We are a specialty finance company primarily engaged in originating and investing in CRE loans and related investments. We are externally managed by ACREM, a subsidiary of Ares Management, a publicly traded, leading global alternative asset manager, pursuant to the terms of the Management Agreement. From the commencement of our operations in late 2011, we have been primarily focused on directly originating and managing a diversified portfolio of CRE debt-related investments for our own account. We were formed and commenced operations in late 2011. We are aMaryland corporation and completed our initial public offering inMay 2012 . We have elected and qualified to be taxed as a REIT forUnited States federal income tax purposes under the Internal Revenue Code of 1986, as amended, commencing with our taxable year endedDecember 31, 2012 . We generally will not be subject toUnited States federal income taxes on our REIT taxable income as long as we annually distribute to stockholders an amount at least equal to our REIT taxable income prior to the deduction for dividends paid and comply with various other requirements as a REIT. We also operate our business in a manner that is intended to permit us to maintain our exemption from registration under the 1940 Act.
Below are significant developments during the year ended
presented by quarter:
Developments During the First Quarter of 2022:
•ACRE upsized an existing$20.8 million senior mortgage loan on an industrial property located inColorado by$3.8 million . •ACRE originated a$4.7 million senior mortgage loan on an industrial property located inFlorida . •ACRE originated a$5.9 million senior mortgage loan on an industrial property located inFlorida . •ACRE originated a$55.7 million senior mortgage loan on a hotel property located inNew York . •ACRE originated a$60.8 million senior mortgage loan on a hotel property located inCalifornia . •ACRE originated a$91.1 million senior mortgage loan on a residential condominium property located inNew York . This senior mortgage loan refinanced the previously existing$71.8 million senior mortgage loan that was held by the Company. •ACRE originated an$18.2 million senior mortgage loan on a self storage property located inPhiladelphia . •ACRE originated an$8.5 million senior mortgage loan on a self storage property located inMassachusetts . •ACRE originated a$5.9 million senior mortgage loan on a self storage property located inNew Jersey . •ACRE originated a$5.4 million senior mortgage loan on a self storage property located inWisconsin . •ACRE originated a$2.9 million senior mortgage loan on a self storage property located inTexas . •ACRE amended the Citibank Facility to, among other things, extend the initial maturity date and funding availability period toJanuary 13, 2025 , subject to two 12-month extensions, each of which may be exercised at ACRE'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 toJanuary 13, 2027 . •ACRE closed the sale of the hotel property that was classified as real estate owned to a third party for$40.0 million . During the three months endedMarch 31, 2022 , ACRE recognized a$2.2 million gain on the sale of the hotel property as the net carrying value of the hotel property as of the sale closing date was lower than the net sales proceeds received by ACRE. •ACRE re-calibrated its net exposure to interest rate changes by terminating its interest rate cap derivative, which had a notional amount of$170.0 million on the termination date and a strike rate of 0.50%. For the three months endedMarch 31, 2022 , ACRE recognized a$2.0 million realized gain within other comprehensive income in conjunction with the termination of the interest rate cap. In accordance with FASB ASC Topic 815, Derivatives and Hedging, the realized gain will be recognized within current earnings over the remaining original term of the interest rate cap derivative as it was designated as an effective hedge.
Developments During the Second Quarter of 2022:
•ACRE originated an$82.2 million senior mortgage loan on an office property located inMassachusetts . •ACRE purchased a$13.8 million senior mortgage loan on a self storage property located inPennsylvania from a third party. •ACRE purchased an$8.0 million senior mortgage loan on a self storage property located inTexas from a third party. •ACRE purchased a$7.7 million senior mortgage loan on a self storage property located inMassachusetts from a third party. •ACRE purchased a$6.8 million senior mortgage loan on a self storage property located inMassachusetts from a third party. •ACRE purchased a$4.5 million senior mortgage loan on a self storage property located inFlorida from a third party. •ACRE originated a$133.0 million senior mortgage loan on a multifamily property located inNew York . •ACRE originated a$100.0 million senior mortgage loan on a multifamily property located inTexas . 55 -------------------------------------------------------------------------------- Table of Contents •ACRE entered into an underwriting agreement (the "Underwriting Agreement") in which ACRE agreed to sell an aggregate of 7,000,000 shares of ACRE's common stock, par value$0.01 per share. The public offering generated net proceeds of approximately$103.2 million , after deducting transaction expenses.
Developments During the Third Quarter of 2022:
•ACRE purchased a$17.6 million senior mortgage loan on a self storage property located inNew Jersey from a third party. •ACRE purchased an$11.5 million senior mortgage loan on a self storage property located inWashington from a third party. •ACRE originated a$20.6 million mezzanine loan on a multifamily property located inSouth Carolina . •ACRE purchased a AAA rated CRE debt security with a face amount of$18.0 million from a third party. •ACRE purchased a AAA rated CRE debt security with a face amount of$5.0 million from a third party. •ACRE purchased a AAA rated CRE debt security with a face amount of$5.0 million from a third party. •A wholly owned subsidiary of ACRE closed a$105.0 million note financing, which is secured by a$133.0 million senior mortgage loan held by ACRE on a multifamily property located inNew York and is fully and unconditionally guaranteed by ACRE pursuant to a Guaranty of Recourse Obligation. The initial maturity date of the$105.0 million note isJuly 28, 2025 , subject to two 12-month extensions, each of which may be exercised at ACRE's option, subject to the satisfaction of certain conditions, including payment of an extension fee, which, if both were exercised, would extend the maturity date toJuly 28, 2027 . Advances under the$105.0 million note accrue interest at a per annum rate equal to the sum of one-month SOFR plus a spread of 2.00%. •ACRE's Board of Directors approved a stock repurchase program of up to$50.0 million , which is expected to be in effect untilJuly 26, 2023 , or until the approved dollar amount has been used to repurchase shares (the "Repurchase Program"). Pursuant to the Repurchase Program, ACRE may repurchase shares of its common stock in amounts, at prices and at such times as it deems appropriate, subject to market conditions and other considerations, including all applicable legal requirements.
