ARES COMMERCIAL REAL ESTATE CORP Management’s Report of Financial Condition and Results of Operations (Form 10-Q)

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Insight

We are a specialty finance company primarily engaged in originating and
investing in commercial real estate ("CRE") loans and related investments. We
are externally managed by ACREM, a subsidiary of Ares Management Corporation
(NYSE: ARES) ("Ares Management"), a publicly traded, leading global alternative
asset manager, pursuant to the terms of the management agreement originally
dated April 25, 2012, and amended and restated on 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, 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 2022:

•ACRE purchased a $17.6 million senior mortgage loan on a self storage property
located in New Jersey from a third party.
•ACRE purchased an $11.5 million senior mortgage loan on a self storage property
located in Washington from a third party.
•ACRE originated a $20.6 million mezzanine loan on a multifamily property
located in South Carolina.
•ACRE purchased a AAA rated CRE debt security with a face amount of $18.0
million from a third party.
•ACRE purchased a AAA rated CRE debt security with a face amount of $5.0 million
from a third party.
•ACRE purchased a AAA rated CRE debt security with a face amount of $5.0 million
from a third party.
•A wholly owned subsidiary of ACRE closed a $105.0 million note financing, which
is secured by a $133.0 million senior mortgage loan held by ACRE on a
multifamily property located in New York and is fully and unconditionally
guaranteed by ACRE pursuant to a Guaranty of Recourse Obligation. The initial
maturity date of the $105.0 million note is July 28, 2025, subject to two
12-month extensions, each of which may be exercised at ACRE's option, subject to
the satisfaction of certain conditions, including payment of an extension fee,
which, if both were exercised, would extend the maturity date to July 28, 2027.
Advances under the $105.0 million note accrue interest at a per annum rate equal
to the sum of one-month SOFR plus a spread of 2.00%.
•ACRE's Board of Directors approved a stock repurchase program of up to $50.0
million, which is expected to be in effect until July 26, 2023, or until the
approved dollar amount has been used to repurchase shares (the "Repurchase
Program"). Pursuant to the Repurchase Program, ACRE may repurchase shares of its
common stock in amounts, at prices and at such times as it deems appropriate,
subject to market conditions and other considerations, including all applicable
legal requirements.

Trends Affecting Our Business

Global markets continued to see volatility during the third quarter, fueled by
further tightening of monetary policy and geopolitical uncertainty. In response
to heightened inflation, the Federal Reserve continues to raise interest rates,
which has created further uncertainty for the economy and for our borrowers.
These current macroeconomic conditions may continue or aggravate and could cause
the United States economy or other global economies to experience an economic
slowdown or recession. We continue to monitor the uncertainty surrounding
inflation and rising interest rates; however, the full impact that these factors
may have on our business remains uncertain.

Factors Affecting Our Results of Operations

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

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Stock Repurchase Program

On July 26, 2022, our Board of Directors approved a stock repurchase program of
up to $50.0 million, which is expected to be in effect until July 26, 2023, or
until the approved dollar amount has been used to repurchase shares (the
"Repurchase Program"). 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. We did not conduct any repurchases under the Repurchase Program
during the three months ended September 30, 2022.

Loans held for the investment portfolio

As of September 30, 2022, our portfolio included 70 loans held for investment,
excluding 139 loans that were repaid, sold or converted to real estate owned
since inception. As of September 30, 2022, the aggregate originated commitment
under these loans at closing was approximately $2.9 billion and outstanding
principal was $2.5 billion. During the nine months ended September 30, 2022, we
funded approximately $601.8 million of outstanding principal and received
repayments of $503.9 million of outstanding principal. As of September 30, 2022,
90.8% of our loans have LIBOR or SOFR floors, with a weighted average floor of
0.92%, calculated based on loans with LIBOR or SOFR floors. References to LIBOR
or "L" are to 30-day LIBOR and references to SOFR or "S" are to 30-day SOFR
(unless otherwise specifically stated).

Except as disclosed in Note 3 to our consolidated financial statements included in this Quarterly Report on Form 10-Q, as of September 30, 2022all loans held for investment purposes were repaying 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, 2022 ($ in
thousands):

                                                                                     As of September 30, 2022
                                                                                                                                             Weighted
                                                                                                                                             Average
                                           Carrying Amount         Outstanding            Weighted Average Unleveraged Effective          Remaining Life
                                                 (1)              Principal (1)                            Yield                             (Years)
Senior mortgage loans                      $  2,470,545          $   2,488,199                      7.3  % (2)         7.7  % (3)                

1.4

Subordinated debt and preferred equity
investments                                      38,064                 38,834                     13.3  % (2)        13.3  % (3)                   

