Ares Commercial Real Estate (ACRE) risk factors, FY2024 10-K

RISKS RELATED TO OUR BUSINESS

1. 01A global economic slowdown or further declines in real estate values, could impair our investments and have a significant adverse effect on our business, financial condition and results of operations
2. 02The Financing Agreements and any bank credit facilities and repurchase agreements that we may use in the future to finance our assets may require us to provide additional collateral or pay down debt” included in this annual report on Form 10-K
3. 03Macroeconomic conditions, including those adversely impacting office properties, have resulted and may continue to result in increases to our CECL Reserve and could have an adverse effect on our financial results
4. 04If there is a further deterioration of credit in our existing loan portfolio secured by office properties, as a result of increased vacancy rates, volatility, liquidity or otherwise, we may need to increase our CECL Reserve to account for such conditions
5. 05Changing interest rates could adversely impact our financial condition
6. 06Our board of directors may change our investment strategy or guidelines, financing strategy or leverage policies without stockholder consent
7. 07We are highly dependent on the information systems of Ares Management and systems failures could significantly disrupt our business, which may, in turn, negatively affect the market price of our common stock and our ability to pay dividends
8. 08State licensing requirements causes us to incur expenses and our failure to comply with such requirements may have a material adverse effect on us and our operations

RISKS RELATED TO SOURCES OF FINANCING AND HEDGING

1. 09We incur significant debt, which subjects us to increased risk of loss and reduces cash available for distributions to our stockholders
2. 10The Financing Agreements impose, and any additional lending facilities will impose, restrictive covenants and other restrictions
3. 11The Financing Agreements and any bank credit facilities and repurchase agreements that we may use in the future to finance our investments may require us to provide additional collateral or pay down debt
4. 12Our access to sources of financing may be limited and thus our ability to grow our business and to maximize our returns may be adversely affected
5. 13Lender consent rights under warehouse facilities we may utilize may limit our ability to originate or acquire assets
6. 14We have utilized and may continue to utilize in the future non-recourse long-term securitizations. Such structures expose us to risks which could result in losses
7. 15The securitization process is subject to an evolving regulatory environment that may affect certain aspects of our current business
8. 16We enter into hedging transactions from time to time and such transactions expose us to contingent liabilities
9. 17Hedging against interest rate or currency exposure may adversely affect our earnings, which could reduce our cash available for distribution to our stockholders
10. 18Hedging instruments often are not traded on regulated exchanges or guaranteed by an exchange or its clearing house, and involve risks and costs that could result in material losses

RISKS RELATED TO OUR INVESTMENTS

1. 19We allocate our available capital without input from our stockholders
2. 20The lack of liquidity in our investments may adversely affect our business
3. 21Our portfolio is concentrated in a limited number of loans and has a higher exposure to the office and mixed-use sectors compared to the other property types, which subjects us to a risk of significant loss if any of these loans default
4. 22Our investments are subject to risks particular to real property. These risks may result in a reduction or elimination of, or return from, a loan secured by a particular property
5. 23The CRE loans we originate and the mortgage loans underlying any commercial mortgage-backed securities investments that we may make are subject to the ability of the commercial property owner to generate net income from operating the property, as well as the risks of delinquency and foreclosure
6. 24We are subject to various risks related to the ownership of real property
7. 25Prepayment rates may adversely affect the value of our portfolio of assets
8. 26If we are unable to successfully integrate new assets and manage our growth, our results of operations and financial condition may suffer
9. 27We operate in a competitive market for investment opportunities and loan originations and competition may limit our ability to originate or acquire our target investments on attractive terms
10. 28If our Manager overestimates the yields or incorrectly prices the risks of our investments, we may experience losses
11. 29Loans on properties in transition will involve a greater risk of loss than traditional investment-grade mortgage loans with fully insured borrowers
12. 30Risks of cost overruns and non-completion of renovation, construction and development of the properties underlying short term senior loans on properties in transition may result in significant losses
13. 31Investments in non-investment grade rated CRE loans or securities involve increased risk of loss
14. 32The B-Notes and C-Notes that we have originated or may originate or acquire in the future may be subject to additional risks related to the privately negotiated structure and terms of the transaction, which may result in losses to us
15. 33Our mezzanine loan assets involve greater risks of loss than senior loans secured by real properties
16. 34Investments in preferred equity involve a greater risk of loss than traditional debt financing
17. 35Any credit ratings assigned to our investments will be subject to ongoing evaluations and revisions and we cannot assure you that those ratings will not be downgraded
18. 36We may experience a decline in the fair value of our assets
19. 37Some of our portfolio investments are recorded at fair value and, as a result, there is uncertainty as to the value of these investments
20. 38Commercial mortgage-backed securities pose risks of the securitization process and the risk that the special servicer may take actions that could adversely affect our interests
21. 39Real estate valuation is inherently subjective and uncertain
22. 40We may invest in non-performing real estate loans and participations
23. 41Insurance on mortgage loans and real estate securities collateral may not cover all losses
24. 42Liability relating to environmental matters may impact the value of properties that we may acquire upon foreclosure of the properties underlying our investments
25. 43The properties underlying our CRE loans may be subject to other unknown liabilities that could adversely affect the value of these properties, and as a result, our investments
26. 44Construction loans involve an increased risk of loss
27. 45Our investments in construction loans require us to make estimates about the fair value of land improvements that may be challenged by the IRS
28. 46Our investments may be concentrated and could be subject to risk of default
29. 47We have foreclosed and in the future may need to foreclose on loans that are in default, which could result in losses

