to March 10, 2025, subject to one 12-month extension, which may be exercised at our option if certain conditions described in the CNB Facility are met, including applicable extension fees being paid, which, if exercised, would extend the maturity date to March 10, 2026 and (2) set the interest rate on advances under the CNB Facility to 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. 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, 2024, there was approximately $49.0 million immediately available 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.

Previous wording

(6)A wholly owned subsidiary of ours is party to a Credit and Security Agreement with the lender referred to therein, which provides for a $105.0 million note (the “Notes Payable”). The $105.0 million note 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.

Current wording

(6)A wholly owned subsidiary of ours was party to a Credit and Security Agreement with the lender referred to therein, which provided for a $105.0 million note (the “Notes Payable”). The $105.0 million note was subject to two 12-month extensions, each of which may have been exercised at our option provided that certain conditions were met and applicable extension fees were paid. In September 2024, we elected to repay in full and terminate the $105.0 million note prior to its scheduled maturity on July 28, 2025.

Previous wording

(7)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. In May 2024, we amended the Secured Term Loan to, among other things: (1) change the schedule of interest rate increases on advances under the Secured Term Loan 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 and (2) add 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) $135.0 million as of August 1, 2024, (ii) $130.0 million as of November 1, 2024, (iii) $120.0 million as of February 1, 2025, (iv) $110.0 million as of May 1, 2025, (v) $100.0 million as of August 1, 2025 and (vi) $90.0 million as of November 1, 2025. In connection with the amendment and concurrently therewith, we paid down $10.0 million of outstanding principal on the Secured Term Loan at par and thus, the total commitment of the Secured Term Loan was reduced to $140.0 million.

Current wording

(7)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. In May 2024, we amended the Secured Term Loan to, among other things: (1) change the schedule of interest rate increases on advances under the Secured Term Loan 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 and (2) add 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) $135.0 million as of August 1, 2024, (ii) $130.0 million as of November 1, 2024, (iii) $120.0 million as of February 1, 2025, (iv) $110.0 million as of May 1, 2025, (v) $100.0 million as of August 1, 2025 and (vi) $90.0 million as of November 1, 2025. In connection with the amendment and concurrently therewith, we paid down $10.0 million of outstanding principal on the Secured Term Loan at par. In addition, in each of August 2024 and September 2024, we elected to repay $5.0 million of outstanding principal on the Secured Term Loan at par and thus, the total commitment of the Secured Term Loan was reduced to $130.0 million.

Previous wording

As of June 30, 2024, the carrying amount and outstanding principal of our CLO Securitizations was $588.4 million and $588.9 million, respectively. See Note 15 to our consolidated financial statements included in this quarterly report on Form 10-Q for additional terms and details of our CLO Securitizations.

Current wording

As of September 30, 2024, the carrying amount and outstanding principal of our CLO Securitizations was $574.9 million and $575.2 million, respectively. See Note 15 to our consolidated financial statements included in this quarterly report on Form 10-Q for additional terms and details of our CLO Securitizations.