UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________________________________________________________ 
FORM 10-Q
ý      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
For the quarterly period ended March 31, 2020
 OR
 o       TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
For the transition period from _____ to _____

Commission File No. 001-35517
ACRE04.JPG
 ARES COMMERCIAL REAL ESTATE CORPORATION
(Exact name of Registrant as specified in its charter) 
Maryland
 
45-3148087
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization)
 
Identification Number)
 
245 Park Avenue, 42nd Floor, New York, NY 10167
(Address of principal executive offices) (Zip Code)
 
(212) 750-7300
(Registrant’s telephone number, including area code)
 
N/A
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common stock, $0.01 par value per share
ACRE
New York Stock Exchange
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days:   Yes ý  No o
 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).   Yes ý  No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one): 
Large accelerated filer o
 
Accelerated filer x
Non-accelerated filer o
 
Smaller reporting company o
Emerging growth company o
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o  No ý
 
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class
 
Outstanding at May 7, 2020
Common stock, $0.01 par value
 
33,441,937
 




ARES COMMERCIAL REAL ESTATE CORPORATION

INDEX

 
 
 
 
 
 
 
 
 
2
 
 
 
 
3
 
 
 
 
4
 
 
 
 
5
 
 
 
 
6
 
 
 
30
 
 
 
41
 
 
 
43
 
 
 
 
 
 
 
44
 
 
 
44
 
 
 
45
 
 
 
45
 
 
 
45
 
 
 
45
 
 
 
46






PART I — FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements
 
ARES COMMERCIAL REAL ESTATE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)

 
As of
 
March 31, 2020

December 31, 2019
 
(unaudited)
 

ASSETS
 
 
 
Cash and cash equivalents
$
74,498

 
$
5,256

Restricted cash
379

 
379

Loans held for investment ($425,817 and $515,896 related to consolidated VIEs, respectively)
1,870,639

 
1,682,498

Current expected credit loss reserve
(29,143
)
 

Loans held for investment, net of current expected credit loss reserve
1,841,496

 
1,682,498

Real estate owned, net
37,907

 
37,901

Other assets ($1,010 and $1,309 of interest receivable related to consolidated VIEs, respectively; $131,183 and $41,104 of other receivables related to consolidated VIEs, respectively)
147,075

 
58,100

Total assets
$
2,101,355

 
$
1,784,134

LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
LIABILITIES
 
 
 
Secured funding agreements
$
990,564

 
$
728,589

Notes payable and secured borrowings
65,047

 
54,708

Secured term loan
109,378

 
109,149

Collateralized loan obligation securitization debt (consolidated VIE)
443,558

 
443,177

Due to affiliate
2,836

 
2,761

Dividends payable
11,057

 
9,546

Other liabilities ($691 and $718 of interest payable related to consolidated VIEs, respectively)
12,850

 
9,865

Total liabilities
1,635,290

 
1,357,795

Commitments and contingencies (Note 7)


 


STOCKHOLDERS' EQUITY
 
 
 
Common stock, par value $0.01 per share, 450,000,000 shares authorized at March 31, 2020 and December 31, 2019 and 33,398,952 and 28,865,610 shares issued and outstanding at March 31, 2020 and December 31, 2019, respectively
329

 
283

Additional paid-in capital
496,689

 
423,619

Accumulated earnings (deficit)
(30,953
)
 
2,437

Total stockholders' equity
466,065

 
426,339

Total liabilities and stockholders' equity
$
2,101,355

 
$
1,784,134


   See accompanying notes to consolidated financial statements.

2




ARES COMMERCIAL REAL ESTATE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)

 
For the three months ended March 31,
 
2020

2019

(unaudited)

(unaudited)
Revenue:



Interest income from loans held for investment
$
31,448


$
27,986

Interest expense
(15,534
)

(15,740
)
Net interest margin
15,914


12,246

Revenue from real estate owned
5,220


1,911

Total revenue
21,134


14,157

Expenses:




Management and incentive fees to affiliate
1,773


1,574

Professional fees
903


478

General and administrative expenses
868


1,120

General and administrative expenses reimbursed to affiliate
1,051


659

Expenses from real estate owned
6,676


1,687

Total expenses
11,271


5,518

Provision for current expected credit losses
27,117

 

Income (loss) before income taxes
(17,254
)

8,639

Income tax expense, including excise tax
9


96

Net income (loss) attributable to common stockholders
$
(17,263
)

$
8,543

Earnings (loss) per common share:





Basic and diluted earnings (loss) per common share
$
(0.54
)

$
0.30

Weighted average number of common shares outstanding:




Basic weighted average shares of common stock outstanding
31,897,952


28,561,827

Diluted weighted average shares of common stock outstanding
31,897,952


28,780,980

Dividends declared per share of common stock
$
0.33


$
0.33





   See accompanying notes to consolidated financial statements.

3




ARES COMMERCIAL REAL ESTATE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands, except share and per share data)
(unaudited)

 
Common Stock
 
Additional
Paid-in
Capital
 
Accumulated
Earnings (Deficit)
 
Total Stockholders’ Equity
 
Shares
 
Amount
Balance at December 31, 2018
28,755,665

 
$
283

 
$
421,739

 
$
3,565

 
$
425,587

Stock-based compensation
93,405

 

 
492

 

 
492

Net income

 

 

 
8,543

 
8,543

Dividends declared

 

 

 
(9,520
)
 
(9,520
)
Balance at March 31, 2019
28,849,070

 
$
283

 
$
422,231

 
$
2,588

 
$
425,102

Stock-based compensation
19,665

 

 
427

 

 
427

Net income

 

 

 
9,755

 
9,755

Dividends declared

 

 

 
(9,527
)
 
(9,527
)
Balance at June 30, 2019
28,868,735

 
$
283

 
$
422,658

 
$
2,816

 
$
425,757

Stock-based compensation
(3,125
)
 

 
479

 

 
479

Net income

 

 

 
9,034

 
9,034

Dividends declared

 

 

 
(9,526
)
 
(9,526
)
Balance at September 30, 2019
28,865,610

 
$
283

 
$
423,137

 
$
2,324

 
$
425,744

Stock-based compensation

 

 
482

 

 
482

Net income

 

 

 
9,660

 
9,660

Dividends declared

 

 

 
(9,547
)
 
(9,547
)
Balance at December 31, 2019
28,865,610

 
$
283

 
$
423,619

 
$
2,437

 
$
426,339

Sale of common stock
4,600,000

 
46

 
73,186

 

 
73,232

Offering costs

 

 
(341
)
 

 
(341
)
Stock-based compensation
(66,658
)
 

 
225

 

 
225

Net loss

 

 

 
(17,263
)
 
(17,263
)
Dividends declared

 

 

 
(11,076
)
 
(11,076
)
Impact of adoption of CECL (Note 2)

 

 

 
(5,051
)
 
(5,051
)
Balance at March 31, 2020
33,398,952

 
$
329

 
$
496,689

 
$
(30,953
)
 
$
466,065

   
See accompanying notes to consolidated financial statements.


4




ARES COMMERCIAL REAL ESTATE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)

 
For the three months ended March 31,
 
2020
 
2019
 
(unaudited)
 
(unaudited)
Operating activities:
 
 
 
Net income (loss)
$
(17,263
)
 
$
8,543

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
 
 
 
Amortization of deferred financing costs
1,622

 
1,665

Accretion of deferred loan origination fees and costs
(1,967
)
 
(1,266
)
Stock-based compensation
225

 
492

Depreciation of real estate owned
221

 
54

Provision for current expected credit losses
27,117

 

Changes in operating assets and liabilities:
 
 
 
Other assets
(1,343
)
 
(1,694
)
Due to affiliate
75

 
(904
)
Other liabilities
(420
)
 
(101
)
Net cash provided by (used in) operating activities
8,267

 
6,789

Investing activities:
 
 
 
Issuance of and fundings on loans held for investment
(294,733
)
 
(120,305
)
Principal repayment of loans held for investment
17,471

 
109,894

Receipt of origination fees
3,538

 
1,426

Purchases of capitalized additions to real estate owned
(227
)
 

Net cash provided by (used in) investing activities
(273,951
)
 
(8,985
)
Financing activities:
 
 
 
Proceeds from secured funding agreements
355,083

 
107,019

Repayments of secured funding agreements
(93,108
)
 
(263,444
)
Proceeds from notes payable and secured borrowings
10,555

 

Payment of secured funding costs
(1,005
)
 
(3,413
)
Proceeds from issuance of debt of consolidated VIEs

 
172,673

Dividends paid
(9,565
)
 
(8,914
)
Proceeds from sale of common stock
73,232

 

Payment of offering costs
(266
)
 

Net cash provided by (used in) financing activities
334,926

 
3,921

Change in cash, cash equivalents and restricted cash
69,242

 
1,725

Cash, cash equivalents and restricted cash, beginning of period
5,635

 
11,468

Cash, cash equivalents and restricted cash, end of period
$
74,877

 
$
13,193

   
See accompanying notes to consolidated financial statements.

5




ARES COMMERCIAL REAL ESTATE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of March 31, 2020
(in thousands, except share and per share data, percentages and as otherwise indicated)
(unaudited)

1.   ORGANIZATION

Ares Commercial Real Estate Corporation (together with its consolidated subsidiaries, the “Company” or “ACRE”) is a specialty finance company primarily engaged in originating and investing in commercial real estate loans and related investments. Through Ares Commercial Real Estate Management LLC (“ACREM” or the Company’s “Manager”), a Securities and Exchange Commission (“SEC”) registered investment adviser and a subsidiary of Ares Management Corporation (NYSE: ARES) (“Ares Management” or “Ares”), a publicly traded, leading global alternative asset manager, it has investment professionals strategically located across the United States and Europe who directly source new loan opportunities for the Company with owners, operators and sponsors of commercial real estate (“CRE”) properties. The Company was formed and commenced operations in late 2011. The Company is a Maryland corporation and completed its initial public offering (the “IPO”) in May 2012. The Company is externally managed by its Manager, pursuant to the terms of a management agreement (the “Management Agreement”).
 
The Company operates as one operating segment and is primarily focused on directly originating and managing a diversified portfolio of CRE debt-related investments for the Company’s own account. The Company’s target investments include senior mortgage loans, subordinated debt, preferred equity, mezzanine loans and other CRE investments, including commercial mortgage backed securities. These investments are generally held for investment and are secured, directly or indirectly, by office, multifamily, retail, industrial, lodging, senior-living, self storage, student housing, residential and other commercial real estate properties, or by ownership interests therein.