3.1

Total loans held for the investment portfolio $2,508,609 $2,527,033

                      7.4  % (2)         7.8  % (3)                

1.4

_______________________________

(1)The difference between the Carrying Amount and the Outstanding Principal
amount of the loans held for investment consists of unamortized purchase
discount, deferred loan fees and loan origination costs.
(2)Unleveraged Effective Yield is the compounded effective rate of return that
would be earned over the life of the investment based on the contractual
interest rate (adjusted for any deferred loan fees, costs, premiums or
discounts) and assumes no dispositions, early prepayments or defaults. The total
Weighted Average Unleveraged Effective Yield is calculated based on the average
of Unleveraged Effective Yield of all loans held by us as of September 30, 2022
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, 2022 as weighted by the total outstanding principal balance of
each interest accruing loan (excludes loans on non-accrual status as of
September 30, 2022).

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. There have been no significant changes to our critical accounting
estimates as
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disclosed in Part II, "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations" in our 2021 Annual Report on Form 10-K. See
Note 2 to our consolidated financial statements included in this quarterly
report on Form 10-Q, which describes factors which may impact management's
estimates and assumptions and the recently issued accounting pronouncements that
were adopted or not yet required to be adopted by us.

RECENT DEVELOPMENTS

Our Board of Directors declared a regular cash dividend of $0.33 per common
share and a supplemental cash dividend of $0.02 per common share for the fourth
quarter of 2022. The fourth quarter 2022 and supplemental cash dividends will be
payable on January 18, 2023 to common stockholders of record as of December 30,
2022.
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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, 2022 and 2021 ($ in
thousands):

                                                   For the three months ended             For the nine months ended
                                                          September 30,                         September 30,
                                                     2022               2021               2022               2021
Total revenue                                    $   27,271          $ 27,204          $   76,440          $ 71,958
Total expenses                                        7,137            10,886              24,895            28,814
Provision for current expected credit losses         19,485             6,367              26,659              (756)

Gain on sale of real estate owned                         -                 -               2,197                 -
Income before income taxes                              649             9,951              27,083            43,900
Income tax expense, including excise tax                  5                 -                 208               593

Net income attributable to ordinary shareholders $644 $9,951 $26,875 $43,307



The following tables set forth select details of our consolidated results of
operations for the three and nine months ended September 30, 2022 and 2021 ($ in
thousands):

Net Interest Margin

                                                        For the three months ended             For the nine months ended
                                                               September 30,                         September 30,
                                                          2022               2021                2022               2021
Interest income                                       $   45,633          $ 34,023          $   117,619          $ 95,587
Interest expense                                         (18,362)          (12,669)             (43,851)          (35,900)
Net interest margin                                   $   27,271          $ 21,354          $    73,768          $ 59,687



For the three months ended September 30, 2022 and 2021, net interest margin was
approximately $27.3 million and $21.4 million, respectively. For the three
months ended September 30, 2022 and 2021, interest income of $45.6 million and
$34.0 million, respectively, was generated by weighted average earning assets of
$2.6 billion and $2.3 billion, respectively, offset by $18.4 million and
$12.7 million, respectively, of interest expense, unused fees and amortization
of deferred loan costs. The weighted average borrowings under the Wells Fargo
Facility, the Citibank Facility, the CNB Facility, the MetLife Facility and the
Morgan Stanley Facility (individually defined below and collectively, the
"Secured Funding Agreements"), Notes Payable (as defined below), the Secured
Term Loan, Secured Borrowings and securitization debt (as defined below) were
$1.9 billion for the three months ended September 30, 2022 and $1.7 billion for
the three months ended September 30, 2021. The increase in net interest margin
for the three months ended September 30, 2022 compared to the three months ended
September 30, 2021 primarily relates to an increase in our weighted average
earning assets and weighted average borrowings for the three months ended
September 30, 2022, the benefit received from our interest rate hedging
derivative contracts for the three months ended September 30, 2022, the benefit
received from the increase in LIBOR and SOFR rates on our loans held for
investment for the three months ended September 30, 2022 and the impact of the
accelerated recognition of deferred fees and prepayment penalties received from
borrowers related to loans that were repaid during the three months ended
September 30, 2022.