RISKS RELATED TO OUR COMMON STOCK

1. 48The market price of our common stock may fluctuate significantly
2. 49As of December 31, 2024 and 2023, we had 54,542,178 and 54,149,225 shares of common stock outstanding, respectively
3. 50We have not established a minimum distribution payment level and we may be unable to generate sufficient cash flows from our operations to make distributions to our stockholders at any time in the future
4. 51Our distributions may exceed our cash flow from our operations and our net income
5. 52Investing in our common stock may involve a high degree of risk
6. 53Future offerings of securities may adversely affect the market price of our common stock

RISKS RELATED TO OUR ORGANIZATION AND STRUCTURE

1. 54The Maryland General Corporation Law, or the “MGCL,” prohibits certain business combinations, which may make it more difficult for us to be acquired
2. 55Stockholders have limited control over changes in our policies and operations
3. 56Our authorized but unissued shares of common and preferred stock may prevent a change in control
4. 57Maintenance of our exemption from registration under the 1940 Act imposes significant limits on our operations. Your investment return may be reduced if we are required to register as an investment company under the 1940 Act
5. 58There can be no assurance that the laws and regulations governing the 1940 Act status of REITs, including the SEC or its staff providing more specific or different guidance regarding these exemptions, will not change in a manner that adversely affects our operations
6. 59Rapid and steep declines in the values of our real estate-related investments may make it more difficult for us to maintain our qualification as a REIT or exemption from the 1940 Act
7. 60Our rights and the rights of our stockholders to recover on claims against our directors and officers are limited, which could reduce our stockholders and our recovery against them if they negligently cause us to incur losses
8. 61Our charter contains provisions that make removal of our directors difficult, which could make it difficult for our stockholders to effect changes to our management
9. 62Ownership limitations may restrict change of control or business combination opportunities in which our stockholders might receive a premium for their shares