The Company has elected and qualified to be taxed as a real estate investment trust (“REIT”) for United States federal income tax purposes under the Internal Revenue Code of 1986, as amended (the “Code”), commencing with its taxable year ended December 31, 2012. The Company generally will not be subject to United States federal income taxes on its REIT taxable income as long as it annually distributes all of its REIT taxable income prior to the deduction for dividends paid to stockholders and complies with various other requirements as a REIT.

2.   SIGNIFICANT ACCOUNTING POLICIES

The accompanying unaudited consolidated interim financial statements should be read in conjunction with the audited consolidated financial statements and the related management's discussion and analysis of financial condition and results of operations included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2019 filed with the SEC.

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

Basis of Presentation

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

Interim financial statements are prepared in accordance with GAAP and pursuant to the requirements for reporting on Form 10-Q and Article 10 of Regulation S-X. The current period’s results of operations will not necessarily be indicative of results that ultimately may be achieved for the year ending December 31, 2020.


6




Use of Estimates in the Preparation of Financial Statements

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect certain reported amounts and disclosures. As of the filing date of this Quarterly Report, there is an outbreak of a novel and highly contagious form of coronavirus (“COVID-19”), which the World Health Organization has declared a global pandemic, the United States has declared a national emergency, and for the first time in its history, every state in the United States is under a federal disaster declaration. Many states, including those in which the Company and its borrowers operate, have issued orders requiring the closure of non-essential businesses and/or requiring residents to stay at home. The COVID-19 pandemic and preventative measures taken to contain or mitigate its spread have caused, and are continuing to cause, business shutdowns, cancellations of events and travel, significant reductions in demand for certain goods and services, reductions in business activity and financial transactions, supply chain interruptions and overall economic and financial market instability both globally and in the United States. Such effects will likely continue for the duration of the pandemic, which is uncertain, and for some period thereafter, which could adversely affect the Company’s business, financial condition and results of operations. The Company believes the estimates and assumptions underlying its consolidated financial statements are reasonable and supportable based on the information available as of March 31, 2020, however, uncertainty over the ultimate impact the COVID-19 pandemic will have on the global economy and the Company’s business, makes any estimates and assumptions as of March 31, 2020 inherently less certain than they would be absent the current and potential impacts of the COVID-19 pandemic. Actual results could differ from those estimates.

Variable Interest Entities

The Company evaluates all of its interests in VIEs for consolidation. When the Company’s interests are determined to be variable interests, the Company assesses whether it is deemed to be the primary beneficiary of the VIE. The primary beneficiary of a VIE is required to consolidate the VIE. Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 810, Consolidation, defines the primary beneficiary as the party that has both (i) the power to direct the activities of the VIE that most significantly impact its economic performance, and (ii) the obligation to absorb losses and the right to receive benefits from the VIE which could be potentially significant. The Company considers its variable interests, as well as any variable interests of its related parties in making this determination. Where both of these factors are present, the Company is deemed to be the primary beneficiary and it consolidates the VIE. Where either one of these factors is not present, the Company is not the primary beneficiary and it does not consolidate the VIE.
 
To assess whether the Company has the power to direct the activities of a VIE that most significantly impact the VIE’s economic performance, the Company considers all facts and circumstances, including its role in establishing the VIE and its ongoing rights and responsibilities. This assessment includes first, identifying the activities that most significantly impact the VIE’s economic performance; and second, identifying which party, if any, has power over those activities. In general, the parties that make the most significant decisions affecting the VIE or have the right to unilaterally remove those decision makers are deemed to have the power to direct the activities of a VIE.

To assess whether the Company has the obligation to absorb losses of the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE, the Company considers all of its economic interests, including debt and equity investments, servicing fees, and other arrangements deemed to be variable interests in the VIE. This assessment requires that the Company applies judgment in determining whether these interests, in the aggregate, are considered potentially significant to the VIE. Factors considered in assessing significance include: the design of the VIE, including its capitalization structure; subordination of interests; payment priority; relative share of interests held across various classes within the VIE’s capital structure; and the reasons why the interests are held by the Company.
 
For VIEs of which the Company is determined to be the primary beneficiary, all of the underlying assets, liabilities, equity, revenue and expenses of the structures are consolidated into the Company’s consolidated financial statements.
 
The Company performs an ongoing reassessment of: (1) whether any entities previously evaluated under the majority voting interest framework have become VIEs, based on certain events, and therefore are subject to the VIE consolidation framework, and (2) whether changes in the facts and circumstances regarding its involvement with a VIE cause the Company’s consolidation conclusion regarding the VIE to change. See Note 14 included in these consolidated financial statements for further discussion of the Company’s VIEs.


7




Cash, Cash Equivalents and Restricted Cash

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

Restricted cash includes deposits required under certain Secured Funding Agreements (each individually defined in Note 5 included in these consolidated financial statements).

The following table provides a reconciliation of cash, cash equivalents and restricted cash in the consolidated balance sheets to the total amount shown in the consolidated statements of cash flows ($ in thousands):
 
As of March 31,
 
2020
 
2019
Cash and cash equivalents
$
74,498

 
$
12,814

Restricted cash
379

 
379

Total cash, cash equivalents and restricted cash shown in the Company's consolidated statements of cash flows
$
74,877

 
$
13,193


Loans Held for Investment

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

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

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


8




Current Expected Credit Losses
    
In June 2016, the FASB issued Accounting Standards Update (“ASU”) No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The standard replaced the incurred loss impairment methodology pursuant to GAAP with a methodology that reflects current expected credit losses (“CECL”) on both the outstanding balances and unfunded commitments on loans held for investment and requires consideration of a broader range of historical experience adjusted for current conditions and reasonable and supportable forecast information to inform credit loss estimates (the “CECL Reserve”). ASU No. 2016-13 was effective for annual reporting periods beginning after December 15, 2019, including interim periods within that reporting period. ASU No. 2016-13 was adopted by the Company on a modified retrospective basis through a cumulative-effect adjustment to retained earnings as of January 1, 2020. Subsequent period increases and decreases to expected credit losses will impact earnings and are recorded within provision for current expected credit losses in the Company’s consolidated statements of operations. The CECL Reserve related to outstanding balances on loans held for investment required under ASU No. 2016-13 is a valuation account that is deducted from the amortized cost basis of the Company’s loans held for investment in the Company’s consolidated balance sheets. The CECL Reserve related to unfunded commitments on loans held for investment is recorded within other liabilities in the Company's consolidated balance sheets. See Note 4 included in these consolidated financial statements for CECL related disclosures.

Real Estate Owned

Real estate assets are carried at their estimated fair value at acquisition and are presented net of accumulated depreciation and impairment charges. The Company allocates the purchase price of acquired real estate assets based on the fair value of the acquired land, building, furniture, fixtures and equipment.

Real estate assets are depreciated using the straight-line method over estimated useful lives of up to 40 years for buildings and improvements and up to 15 years for furniture, fixtures and equipment. Renovations and/or replacements that improve or extend the life of the real estate asset are capitalized and depreciated over their estimated useful lives. The cost of ordinary repairs and maintenance are expensed as incurred.

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

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

Debt Issuance Costs

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

9




costs for the note payable on the hotel property that is recognized as real estate owned in the Company’s consolidated balance sheets (see Note 6 included in these consolidated financial statements for additional information on the note payable) is included within expenses from real estate owned in the Company’s consolidated statements of operations.

The original issue discount (“OID”) on amounts drawn under the Company’s Secured Term Loan represents a discount to the face amount of the drawn debt obligations. The OID is amortized over the term of the Secured Term Loan using the effective interest method and is included within interest expense in the Company’s consolidated statements of operations while the unamortized balance is included as a reduction to the carrying amount of the Secured Term Loan in the Company’s consolidated balance sheets.

Revenue Recognition

Interest income from loans held for investment is accrued based on the outstanding principal amount and the contractual terms of each loan. For loans held for investment, origination fees, contractual exit fees and direct loan origination costs are also recognized in interest income from loans held for investment over the initial loan term as a yield adjustment using the effective interest method.

Revenue from real estate owned represents revenue associated with the operations of a hotel property classified as real estate owned. Revenue from the operation of the hotel property is recognized when guestrooms are occupied, services have been rendered or fees have been earned. Revenues are recorded net of any discounts and sales and other taxes collected from customers. Revenues consist of room sales, food and beverage sales and other hotel revenues.

Net Interest Margin and Interest Expense
Net interest margin in the Company’s consolidated statements of operations serves to measure the performance of the Company’s loans held for investment as compared to its use of debt leverage. The Company includes interest income from its loans held for investment and interest expense related to its Secured Funding Agreements, Notes Payable and Secured Borrowings, securitizations debt and the Secured Term Loan (individually defined in Note 6 included in these consolidated financial statements) in net interest margin. For the three months ended March 31, 2020 and 2019, interest expense is comprised of the following ($ in thousands):
 
For the three months ended March 31,
 
2020
 
2019
Secured funding agreements
$
8,847

 
$
8,457

Notes payable and secured borrowings (1)
365

 

Securitizations debt
4,257

 
5,027

Secured term loan
2,065

 
2,256

Interest expense
$
15,534

 
$
15,740

_______________________________________________________________________________

(1)
Excludes interest expense on the $28.3 million note payable, which is secured by a hotel property that is recognized as real estate owned in the Company’s consolidated balance sheets (see Note 6 included in these consolidated financial statements for additional information on the note payable). Interest expense on the $28.3 million note payable is included within expenses from real estate owned in the Company’s consolidated statements of operations.
Comprehensive Income
For the three months ended March 31, 2020 and 2019, comprehensive income (loss) equaled net income (loss); therefore, a separate consolidated statement of comprehensive income (loss) is not included in the accompanying consolidated financial statements.

Recent Accounting Pronouncements

In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The

10




amendments apply only to contracts, hedging relationships, and other transactions that reference the London Interbank Offered Rate (“LIBOR”) or another reference rate expected to be discontinued because of reference rate reform. ASU No. 2020-04 is effective for all entities as of March 12, 2020 through December 31, 2022. The Company is currently evaluating the impact of adopting this ASU on its consolidated financial statements.