For the nine months ended September 30, 2022 and 2021, net interest margin was
approximately $73.8 million and $59.7 million, respectively. For the nine months
ended September 30, 2022 and 2021, interest income of $117.6 million and $95.6
million, respectively, was generated by weighted average earning assets of
$2.5 billion and $2.1 billion, respectively, offset by $43.9 million and $35.9
million, respectively, of interest expense, unused fees and amortization of
deferred loan costs. The weighted average borrowings under the Secured Funding
Agreements, Notes Payable (excluding the Note Payable on the hotel property that
was recognized as real estate owned in our consolidated balance sheets), the
Secured Term Loan, Secured Borrowings and securitization debt were $1.9 billion
for the nine months ended September 30, 2022 and $1.6 billion for the nine
months ended September 30, 2021. The increase in net interest margin for the
nine months ended September 30, 2022 compared to the nine months ended September
30, 2021 primarily relates to an increase in our weighted average earning assets
and weighted average borrowings for the nine months ended September 30, 2022,
the benefit received from our interest rate hedging derivative contracts for the
nine months ended September 30, 2022, the benefit received from the increase in
LIBOR and SOFR rates on our loans held for investment for the nine months ended
September 30, 2022 and the impact of the accelerated recognition of deferred
fees and prepayment penalties received from borrowers related to loans that were
repaid during the nine months ended September 30, 2022.
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Income from real estate owned

On March 8, 2019, we acquired legal title to a hotel property through a deed in
lieu of foreclosure. Prior to March 8, 2019, the hotel property collateralized a
$38.6 million senior mortgage loan that we held that was in maturity default due
to the failure of the borrower to repay the outstanding principal balance of the
loan by the December 2018 maturity date. In conjunction with the deed in lieu of
foreclosure, we derecognized the $38.6 million senior mortgage loan and
recognized the hotel property as real estate owned. For the three months ended
September 30, 2022, there was no revenue from real estate owned as we closed the
sale of the hotel property to a third party on March 1, 2022. For the three
months ended September 30, 2021, revenue from real estate owned was
$5.9 million. For the nine months ended September 30, 2022 and 2021, revenue
from real estate owned was $2.7 million and $12.3 million, respectively.
Revenues consisted of room sales, food and beverage sales and other hotel
revenues. The decrease in revenue from real estate owned for the nine months
ended September 30, 2022 compared to the nine months ended September 30, 2021 is
primarily due to the nine months ended September 30, 2022 only including two
months of hotel operations. In connection with the sale of the hotel property,
we provided a senior mortgage loan to the buyer of the hotel property. The
initial advance funded under such loan was $30.7 million, with up to another
$25.0 million of additional loan proceeds to be available for future advances to
cover a portion of the anticipated property renovation plan costs, provided
certain conditions are satisfied. At closing, the buyer contributed
$12.9 million of equity into the purchase. Additionally, the buyer is required
to fund an additional $8.7 million of equity associated with the anticipated
property renovation plan costs.

Functionnary costs

                                                    For the three months ended            For the nine months ended
                                                          September 30,                         September 30,
                                                      2022              2021               2022               2021

Affiliate management and incentive fees $3,868 $3,175 $10,608 $8,693
Professional fees

                                       842               480               2,720             1,880
General and administrative expenses                   1,416             1,119               4,617             3,470
General and administrative expenses reimbursed to
affiliate                                             1,011               773               2,641             2,313
Expenses from real estate owned                           -             5,339               4,309            12,458
Total expenses                                    $   7,137          $ 10,886          $   24,895          $ 28,814



See the Related Party Expenses, Other Expenses and Expenses from Real Estate
Owned discussions below for the cause of the decrease in operating expenses for
the three months ended September 30, 2022 compared to the three months ended
September 30, 2021 and the cause of the decrease in operating expenses for the
nine months ended September 30, 2022 compared to the nine months ended September
30, 2021.

Related Party Expenses

For the three months ended September 30, 2022, related party expenses included
$3.9 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
$0.9 million in incentive fees. For the three months ended September 30, 2022,
related party expenses also included $1.0 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, 2021, related party expenses included $3.2 million in management
and incentive fees due to our Manager pursuant to the Management Agreement,
which consisted of $2.6 million in management fees and $0.6 million in incentive
fees. For the three months ended September 30, 2021, related party expenses also
included $0.8 million for our share of allocable general and administrative
expenses for which we were required to reimburse our Manager pursuant to the
Management Agreement. The increase in management fees for the three months ended
September 30, 2022 compared to the three months ended September 30, 2021
primarily relates to an increase in our weighted average stockholders' equity
for the three months ended September 30, 2022 as a result of the public offering
of 7,000,000 shares of our common stock in May 2022, which generated net
proceeds of approximately $103.2 million. The increase in incentive fees for the
three months ended September 30, 2022 compared to the three months ended
September 30, 2021, primarily relates to our Core Earnings (as defined below)
for the twelve months ended September 30, 2022 exceeding the 8% minimum return
by a higher margin than the twelve months ended September 30, 2021. "Core
Earnings" is defined in the Management Agreement as GAAP net income (loss)
computed in accordance with GAAP, excluding non-cash equity compensation
expense, the incentive fee, depreciation and amortization (to the extent that
any of our target investments are structured as debt and we foreclose on any
properties underlying such debt), any unrealized gains, losses or other non-cash
items recorded in net income (loss) for the period, regardless of whether such
items are included in other comprehensive income or loss, or in net income
(loss), and one-time events pursuant to changes in GAAP and certain non-cash
charges after
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discussions between our Manager 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
September 30, 2022 compared to the three months ended September 30, 2021
primarily 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
and the inclusion of additional eligible expense reimbursements per the Amended
and Restated Management Agreement that became effective during the three months
ended September 30, 2022.