Developments During the Fourth Quarter of 2022:
•ACRE originated a$56.0 million senior mortgage loan on an office property located inIllinois . This senior mortgage loan refinanced the previously existing$61.0 million senior mortgage loan that was held by ACRE. •ACRE amended the Wells Fargo Facility (as defined below) to, among other things, (1) extend the funding period of the Wells Fargo Facility toDecember 15, 2025 , (2) extend the initial maturity date of the Wells Fargo Facility toDecember 15, 2025 , subject to two 12-month extensions, each of which may be exercised at ACRE's option, subject to the satisfaction of certain conditions, including payment of an extension fee, which, if both were exercised, would extend the maturity date of the Wells Fargo Facility toDecember 14, 2027 and (3) update the interest rate on advances under the Wells Fargo Facility from a per annum rate equal to the sum of one-month LIBOR or SOFR plus a pricing margin range of 1.50% to 2.75%, subject to certain exceptions, to a per annum rate equal to the sum of one-month LIBOR or SOFR plus a pricing margin range of 1.50% to 3.75%, subject to certain exceptions.
Trends Affecting Our Business
Global markets continued to see volatility during the year, fueled by further tightening of monetary policy and geopolitical uncertainty. In response to heightened inflation, theFederal Reserve continues to raise interest rates, which has created further uncertainty for the economy and for our borrowers. These current macroeconomic conditions may continue or aggravate and could causethe United States economy or other global economies to experience an economic slowdown or recession. We continue to monitor the uncertainty surrounding inflation and rising interest rates; however, the full impact that these factors may have on our business remains uncertain.
Factors Impacting Our Operating Results
The results of our operations are affected by a number of factors and primarily depend on, among other things, the level of our net interest income, the market value of our assets and the supply of, and demand for, commercial mortgage loans, CRE debt and other financial assets in the marketplace. Our net interest income, which reflects the amortization of origination fees and direct costs, is recognized based on the contractual rate and the outstanding principal balance of the loans we originate. Interest rates will vary according to the type of investment, conditions in the financial markets, creditworthiness of our borrowers, competition and other factors, none of which can be predicted with any certainty. Our operating results may also be impacted by credit losses in excess of initial anticipations or unanticipated credit events experienced by borrowers.
Changes in Fair Value of Our Assets. We originate 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”).
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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. We monitor the performance of our 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. We 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. Other than as set forth in Note 3 to our consolidated financial statements included in this annual report on Form 10-K, and as set forth below, as ofDecember 31, 2022 and 2021, all loans held for investment were paying in accordance with their contractual terms. As ofDecember 31, 2022 , the Company had three loans held for investment on non-accrual status with a carrying value of$99.1 million . As ofDecember 31, 2021 , the Company had two loans held for investment on non-accrual status with a carrying value of$45.0 million . 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. There were no write-offs during the years endedDecember 31, 2022 , 2021 and 2020.
Changes in Market Interest Rates. With respect to our business operations,
increases in interest rates, in general, may over time cause:
•the interest expense associated with our borrowings to increase, subject to any
applicable ceilings;
•the value of our mortgage loans to decline;
•coupons on our floating rate mortgage loans to reset to higher interest rates;
and
•to the extent we enter into interest rate swap agreements as part of our
hedging strategy where we pay fixed and receive floating interest rates, the
value of these agreements to increase.
Conversely, decreases in interest rates, in general, may over time cause:
•the interest expense associated with our borrowings to decrease, subject to any
applicable floors;
•the value of our mortgage loan portfolio to increase, for such mortgages with
applicable floors;
•coupons on our floating rate mortgage loans to reset to lower interest rates,
subject to any applicable floors; and
•to the extent we enter into interest rate swap agreements as part of our
hedging strategy where we pay fixed and receive floating interest rates, the
value of these agreements to decrease.
Credit Risk. We are subject to varying degrees of credit risk in connection with
our target investments. Our Manager seeks to mitigate this risk by seeking to
originate or acquire investments of higher quality at appropriate prices with
appropriate risk adjusted returns given anticipated and unanticipated losses, by
employing a comprehensive review and selection process and by proactively
monitoring originated or acquired investments (see the performance monitoring
methodology above in
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Changes in Fair Value of Our Assets). Nevertheless, unanticipated credit losses
could occur that could adversely impact our operating results and stockholders'
equity.
Performance of Commercial Real Estate Related Markets. Our business is dependent
on the general demand for, and value of, commercial real estate and related
services, which are sensitive to economic conditions. Demand for commercial real
estate generally increases during periods of stronger economic conditions,
resulting in increased property values, transaction volumes and loan origination
volumes. During periods of weaker economic conditions, commercial real estate
may experience higher property vacancies, lower demand and reduced values. These
conditions can result in lower property transaction volumes and loan
originations. Decreases in property values reduce the value of the collateral
and the potential proceeds available to a borrower to repay the underlying loan
or loans, as the case may be, which could also cause us to suffer losses.
Availability of Leverage and Equity. We expect to use leverage to make
additional investments that may increase our potential returns. We may not be
able to obtain the amount of leverage we desire and, consequently, the returns
generated from our investments may be less than we currently expect. To grow our
portfolio of investments, we also may determine to raise additional equity. Our
access to additional equity will depend on many factors, and our ability to
raise equity in the future cannot be predicted at this time.
Size of Portfolio. The size of our portfolio of investments, as measured both by
the aggregate principal balance and the number of our CRE loans and our other
investments, is also an important factor in determining our operating results.
Generally, as the size of our portfolio grows, the amount of interest income we
receive increases and, at such times, we may achieve certain economies of scale
and can diversify risk within our portfolio investments. A larger portfolio,
however, may result in increased expenses; for example, we may incur additional
interest expense or other costs to finance our investments. Also, if the
aggregate principal balance of our portfolio grows but the number of our loans
or the number of our borrowers does not grow, we could face increased risk by
reason of the concentration of our investments.