3.   LOANS HELD FOR INVESTMENT

As of March 31, 2020, the Company’s portfolio included 53 loans held for investment, excluding 92 loans that were repaid, sold or converted to real estate owned since inception. The aggregate originated commitment under these loans at closing was approximately $2.2 billion and outstanding principal was $1.9 billion as of March 31, 2020. During the three months ended March 31, 2020, the Company funded approximately $297.3 million of outstanding principal and received repayments of $107.1 million of outstanding principal as described in more detail in the tables below. As of March 31, 2020, 93.7% of the Company’s loans have LIBOR floors, with a weighted average floor of 1.77%, calculated based on loans with LIBOR floors. References to LIBOR or “L” are to 30-day LIBOR (unless otherwise specifically stated).
 
The Company’s investments in loans held for investment are accounted for at amortized cost. The following tables summarize the Company’s loans held for investment as of March 31, 2020 and December 31, 2019 ($ in thousands):

 
As of March 31, 2020

Carrying Amount (1)
 
Outstanding Principal (1)
 
Weighted Average Unleveraged Effective Yield
 
Weighted Average Remaining Life (Years)
Senior mortgage loans
$
1,783,789

 
$
1,795,079

 
5.9
%
(2)
6.2
%
(3)
 
1.5
Subordinated debt and preferred equity investments
86,850

 
88,008

 
13.5
%
(2)
13.5
%
(3)
 
2.5
Total loans held for investment portfolio
$
1,870,639

 
$
1,883,087

 
6.2
%
(2)
6.6
%
(3)
 
1.6

 
As of December 31, 2019
 
Carrying Amount (1)
 
Outstanding Principal (1)
 
Weighted Average Unleveraged Effective Yield (2)
 
Weighted Average Remaining Life (Years)
Senior mortgage loans
$
1,622,666

 
$
1,632,164

 
6.5%
 
1.5
Subordinated debt and preferred equity investments
59,832

 
60,730

 
15.1%
 
2.6
Total loans held for investment portfolio
$
1,682,498

 
$
1,692,894

 
6.8%
 
1.6
_______________________________________________________________________________

(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 the Company as of March 31, 2020 and December 31, 2019 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 the Company as of March 31, 2020 as weighted by the total outstanding principal balance of each interest accruing loan (excludes loans on non-accrual status as of March 31, 2020).



11




A more detailed listing of the Company’s loans held for investment portfolio based on information available as of March 31, 2020 is as follows ($ in millions, except percentages):
Loan Type
 
Location
 
Outstanding Principal (1)
 
Carrying Amount (1)
 
Interest Rate
 
Unleveraged Effective Yield (2)
 
Maturity Date (3)
 
Payment Terms (4)
 
Senior Mortgage Loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Office
 
Diversified
 
$107.5

$106.9
 
L+3.65%

5.7%
 
Jan 2023

I/O

Mixed-use
 
FL
 
100.6

100.0
 
L+4.25%

7.8%
 
Feb 2021

I/O

Multifamily
 
FL
 
89.7

89.7
 
L+4.75%

5.7%
 
May 2020
(5)
I/O

Multifamily
 
TX
 
75.0

74.7
 
L+2.85%

5.0%
 
Oct 2022

I/O

Office
 
IL
 
69.5

69.3
 
L+3.75%

5.6%
 
Dec 2020

I/O

Hotel
 
OR/WA
 
68.1

67.8
 
L+3.45%

4.6%
(6)
May 2021

I/O

Hotel
 
Diversified
 
60.3

60.0
 
L+3.60%

6.2%
 
Sep 2021

I/O

Office
 
IL
 
57.2

57.0
 
L+3.95%

6.3%
 
Jun 2021

I/O

Office
 
NC
 
53.9

53.4
 
L+4.25%

8.5%
 
Mar 2021

I/O

Industrial
 
FL
 
52.5

52.0
 
L+6.10%

8.8%
 
Oct 2022

I/O

Mixed-use
 
CA
 
49.0

48.8
 
L+4.00%

6.3%
 
Apr 2021

I/O

Multifamily
 
FL
 
45.4

45.4
 
L+4.75%

5.7%
 
May 2020
(5)
I/O

Industrial
 
NY
 
43.8

43.4
 
L+5.00%

8.3%
 
Feb 2021

I/O

Multifamily
 
FL
 
42.8

42.5
 
L+2.60%

5.5%
 
Jan 2022

I/O

Student Housing
 
CA
 
41.7

41.7
 
L+3.95%

5.7%
 
Jul 2020

I/O

Multifamily
 
NJ
 
41.0

40.7
 
L+3.05%

4.9%
 
Mar 2022

I/O

Student Housing
 
TX
 
41.0

40.9
 
L+4.75%

6.3%
 
Jan 2021

I/O

Hotel
 
CA
 
40.0

39.9
 
L+4.12%

5.9%
 
Jan 2021

I/O

Multifamily
 
IL
 
39.4

39.3
 
L+3.50%

6.5%
 
Nov 2020

I/O

Office
 
GA
 
37.2

36.7
 
L+3.05%

5.8%
 
Dec 2022

I/O

Multifamily
 
KS
 
35.8

35.5
 
L+3.25%

5.5%
 
Nov 2022

I/O

Hotel
 
MI
 
35.2

35.2
 
L+4.40%

—%
(7)
Jul 2020

I/O

Industrial
 
NC
 
34.8

34.6
 
L+4.05%

5.9%
 
Mar 2024

I/O

Mixed-use
 
TX
 
34.3

34.0
 
L+3.75%

6.7%
 
Sep 2022

I/O

Hotel
 
IL
 
32.9

32.7
 
L+4.40%

—%
(7)
May 2021

I/O

Hotel
 
MN
 
31.5

31.4
 
L+3.55%

6.0%
 
Aug 2021

I/O

Office
 
CA
 
30.9

30.6
 
L+3.35%

6.0%
 
Nov 2022

I/O

Multifamily
 
NY
 
30.1

30.1
 
L+3.20%

4.9%
 
Dec 2020

I/O

Student Housing
 
NC
 
30.0

29.9
 
L+3.15%

5.9%
 
Feb 2022

I/O

Multifamily
 
TX
 
29.6

29.3
 
L+3.25%

5.5%
 
Feb 2023

I/O

Multifamily
 
PA
 
29.3

29.2
 
L+3.00%

5.9%
 
Dec 2021

I/O

Office
 
IL
 
27.5

27.2
 
L+3.80%

6.2%
 
Jan 2023

I/O

Multifamily
 
TX
 
27.5

27.5
 
L+3.20%

4.9%
 
Oct 2020

I/O

Student Housing
 
TX
 
24.6

24.3
 
L+3.45%

5.5%
 
Feb 2023

I/O

Student Housing
 
AL
 
24.1

23.6
 
L+4.45%

—%
(7)
Aug 2020
(8)
I/O

Student Housing
 
FL
 
22.0

21.8
 
L+3.25%

5.9%
 
Aug 2022

I/O

Industrial
 
CA
 
21.1

20.9
 
L+4.50%

7.4%
 
Dec 2021

I/O

Mixed-use
 
CA
 
19.7

19.3
 
L+4.10%

6.4%
 
Mar 2023

I/O

Self Storage
 
FL
 
19.5

19.4
 
L+3.50%

6.0%
 
Mar 2022

I/O

Multifamily
 
WA
 
18.6

18.4
 
L+3.00%

5.1%
 
Mar 2023

I/O

Office
 
CA
 
17.8

17.7
 
L+3.40%

6.3%
 
Nov 2021

I/O

Office
 
TX
 
13.5

13.3
 
L+4.05%

7.7%
 
Nov 2021

I/O

Office
 
NC
 
13.3

12.6
 
L+3.53%

7.7%
 
May 2023

I/O

Industrial
 
CA
 
13.0

12.8
 
L+3.75%

6.3%
 
Mar 2023

I/O

Residential
 
CA
 
12.2

12.2
 
13.00%

14.4%
 
Aug 2020
(9)
I/O

Office
 
NC
 
8.6

8.5
 
L+4.00%

6.7%
 
Nov 2022

I/O

Multifamily
 
SC
 
2.1

1.7
 
L+6.50%

10.2%
 
Sep 2022

I/O

Subordinated Debt and Preferred Equity Investments:
 

 



 



 




Office
 
IL
 
26.2

25.8
 
L+8.00%

10.2%
 
Mar 2023

I/O

Office
 
NJ
 
17.0

16.4
 
12.00%

12.8%
 
Jan 2026

I/O
(10)
Residential Condominium
 
NY
 
15.5

15.4
 
L+14.00%
(11)
19.1%
 
May 2021
(11)
I/O

Mixed-use
 
IL
 
14.9

14.8
 
L+12.25%

14.6%
 
Nov 2021

I/O

Residential Condominium
 
HI
 
11.5

11.5
 
14.00%

14.5%
 
Oct 2020
(12)
I/O

Office
 
CA
 
2.9

2.9
 
L+8.25%

9.7%
 
Nov 2021

I/O

Total/Weighted Average
 
 
 
$1,883.1
 
$1,870.6
 
 
 
6.2%
 
 
 
 
 

_________________________


12





(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. For the loans held for investment that represent co-investments with other investment vehicles managed by Ares Management (see Note 12 included in these consolidated financial statements for additional information on co-investments), only the portion of Carrying Amount and Outstanding Principal held by the Company is reflected.
(2)
Unleveraged Effective Yield is the compounded effective rate of return that would be earned over the life of the investment based on the contractual interest rate (adjusted for any deferred loan fees, costs, premiums or discounts) and assumes no dispositions, early prepayments or defaults. Unleveraged Effective Yield for each loan is calculated based on LIBOR as of March 31, 2020 or the LIBOR floor, as applicable. The total Weighted Average Unleveraged Effective Yield is calculated based on the average of Unleveraged Effective Yield of all loans held by the Company as of March 31, 2020 as weighted by the outstanding principal balance of each loan.
(3)
Certain loans are subject to contractual extension options that generally vary between one and two 12-month extensions and may be subject to performance based or other conditions as stipulated in the loan agreement. Actual maturities may differ from contractual maturities stated herein as certain borrowers may have the right to prepay with or without paying a prepayment penalty. The Company may also extend contractual maturities and amend other terms of the loans in connection with loan modifications.
(4)
I/O = interest only, P/I = principal and interest.
(5)
In March 2020, the Company and the borrower entered into an extension agreement, which extended the maturity date on the senior Florida loan to May 2020.
(6)
At origination, the Oregon/Washington loan was structured as both a senior and mezzanine loan with the Company holding both positions. The mezzanine position of this loan, which had an outstanding principal balance of $13.1 million as of March 31, 2020, was on non-accrual status as of March 31, 2020 and therefore, the Unleveraged Effective Yield presented is for the senior position only as the mezzanine position is non-interest accruing.
(7)
Loan was on non-accrual status as of March 31, 2020 and therefore, there is no Unleveraged Effective Yield as the loan is non-interest accruing.
(8)
In February 2020, the Company and the borrower entered into a modification and extension agreement to, among other things, extend the maturity date on the senior Alabama loan to August 2020.
(9)
In February 2020, the Company and the borrowers entered into a modification and extension agreement to, among other things, extend the maturity date on the senior California loan to August 2020.
(10)
In February 2021, amortization will begin on the subordinated New Jersey loan, which had an outstanding principal balance of $17.0 million as of March 31, 2020. The remainder of the loans in the Company’s portfolio are non-amortizing through their primary terms.
(11)
The subordinated New York loan includes a $2.1 million loan to the borrower, for which such amount accrues interest at a per annum rate of 20.00% and has an initial maturity date of April 2020. The remaining outstanding principal balance of the subordinated New York loan accrues interest at L + 14.00% and has an initial maturity date of May 2021.
(12)
In March 2020, the Company and the borrower entered into a modification and extension agreement to, among other things, extend the maturity date on the subordinated Hawaii loan to October 2020.