For the nine months ended September 30, 2022, related party expenses included
$10.6 million in management and incentive fees due to our Manager pursuant to
the Management Agreement, which consisted of $8.4 million in management fees and
$2.2 million in incentive fees. For the nine months ended September 30, 2022,
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. For the nine months ended
September 30, 2021, related party expenses included $8.7 million in management
and incentive fees due to our Manager pursuant to the Management Agreement,
which consisted of $6.8 million in management fees and $1.9 million in incentive
fees. For the nine months ended September 30, 2021, related party expenses also
included $2.3 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 increase in management fees for the nine months ended
September 30, 2022 compared to the nine months ended September 30, 2021
primarily relates to an increase in our weighted average stockholders' equity
for the nine months ended September 30, 2022 as a result of the public offering
of 7,000,000 shares of our common stock in March 2021, which generated net
proceeds of approximately $100.7 million, the public offering of 6,500,000
shares of our common stock in June 2021, which generated net proceeds of
approximately $101.6 million and the public offering of 7,000,000 shares of our
common stock in May 2022, which generated net proceeds of approximately $103.2
million. The increase in incentive fees for the nine months ended September 30,
2022 compared to the nine months ended September 30, 2021 primarily relates to
our Core Earnings for the twelve months ended September 30, 2022 exceeding the
8% minimum return by a higher margin than the twelve months ended September 30,
2021. On April 25, 2022, ACRE and ACREM entered into an amendment to the
Management Agreement to (a) include a $2.4 million adjustment to reverse the
impact of accumulated depreciation following the sale of the real estate owned
property for the three months ended March 31, 2022 and to (b) include a $2.0
million adjustment to include the realized gain from the termination of the
interest rate cap derivative for the three months ended March 31, 2022, in each
case, with respect to Core Earnings for the three months ended March 31, 2022.
Core Earnings is defined in the Management Agreement and is used to calculate
the incentive fees the Company pays to ACREM. The increase in allocable general
and administrative expenses due to our Manager for the nine months ended
September 30, 2022 compared to the nine months ended September 30, 2021
primarily 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
and the inclusion of additional eligible expense reimbursements per the Amended
and Restated Management Agreement that became effective during the nine months
ended September 30, 2022.

Other Expenses

For the three months ended September 30, 2022 and 2021, professional fees were
$0.8 million and $0.5 million, respectively. The increase in professional fees
for the three months ended September 30, 2022 compared to the three months ended
September 30, 2021 primarily relates to an increase in our use of third-party
professionals due to changes in transaction activity year over year. For the
three months ended September 30, 2022 and 2021, general and administrative
expenses were $1.4 million and $1.1 million, respectively. The increase in
general and administrative expenses for the three months ended September 30,
2022 compared to the three months ended September 30, 2021 primarily relates to
an increase in stock-based compensation expense due to new restricted stock and
restricted stock unit grants awarded after September 30, 2021.

For the nine months ended September 30, 2022 and 2021, professional fees were
$2.7 million and $1.9 million, respectively. The increase in professional fees
for the nine months ended September 30, 2022 compared to the nine months ended
September 30, 2021 primarily relates to an increase in our use of third-party
professionals due to changes in transaction activity year over year. For the
nine months ended September 30, 2022 and 2021, general and administrative
expenses were $4.6 million and $3.5 million, respectively. The increase in
general and administrative expenses for the nine months ended September 30, 2022
compared to the nine months ended September 30, 2021 primarily relates to an
increase in stock-based compensation expense due to restricted stock and
restricted stock unit awards granted after September 30, 2021.