Stock Repurchase Program
OnJuly 26, 2022 , our Board of Directors approved a stock repurchase program of up to$50.0 million , which is expected to be in effect untilJuly 26, 2023 , or until the approved dollar amount has been used to repurchase shares (the "Repurchase Program"). Pursuant to the Repurchase Program, we may repurchase shares of our common stock in amounts, at prices and at such times as we deem appropriate, subject to market conditions and other considerations, including all applicable legal requirements. Repurchases may include purchases on the open market or privately negotiated transactions, under Rule 10b5-1 trading plans, under accelerated share repurchase programs, in tender offers and otherwise. The Repurchase Program does not obligate us to acquire any particular amount of shares of our common stock and may be modified or suspended at any time at our discretion. We did not conduct any repurchases under the Repurchase Program during the year endedDecember 31, 2022 .
Loans Held for Investment Portfolio
As ofDecember 31, 2022 , our portfolio included 60 loans held for investment, excluding 150 loans that were repaid, sold or converted to real estate owned since inception. As ofDecember 31, 2022 , the aggregate originated commitment under these loans at closing was approximately$2.6 billion and outstanding principal was$2.3 billion . During the year endedDecember 31, 2022 , we funded approximately$676.9 million of outstanding principal and received repayments of$823.2 million of outstanding principal. As ofDecember 31, 2022 , 90.2% of our loans have LIBOR or SOFR floors, with a weighted average floor of 0.95%, calculated based on loans with LIBOR or SOFR floors. References to LIBOR or "L" are to 30-day LIBOR and references to SOFR or "S" are to 30-day SOFR (unless otherwise specifically stated).
Other than as set forth in Note 3 to our consolidated financial statements
included in this annual report on Form 10-K, as of
held for investment were paying in accordance with their contractual terms.
Our loans held for investment are accounted for at amortized cost. The following table summarizes our loans held for investment as ofDecember 31, 2022 ($ in thousands): 58
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As of December 31, 2022
Weighted
Average
Carrying Amount Outstanding Weighted Average Unleveraged Effective Remaining
(1) Principal (1) Yield Life (Years)
Senior mortgage loans $ 2,225,725 $ 2,243,818 8.4 % (2) 8.8 % (3)
1.3
Subordinated debt and preferred equity investments 38,283 39,003 14.0 % (2) 14.0 % (3)
2.8
Total loans held for investment portfolio
8.5 % (2) 8.9 % (3)
1.4
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(1)The difference between the Carrying Amount and the Outstanding Principal amount of the loans held for investment consists of unamortized purchase discount, deferred loan fees and loan origination costs. (2)Unleveraged Effective Yield is the compounded effective rate of return that would be earned over the life of the investment based on the contractual interest rate (adjusted for any deferred loan fees, costs, premiums or discounts) and assumes no dispositions, early prepayments or defaults. The total Weighted Average Unleveraged Effective Yield is calculated based on the average of Unleveraged Effective Yield of all loans held by us as ofDecember 31, 2022 as weighted by the outstanding principal balance of each loan. (3)Unleveraged Effective Yield is the compounded effective rate of return that would be earned over the life of the investment based on the contractual interest rate (adjusted for any deferred loan fees, costs, premiums or discounts) and assumes no dispositions, early prepayments or defaults. The total Weighted Average Unleveraged Effective Yield is calculated based on the average of Unleveraged Effective Yield of all interest accruing loans held by us as ofDecember 31, 2022 as weighted by the total outstanding principal balance of each interest accruing loan (excludes loans on non-accrual status as ofDecember 31, 2022 ). Critical Accounting Estimates Our consolidated financial statements have been prepared in accordance with generally accepted accounting principles ("GAAP"), which require management to make estimates and assumptions that affect reported amounts. These estimates and assumptions are based on historical experience and other factors management believes to be reasonable. Actual results may differ from those estimates and assumptions. We believe the following critical accounting policy represents an area where more significant judgments and estimates are used in the preparation of our consolidated financial statements. Current Expected Credit Loss Reserve. InJune 2016 , the FASB issued 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 afterDecember 15, 2019 , including interim periods within that reporting period. We adopted ASU No. 2016-13 on a modified retrospective basis through a cumulative-effect adjustment to retained earnings as ofJanuary 1, 2020 . Subsequent period increases and decreases to expected credit losses impact earnings and are recorded within provision for current expected credit losses in our 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 our loans held for investment in our consolidated balance sheets. The CECL Reserve related to unfunded commitments on loans held for investment is recorded within other liabilities in our consolidated balance sheets. We estimate our CECL Reserve primarily using a probability-weighted model that considers the likelihood of default and expected loss given default for each individual loan. Calculation of the CECL Reserve requires loan specific data, which includes capital senior to us when we are the subordinate lender, changes in net operating income, debt service coverage ratio, loan-to-value, occupancy, property type and geographic location. Estimating the CECL Reserve also 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) calibration of the likelihood of default to reflect the risk characteristics of our floating-rate loan portfolio and (iv) our current and future view of the macroeconomic environment. We may consider loan-specific qualitative factors on certain loans to estimate our CECL Reserve. In order to estimate the future expected loan losses relevant to our portfolio, we utilize 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 dating back to 1998, which we believe is a reasonably comparable and available data set to our type of loans. 59
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See Note 4 to our consolidated financial statements included in this annual
report on Form 10-K for CECL related disclosures.
Recent Accounting Pronouncements
See Note 2 to our consolidated financial statements included in this annual
report on Form 10-K, which describes recent accounting pronouncements that we
have adopted or are currently evaluating.