The Company has made, and may continue to make, modifications to loans, including loans that are in default. Loan terms that may be modified include interest rates, required prepayments, asset release prices, maturity dates, covenants, principal amounts and other loan terms. The terms and conditions of each modification vary based on individual circumstances and will be determined on a case by case basis. The Company’s Manager monitors and evaluates each of the Company’s loans held for investment and has maintained regular communications with borrowers and sponsors regarding the potential impacts of the COVID-19 pandemic on the Company’s loans. Some of the Company’s borrowers, in particular, borrowers with properties exposed to the hospitality, student housing and retail industries, have indicated that due to the impact of the COVID-19 pandemic, they may be unable to timely execute their business plans, are experiencing cash flow pressure, have had to temporarily close their businesses or have experienced other negative business consequences. Certain borrowers have requested temporary interest deferral or forbearance or other modifications of their loans. Based on these discussions with borrowers, the Company has made certain loan modifications subsequent to the three months ended March 31, 2020. These modifications could include deferrals or capitalization of interest, amendments in extension, future funding or performance tests, extension of the maturity date, repurposing of reserves or covenant waivers on loans secured by properties directly or indirectly impacted by the COVID-19 pandemic.


13




For the three months ended March 31, 2020, the activity in the Company’s loan portfolio was as follows ($ in thousands):
Balance at December 31, 2019
$
1,682,498

Initial funding
284,562

Origination fees and discounts, net of costs
(3,538
)
Additional funding
12,700

Amortizing payments
(482
)
Loan payoffs
(107,068
)
Origination fee accretion
1,967

Balance at March 31, 2020
$
1,870,639


As of March 31, 2020, all loans were paying in accordance with their contractual terms. However, the Company placed four loans on non-accrual status due to the impact of the COVID-19 pandemic. As of March 31, 2020, the carrying value of loans held for investment on non-accrual status was $104.6 million.
    
4.     CURRENT EXPECTED CREDIT LOSSES

The Company estimates its CECL Reserve primarily using a probability-weighted model that considers the likelihood of default and expected loss given default for each individual loan. Estimating the CECL Reserve requires significant judgment with respect to various factors, including (i) the appropriate historical loan loss reference data, (ii) the expected timing of loan repayments, (iii) capital senior to the Company when the Company is the subordinate lender, (iv) certain risk drivers of loans, including change in net operating income, debt service coverage ratio, loan-to-value, occupancy, property type, geographic location and (v) the Company’s current and future view of the macroeconomic environment. The Company may consider loan-specific qualitative factors on certain loans to estimate its CECL Reserve. In order to estimate the future expected loan losses relevant to the Company’s portfolio, the Company utilizes historical market loan loss data licensed from a third party data service. The third party’s loan database includes historical loss data for commercial mortgage-backed securities, or CMBS, issued from 1998 through March 31, 2018, which the Company believes is a reasonably comparable and available data set to its type of loans. The Company utilized macroeconomic data that forecasts a recession over the next several quarters due to the uncertainty of the short and long-term economic implications of the COVID-19 pandemic and its financial impact on the Company. For periods beyond the reasonable and supportable forecast period, the Company reverts back to historical loss data. Management’s current estimate of expected credit losses has increased from January 1, 2020 to March 31, 2020 due to the likelihood of a recession caused by the impact of the COVID-19 pandemic, which was not known as of January 1, 2020 and thus, did not have an impact on the Company’s current expected credit loss reserve as of January 1, 2020. The CECL Reserve takes into consideration the macroeconomic impact of the COVID-19 pandemic on CRE properties and is not specific to any loan losses or impairments on the Company’s loans held for investment.

As of March 31, 2020, the Company’s CECL Reserve for its loans held for investment portfolio is $32.2 million or 149 basis points of the Company’s total loan commitment balance of $2.2 billion and is bifurcated between the current expected credit loss reserve (contra-asset) related to outstanding balances on loans held for investment of $29.1 million and a liability for unfunded commitments of $3.0 million. The liability was based on the unfunded portion of the loan commitment over the full contractual period over which the Company is exposed to credit risk through a current obligation to extend credit. Management considered the likelihood that funding will occur, and if funded, the expected credit loss on the funded portion.    


14




Current Expected Credit Loss Reserve for Funded Loan Commitments    

Activity related to the CECL Reserve for outstanding balances on the Company’s loans held for investment as of and for the three months ended March 31, 2020 was as follows ($ in thousands):
Balance at December 31, 2019
$

Impact of adoption of CECL
4,440

Provision for current expected credit losses
24,703

Write-offs

Recoveries

Balance at March 31, 2020 (1)
$
29,143

______________________________

(1)
As of March 31, 2020, the CECL Reserve related to outstanding balances on loans held for investment is recorded within current expected credit loss reserve in the Company's consolidated balance sheets.

Current Expected Credit Loss Reserve for Unfunded Loan Commitments    

Activity related to the CECL Reserve for unfunded commitments on the Company’s loans held for investment as of and for the three months ended March 31, 2020 was as follows ($ in thousands):

Balance at December 31, 2019
$

Impact of adoption of CECL
611

Provision for current expected credit losses
2,414

Write-offs

Recoveries

Balance at March 31, 2020 (1)
$
3,025

______________________________

(1)
As of March 31, 2020, the CECL Reserve related to unfunded commitments on loans held for investment is recorded within other liabilities in the Company's consolidated balance sheets.

The Company continuously evaluates the credit quality of each loan by assessing the risk factors of each loan and assigning a risk rating based on a variety of factors. Risk factors include property type, geographic and local market dynamics, physical condition, leasing and tenant profile, projected cash flow, loan structure and exit plan, loan-to-value ratio, debt service coverage ratio, project sponsorship, and other factors deemed necessary. Based on a 5-point scale, the Company’s loans are rated "1" through "5," from less risk to greater risk, which ratings are defined as follows:
Ratings    
 
Definition
1
 
Very Low Risk
2
 
Low Risk
3
 
Medium Risk
4
 
High Risk/Potential for Loss: Asset performance is trailing underwritten expectations. Loan at risk of impairment without material improvement to performance
5
 
Impaired/Loss Likely: A loan that has a significantly increased probability of default or principal loss

The risk ratings are primarily based on historical data and may take into account future economic conditions. The Company made qualitative overrides to its risk ratings as of March 31, 2020 to take into account the impact of the COVID-19 pandemic on certain higher risk loans held for investment.

As of March 31, 2020, the carrying value, excluding the CECL Reserve, of the Company’s loans held for investment within each risk rating by year of origination is as follows ($ in thousands):

15




 
2020
 
2019
 
2018
 
2017
 
2016
 
Prior
 
Total
Risk rating:
 
 
 
 
 
 
 
 
 
 
 
 
 
1
$

 
$

 
$

 
$

 
$

 
$

 
$

2

 
161,343

 
8,521

 
57,544

 

 

 
227,408

3
283,765

 
451,948

 
286,438

 
179,028

 
151,440

 

 
1,352,619

4

 

 
191,899

 
63,513

 

 
35,200

 
290,612

5

 

 

 

 

 

 

Total
$
283,765

 
$
613,291

 
$
486,858

 
$
300,085

 
$
151,440

 
$
35,200

 
$
1,870,639


Accrued Interest Receivable

The Company elected not to measure a current expected credit loss reserve on accrued interest receivable. As of March 31, 2020, interest receivable of $9.8 million is included within other assets in the Company's consolidated balance sheets and is excluded from the carrying value of loans held for investment. If the Company were to have uncollectible accrued interest receivable, it would write it off in a timely manner by recognizing credit loss expense and no longer accrue for these amounts.

5.     REAL ESTATE OWNED

On March 8, 2019, the Company acquired legal title to a hotel property located in New York through a deed in lieu of foreclosure. Prior to March 8, 2019, the hotel property collateralized a $38.6 million senior mortgage loan held by the Company 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, the Company derecognized the $38.6 million senior mortgage loan and recognized the hotel property as real estate owned. As the Company does not expect to complete a sale of the hotel property within the next twelve months, the hotel property is considered held for use, and is carried at its estimated fair value at acquisition and is presented net of accumulated depreciation and impairment charges. The Company did not recognize any gain or loss on the derecognition of the senior mortgage loan as the fair value of the hotel property of $36.9 million and the net assets held at the hotel property of $1.7 million at acquisition approximated the $38.6 million carrying value of the senior mortgage loan. The assets and liabilities of the hotel property are included within other assets and other liabilities, respectively, in the Company’s consolidated balance sheets and include items such as cash, restricted cash, trade receivables and payables and advance deposits.

The following table summarizes the Company’s real estate owned as of March 31, 2020 and December 31, 2019 ($ in thousands):

 
As of
 
March 31, 2020
 
December 31, 2019
Land
$
10,200

 
$
10,200

Buildings and improvements
24,281

 
24,281

Furniture, fixtures and equipment
4,314

 
4,087

 
38,795

 
38,568

Less: Accumulated depreciation
(888
)
 
(667
)
Real estate owned, net
$
37,907

 
$
37,901


As of March 31, 2020, no impairment charges have been recognized for real estate owned.

For the three months ended March 31, 2020 and 2019, the Company incurred depreciation expense of $221 thousand and $54 thousand, respectively. Depreciation expense is included within expenses from real estate owned in the Company’s consolidated statements of operations.