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Real estate expenses

For the three and nine months ended September 30, 2022 and 2021, expenses related to owned real estate included the following (in thousands of dollars):

                                                    For the three months ended            For the nine months ended
                                                          September 30,                         September 30,
                                                      2022                2021              2022              2021
Hotel operating expenses                         $          -          $ 4,694          $   3,631          $ 10,539
Interest expense on note payable                            -              420                678             1,245
Depreciation expense                                        -              225                  -               674
Expenses from real estate owned                  $          -          $ 

5,339 $4,309 $12,458



For the three months ended September 30, 2022, there were no expenses from real
estate owned as we closed the sale of the hotel property to a third party on
March 1, 2022. For the three months ended September 30, 2021, hotel operating
expenses were $4.7 million. Hotel operating expenses consisted primarily of
expenses incurred in the day-to-day operation of our hotel property, including
room expense, food and beverage expense and other operating expenses. Room
expense included housekeeping and front office wages and payroll taxes,
reservation systems, room supplies, laundry services and other costs. Food and
beverage expense primarily included the cost of food, the cost of beverages and
associated labor costs. Other operating expenses included labor and other costs
associated with administrative departments, sales and marketing, repairs and
maintenance, real estate taxes, insurance, utility costs and management and
incentive fees paid to the hotel property manager. For the three months ended
September 30, 2021, interest expense on our note payable was $0.4 million. For
the three months ended September 30, 2021, depreciation expense was
$0.2 million.

For the nine months ended September 30, 2022 and 2021, hotel operating expenses
were $3.6 million and $10.5 million, respectively. The decrease in hotel
operating expenses for the nine months ended September 30, 2022 compared to the
nine months ended September 30, 2021 is primarily due to the nine months ended
September 30, 2022 only including two months of hotel operations. For the nine
months ended September 30, 2022 and 2021, interest expense on our note payable
was $0.7 million and $1.2 million, respectively. The decrease in interest
expense on our note payable for the nine months ended September 30, 2022
compared to the nine months ended September 30, 2021 is primarily attributed to
the nine months ended September 30, 2022 only including two months of hotel
operations. This was partially offset by the accelerated recognition of deferred
costs for the nine months ended September 30, 2022 due to the repayment of our
note payable in conjunction with the sale of the hotel property to a third party
on March 1, 2022. For the nine months ended September 30, 2022, no depreciation
expense was incurred as the hotel property was classified as real estate owned
held for sale effective in November 2021. For the nine months ended September
30, 2021, depreciation expense was $0.7 million.

Provision for current expected credit losses

For the three months ended September 30, 2022 and 2021, the provision for
current expected credit losses was $19.5 million and $6.4 million, respectively.
The increase in the provision for current expected credit losses for the three
months ended September 30, 2022 compared to the three months ended September 30,
2021 is primarily due to changes to the loan portfolio and the impact of the
current macroeconomic environment on certain assets, including rising inflation,
geopolitical uncertainty, rapidly rising interest rates and the ongoing effects
of the COVID-19 pandemic, partially offset by shorter average remaining loan
term and loan repayments during the three months ended September 30, 2022.

For the nine months ended September 30, 2022 and 2021, the provision for current
expected credit losses was $26.7 million and $(0.8) million, respectively. The
increase in the provision for current expected credit losses for the nine months
ended September 30, 2022 compared to the nine months ended September 30, 2021 is
primarily due to changes to the loan portfolio and the impact of the current
macroeconomic environment on certain assets, including rising inflation,
geopolitical uncertainty, rapidly rising interest rates and the ongoing effects
of the COVID-19 pandemic, partially offset by shorter average remaining loan
term and loan repayments during the nine months ended September 30, 2022.

The current expected credit loss reserve ("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 specific 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 and geopolitical conditions and
the ongoing effects of the COVID-19 pandemic.

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Gain on Sale of Real Estate Owned

For the nine months ended September 30, 2022, we recognized a $2.2 million gain
on the sale of the hotel property that was recognized as real estate owned as
the net carrying value of the hotel property as of the March 1, 2022 sale date
was lower than the net sales proceeds received by the Company.

CASH AND CAPITAL RESOURCES

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

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

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. Due
to the impact of the COVID-19 pandemic, in 2020 and to a lesser extent for the
periods following, we experienced borrowers unable to pay interest and principal
payments timely, including at the maturity date of the borrower's loan. Our
Secured Funding Agreements contain margin call provisions following the
occurrence of certain mortgage loan credit events. If we are unable to make the
required payment or if we fail to meet or satisfy any of the covenants in our
Financing Agreements, we would be in default under these agreements, and our
lenders could elect to declare outstanding amounts due and payable, terminate
their commitments, require the posting of additional collateral, including cash
to satisfy margin calls, and enforce their interests against existing
collateral. We are also subject to cross-default and acceleration rights with
respect to our Financing Agreements. Given the impact of the COVID-19 pandemic
on the real estate industry and the potential impact on our borrowers, to
mitigate the risk of future margin calls we proactively engaged in discussions
with certain of our lenders in 2020 and to a lesser extent in periods following
to modify the terms of our borrowings on certain assets within these facilities,
in order to, among other things, reduce the amounts we are borrowing against
such assets and/or increase the borrowing spreads. As a result of current
macroeconomic and geopolitical conditions and the ongoing risks of COVID-19,
there is no guarantee that borrowers will be able to pay interest and principal
payments timely. We may not receive financing from our Secured Funding
Agreements with respect to our commitments to fund our loans held for investment
in the future. See "Summary of Financing Agreements" below for a description of
our Financing Agreements.