RECENT DEVELOPMENTS
In
located in
triggered an event of default under the loan agreement. As of
the outstanding principal balance of the senior
InJanuary 2023 , the senior mortgage loan held by us on a mixed-use property located inCalifornia did not receive the January interest payment, which triggered an event of default under the loan agreement. As ofFebruary 14, 2023 , the outstanding principal balance of the seniorCalifornia loan is$37.9 million . InJanuary 2023 , we sold the senior loan collateralized by a residential property inCalifornia and was in maturity default due to the failure of the borrower to repay the outstanding principal balance of the loan by the maturity date. We sold the loan at an all-cash price of$10.0 million , with estimated net proceeds of$9.8 million . InFebruary 2023 , the senior mortgage loan held by us on a mixed-use property located inFlorida was not repaid upon its contractual maturity, which triggered an event of default under the loan agreement. As ofFebruary 14, 2023 , the outstanding principal balance of the seniorFlorida loan is$84.0 million . Our Board of Directors declared a regular cash dividend of$0.33 per common share and a supplemental cash dividend of$0.02 per common share for the first quarter of 2023. The first quarter 2023 and supplemental cash dividends will be payable onApril 18, 2023 to common stockholders of record as ofMarch 31, 2023 . 60 -------------------------------------------------------------------------------- Table of Contents RESULTS OF OPERATIONS
For the years ended
The following table sets forth a summary of our consolidated results of
operations for the years ended
For the years ended
December 31,
2022 2021
Total revenue $ 106,849 $ 102,069
Total expenses 32,728 40,877
Provision for current expected credit losses 46,061 10
Gain on sale of real estate owned 2,197 -
Income before income taxes 30,257 61,182
Income tax expense, including excise tax 472 722
Net income attributable to common stockholders
The following tables set forth select details of our consolidated results of
operations for the years ended
Net Interest Margin
For the years ended December 31,
2022 2021
Interest income $ 170,171 $ 133,631
Interest expense (65,994) (50,080)
Net interest margin $ 104,177 $ 83,551
For the years ended December 31, 2022 and 2021, net interest margin was
approximately $104.2 million and $83.6 million , respectively. For the years
ended December 31, 2022 and 2021, interest income of $170.2 million and $133.6
million , respectively, was generated by weighted average earning assets of
$2.5 billion and $2.2 billion , respectively, offset by $66.0 million and $50.1
million , respectively, of interest expense, unused fees and amortization of
deferred loan costs. The weighted average borrowings under the Secured Funding
Agreements, Notes Payable (excluding the Note Payable on the hotel property that
was recognized as real estate owned in our consolidated balance sheets), the
Secured Term Loan, secured borrowings (described in Note 7 to our consolidated
financial statements included in this annual report on Form 10-K) and
securitization debt were $1.9 billion for the year ended December 31, 2022 and
$1.6 billion for the year ended December 31, 2021 . The increase in net interest
margin for the year ended December 31, 2022 compared to the year ended December
31, 2021 primarily relates to an increase in our weighted average earning assets
and weighted average borrowings for the year ended December 31, 2022 , the
benefit received from our interest rate hedging derivative contracts for the
year ended December 31, 2022 , the benefit received from the increase in LIBOR
and SOFR rates on our loans held for investment for the year ended December 31,
2022 and the impact of the accelerated recognition of deferred fees and
prepayment penalties received from borrowers related to loans that were repaid
during the year ended December 31, 2022 .
Revenue From Real Estate Owned
OnMarch 8, 2019 , we acquired legal title to a hotel property through a deed in lieu of foreclosure. Prior toMarch 8, 2019 , the hotel property collateralized a$38.6 million senior mortgage loan that we held that was in maturity default due to the failure of the borrower to repay the outstanding principal balance of the loan by theDecember 2018 maturity date. In conjunction with the deed in lieu of foreclosure, we derecognized the$38.6 million senior mortgage loan and recognized the hotel property as real estate owned. For the years endedDecember 31, 2022 and 2021, revenue from real estate owned was$2.7 million and$18.5 million , respectively. Revenues consisted of room sales, food and beverage sales and other hotel revenues. The decrease in revenue from real estate owned for the year endedDecember 31, 2022 compared to the year endedDecember 31, 2021 is primarily due to the year endedDecember 31, 2022 only including two months of hotel operations. In connection with the sale of the hotel property, we provided a senior mortgage loan to the buyer of the hotel property. The initial advance funded under such loan was$30.7 million , with up to another$25.0 million of additional loan proceeds to be available 61 -------------------------------------------------------------------------------- Table of Contents for future advances to cover a portion of the anticipated property renovation plan costs, provided certain conditions are satisfied. At closing, the buyer contributed$12.9 million of equity into the purchase. Additionally, the buyer is required to fund an additional$8.7 million of equity associated with the anticipated property renovation plan costs. Operating Expenses For the years ended December 31, 2022 2021 Management and incentive fees to affiliate$ 14,898 $ 12,136 Professional fees 3,350 2,436 General and administrative expenses 6,394 4,741 General and administrative expenses reimbursed to affiliate 3,777 3,016 Expenses from real estate owned 4,309 18,548 Total expenses$ 32,728 $ 40,877 See the Related Party Expenses, Other Expenses and Expenses from Real Estate Owned discussions below for the cause of the decrease in operating expenses for the year endedDecember 31, 2022 compared to the year endedDecember 31, 2021 .