6.   DEBT

Financing Agreements

The Company borrows funds, as applicable in a given period, under the Wells Fargo Facility, the Citibank Facility, the BAML Facility, the CNB Facility, the MetLife Facility, the U.S. Bank Facility and the Morgan Stanley Facility (individually defined below and collectively, the “Secured Funding Agreements”), Notes Payable and Secured Borrowings (as defined below) and the Secured Term Loan (as defined below). The Company refers to the Secured Funding Agreements, Notes Payable and Secured Borrowings and the Secured Term Loan as the “Financing Agreements.” The outstanding balance of the Financing Agreements in the table below are presented gross of debt issuance costs. As of March 31, 2020 and December 31, 2019, the outstanding balances and total commitments under the Financing Agreements consisted of the following ($ in thousands):


16




 
March 31, 2020
 
December 31, 2019
 
 
Outstanding Balance
 
Total
Commitment
 
Outstanding Balance
 
Total
Commitment
 
Wells Fargo Facility
$
472,888

 
$
500,000

 
$
360,354

 
$
500,000

 
Citibank Facility
122,542

 
325,000

 
126,603

 
325,000

 
BAML Facility
36,280

 
36,280

(1)
36,280

 
36,280

(1)
CNB Facility
50,000

 
50,000

(2)
30,500

 
50,000

(2)
MetLife Facility
152,455

 
180,000

 
131,807

 
180,000

 
U.S. Bank Facility
39,177

 
185,989

 
43,045

 
185,989

 
Morgan Stanley Facility
117,222


150,000

 

 

 
Notes Payable and Secured Borrowings
66,710

 
108,555

 
56,155

 
84,155

 
Secured Term Loan
110,000

 
110,000

 
110,000

 
110,000

 
   Total
$
1,167,274

 
$
1,645,824

 
$
894,744

 
$
1,471,424

 

______________________________

(1)
In May 2019, the Company’s borrowing period for new individual loans under the BAML Facility (as defined below) expired and its term was not extended. As such, the total commitment amount under the BAML Facility as of March 31, 2020 represents the outstanding balance under the facility at the time the borrowing period expired, which was permitted to remain outstanding until September 2019, per the original terms of the BAML Facility. In September 2019, the Company amended the BAML Facility to extend the maturity date for the outstanding balance to December 4, 2019. In addition, in December 2019, the Company amended the BAML Facility to extend the maturity date for the outstanding balance to March 3, 2020. In addition, effective February 2020, the Company amended the BAML Facility to extend the maturity date for the outstanding balance to July 1, 2020.
    
(2)
The CNB Facility (as defined below) has an accordion feature that provides for, subject to approval by City National Bank in its sole discretion, an increase in the commitment amount from $50.0 million to $75.0 million for up to a period of 120 days once per calendar year.

Some of the Company’s Financing Agreements are collateralized by (i) assignments of specific loans, preferred equity or a pool of loans held for investment or loans held for sale owned by the Company, (ii) interests in the subordinated portion of the Company’s securitization debt, or (iii) interests in wholly-owned entity subsidiaries that hold the Company’s loans held for investment. The Company is the borrower or guarantor under each of the Financing Agreements. Generally, the Company partially offsets interest rate risk by matching the interest index of loans held for investment with the Secured Funding Agreements used to fund them. The Company’s Financing Agreements contain various affirmative and negative covenants, including negative pledges, and provisions regarding events of default that are normal and customary for similar financing arrangements.

Wells Fargo Facility
 
The Company is party to a master repurchase funding facility with Wells Fargo Bank, National Association (“Wells Fargo”) (the “Wells Fargo Facility”), which allows the Company to borrow up to $500.0 million. Under the Wells Fargo Facility, the Company is permitted to sell, and later repurchase, certain qualifying senior commercial mortgage loans, A-Notes, pari-passu participations in commercial mortgage loans and mezzanine loans under certain circumstances, subject to available collateral approved by Wells Fargo in its sole discretion. The initial maturity date of the Wells Fargo Facility is December 14, 2020, subject to three 12-month extensions, each of which may be exercised at the Company’s option, subject to the satisfaction of certain conditions, including payment of an extension fee, which, if all three were exercised, would extend the maturity date of the Wells Fargo Facility to December 14, 2023. Advances under the Wells Fargo Facility accrue interest at a per annum rate equal to the sum of one-month LIBOR plus a pricing margin range of 1.50% to 2.25%, subject to certain exceptions. The Company incurs a non-utilization fee of 25 basis points per annum on the average daily available balance of the Wells Fargo Facility to the extent less than 75% of the Wells Fargo Facility is utilized. For the three months ended March 31, 2020 and 2019, the Company incurred a non-utilization fee of $19 thousand and $133 thousand, respectively. The non-utilization fee is included within interest expense in the Company’s consolidated statements of operations.




17




Citibank Facility

The Company is party to a $325.0 million master repurchase facility with Citibank, N.A. (“Citibank”) (the “Citibank Facility”). Under the Citibank Facility, the Company is permitted to sell and later repurchase certain qualifying senior commercial mortgage loans and A-Notes approved by Citibank in its sole discretion. The initial maturity date of the Citibank Facility is December 13, 2021, subject to two 12-month extensions, each of which may be exercised at the Company’s option assuming no existing defaults under the Citibank Facility and applicable extension fees being paid, which, if both were exercised, would extend the maturity date of the Citibank Facility to December 13, 2023. Advances under the Citibank Facility accrue interest at a per annum rate equal to the sum of one-month LIBOR plus an indicative pricing margin range of 1.50% to 2.25%, subject to certain exceptions. The Company incurs a non-utilization fee of 25 basis points per annum on the average daily available balance of the Citibank Facility to the extent less than 75% of the Citibank Facility is utilized. For the three months ended March 31, 2020 and 2019, the Company incurred a non-utilization fee of $130 thousand and $88 thousand, respectively. The non-utilization fee is included within interest expense in the Company’s consolidated statements of operations.
 
BAML Facility

The Company is party to a $125.0 million Bridge Loan Warehousing Credit and Security Agreement with Bank of America, N.A. (“Bank of America”) (the “BAML Facility”). Under the BAML Facility, the Company may obtain advances secured by eligible commercial mortgage loans collateralized by multifamily properties. Bank of America may approve the loans on which advances are made under the BAML Facility in its sole discretion. The Company was able to request individual loans under the facility up to May 23, 2019 and the term of the borrowing period was not extended. Individual advances under the BAML Facility had a two-year maturity, subject to one 12-month extension at the Company’s option upon the satisfaction of certain conditions and applicable extension fees being paid. As of March 31, 2020, the Company had one individual advance outstanding in the amount of $36.3 million that had a maturity date of September 5, 2019 per the original terms of the BAML Facility. In September 2019, the Company amended the BAML Facility to extend the maturity date for the one individual advance outstanding to December 4, 2019. In addition, in December 2019, the Company amended the BAML Facility to extend the maturity date for the one individual advance outstanding to March 3, 2020. In addition, effective February 2020, the Company amended the BAML Facility to extend the maturity date for the one individual advance outstanding to July 1, 2020. Advances under the BAML Facility accrue interest at a per annum rate equal to the sum of one-month LIBOR plus a spread of 2.00%, subject to certain exceptions. The Company incurred a non-utilization fee of 12.5 basis points per annum up to May 23, 2019 on the average daily available balance of the BAML Facility to the extent less than 50% of the BAML Facility was utilized. For the three months ended March 31, 2020, the Company did not incur a non-utilization fee. For the three months ended March 31, 2019, the Company incurred a non-utilization fee of $28 thousand. The non-utilization fee is included within interest expense in the Company’s consolidated statements of operations.  
CNB Facility

The Company is party to a $50.0 million secured revolving funding facility with City National Bank (the “CNB Facility”). The Company is permitted to borrow funds under the CNB Facility to finance investments and for other working capital and general corporate needs. In March 2020, the Company exercised a 12-month extension option on the CNB Facility to extend the initial maturity date to March 10, 2021. In June 2019, the Company amended the CNB Facility to, among other things, (1) add an accordion feature that provides for, subject to approval by City National Bank in its sole discretion, an increase in the commitment amount from $50.0 million to $75.0 million for up to a period of 120 days once per calendar year, (2) add two additional 12-month extensions, each of which may be exercised at the Company’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 of the CNB Facility to March 10, 2022 and (3) decrease the interest rate on advances to a per annum rate equal to the sum of, at the Company’s option, either (a) LIBOR for a one, two, three, six or, if available to all lenders, 12-month interest period plus 2.65% or (b) a base rate (which is the highest of a prime rate, the federal funds rate plus 0.50%, or one-month LIBOR plus 1.00%) plus 1.00%; provided that in no event shall the interest rate be less than 2.65%. Previously the interest rate on advances was a per annum rate equal to the sum of, at the Company’s option, either (a) LIBOR for a one, two, three, six or, if available to all lenders, 12-month interest period plus 3.00% or (b) a base rate (which is the highest of a prime rate, the federal funds rate plus 0.50%, or one-month LIBOR plus 1.00%) plus 1.25%. Unless at least 75% of the CNB Facility is used on average, unused commitments under the CNB Facility accrue non-utilization fees at the rate of 0.375% per annum. For the three months ended March 31, 2020 and 2019, the Company incurred a non-utilization fee of $32 thousand and $45 thousand, respectively. The non-utilization fee is included within interest expense in the Company’s consolidated statements of operations.



18




MetLife Facility    

The Company is party to a $180.0 million revolving master repurchase facility with Metropolitan Life Insurance Company (“MetLife”) (the “MetLife Facility”), pursuant to which the Company may sell, and later repurchase, commercial mortgage loans meeting defined eligibility criteria which are approved by MetLife in its sole discretion. The initial maturity date of the MetLife Facility is August 12, 2020, subject to two 12-month extensions, each of which may be exercised at the Company’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 of the MetLife Facility to August 12, 2022. Advances under the MetLife Facility accrue interest at a per annum rate equal to the sum of one-month LIBOR plus a spread of 2.30%, subject to certain exceptions. The Company incurs a non-utilization fee of 25 basis points per annum on the average daily available balance of the MetLife Facility to the extent less than 65% of the MetLife Facility is utilized. For the three months ended March 31, 2020 and 2019, the Company did not incur a non-utilization fee.