Subject to maintaining our qualification as a REIT and our exemption from
registration under the 1940 Act, we expect that our primary sources of enhancing
our liquidity will be financing, to the extent available to us, through credit,
secured funding and other lending facilities, other sources of private
financing, including warehouse and repurchase facilities, and public or private
offerings of our equity or debt securities. On June 30, 2022, we filed a
registration statement on Form S-3 with the SEC, which became effective on July
26, 2022, in order to permit us to offer, from time to time, in one or more
offerings or series of offerings up to $1.25 billion of our common stock,
preferred stock, debt securities, subscription rights to purchase shares of our
common stock, warrants representing rights to purchase shares of our common
stock, preferred stock or debt securities, or units. The specifics of any future
offerings, along with the use of proceeds of any securities offered, will be
described in detail in a prospectus supplement, or other offering materials, at
the time of any offering. Furthermore, we have sold, and may continue to sell
certain of our mortgage loans, or interests therein, in order to manage
liquidity needs. Subject to maintaining our qualification as a REIT, we may also
change our dividend practice, including by reducing the amount of, or
temporarily suspending, our future dividends or making dividends that are
payable in cash and shares of our common stock for some period of time. We are
also able to access additional liquidity through the (i) reinvestment provisions
in our FL3 CLO Securitization, which allows us to replace mortgage assets in our
FL3 CLO Securitization which have repaid and (ii) future funding acquisition
provisions in our FL4 collateralized loan obligation securitization debt ("FL4
CLO Securitization", together with our FL3 CLO Securitization, our "CLO
Securitizations"), which allows us to use mortgage asset repayment funds to
acquire additional funded pari-passu participations related to the mortgage
assets then-remaining in our FL4 CLO Securitization; each subject to the
satisfaction of certain reinvestment or acquisition conditions, which may
include receipt of a Rating Agency Confirmation and investor approval. There can
be no assurance that the conditions for reinvestment or acquisition will be
satisfied and whether our CLO Securitizations will acquire any additional
mortgage assets or funded pari-passu participations. In addition, our CLO
Securitizations contain certain senior note overcollateralization ratio tests.
To the extent we fail to meet these tests, amounts that would otherwise be used
to make payments on the subordinate securities that we
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hold will be used to repay principal on the more senior securities to the extent
necessary to satisfy any senior note overcollateralization ratio and we may
incur significant losses. Our sources of liquidity may be impacted to the extent
we do not receive cash payments that we would otherwise expect to receive from
the CLO Securitizations if these tests were met.

Ares Management or one of its investment vehicles, including the Ares Warehouse
Vehicle, may originate mortgage loans. 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 1, 2022, we had approximately $156 million in liquidity including
$81 million of unrestricted cash and $75 million of availability under secured
funding agreements.

In the Market Share Offering Program

On November 22, 2019, we entered into an equity distribution agreement (the
"Equity Distribution Agreement"), pursuant to which we offered and sold, from
time to time, shares of our common stock, par value $0.01 per share, having an
aggregate offering price of up to $100.0 million. Subject to the terms and
conditions of the Equity Distribution Agreement, sales of common stock, if any,
were made in transactions that are deemed to be an "at the market offering" as
defined in Rule 415(a)(4) under the Securities Act of 1933, as amended. During
the nine months ended September 30, 2022, we sold 190,369 shares of common stock
under the Equity Distribution Agreement. On June 30, 2022, we filed a new
registration statement on Form S-3 with the SEC, which became effective on July
26, 2022; however, the "at the market offering" program is currently
unavailable.

Equity offerings

On May 17, 2022, we entered into an underwriting agreement (the "Underwriting
Agreement"), by and among us, ACREM, and Morgan Stanley & Co. LLC, Wells Fargo
Securities, LLC, Citigroup Global Markets Inc. and UBS Securities LLC, as joint
book running managers for the offering and as representatives of the several
underwriters listed therein (collectively, the "Underwriters"). Pursuant to the
terms of the Underwriting Agreement, we agreed to sell, and the Underwriters
agreed to purchase, subject to the terms and conditions set forth in the
Underwriting Agreement, an aggregate of 7,000,000 shares of our common stock,
par value $0.01 per share. The public offering closed on May 20, 2022 and
generated net proceeds of approximately $103.2 million, after deducting
transaction expenses.