Related Party Expenses
For the year endedDecember 31, 2022 , related party expenses included$14.9 million in management and incentive fees due to our Manager pursuant to the Management Agreement, which consisted of$11.5 million in management fees and$3.4 million in incentive fees. For the year endedDecember 31, 2022 , related party expenses also included$3.8 million for our share of allocable general and administrative expenses for which we were required to reimburse our Manager pursuant to the Management Agreement. For the year endedDecember 31, 2021 , related party expenses included$12.1 million in management and incentive fees due to our Manager pursuant to the Management Agreement, which consisted of$9.4 million in management fees and$2.8 million in incentive fees. For the year endedDecember 31, 2021 , related party expenses also included$3.0 million for our share of allocable general and administrative expenses for which we were required to reimburse our Manager pursuant to the Management Agreement. The increase in management fees for the year endedDecember 31, 2022 compared to the year endedDecember 31, 2021 primarily relates to an increase in our weighted average stockholders' equity for the year endedDecember 31, 2022 as a result of the public offering of 7,000,000 shares of our common stock inMay 2022 , which generated net proceeds of approximately$103.2 million . The increase in incentive fees for the year endedDecember 31, 2022 compared to the year endedDecember 31, 2021 primarily relates to our Core Earnings (defined below) for the year endedDecember 31, 2022 exceeding the 8% minimum return by a higher margin than the year endedDecember 31, 2021 . "Core Earnings" is defined in the Management Agreement as GAAP net income (loss) computed in accordance with GAAP, excluding non-cash equity compensation expense, the incentive fee, depreciation and amortization (to the extent that any of our target investments are structured as debt and we foreclose on any properties underlying such debt), any unrealized gains, losses or other non-cash items recorded in net income (loss) for the period, regardless of whether such items are included in other comprehensive income or loss, or in net income (loss), and one-time events pursuant to changes in GAAP and certain non-cash charges after discussions between our Manager and our independent directors and after approval by a majority of our independent directors. OnApril 25, 2022 , ACRE and ACREM entered into an amendment to the Management Agreement to (a) include a$2.4 million adjustment to reverse the impact of accumulated depreciation following the sale of the hotel real estate owned property for the three months endedMarch 31, 2022 and to (b) include a$2.0 million adjustment to include the realized gain from the termination of the interest rate cap derivative for the three months endedMarch 31, 2022 , in each case, with respect to Core Earnings for the three months endedMarch 31, 2022 . Core Earnings is defined in the Management Agreement and is used to calculate the incentive fees the Company pays to ACREM. The increase in allocable general and administrative expenses due to our Manager for the year endedDecember 31, 2022 compared to the year endedDecember 31, 2021 primarily relates to an increase in the percentage of time allocated to us by employees of our Manager due to changes in transaction activity year over year and the inclusion of additional eligible expense reimbursements per the Amended and Restated Management Agreement that became effective during the year endedDecember 31, 2022 . Other Expenses For the years endedDecember 31, 2022 and 2021, professional fees were$3.4 million and$2.4 million , respectively. The increase in professional fees for the year endedDecember 31, 2022 compared to the year endedDecember 31, 2021 primarily relates to an increase in our use of third-party professionals due to changes in transaction activity year over year. For the years endedDecember 31, 2022 and 2021, general and administrative expenses were$6.4 million and$4.7 million , respectively. The increase in general and administrative expenses for the year endedDecember 31, 2022 compared to the year 62 -------------------------------------------------------------------------------- Table of Contents endedDecember 31, 2021 primarily relates to an increase in stock-based compensation expense due to restricted stock and restricted stock unit awards granted afterDecember 31, 2021 .
Expenses From Real Estate Owned
For the years ended
was comprised of the following ($ in thousands):
For the years ended December 31,
2022 2021
Hotel operating expenses $ 3,631 $ 16,058
Interest expense on note payable
678 1,665
Depreciation expense - 825 Expenses from real estate owned
For the years endedDecember 31, 2022 and 2021, hotel operating expenses were$3.6 million and$16.1 million , respectively. Hotel operating expenses consisted primarily of expenses incurred in the day-to-day operation of our hotel property, including room expense, food and beverage expense and other operating expenses. Room expense included housekeeping and front office wages and payroll taxes, reservation systems, room supplies, laundry services and other costs. Food and beverage expense primarily included the cost of food, the cost of beverages and associated labor costs. Other operating expenses included labor and other costs associated with administrative departments, sales and marketing, repairs and maintenance, real estate taxes, insurance, utility costs and management and incentive fees paid to the hotel property manager. The decrease in hotel operating expenses for the year endedDecember 31, 2022 compared to the year endedDecember 31, 2021 is primarily due to the year endedDecember 31, 2022 only including two months of hotel operations. For the years endedDecember 31, 2022 and 2021, interest expense on our note payable was$0.7 million and$1.7 million , respectively. The decrease in interest expense on our note payable for the year endedDecember 31, 2022 compared to the year endedDecember 31, 2021 is primarily attributed to the year endedDecember 31, 2022 only including two months of hotel operations. This was partially offset by the accelerated recognition of deferred costs for the year endedDecember 31, 2022 due to the repayment of our note payable in conjunction with the sale of the hotel property to a third party onMarch 1, 2022 . For the year endedDecember 31, 2022 , no depreciation expense was incurred as the hotel property was classified as real estate owned held for sale effective inNovember 2021 . For the year endedDecember 31, 2021 , depreciation expense was$0.8 million .
Provision for Current Expected Credit Losses
For the years endedDecember 31, 2022 and 2021, the provision for current expected credit losses was$46.1 million and$10 thousand , respectively. The increase in the provision for current expected credit losses for the year endedDecember 31, 2022 compared to the year endedDecember 31, 2021 is primarily due to changes to the loan portfolio, including new loan production, and the impact of the current macroeconomic environment on certain assets, including rising inflation, and rapidly rising interest rates, partially offset by shorter average remaining loan term and loan repayments during the year endedDecember 31, 2022 . The current expected credit loss reserve ("CECL Reserve") takes into consideration our estimates relating to the impact of macroeconomic conditions on CRE properties and is not specific to any loan losses or impairments on our loans held for investment, unless the Company determines that a specific reserve is warranted for a select asset. Additionally, the CECL Reserve is not an indicator of what we expect our CECL Reserve would have been absent the current and potential future impacts of macroeconomic conditions.
Gain on Sale of Real Estate Owned
For the year endedDecember 31, 2022 , we recognized a$2.2 million gain on the sale of the hotel property that was recognized as real estate owned as the net carrying value of the hotel property as of theMarch 1, 2022 sale date was lower than the net sales proceeds received by the Company.
For the years ended
63 -------------------------------------------------------------------------------- Table of Contents The comparison of our results of operations for the fiscal years endedDecember 31, 2021 and 2020 can be found in our annual report on Form 10-K for the fiscal year endedDecember 31, 2021 located within Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations, which is incorporated by reference herein.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity is a measure of our ability to meet potential cash requirements,
including ongoing commitments to repay borrowings, fund and maintain our assets
and operations, make distributions to our stockholders and other general
business needs. We use significant cash to purchase our target investments, make
principal and interest payments on our borrowings, make distributions to our
stockholders and fund our operations.
Our primary sources of cash generally consist of unused borrowing capacity under
our Secured Funding Agreements, the net proceeds of future equity offerings,
payments of principal and interest we receive on our portfolio of assets and
cash generated from our operating activities. Principal repayments from mortgage
loans in securitizations where we retain the subordinate securities are applied
sequentially, first used to pay down the senior notes, and accordingly, we will
not receive any proceeds from repayment of loans in the securitizations until
all senior notes are repaid in full.