U.S. Bank Facility

The Company is party to a $186.0 million master repurchase and securities contract with U.S. Bank National Association (“U.S. Bank”) (the “U.S. Bank Facility”). Pursuant to the U.S. Bank Facility, the Company is permitted to sell, and later repurchase, eligible commercial mortgage loans collateralized by retail, office, mixed-use, multifamily, industrial, hospitality, student housing, manufactured housing or self storage properties. U.S. Bank may approve the mortgage loans that are subject to the U.S. Bank Facility in its sole discretion. The initial maturity date of the U.S. Bank Facility is July 31, 2020, subject to two 12-month extensions, each of which may be exercised at the Company’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 of the U.S. Bank Facility to July 31, 2022. Advances under the U.S. Bank Facility generally accrue interest at a per annum rate equal to the sum of one-month LIBOR plus a spread of 2.25%, unless otherwise agreed between U.S. Bank and the Company, depending upon the mortgage loan sold to U.S. Bank in the applicable transaction. The Company incurs a non-utilization fee of 25 basis points per annum on the average daily available balance of the U.S. Bank Facility to the extent less than 50% of the U.S. Bank Facility is utilized. For the three months ended March 31, 2020 and 2019, the Company incurred a non-utilization fee of $90 thousand and $10 thousand, respectively. The non-utilization fee is included within interest expense in the Company’s consolidated statements of operations.

Morgan Stanley Facility

In January 2020, the Company entered into a $150.0 million master repurchase and securities contract with Morgan Stanley Bank, N.A. (“Morgan Stanley”) (the “Morgan Stanley Facility”). Under the Morgan Stanley Facility, the Company is permitted to sell, and later repurchase, certain qualifying commercial mortgage loans collateralized by retail, office, mixed-use, multifamily, industrial, hospitality, student housing or self-storage properties. Morgan Stanley may approve the mortgage loans that are subject to the Morgan Stanley Facility in its sole discretion. The initial maturity date of the Morgan Stanley Facility is January 16, 2023, subject to two 12-month extensions, each of which may be exercised at the Company’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 of the Morgan Stanley Facility to January 16, 2025. Advances under the Morgan Stanley Facility generally accrue interest at a per annum rate equal to the sum of one-month LIBOR plus a spread ranging from 1.75% to 2.25%, determined by Morgan Stanley, depending upon the mortgage loan sold to Morgan Stanley in the applicable transaction.
Notes Payable and Secured Borrowings

Certain of the Company’s subsidiaries are party to three separate non-recourse note agreements and a secured borrowing agreement on a transferred loan (collectively, the “Notes Payable and Secured Borrowings”) with the lenders referred to therein, consisting of (1) a $32.4 million note that was closed in May 2019, which is secured by a $40.5 million senior mortgage loan held by the Company on an industrial property located in North Carolina, (2) a $28.3 million note that was closed in June 2019, which is secured by a hotel property located in New York that is recognized as real estate owned in the Company’s consolidated balance sheets, (3) a $23.5 million note that was closed in November 2019, which is secured by a $34.6 million senior mortgage loan held by the Company on a multifamily property located in South Carolina and (4) a secured borrowing that was closed in February 2020, which is secured by a $24.4 million senior mortgage loan on an office property located in North Carolina that was originated by the Company.

The initial maturity date of the $32.4 million note is March 5, 2024, subject to one 12-month extension, which may be exercised at the Company’s option, subject to the satisfaction of certain conditions, including payment of an extension fee, which, if exercised, would extend the maturity date to March 5, 2025. Advances under the $32.4 million note accrue interest at

19




a per annum rate equal to the sum of one-month LIBOR plus a spread of 2.50%. As of March 31, 2020, the total outstanding principal balance of the note was $27.9 million.

The maturity date of the $28.3 million note is June 10, 2024. The loan may be prepaid at any time subject to the payment of a prepayment fee, if applicable. Initial advances under the $28.3 million note accrue interest at a per annum rate equal to the sum of one-month LIBOR plus a spread of 3.00%. If the hotel property that collateralizes the $28.3 million note achieves certain financial performance hurdles, the interest rate on advances will decrease to a per annum rate equal to the sum of one-month LIBOR plus a spread of 2.50%. The $28.3 million loan amount may be increased to up to $30.0 million to fund certain construction costs of improvements at the hotel, subject to the satisfaction of certain conditions and the payment of a commitment fee. As of March 31, 2020, the total outstanding principal balance of the note was $28.3 million.

The initial maturity date of the $23.5 million note is September 5, 2022, subject to two 12-month extensions, each of which may be exercised at the Company’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 September 5, 2024. Advances under the $23.5 million note accrue interest at a per annum rate equal to the sum of one-month LIBOR plus a spread of 3.75%. As of March 31, 2020, there was no outstanding principal balance on the note.

In April 2019, the Company originated a $30.5 million loan on an office property located in North Carolina, which was bifurcated between a $24.4 million senior mortgage loan and a $6.1 million mezzanine loan. In February 2020, the Company transferred its interest in the $24.4 million senior mortgage loan to a third party and retained the $6.1 million mezzanine loan. The Company evaluated whether the transfer of the $24.4 million senior mortgage loan met the criteria in FASB ASC Topic 860, Transfers and Servicing, for treatment as a sale – legal isolation, ability of transferee to pledge or exchange the transferred assets without constraint and transfer of effective control – and determined that the transfer did not qualify as a sale and thus, is treated as a financing transaction. As such, the Company did not derecognize the $24.4 million senior mortgage loan asset and recorded a secured borrowing liability in the consolidated balance sheets. The initial maturity date of the $24.4 million secured borrowing is May 5, 2023, subject to one 12-month extension, which may be exercised at the transferee’s option, which, if exercised, would extend the maturity date to May 5, 2024. Advances under the $24.4 million secured borrowing accrue interest at a per annum rate equal to the sum of one-month LIBOR plus a spread of 2.50%. As of March 31, 2020, the total outstanding principal balance of the secured borrowing was $10.6 million.

Secured Term Loan

The Company and certain of its subsidiaries are party to a $110.0 million 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”). The initial maturity date of the Secured Term Loan is December 22, 2020, subject to one 12-month extension, which may be exercised at the Company’s option, provided there are no existing events of default under the Secured Term Loan, which, if exercised, would extend the maturity date of the Secured Term Loan to December 22, 2021. During the extension period, the spread on advances under the Secured Term Loan increases every three months by 0.125%, 0.375% and 0.750% per annum, respectively, beginning after the third-month of the extension period. Advances under the Secured Term Loan accrue interest at a per annum rate equal to the sum of, at the Company’s option, one, two, three or six-month LIBOR plus a spread of 5.00%. The total original issue discount on the Secured Term Loan draws was $2.6 million, which represents a discount to the debt cost to be amortized into interest expense using the effective interest method over the term of the Secured Term Loan. For the three months ended March 31, 2020 and 2019, the estimated per annum effective interest rate of the Secured Term Loan, which is equal to LIBOR plus the spread plus the accretion of the original issue discount and associated costs, was 7.4% and 8.2%, respectively.


7.   COMMITMENTS AND CONTINGENCIES

As further discussed in Note 2, the full extent of the impact of the COVID-19 pandemic on the global economy and the Company’s business is uncertain. As of March 31, 2020, there were no contingencies recorded on the Company’s consolidated balance sheets as a result of the COVID-19 pandemic, however, if the global pandemic continues and market conditions worsen, it could adversely affect the Company’s business, financial condition and results of operations.
    
As of March 31, 2020 and December 31, 2019, the Company had the following commitments to fund various senior mortgage loans, subordinated debt investments, as well as preferred equity investments accounted for as loans held for investment ($ in thousands):

20




 
As of
 
March 31, 2020
 
December 31, 2019
Total commitments
$
2,158,059

 
$
1,909,084

Less: funded commitments
(1,883,087
)
 
(1,692,894
)
Total unfunded commitments
$
274,972

 
$
216,190


The Company from time to time may be a party to litigation relating to claims arising in the normal course of business. As of March 31, 2020, the Company is not aware of any legal claims that could materially impact its business, financial condition or results of operations.

8.   STOCKHOLDERS’ EQUITY

At the Market Stock Offering Program

On November 22, 2019, the Company entered into an equity distribution agreement (the “Equity Distribution Agreement”), pursuant to which the Company may offer and sell, from time to time, shares of the Company’s 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, may be 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 three months ended March 31, 2020, the Company did not issue or sell any shares of common stock under the Equity Distribution Agreement.

Equity Offerings

On January 22, 2020, the Company entered into an underwriting agreement (the “Underwriting Agreement”), by and among the Company, ACREM, and Wells Fargo Securities, LLC, Citigroup Global Markets Inc. and Morgan Stanley & Co. LLC, as representatives of the several underwriters listed therein (collectively, the “Underwriters”). Pursuant to the terms of the Underwriting Agreement, the Company agreed to sell, and the Underwriters agreed to purchase, subject to the terms and conditions set forth in the Underwriting Agreement, an aggregate of 4,000,000 shares of the Company’s common stock, par value $0.01 per share. In addition, the Company granted to the Underwriters a 30-day option to purchase up to an additional 600,000 shares. The public offering closed on January 27, 2020 and generated net proceeds of approximately $63.3 million, after deducting transaction expenses. On January 30, 2020, the Company sold an additional 600,000 shares pursuant to the Underwriters option to purchase additional shares, generating additional net proceeds of approximately $9.6 million.

Equity Incentive Plan
 
On April 23, 2012, the Company adopted an equity incentive plan. In April 2018, the Company’s board of directors authorized, and in June 2018, the Company’s stockholders approved, an amended and restated equity incentive plan that increased the total amount of shares of common stock the Company may grant thereunder to 1,390,000 shares (the “Amended and Restated 2012 Equity Incentive Plan”). Pursuant to the Amended and Restated 2012 Equity Incentive Plan, the Company may grant awards consisting of restricted shares of the Company’s common stock, restricted stock units (“RSUs”) and/or other equity-based awards to the Company’s outside directors, employees of the Manager, officers, ACREM and other eligible awardees under the plan. Any restricted shares of the Company’s common stock and RSUs will be accounted for under FASB ASC Topic 718, Compensation—Stock Compensation, resulting in stock-based compensation expense equal to the grant date fair value of the underlying restricted shares of common stock or RSUs.
 
Restricted stock and RSU grants generally vest ratably over a one to four year period from the vesting start date. The grantee receives additional compensation for each outstanding restricted stock or RSU grant, classified as dividends paid, equal to the per-share dividends received by common stockholders.

