Edgar Filing: Ares Commercial Real Estate Corp

Document

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 June 30, 2016

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period to

Commission File No. 001-35517

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)

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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post 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, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting 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
(Do not check if a smaller reporting company)

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 August 2, 2016
Common stock, $0.01 par value		28,513,137

ARES COMMERCIAL REAL ESTATE CORPORATION

INDEX



Part I.	Financial Information

Item 1.	Consolidated Financial Statements

	Consolidated Balance Sheets as of June 30, 2016 (unaudited) and December 31, 2015	2

	Consolidated Statements of Operations for the three and six months ended June 30, 2016 and 2015 (unaudited)	3

	Consolidated Statement of Equity for the six months ended June 30, 2016 (unaudited)	4

	Consolidated Statements of Cash Flows for the six months ended June 30, 2016 and 2015 (unaudited)	5

	Notes to Consolidated Financial Statements (unaudited)	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	38

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	50

Item 4.	Controls and Procedures	52

Part II.	Other Information

Item 1.	Legal Proceedings	53

Item 1A.	Risk Factors	53

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	53

Item 3.	Defaults Upon Senior Securities	53

Item 4.	Mine Safety Disclosures	54

Item 5.	Other Information	54

Item 6.	Exhibits	54

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
	June 30, 2016			December 31, 2015
	(unaudited)
ASSETS
Cash and cash equivalents ($2 and $8 related to consolidated VIEs, respectively)	$	5,309		$	5,066
Restricted cash	11,732			13,083
Loans held for investment ($270,141 and $483,572 related to consolidated VIEs, respectively)	1,142,967			1,174,391
Other assets ($1,518 and $2,695 of interest receivable related to consolidated VIEs, respectively; $35,607 of other receivables related to consolidated VIEs as of December 31, 2015)	12,457			53,191
Assets of discontinued operations held for sale	159,606			133,251
Total assets	$	1,332,071		$	1,378,982
LIABILITIES AND EQUITY
LIABILITIES
Secured funding agreements	$	601,794		$	522,775
Secured term loan	70,205			69,762
Commercial mortgage-backed securitization debt (consolidated VIE)	—			61,815
Collateralized loan obligation securitization debt (consolidated VIE)	104,656			192,528
Due to affiliate	2,073			2,424
Dividends payable	7,413			7,152
Other liabilities ($129 and $299 of interest payable related to consolidated VIEs, respectively)	14,137			14,507
Liabilities of discontinued operations held for sale	77,496			51,531
Total liabilities	877,774			922,494
Commitments and contingencies (Note 7)
EQUITY
Common stock, par value $0.01 per share, 450,000,000 shares authorized at June 30, 2016 and December 31, 2015, 28,513,137 and 28,609,650 shares issued and outstanding at June 30, 2016 and December 31, 2015, respectively	283			284
Additional paid-in capital	420,013			421,179
Accumulated deficit	(13,005		)	(11,992		)
Total stockholders' equity	407,291			409,471
Non-controlling interests in consolidated VIEs	47,006			47,017
Total equity	454,297			456,488
Total liabilities and equity	$	1,332,071		$	1,378,982

See accompanying notes to consolidated financial statements.

ARES COMMERCIAL REAL ESTATE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except share and per share data)



	For the three months ended June 30,						For the six months ended June 30,
	2016			2015			2016			2015
	(unaudited)			(unaudited)			(unaudited)			(unaudited)
Net interest margin:
Interest income from loans held for investment	$	18,929		$	21,012		$	37,679		$	44,182
Interest expense	(8,415		)	(8,701		)	(16,940		)	(18,879		)
Net interest margin	10,514			12,311			20,739			25,303
Expenses:
Management fees to affiliate	1,338			1,346			2,690			2,689
Professional fees	535			412			1,025			918
General and administrative expenses	686			647			1,409			1,446
General and administrative expenses reimbursed to affiliate	660			821			1,557			1,751
Total expenses	3,219			3,226			6,681			6,804
Income from continuing operations before income taxes	7,295			9,085			14,058			18,499
Income tax expense (benefit)	3			3			7			(18		)
Net income from continuing operations	7,292			9,082			14,051			18,517
Net income from discontinued operations held for sale, net of income taxes	2,689			2,181			2,355			2,041
Net income attributable to ACRE	9,981			11,263			16,406			20,558
Less: Net income attributable to non-controlling interests	(1,288		)	(2,296		)	(2,577		)	(4,529		)
Net income attributable to common stockholders	$	8,693		$	8,967		$	13,829		$	16,029
Basic earnings per common share:
Net income from continuing operations	$	0.21		$	0.24		$	0.40		$	0.49
Net income from discontinued operations held for sale	0.09			0.08			0.08			0.07
Net income	$	0.31		$	0.31		$	0.49		$	0.56
Diluted earnings per common share:
Net income from continuing operations	$	0.21		$	0.24		$	0.40		$	0.49
Net income from discontinued operations held for sale	0.09			0.08			0.08			0.07
Net income	$	0.31		$	0.31		$	0.48		$	0.56
Weighted average number of common shares outstanding:
Basic weighted average shares of common stock outstanding	28,428,703			28,491,711			28,479,015			28,488,022
Diluted weighted average shares of common stock outstanding	28,495,833			28,585,780			28,548,944			28,585,285
Dividends declared per share of common stock	$	0.26		$	0.25		$	0.52		$	0.50