We expect our primary sources of cash to continue to be sufficient to fund our
operating activities and cash commitments for investing and financing activities
for at least the next 12 months and thereafter for the foreseeable future. As a
result of the current macroeconomic environment, borrowers may be unable to make
interest and principal payments timely, including at the maturity date of the
borrower's loan. We have increased our CECL Reserve to reflect this risk. Our
Secured Funding Agreements contain margin call provisions following the
occurrence of certain mortgage loan credit events. If we are unable to make the
required payment or if we fail to meet or satisfy any of the covenants in our
Financing Agreements, we would be in default under these agreements, and our
lenders could elect to declare outstanding amounts due and payable, terminate
their commitments, require the posting of additional collateral, including cash
to satisfy margin calls, and enforce their interests against existing
collateral. We are also subject to cross-default and acceleration rights with
respect to our Financing Agreements. During the COVID-19 pandemic, to mitigate
the risk of future margin calls, we proactively engaged in discussions with
certain of our lenders to modify the terms of our borrowings on certain assets
within these facilities, in order to, among other things, reduce the amounts we
were borrowing against such assets and/or increase the borrowing spreads. If we
experience borrower default as a result of the current macroeconomic conditions,
we may not be able to negotiate modifications to our borrowings with our
lenders, similar to those negotiated during COVID-19, or to receive financing
from our Secured Funding Agreements with respect to our commitments to fund our
loans held for investment in the future. See "Summary of Financing Agreements"
below for a description of our Financing Agreements.
Subject to maintaining our qualification as a REIT and our exemption from
registration under the 1940 Act, we expect that our primary sources of liquidity
will be financing, to the extent available to us, through credit, secured
funding and other lending facilities, other sources of private financing,
including warehouse and repurchase facilities, and public or private offerings
of our equity or debt securities. Furthermore, we have sold, and may continue to
sell certain of our mortgage loans, or interests therein, in order to manage
liquidity needs. Subject to maintaining our qualification as a REIT, we may also
change our dividend practice, including by reducing the amount of, or
temporarily suspending, our future dividends or making dividends that are
payable in cash and shares of our common stock for some period of time. We are
also able to access additional liquidity through the (i) reinvestment provisions
in our FL3 CLO Securitization, which allows us to replace mortgage assets in our
FL3 CLO Securitization which have repaid and (ii) future funding acquisition
provisions in our FL4 collateralized loan obligation securitization debt ("FL4
CLO Securitization", together with our FL3 CLO Securitization, our "CLO
Securitizations"), which allows us to use mortgage asset repayment funds to
acquire additional funded pari-passu participations related to the mortgage
assets then-remaining in our FL4 CLO Securitization; each subject to the
satisfaction of certain reinvestment or acquisition conditions, which may
include receipt of a Rating Agency Confirmation and investor approval. There can
be no assurance that the conditions for reinvestment or acquisition will be
satisfied and whether our CLO Securitizations will acquire any additional
mortgage assets or funded pari-passu participations. In addition, our CLO
Securitizations contain certain senior note overcollateralization ratio tests.
To the extent we fail to meet these tests, amounts that would otherwise be used
to make payments on the subordinate securities that we hold will be used to
repay principal on the more senior securities to the extent necessary to satisfy
any senior note overcollateralization ratio and we may incur significant losses.
Our sources of liquidity may be impacted to the extent we do not receive cash
payments that we would otherwise expect to receive from the CLO Securitizations
if these tests were met.
Ares Management or one of its investment vehicles, including the Ares Warehouse
Vehicle, may originate mortgage loans. We have had and may continue to have the
opportunity to purchase such loans that are determined by our Manager in good
faith to be appropriate for us, depending on our available liquidity. Ares
Management or one of its investment vehicles may also acquire mortgage loans
from us.
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We have commitments to fund various senior mortgage loans, as well as subordinated debt and preferred equity investments in our portfolio. Other than as set forth in this annual report on Form 10-K, we do not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured investment vehicles, special purpose entities or variable interest entities, established to facilitate off-balance sheet arrangements or other contractually narrow or limited purposes. Further, we have not guaranteed any obligations of unconsolidated entities or entered into any commitment or intend to provide additional funding to any such entities.
As of
including
under our Secured Funding Agreements.
At the Market Stock Offering Program
OnNovember 22, 2019 , we entered into an equity distribution agreement (the "Equity Distribution Agreement"), governing an "at the market offering" program having an aggregate offering price of up to$100.0 million . During the year endedDecember 31, 2022 , we sold 190,369 shares of our common stock under the Equity Distribution Agreement at an average price of$15.33 per share. The sales generated net proceeds of approximately$2.9 million . The "at the market offering" program is currently unavailable.
Equity Offerings
On
shares of our common stock, generating net proceeds of approximately
Cash Flows
The following table sets forth changes in cash and cash equivalents for the
years ended
For the years ended December
31,
2022 2021
Net income $
29,785
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
27,372 (12,110) Net cash provided by (used in) operating activities 57,157 48,350 Net cash provided by (used in) investing activities 193,173 (699,685) Net cash provided by (used in) financing activities (159,667) 627,174 Change in cash and cash equivalents $
90,663
During the years ended
increased (decreased) by
Operating Activities
For the years endedDecember 31, 2022 and 2021, net cash provided by operating activities totaled$57.2 million and$48.4 million , respectively. For the year endedDecember 31, 2022 , adjustments to net income related to operating activities primarily included the provision for current expected credit losses of$46.1 million , accretion of discounts, deferred loan origination fees and costs of$10.3 million , amortization of deferred financing costs of$7.1 million , change in other assets of$17.7 million and gain on sale of real estate owned of$2.2 million . For the year endedDecember 31, 2021 , adjustments to net income related to operating activities primarily included the provision for current expected credit losses of$10 thousand , accretion of discounts, deferred loan origination fees and costs of$8.4 million , amortization of deferred financing costs of$9.9 million and change in other assets of$18.5 million . Investing Activities For the years endedDecember 31, 2022 and 2021, net cash provided by (used in) investing activities totaled$193.2 million and$(699.7) million , respectively. This change in net cash provided by investing activities was primarily as a result of the cash received from principal repayment of loans held for investment and from the sale of real estate owned 65
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exceeding the cash used for the origination and funding of loans held for
investment and purchases of available-for-sale debt securities for the year
ended
Financing Activities
For the year endedDecember 31, 2022 , net cash used in financing activities totaled$159.7 million and primarily related to repayments of our Secured Funding Agreements of$402.0 million , repayments of our Notes Payable of$51.1 million , repayments of debt of consolidated VIEs of$85.9 million and dividends paid of$71.8 million , partially offset by proceeds from our Secured Funding Agreements of$267.2 million , proceeds from our Notes Payable of$105.0 million and proceeds from the sale of our common stock of$106.3 million . For the year endedDecember 31, 2021 , net cash provided by financing activities totaled$627.2 million and primarily related to proceeds from our Secured Funding Agreements of$970.0 million , proceeds from our Secured Term Loan of$90.0 million , proceeds from the issuance of debt of consolidated VIEs of$540.5 million and proceeds from the sale of our common stock of$204.8 million , partially offset by repayments of our Secured Funding Agreements of$885.5 million , repayments of our Notes Payable of$27.9 million , repayments of our Secured Term Loan of$50.0 million , repayments of our secured borrowings of$37.5 million , repayments of debt of consolidated VIEs of$121.2 million and dividends paid of$58.4 million .