The following table details the restricted stock and RSU grants awarded as of March 31, 2020:


21




Grant Date
 
Vesting Start Date
 
Shares Granted
 
May 1, 2012
 
July 1, 2012
 
35,135
 
June 18, 2012
 
July 1, 2012
 
7,027
 
July 9, 2012
 
October 1, 2012
 
25,000
 
June 26, 2013
 
July 1, 2013
 
22,526
 
November 25, 2013
 
November 25, 2016
 
30,381
 
January 31, 2014
 
August 31, 2015
 
48,273
 
February 26, 2014
 
February 26, 2014
 
12,030
 
February 27, 2014
 
August 27, 2014
 
22,354
 
June 24, 2014
 
June 24, 2014
 
17,658
 
June 24, 2015
 
July 1, 2015
 
25,555
 
April 25, 2016
 
July 1, 2016
 
10,000
 
June 27, 2016
 
July 1, 2016
 
24,680
 
April 25, 2017
 
April 25, 2018
 
81,710
 
June 7, 2017
 
July 1, 2017
 
18,224
 
October 17, 2017
 
January 2, 2018
 
7,278
 
December 15, 2017
 
January 2, 2018
 
8,948
 
May 14, 2018
 
July 2, 2018
 
31,766
 
June 26, 2018
 
July 1, 2019
 
67,918
 
December 14, 2018
 
March 31, 2019
 
57,065
 
March 7, 2019
 
April 1, 2020
 
102,300
 
April 23, 2019
 
July 1, 2019
 
19,665
 
December 20, 2019
 
March 31, 2020
 
61,594
(1)
January 6, 2020
 
January 1, 2021
 
59,457
(1)
Total
 
 
 
796,544
 
______________________________________
(1)    Represents an RSU grant.

The following tables summarize the (i) non-vested shares of restricted stock and RSUs and (ii) vesting schedule of shares of restricted stock and RSUs for the Company’s directors and officers and employees of the Manager as of March 31, 2020:

Schedule of Non-Vested Share and Share Equivalents

 
 Restricted Stock Grants—Directors
 
Restricted Stock Grants—Officers and Employees of the Manager
 
RSUs—Officers and Employees of the Manager
 
Total
Balance at December 31, 2019
12,332

 
211,467

 
61,594

 
285,393

Granted

 

 
59,457

 
59,457

Vested
(5,332
)
 
(36,340
)
 
(9,944
)
 
(51,616
)
Forfeited

 
(76,602
)
 
(2,600
)
 
(79,202
)
Balance at March 31, 2020
7,000

 
98,525

 
108,507

 
214,032



22




Future Anticipated Vesting Schedule
 
Restricted Stock Grants—Directors
 
Restricted Stock Grants—Officers and Employees of the Manager
 
RSUs—Officers and Employees of the Manager
 
Total
2020
6,166

 
29,402

 

 
35,568

2021
834

 
40,047

 
36,176

 
77,057

2022

 
29,076

 
36,171

 
65,247

2023

 

 
36,160

 
36,160

2024

 

 

 

Total
7,000

 
98,525

 
108,507

 
214,032


9.   EARNINGS PER SHARE

The following information sets forth the computations of basic and diluted earnings (loss) per common share for the three months ended March 31, 2020 and 2019 ($ in thousands, except share and per share data):

 
For the three months ended March 31,
 
2020

2019
Net income (loss) attributable to common stockholders
$
(17,263
)
 
$
8,543

Divided by:
 
 
 
Basic weighted average shares of common stock outstanding:
31,897,952

 
28,561,827

Weighted average non-vested restricted stock and RSUs (1)

 
219,153

Diluted weighted average shares of common stock outstanding:
31,897,952

 
28,780,980

Basic and diluted earnings (loss) per common share
$
(0.54
)
 
$
0.30

_____________________________

(1)    For the three months ended March 31, 2020, the weighted average non-vested restricted stock and RSUs of 223,022 shares were excluded from the computation of diluted earnings (loss) per common share as the impact of including those shares would be anti-dilutive.

10.   INCOME TAX
    
The Company wholly owns ACRC Lender W TRS LLC, which is a taxable REIT subsidiary (“TRS”) formed to issue and hold certain loans intended for sale. The Company also wholly owns ACRC 2017-FL3 TRS LLC, which is a TRS formed to hold a portion of the CLO Securitization (as defined below), including the portion that generates excess inclusion income. Additionally, the Company wholly owns ACRC WM Tenant LLC, which is a TRS formed to lease from an affiliate the hotel property classified as real estate owned acquired on March 8, 2019. ACRC WM Tenant LLC engaged a third-party hotel management company to operate the hotel under a management contract.

The income tax provision for the Company and the TRSs consisted of the following for the three months ended March 31, 2020 and 2019 ($ in thousands):

 
For the three months ended March 31,
 
2020

2019
Current
$
18

 
$
6

Deferred
(99
)
 

Excise tax
90

 
90

   Total income tax expense, including excise tax
$
9


$
96



23




For both the three months ended March 31, 2020 and 2019, the Company incurred an expense of $90 thousand for U.S. federal excise tax. Excise tax represents a 4% tax on the sum of a portion of the Company’s ordinary income and net capital gains not distributed during the calendar year (including any distribution declared in the fourth quarter and paid following January) plus any prior year shortfall. If it is determined that an excise tax liability exists for the current year, the Company will accrue excise tax on estimated excess taxable income as such taxable income is earned. The quarterly expense is calculated in accordance with applicable tax regulations.

The TRSs recognize interest and penalties related to unrecognized tax benefits within income tax expense in the Company’s consolidated statements of operations. Accrued interest and penalties, if any, are included within other liabilities in the Company’s consolidated balance sheets.

As of March 31, 2020, tax years 2016 through 2019 remain subject to examination by taxing authorities. The Company does not have any unrecognized tax benefits and the Company does not expect that to change in the next 12 months.

11.   FAIR VALUE

The Company follows FASB ASC Topic 820-10, Fair Value Measurement (“ASC 820-10”), which expands the application of fair value accounting. ASC 820-10 defines fair value, establishes a framework for measuring fair value in accordance with GAAP and expands disclosure requirements for fair value measurements. ASC 820-10 determines fair value to be the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date. ASC 820-10 specifies a hierarchy of valuation techniques based on the inputs used in measuring fair value.

In accordance with ASC 820-10, the inputs used to measure fair value are summarized in the three broad levels listed below:

Level 1-Quoted prices in active markets for identical assets or liabilities.

Level 2-Prices are determined using other significant observable inputs. Observable inputs are inputs that other market participants would use in pricing a security. These may include quoted prices for similar securities, interest rates, prepayment speeds, credit risk and others.

Level 3-Prices are determined using significant unobservable inputs. In situations where quoted prices or observable inputs are unavailable (for example, when there is little or no market activity for an investment at the end of the period), unobservable inputs may be used.

GAAP requires disclosure of fair value information about financial and nonfinancial assets and liabilities, whether or not recognized in the financial statements, for which it is practical to estimate the value. In cases where quoted market prices are not available, fair values are based upon the application of discount rates to estimated future cash flows using market yields, or other valuation methodologies. Any changes to the valuation methodology will be reviewed by the Company’s management to ensure the changes are appropriate. The methods used may produce a fair value calculation that is not indicative of net realizable value or reflective of future fair values. Furthermore, while the Company anticipates that the valuation methods are appropriate and consistent with other market participants, the use of different methodologies, or assumptions, to determine the fair value of certain financial and nonfinancial assets and liabilities could result in a different estimate of fair value at the reporting date. The Company uses inputs that are current as of the measurement date, which may fall within periods of market dislocation, during which price transparency may be reduced.

As of March 31, 2020 and December 31, 2019, the Company did not have any financial and nonfinancial assets or liabilities required to be recorded at fair value on a recurring basis.

Nonrecurring Fair Value Measurements

The Company is required to record real estate owned, a nonfinancial asset, at fair value on a nonrecurring basis in accordance with GAAP. Real estate owned consists of a hotel property that was acquired by the Company on March 8, 2019 through a deed in lieu of foreclosure. See Note 5 included in these consolidated financial statements for more information on real estate owned. Real estate owned is recorded at fair value at acquisition using Level 3 inputs and is evaluated for indicators of impairment on a quarterly basis. Real estate owned is considered impaired when the sum of estimated future undiscounted cash flows expected to be generated by the real estate owned over the estimated remaining holding period is less than the carrying amount of such real estate owned. Cash flows include operating cash flows and anticipated capital proceeds generated

24




by the real estate owned. An impairment charge is recorded equal to the excess of the carrying value of the real estate owned over the fair value. The fair value of the hotel property at acquisition was estimated using a third-party appraisal, which utilized standard industry valuation techniques such as the income and market approach. When determining the fair value of a hotel, certain assumptions are made including, but not limited to: (1) projected operating cash flows, including factors such as booking pace, growth rates, occupancy, daily room rates, hotel specific operating costs and future capital expenditures; and (2) projected cash flows from the eventual disposition of the hotel based upon the Company’s estimation of a hotel specific capitalization rate, hotel specific discount rates and comparable selling prices in the market.

As of March 31, 2020 and December 31, 2019, the Company did not have any financial assets or liabilities or nonfinancial liabilities required to be recorded at fair value on a nonrecurring basis.

Financial Assets and Liabilities Not Measured at Fair Value
 
As of March 31, 2020 and December 31, 2019, the carrying values and fair values of the Company’s financial assets and liabilities recorded at cost are as follows ($ in thousands):
 
 
 
As of
 
 
 
March 31, 2020
 
December 31, 2019
 
Level in Fair Value Hierarchy
 
Carrying Value
 
Fair
Value
 
Carrying Value
 
Fair
Value
Financial assets:
 
 
 
 
 
 
 
 
 
   Loans held for investment
3
 
$
1,870,639

 
$
1,831,481

 
$
1,682,498

 
$
1,692,894

Financial liabilities:
 
 
 
 
 
 
 
 
 
   Secured funding agreements
2
 
$
990,564

 
$
990,564

 
$
728,589

 
$
728,589

   Notes payable and secured borrowings
3
 
65,047

 
66,490

 
54,708

 
56,155

   Secured term loan
3
 
109,378

 
109,040

 
109,149

 
110,000

Collateralized loan obligation securitization debt (consolidated VIE)
3
 
443,558

 
419,069

 
443,177

 
445,600


The carrying values of cash and cash equivalents, restricted cash, interest receivable, due to affiliate liability and accrued expenses, which are all categorized as Level 2 within the fair value hierarchy, approximate their fair values due to their short-term nature.
 