See accompanying notes to consolidated financial statements.

ARES COMMERCIAL REAL ESTATE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF EQUITY

(in thousands, except share and per share data)

(unaudited)



	Common Stock					Additional Paid-in Capital			Accumulated Deficit			Total Stockholders' Equity			Non-Controlling Interests			Total Equity
	Shares		Amount			Additional Paid-in Capital			Accumulated Deficit			Total Stockholders' Equity			Non-Controlling Interests			Total Equity
Balance at December 31, 2015	28,609,650		$	284		$	421,179		$	(11,992	)	$	409,471		$	47,017		$	456,488
Stock‑based compensation	33,403		—			269			—			269			—			269
Repurchase and retirement of common stock	(129,916	)	(1		)	(1,435		)	—			(1,436		)	—			(1,436		)
Net income attributable to common stockholders	—					—			13,829			13,829			2,577			16,406
Dividends declared	—					—			(14,842		)	(14,842		)	—			(14,842		)
Contributions from non-controlling interests	—					—			—			—			4			4
Distributions to non-controlling interests	—					—			—			—			(2,592		)	(2,592		)
Balance at June 30, 2016	28,513,137		$	283		$	420,013		$	(13,005	)	$	407,291		$	47,006		$	454,297

See accompanying notes to consolidated financial statements.

ARES COMMERCIAL REAL ESTATE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)



	For the six months ended June 30,
	2016			2015
	(unaudited)			(unaudited)
Operating activities:
Net income	$	16,406		$	20,558
Adjustments to reconcile net income to net cash provided by (used in) operating activities (inclusive of amounts related to discontinued operations held for sale):
Amortization of deferred financing costs	3,150			5,187
Change in mortgage banking activities	(6,444		)	(7,596		)
Change in fair value of mortgage servicing rights	3,895			5,183
Accretion of deferred loan origination fees and costs	(2,013		)	(2,454		)
Provision for loss sharing	(289		)	(991		)
Cash paid to settle loss sharing obligations	—			(122		)
Originations of mortgage loans held for sale	(282,625		)	(382,693		)
Sale of mortgage loans held for sale to third parties	261,499			524,452
Stock-based compensation	269			414
Depreciation expense	112			109
Deferred tax expense	682			668
Changes in operating assets and liabilities:
Restricted cash	1,350			41,208
Other assets	39,681			20,164
Due to affiliate	(135		)	(59		)
Other liabilities	(2,118		)	(1,037		)
Net cash provided by (used in) operating activities	33,420			222,991
Investing activities:
Issuance of and fundings on loans held for investment	(196,108		)	(116,237		)
Principal repayment of loans held for investment	229,447			228,137
Receipt of origination fees	610			757
Purchases of other assets	(352		)	(62		)
Net cash provided by (used in) investing activities	33,597			112,595
Financing activities:
Proceeds from secured funding agreements	438,721			113,870
Repayments of secured funding agreements	(359,702		)	(105,824		)
Payment of secured funding costs	(1,458		)	(556		)
Repayments of debt of consolidated VIEs	(150,281		)	(197,506		)
Proceeds from warehouse lines of credit	332,703			435,592
Repayments of warehouse lines of credit	(311,078		)	(576,905		)
Repurchase of common stock	(1,436		)	—
Dividends paid	(14,582		)	(14,293		)
Contributions from non-controlling interests	4			5,685
Distributions to non-controlling interests	(2,592		)	(4,095		)
Net cash provided by (used in) financing activities	(69,701		)	(344,032		)
Change in cash and cash equivalents	(2,684		)	(8,446		)
Cash and cash equivalents of continuing operations, beginning of period	5,066			15,045
Cash and cash equivalents of discontinued operations held for sale, beginning of period	3,929			1,506
Cash and cash equivalents, end of period	$	6,311		$	8,105
Cash and cash equivalents of continuing operations, end of period	$	5,309		$	5,033
Cash and cash equivalents of discontinued operations held for sale, end of period	$	1,002		$	3,072

See accompanying notes to consolidated financial statements.