For the years ended
The comparison of our cash flows for the fiscal years endedDecember 31, 2021 and 2020 can be found in our annual report on Form 10-K for the fiscal year endedDecember 31, 2021 located within Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations, which is incorporated by reference herein.
Summary of Financing Agreements
The sources of financing, as applicable in a given period, under our Secured
Funding Agreements, Notes Payable and the Secured Term Loan (collectively, the
"Financing Agreements") are described in the following table ($ in thousands):
As of
December 31, 2022 December 31, 2021
Total Outstanding Total Outstanding
Commitment Balance Interest Rate Maturity Date Commitment Balance Interest Rate Maturity Date
Secured Funding Agreements:
Wells Fargo Facility $ 450,000 $ 270,798
Base Rate(1)+1.50 to 3.75%
$ 399,528 LIBOR+1.50 to 2.75% December 14, 2022
(2)
Citibank Facility 325,000 236,240
Base Rate(1)+1.50 to 2.10%
192,970 LIBOR+1.50 to 2.25% January 13, 2022 (3) CNB Facility 75,000 - SOFR+2.65%March 10, 2023 (4) 75,000 - SOFR+2.65%March 10, 2022 (4) MetLife Facility 180,000 - Base Rate(1)+2.10 to 2.50%August 13, 2023 (5) 180,000 20,648 LIBOR+2.10 to 2.50%August 13, 2022
(5)
Morgan Stanley Facility 250,000 198,193
Base Rate(1)+1.50 to 3.00%
226,901 LIBOR+1.50 to 3.00% January 16, 2023 (6) Subtotal$ 1,280,000 $ 705,231 $ 1,280,000 $ 840,047 Notes Payable$ 105,000 $ 105,000 SOFR+2.00%July 28, 2025 (7)$ 51,755 $ 51,110 LIBOR+3.00 to 3.75% (7) Secured Term Loan$ 150,000 $ 150,000 4.50%November 12, 2026 (8)$ 150,000 $ 150,000 4.50%November 12, 2026 (8) Total$ 1,535,000 $ 960,231 $ 1,481,755 $ 1,041,157
_____________________________
(1)The base rate is LIBOR for loans pledged prior toDecember 31, 2021 and SOFR for loans pledged subsequent toDecember 31, 2021 . (2)The maturity date of the master repurchase funding facility withWells Fargo Bank, National Association (the "Wells Fargo Facility") is subject to two 12-month extensions at our option provided that certain conditions are met and applicable extension fees are paid. InDecember 2022 , we amended the Wells Fargo Facility to, among other things, (1) extend the funding period toDecember 15, 2025 , (2) extend the initial maturity date toDecember 15, 2025 and (3) modify the interest rate on advances under the Wells Fargo Facility to a per annum rate equal to the sum of one-month LIBOR or SOFR, as applicable, plus a pricing margin range of 1.50% to 3.75%, subject to certain exceptions. The maximum commitment may be increased to up to$500.0 million at our option, subject to the satisfaction of certain conditions, including payment of an upsize fee. 66 -------------------------------------------------------------------------------- Table of Contents (3)InJanuary 2022 , we amended the Citibank Facility to, among other things, extend the initial maturity date and funding availability period toJanuary 13, 2025 , subject to two 12-month extensions, each of which may be exercised at our option provided that certain conditions are met and applicable extension fees are paid. (4)InMarch 2022 , we exercised a 12-month extension option on the secured revolving funding facility withCity National Bank (the "CNB Facility"). (5)InJuly 2022 , we exercised a 12-month extension option on the revolving master repurchase facility withMetropolitan Life Insurance Company (the "MetLife Facility"). The MetLife Facility is subject to one 12-month extension, which may be exercised at our option provided that certain conditions are met and applicable extension fees are paid. (6)InDecember 2022 , we exercised a 12-month extension option on the master repurchase and securities contract with Morgan Stanley (the "Morgan Stanley Facility"). The Morgan Stanley Facility is subject to one 12-month extension, which may be exercised at our option provided that certain conditions are met and applicable extension fees are paid. (7)A wholly owned subsidiary of ours is party to a Credit and Security Agreement with the lender referred to therein, which provides for a$105.0 million note (the "Notes Payable"). The$105.0 million note is subject to two 12-month extensions at our option provided that certain conditions are met and applicable extension fees are paid. A consolidated subsidiary of ours was party to a$23.5 million note agreement with the lender referred to therein. InJune 2022 , the$23.5 million note was repaid in full and not extended. The outstanding principal on the note at the time of repayment was$22.8 million . InMarch 2022 , the$28.3 million note, which was secured by a hotel property located inNew York that was recognized as real estate owned in our consolidated balance sheets, was repaid in full and not extended. The outstanding principal on the note at the time of repayment was$28.3 million . (8)The maturity date of the Credit and Guaranty Agreement with the lenders referred to therein andCortland Capital Market Services LLC , as administrative agent and collateral agent for the lenders (the "Secured Term Loan") isNovember 12, 2026 and the interest rate on advances under the Secured Term Loan are the following fixed rates: (i) 4.50% per annum untilMay 12, 2025 , (ii) afterMay 12, 2025 throughNovember 12, 2025 , the interest rate increases 0.125% every three months and (iii) afterNovember 12, 2025 throughNovember 12, 2026 , the interest rate increases 0.250% every three months. Our Financing Agreements contain various affirmative and negative covenants, including negative pledges, and provisions related to events of default that are normal and customary for similar financing agreements. As ofDecember 31, 2022 , we were in compliance with all financial covenants of each respective Financing Agreement. We may be required to fund commitments on our loans held for investment in the future and we may not receive funding from our Secured Funding Agreements with respect to these commitments. See Note 6 to our consolidated financial statements included in this annual report on Form 10-K for more information on our Financing Agreements.