Loans held for investment are recorded at cost, net of unamortized loan fees and origination costs. To determine the fair value of the collateral, the Company may employ different approaches depending on the type of collateral. The Company determined the fair value of loans held for investment based on a discounted cash flow methodology, taking into consideration various factors including capitalization rates, discount rates, leasing, occupancy rates, availability and cost of financing, exit plan, sponsorship, actions of other lenders, and comparable selling prices in the market. The Secured Funding Agreements are recorded at outstanding principal, which is the Company’s best estimate of the fair value. The Company determined the fair value of the Notes Payable and Secured Borrowings and the collateralized loan obligation (“CLO”) securitization debt based on a discounted cash flow methodology.

12.   RELATED PARTY TRANSACTIONS

Management Agreement

The Company is party to a Management Agreement under which ACREM, subject to the supervision and oversight of the Company’s board of directors, is responsible for, among other duties, (a) performing all of the Company’s day-to-day functions, (b) determining the Company’s investment strategy and guidelines in conjunction with the Company’s board of directors, (c) sourcing, analyzing and executing investments, asset sales and financing, and (d) performing portfolio management duties. In addition, ACREM has an Investment Committee that oversees compliance with the Company’s investment strategy and guidelines, loans held for investment portfolio holdings and financing strategy.
 
In exchange for its services, ACREM is entitled to receive a base management fee, an incentive fee and expense reimbursements. In addition, ACREM and its personnel may receive grants of equity-based awards pursuant to the Company’s Amended and Restated 2012 Equity Incentive Plan and a termination fee, if applicable.
 

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The base management fee is equal to 1.5% of the Company’s stockholders’ equity per annum, which is calculated and payable quarterly in arrears in cash. For purposes of calculating the base management fee, stockholders’ equity means: (a) the sum of (i) the net proceeds from all issuances of the Company’s equity securities since inception (allocated on a pro-rata daily basis for such issuances during the fiscal quarter of any such issuance), plus (ii) the Company’s retained earnings at the end of the most recently completed fiscal quarter determined in accordance with GAAP (without taking into account any non-cash equity compensation expense incurred in current or prior periods); less (b) (x) any amount that the Company has paid to repurchase the Company’s common stock since inception, (y) any unrealized gains and losses and other non-cash items that have impacted stockholders’ equity as reported in the Company’s consolidated financial statements prepared in accordance with GAAP, and (z) one-time events pursuant to changes in GAAP, and certain non-cash items not otherwise described above, in each case after discussions between ACREM and the Company’s independent directors and approval by a majority of the Company’s independent directors. As a result, the Company’s stockholders’ equity, for purposes of calculating the management fee, could be greater or less than the amount of stockholders’ equity shown in the Company’s consolidated financial statements.
 
The incentive fee is an amount, not less than zero, equal to the difference between: (a) the product of (i) 20% and (ii) the difference between (A) the Company’s Core Earnings (as defined below) for the previous 12-month period, and (B) the product of (1) the weighted average of the issue price per share of the Company’s common stock of all of the Company’s public offerings of common stock multiplied by the weighted average number of all shares of common stock outstanding including any restricted shares of the Company’s common stock, RSUs, or any shares of the Company’s common stock not yet issued, but underlying other awards granted under the Company’s Amended and Restated 2012 Equity Incentive Plan (see Note 8 included in these consolidated financial statements) in the previous 12-month period, and (2) 8%; and (b) the sum of any incentive fees earned by ACREM with respect to the first three fiscal quarters of such previous 12-month period; provided, however, that no incentive fee is payable with respect to any fiscal quarter unless cumulative Core Earnings for the 12 most recently completed fiscal quarters is greater than zero. “Core Earnings” is a non-GAAP measure and is defined 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 the Company’s target investments are structured as debt and the Company forecloses 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 the Company’s independent directors and after approval by a majority of the Company’s independent directors. For both the three months ended March 31, 2020 and 2019, no incentive fees were incurred.

The Company reimburses ACREM at cost for operating expenses that ACREM incurs on the Company’s behalf, including expenses relating to legal, financial, accounting, servicing, due diligence and other services, expenses in connection with the origination and financing of the Company’s investments, communications with the Company’s stockholders, information technology systems, software and data services used for the Company, travel, complying with legal and regulatory requirements, taxes, insurance maintained for the benefit of the Company as well as all other expenses actually incurred by ACREM that are reasonably necessary for the performance by ACREM of its duties and functions under the Management Agreement. Ares Management, from time to time, incurs fees, costs and expenses on behalf of more than one investment vehicle. To the extent such fees, costs and expenses are incurred for the account or benefit of more than one fund, each such investment vehicle, including the Company, will typically bear an allocable portion of any such fees, costs and expenses in proportion to the size of its investment in the activity or entity to which such expense relates (subject to the terms of each fund’s governing documents) or in such other manner as Ares Management considers fair and equitable under the circumstances, such as the relative fund size or capital available to be invested by such investment vehicles. Where an investment vehicle’s governing documents do not permit the payment of a particular expense, Ares Management will generally pay such investment vehicle’s allocable portion of such expense. In addition, the Company is responsible for its proportionate share of certain fees and expenses, including due diligence costs, as determined by ACREM and Ares Management, including legal, accounting and financial advisor fees and related costs, incurred in connection with evaluating and consummating investment opportunities, regardless of whether such transactions are ultimately consummated by the parties thereto.
 
The Company will not reimburse ACREM for the salaries and other compensation of its personnel, except for the allocable share of the salaries and other compensation of the Company’s (a) Chief Financial Officer, based on the percentage of his time spent on the Company’s affairs and (b) other corporate finance, tax, accounting, internal audit, legal, risk management, operations, compliance and other non-investment professional personnel of ACREM or its affiliates who spend all or a portion of their time managing the Company’s affairs based on the percentage of their time spent on the Company’s affairs. The Company is also required to pay its pro-rata portion of rent, telephone, utilities, office furniture, equipment, machinery and other office, internal and overhead expenses of ACREM and its affiliates that are required for the Company’s operations.
 
Certain of the Company’s subsidiaries, along with the Company’s lenders under certain of the Company’s Secured Funding Agreements, as well as under the CLO transaction have entered into various servicing agreements with ACREM’s

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subsidiary servicer, Ares Commercial Real Estate Servicer LLC (“ACRES”). The Company’s Manager will specially service, as needed, certain of the Company’s investments. Effective May 1, 2012, ACRES agreed that no servicing fees pursuant to these servicing agreements would be charged to the Company or its subsidiaries by ACRES or the Manager for so long as the Management Agreement remains in effect, but that ACRES will continue to receive reimbursement for overhead related to servicing and operational activities pursuant to the terms of the Management Agreement.

The term of the Management Agreement ends on May 1, 2021, with automatic one-year renewal terms thereafter. Except under limited circumstances, upon a termination of the Management Agreement, the Company will pay ACREM a termination fee equal to three times the average annual base management fee and incentive fee received by ACREM during the 24-month period immediately preceding the most recently completed fiscal quarter prior to the date of termination, each as described above.

The following table summarizes the related party costs incurred by the Company for the three months ended March 31, 2020 and 2019 and amounts payable to the Company’s Manager as of March 31, 2020 and December 31, 2019 ($ in thousands):
 
Incurred
 
Payable
 
For the three months ended March 31,
 
As of
 
2020
 
2019
 
March 31, 2020
 
December 31, 2019
Affiliate Payments
 
 
 
 
 
 
 
Management fees
$
1,773

 
$
1,574

 
$
1,773

 
$
1,581

Incentive fees

 

 

 
378

General and administrative expenses
1,051

 
659

 
1,051

 
789

Direct costs (1)
53

 
52

 
12

 
13

   Total
$
2,877

 
$
2,285

 
$
2,836


$
2,761

______________________________________________________________________________

(1)
For the three months ended March 31, 2020 and 2019, direct costs incurred are included within general and administrative expenses in the Company’s consolidated statements of operations.

Investments in Loans

From time to time, the Company may co-invest with other investment vehicles managed by Ares Management or its affiliates, including the Manager, and their portfolio companies, including by means of splitting investments, participating in investments or other means of syndication of investments. For such co-investments, the Company expects to act as the administrative agent for the holders of such investments provided that the Company maintains a majority of the aggregate investment. No fees will be received by the Company for performing such service. The Company will be responsible for its pro-rata share of costs and expenses for such co-investments, including due diligence costs for transactions which fail to close. The Company’s investment in such co-investments are made on a pari-passu basis with the other Ares managed investment vehicles and the Company is not obligated to provide, nor has it provided, any financial support to the other Ares managed investment vehicles. As such, the Company’s risk is limited to the carrying value of its investment and the Company recognizes only the carrying value of its investment in its consolidated balance sheets. As of March 31, 2020 and December 31, 2019, the total outstanding principal balance for co-investments held by the Company was $41.9 million and $40.9 million, respectively.

Loan Purchases From Affiliate

An affiliate of the Company’s Manager maintains a $200 million real estate debt warehouse investment vehicle (the “Ares Warehouse Vehicle”) that holds Ares Management originated commercial real estate loans, which are made available to purchase by other investment vehicles, including the Company and other Ares Management managed investment vehicles. From time to time, the Company may purchase loans from the Ares Warehouse Vehicle. The Company’s Manager will approve the purchase of such loans only on terms, including the consideration to be paid, that are determined by the Company’s Manager in good faith to be appropriate for the Company once the Company has sufficient liquidity. The Company is not obligated to purchase any loans originated by the Ares Warehouse Vehicle. Loans purchased by the Company from the Ares Warehouse Vehicle are purchased at fair value as determined by an independent third-party valuation expert and are subject to approval by a majority of the Company’s independent directors.


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In January 2020, the Company purchased a senior mortgage loan from the Ares Warehouse Vehicle with a commitment amount of $132.6 million on a portfolio of office properties located across multiple states. At the January 2020 purchase date, the senior mortgage loan had a total outstanding principal balance of $107.1 million, which is included within loans held for investment in the Company’s consolidated balance sheets.

13.   DIVIDENDS AND DISTRIBUTIONS

The following table summarizes the Company’s dividends declared during the three months ended March 31, 2020 and 2019 ($ in thousands, except per share data):

Date Declared
 
Record Date
 
Payment Date
 
Per Share Amount
 
Total Amount
February 20, 2020
 
March 31, 2020
 
April 15, 2020
 
$
0.33