RISKS RELATED TO OUR RELATIONSHIP WITH OUR MANAGER AND ITS AFFILIATES

1. 63We rely on the resources of our Manager to manage our day-to-day operations, as we do not employ any personnel. We rely completely on our Manager to provide us with investment advisory services
2. 64Our growth depends on the ability of our Manager to make investments on favorable terms that satisfy our investment strategy and otherwise generate attractive risk-adjusted returns initially and consistently from time to time
3. 65There are various conflicts of interest in our relationship with our Manager and Ares Management that could result in decisions that are not in the best interests of our stockholders
4. 66The ability of our Manager and its officers and employees to engage in other business activities may reduce the time our Manager spends managing our business and may result in certain conflicts of interest
5. 67Terminating our Management Agreement for unsatisfactory performance of the Manager or electing not to renew the Management Agreement may be difficult and terminating the agreement in certain circumstances requires payment of a substantial termination fee
6. 68The incentive fee payable to our Manager under the Management Agreement may cause our Manager to select investments in riskier assets to increase its incentive compensation
7. 69Our Manager manages our portfolio in accordance with very broad investment guidelines and our board of directors does not approve each investment and financing decision made by our Manager, which may result in us making riskier investments than those currently comprising our investment portfolio
8. 70Our Manager may change its investment process, or elect not to follow it, without stockholder consent at any time, which may adversely affect our investments
9. 71We do not have a policy that expressly prohibits our directors, officers, stockholders or affiliates from engaging for their own account in business activities of the types conducted by us
10. 72Our Manager is subject to extensive regulation as an investment adviser, which could adversely affect its ability to manage our business
11. 73In addition to other analytical tools, our Manager utilizes financial models to evaluate commercial mortgage loans and CRE-related debt instruments, the accuracy and effectiveness of which cannot be guaranteed
12. 74We do not own the Ares name, but we may use the name pursuant to a license agreement with Ares Management. Use of the name by other parties or the termination of our license agreement may harm our business
13. 75Our Manager’s and Ares Management’s liability is limited under the Management Agreement, and we have agreed to indemnify our Manager against certain liabilities. As a result, we could experience poor performance or losses for which our Manager would not be liable

RISKS RELATED TO UNITED STATES FEDERAL INCOME TAX

1. 76Failure of our subsidiary REIT to qualify as a REIT could adversely impact our ability to qualify as a REIT
2. 77REITs, in certain circumstances, may incur tax liabilities that would reduce the cash available for distribution to our stockholders
3. 78To qualify as a REIT, we must meet annual distribution requirements, which may force us to forgo otherwise attractive opportunities or borrow funds during unfavorable market conditions. This could delay or hinder our ability to meet our investment objectives and reduce your overall return
4. 79Complying with REIT requirements may force us to forgo and/or liquidate otherwise attractive investment opportunities
5. 80Certain of our business activities are potentially subject to the prohibited transaction tax, which could reduce the return on your investment
6. 81The tax on prohibited transactions will limit our ability to engage in transactions, including certain methods of securitizing mortgage loans that would be treated as sales for United States federal income tax purposes
7. 82TRSs are subject to corporate-level taxes and dealings with TRSs may be subject to 100% excise tax
8. 83The failure of mortgage loans subject to a repurchase agreement to qualify as a real estate asset would adversely affect our ability to qualify as a REIT
9. 84The failure of mezzanine loans to qualify as a real estate asset would adversely affect our ability to qualify as a REIT
10. 85acquire, and the inaccuracy of any such opinions, advice or statements may adversely affect our REIT qualification and result in corporate-level tax
11. 86The taxable mortgage pool, or “TMP,” rules may increase the taxes that we or our stockholders may incur, and may limit the manner in which we effect future securitizations
12. 87We may choose to make distributions in our own stock, in which case you may be required to pay income taxes in excess of the cash dividends you receive
13. 88Dividends payable by REITs generally do not qualify for the reduced tax rates available for some dividends
14. 89Complying with REIT requirements may limit our ability to hedge our liabilities effectively and may cause us to incur tax liabilities
15. 90We may be subject to adverse legislative or regulatory tax changes that could increase our tax liability, reduce our operating flexibility and reduce the price of our common stock
16. 91investment in our shares. You also should note that our counsel’s tax opinion is based upon existing law, applicable as of the date of its opinion, all of which will be subject to change, either prospectively or retroactively
17. 92Potential characterization of distributions or gain on sale may be treated as unrelated business taxable income to tax-exempt investors
18. 93If we fail to comply with laws, regulations and market standards regarding the privacy, use and security of borrower information, we may be subject to legal and regulatory actions and our reputation would be harmed, which would materially adversely affect us
19. 94Ineffective internal controls could impact our business and operating results
20. 95We, our Manager or its affiliates may be subject to litigation risks and may incur significant costs in connection with legal and regulatory proceedings and face liabilities and damage to our, our Manager’s or its affiliates’ reputation
21. 96A major public health crisis, pandemic or epidemic, like the COVID-19 pandemic, could disrupt the U.S. and global economy and industries in which we operate and negatively impact us
22. 97ability of our borrowers to meet their obligations to us, all of which could disrupt our business and adversely materially impact our financial results
23. 98Increasing scrutiny from stakeholders and regulators with respect to ESG matters may impose additional costs and expose us to additional risks