Securitizations
As ofDecember 31, 2022 , the carrying amount and outstanding principal of our CLO Securitizations was$777.7 million and$779.0 million , respectively. See Note 16 to our consolidated financial statements included in this annual report on Form 10-K for additional terms and details of our CLO Securitizations.
Leverage Policies
We intend to use prudent amounts of leverage to increase potential returns to our stockholders. To that end, subject to maintaining our qualification as a REIT and our exemption from registration under the 1940 Act, we intend to continue to use borrowings to fund the origination or acquisition of our target investments. Given current market conditions and our focus on first or senior mortgages, we currently expect that such leverage would not exceed, on a debt-to-equity basis, a 4.5-to-1 ratio. Our charter and bylaws do not restrict the amount of leverage that we may use. The amount of leverage we will deploy for particular investments in our target investments will depend upon our Manager's assessment of a variety of factors, which may include, among others, our liquidity position, the anticipated liquidity and price volatility of the assets in our loans held for investment portfolio, the potential for losses and extension risk in our portfolio, the gap between the duration of our assets and liabilities, including hedges, the availability and cost of financing the assets, our opinion of the creditworthiness of our financing counterparties, the impact of the macroeconomic environment onthe United States economy generally or in specific geographic regions and commercial mortgage markets, our outlook for the level and volatility of interest rates, the slope of the yield curve, the credit quality of our assets, the collateral underlying our assets, and our outlook for asset spreads relative to the LIBOR or SOFR curve or another alternative interest index rate commonly used for floating rate loans.
CONTRACTUAL OBLIGATIONS AND COMMITMENTS
Our contractual obligations as of
following table ($ in thousands):
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Less than More than
Total 1 year 1 to 3 years 3 to 5 years 5 years
Wells Fargo Facility$ 270,798 $ -$ 270,798 $ - $ - Citibank Facility 236,240 - 236,240 - - CNB Facility - - - - - MetLife Facility - - - - - Morgan Stanley Facility 198,193 - 198,193 - - Notes Payable 105,000 - 105,000 - - Secured Term Loan 150,000 - - 150,000 - Future Loan Funding Commitments 227,487 36,279 169,543 21,665 - Total$ 1,187,718 $ 36,279 $ 979,774 $ 171,665 $ - The table above does not include the related interest expense under the Secured Funding Agreements, Notes Payable and the Secured Term Loan, as all our interest is variable. Additionally, the table above does not include extension options, as applicable, under the Secured Funding Agreements, Notes Payable and the Secured Term Loan. We may enter into certain contracts that may contain a variety of indemnification obligations, principally with underwriters and counterparties to repurchase agreements. The maximum potential future payment amount we could be required to pay under these indemnification obligations may be unlimited. Other than as set forth in this annual report on Form 10-K, we do not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured investment vehicles, special purpose entities or variable interest entities, established to facilitate off-balance sheet arrangements or other contractually narrow or limited purposes. Further, we have not guaranteed any obligations of unconsolidated entities or entered into any commitment or intend to provide additional funding to any such entities.
Management Agreement
We are also required to pay our Manager a base management fee of 1.5% of our stockholders' equity per year, an incentive fee and expense reimbursements pursuant to our Management Agreement. The table above does not include the amounts payable to our Manager under our Management Agreement as they are not fixed and determinable. See Note 14 to our consolidated financial statements included in this annual report on Form 10-K for additional terms and details of the fees payable under our Management Agreement.
Dividends
We elected to be taxed as a REIT forUnited States federal income tax purposes and, as such, anticipate annually distributing to our stockholders at least 90% of our REIT taxable income, prior to the deduction for dividends paid. If we distribute less than 100% of our REIT taxable income in any tax year (taking into account any distributions made in a subsequent tax year under Sections 857(b)(9) or 858 of the Code), we will pay tax at regular corporate rates on that undistributed portion. Furthermore, if we distribute less than the sum of 1) 85% of our ordinary income for the calendar year, 2) 95% of our capital gain net income for the calendar year and 3) any undistributed shortfall from our prior calendar year (the "Required Distribution") to our stockholders during any calendar year (including any distributions declared by the last day of the calendar year but paid in the subsequent year), then we are required to pay non-deductible excise tax equal to 4% of any shortfall between the Required Distribution and the amount that was actually distributed. Any of these taxes would decrease cash available for distribution to our stockholders. The 90% distribution requirement does not require the distribution of net capital gains. However, if we elect to retain any of our net capital gain for any tax year, we must notify our stockholders and pay tax at regular corporate rates on the retained net capital gain. The stockholders must include their proportionate share of the retained net capital gain in their taxable income for the tax year, and they are deemed to have paid the REIT's tax on their proportionate share of the retained capital gain. Furthermore, such retained capital gain may be subject to the nondeductible 4% excise tax. If we determine that our estimated current year taxable income (including net capital gain) will be in excess of estimated dividend distributions (including capital gains dividends) for the current year from such income, we accrue excise tax on a portion of the estimated excess taxable income as such taxable income is earned. Before we make any distributions, whether forUnited States federal income tax purposes or otherwise, we must first meet both our operating and debt service requirements under on our Financing Agreements and other debt payable. If our cash available for distribution is less than our REIT taxable income, we could be required to sell assets or borrow funds to make cash 68
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