Cash flow

The following table shows the changes in cash and cash equivalents for the nine months ended September 30, 2022 and 2021 (in thousands of dollars):

                                                                            For the nine months ended
                                                                                  September 30,
                                                                             2022                2021
Net income                                                               $ 

26,875 $43,307
Adjustments to reconcile net income to net cash provided by (used in) operating activities:

                                                        15,192            (13,027)
Net cash provided by (used in) operating activities                          42,067             30,280
Net cash provided by (used in) investing activities                         (63,954)          (575,079)
Net cash provided by (used in) financing activities                          48,569            485,810
Change in cash and cash equivalents                                      $  

26,682 ($58,989)

In the nine months ended September 30, 2022 and 2021, cash and cash equivalents increased (decreased) by $26.7 million and ($59.0) millionrespectively.

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Operating Activities

For the nine months ended September 30, 2022 and 2021, net cash provided by
operating activities totaled $42.1 million and $30.3 million, respectively. For
the nine months ended September 30, 2022, adjustments to net income related to
operating activities primarily included the provision for current expected
credit losses of $26.7 million, accretion of discounts, deferred loan
origination fees and costs of $7.9 million, amortization of deferred financing
costs of $5.7 million, change in other assets of $9.8 million and gain on sale
of real estate owned of $2.2 million. For the nine months ended September 30,
2021, adjustments to net income related to operating activities primarily
included the provision for current expected credit losses of $0.8 million,
accretion of discounts, deferred loan origination fees and costs of
$6.0 million, amortization of deferred financing costs of $7.1 million and
change in other assets of $16.7 million.

Investing activities

For the nine months ended September 30, 2022 and 2021, net cash used in
investing activities totaled $64.0 million and $575.1 million, respectively.
This change in net cash used in investing activities was primarily as a result
of the cash used for the origination and funding of loans held for investment
and purchases of available-for-sale debt securities exceeding the cash received
from principal repayment of loans held for investment and from the sale of real
estate owned for the nine months ended September 30, 2022.

Fundraising activities

For the nine months ended September 30, 2022, net cash provided by financing
activities totaled $48.6 million and primarily related to proceeds from our
Secured Funding Agreements of $225.2 million, proceeds from our Notes Payable of
$105.0 million and proceeds from the sale of our common stock of $106.3 million,
partially offset by repayments of our Secured Funding Agreements of
$217.5 million, repayments of our Notes Payable of $51.1 million, repayments of
debt of consolidated VIEs of $40.7 million and dividends paid of $52.6 million.
For the nine months ended September 30, 2021, net cash provided by financing
activities totaled $485.8 million and primarily related to proceeds from our
Secured Funding Agreements of $611.5 million, proceeds from the issuance of debt
of consolidated VIEs of $540.5 million and proceeds from the sale of our common
stock of $202.7 million, partially offset by repayments of our Secured Funding
Agreements of $711.1 million, repayments of our Notes Payable of $27.9 million,
repayments of our Secured Term Loan of $50.0 million, repayments of debt of
consolidated VIEs of $41.0 million and dividends paid of $41.9 million.

Summary of funding agreements

The sources of financing, as applicable in a given period, under our Secured
Funding Agreements, Notes Payable and the Secured Term Loan (collectively, the
"Financing Agreements") are described in the following table ($ in thousands):
                                                                                                                              As of
                                                                   September 30, 2022                                                                                    December 31, 2021
                               Total              Outstanding                                                                            Total              Outstanding
                             Commitment             Balance                   Interest Rate                  Maturity Date             Commitment             Balance               Interest Rate              Maturity Date
Secured Funding Agreements:
Wells Fargo Facility       $   450,000          $    353,920             

Base rate(1)+1.50 to 2.75% December 14, 2022 (2) $450,000

     $    399,528           LIBOR+1.50 to 2.75%         December 14, 2022 

(2)

Citibank Facility              325,000               273,269             

Base rate(1)+1.50 to 2.10% January 13, 2025 (3) 325,000

          192,970           LIBOR+1.50 to 2.25%         January 13, 2022   (3)
CNB Facility                    75,000                     -                   SOFR+2.65%                   March 10, 2023    (4)         75,000                     -               SOFR+2.65%               March 10, 2022    (4)
MetLife Facility               180,000                20,648            

Base rate(1)+2.10 to 2.50% August 13, 2023 (5) 180,000

            20,648           LIBOR+2.10 to 2.50%          August 13, 2022   

(5)

Morgan Stanley
Facility                       250,000               199,860             

Base rate(1)+1.50 to 3.00% January 16, 2023 (6) 250,000

          226,901           LIBOR+1.50 to 3.00%         January 16, 2023   (6)
Subtotal                   $ 1,280,000          $    847,697                                                                         $ 1,280,000          $    840,047

Notes Payable              $   105,000          $    105,000                   SOFR+2.00%                    July 28, 2025    (7)    $    51,755          $     51,110           LIBOR+3.00 to 3.75%                (7)

Secured Term Loan          $   150,000          $    150,000                      4.50%                    November 12, 2026  (8)    $   150,000          $    150,000                  4.50%                November 12, 2026  (8)
Total                      $ 1,535,000          $  1,102,697                                                                         $ 1,481,755          $  1,041,157


_____________________________

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(1)The base rate is LIBOR for loans pledged prior to December 31, 2021 and SOFR
for loans pledged subsequent to December 31, 2021.
(2)The maturity date of the master repurchase funding facility with Wells Fargo
Bank, National Association (the "Wells Fargo Facility") is subject to three
12-month extensions at our option provided that certain conditions are met and
applicable extension fees are paid. The maximum commitment may be increased to
up to $500.0 million at our option, subject to the satisfaction of certain
conditions, including payment of an upsize fee.
(3)In January 2022, we amended the Citibank Facility to, among other things,
extend the initial maturity date and funding availability period to January 13,
2025, 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.
(4)In March 2022, we exercised a 12-month extension option on the secured
revolving funding facility with City National Bank (the "CNB Facility").
(5)In July 2022, we exercised a 12-month extension option on the revolving
master repurchase facility with Metropolitan Life Insurance Company (the
"MetLife Facility"). The MetLife Facility is subject to one 12-month extension,
which may be exercised at our option provided that certain conditions are met
and applicable extension fees are paid.
(6)The maturity date of the master repurchase and securities contract with
Morgan Stanley (the "Morgan Stanley Facility") is subject to two 12-month
extensions at our option provided that certain conditions are met and applicable
extension fees are paid.
(7)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 at our option provided that certain conditions are met and applicable
extension fees are paid. A consolidated subsidiary of ours was party to a $23.5
million note agreement with the lender referred to therein. In June 2022, the
$23.5 million note was repaid in full and not extended. The outstanding
principal on the note at the time of repayment was $22.8 million. In March 2022,
the $28.3 million note, which was secured by a hotel property located in New
York that was recognized as real estate owned in our consolidated balance
sheets, was repaid in full and not extended. The outstanding principal on the
note at the time of repayment was $28.3 million.
(8)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 and the interest rate on advances under the Secured Term Loan are the
following fixed rates: (i) 4.50% per annum until May 12, 2025, (ii) after May
12, 2025 through November 12, 2025, the interest rate increases 0.125% every
three months and (iii) after November 12, 2025 through November 12, 2026, the
interest rate increases 0.250% every three months.

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, 2022,
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, 2022, the carrying amount and outstanding principal of our
CLO Securitizations was $822.3 million and $824.1 million, respectively. See
Note 16 to our consolidated financial statements included in this quarterly
report on Form 10-Q for additional terms and details of our CLO Securitizations.

Leverage policies

We intend to use prudent amounts of leverage to increase potential returns to
our stockholders. To that end, subject to maintaining our qualification as a
REIT and our exemption from registration under the 1940 Act, we intend to
continue to use borrowings to fund the origination or acquisition of our target
investments. Given current market conditions and our focus on first or senior
mortgages, we currently expect that such leverage would not exceed, on a
debt-to-equity basis, a 4.5-to-1 ratio. Our charter and bylaws do not restrict
the amount of leverage that we may use. The amount of leverage we will deploy
for particular investments in our target investments will depend upon our
Manager's assessment of a variety of factors, which may include, among others,
our liquidity position, the anticipated liquidity and price volatility of the
assets in our loans held for investment portfolio, the potential for losses and
extension risk in our portfolio, the gap between the duration of our assets and
liabilities, including hedges, the availability and cost of financing the
assets, our opinion of the creditworthiness of our financing counterparties, the
impact of macroeconomic and geopolitical conditions, including the ongoing
impact of the COVID-19 pandemic on the United States economy generally or in
specific geographic regions and commercial mortgage
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markets, our outlook for the level and volatility of interest rates, the slope
of the yield curve, the credit quality of our assets, the collateral underlying
our assets, and our outlook for asset spreads relative to the LIBOR or SOFR
curve.

Dividends

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

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

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