ARES COMMERCIAL REAL ESTATE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of June 30, 2016

(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 that operates both as a principal lender and as a mortgage banker (with respect to loans collateralized by multifamily and senior-living properties). 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 L.P. (NYSE: ARES) (“Ares Management”), 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").

In the Company’s principal lending business, it is primarily focused on directly originating, managing and servicing a diversified portfolio of CRE debt-related investments for the Company’s own account. The Company’s target investments in its principal lending business include senior mortgage loans, subordinated debt, preferred equity, mezzanine loans and other CRE investments. These investments, which are referred to as the Company’s “principal lending target investments,” are generally held for investment and are secured, directly or indirectly, by office, multifamily, retail, industrial, lodging, senior-living and other commercial real estate properties, or by ownership interests therein.

The Company is also engaged in the mortgage banking business through its wholly owned subsidiary, ACRE Capital LLC (“ACRE Capital”). ACRE Capital primarily originates, sells and services multifamily and senior-living related loans under programs offered by government-sponsored enterprises ("GSEs"), such as the Federal National Mortgage Association (“Fannie Mae”) and the Federal Home Loan Mortgage Corporation ("Freddie Mac") and by government agencies, such as the Government National Mortgage Association (“Ginnie Mae”) and the Federal Housing Administration, a division of the U.S. Department of Housing and Urban Development (together with Ginnie Mae, “HUD”). ACRE Capital is approved as a Fannie Mae Delegated Underwriting and Servicing (“DUS”) lender, a Freddie Mac Program Plus® Seller/Servicer, a Multifamily Accelerated Processing and Section 232 LEAN lender for HUD, and a Ginnie Mae issuer. While ACRE Capital earns little interest income from these activities as it generally only holds loans for short periods, ACRE Capital receives origination fees when it closes loans and sale premiums when it sells loans. ACRE Capital also retains the rights to service the loans, which are known as mortgage servicing rights (“MSRs”) and receives fees for such servicing during the life of the loans, which generally last 10 years or more.

On June 28, 2016, the Company entered into a Purchase and Sale Agreement (the “Agreement”) with Cornerstone Real Estate Advisers LLC ("Cornerstone"), a Delaware limited liability company (the “Buyer”), to sell ACRE Capital Holdings LLC (“TRS Holdings”), the holding company that owns the Company's mortgage banking subsidiary, ACRE Capital. Upon the terms and subject to the conditions set forth in the Agreement, at the closing, the Buyer will purchase from the Company (the “Acquisition”) all of the outstanding common units of TRS Holdings. The Acquisition is expected to close in the third or fourth quarter of 2016, subject to the satisfaction or waiver of various closing conditions, as described below.

The Agreement provides that the Buyer will pay $93 million in cash, subject to certain adjustments, as consideration for the Acquisition. The purchase price is subject to certain adjustments, including a working capital adjustment, an adjustment of $1.15 million in respect of certain change of control payments triggered in connection with the Acquisition and a potential adjustment of up to $3 million based on certain 2016 revenue items.

The Company has elected and qualified to be taxed as a real estate investment trust (“REIT”) for U.S. federal income tax purposes under the Internal Revenue Code of 1986, as amended, commencing with its taxable year ended December 31, 2012. The Company generally will not be subject to U.S. federal income taxes on its REIT taxable income, determined without regard to the deduction for dividends paid and excluding net capital gains, to the extent that it annually distributes all of its REIT taxable income 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, 2015 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, 2016.

Discontinued Operations

As discussed in Note 1 included in these consolidated financial statements, the Company has entered into an agreement to sell TRS Holdings, the holding company that owns the Company’s mortgage banking subsidiary, ACRE Capital. Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 205-20, Presentation of Financial Statements - Discontinued Operations, defines the criteria required for a disposal transaction to qualify for reporting as a discontinued operation. The Company determined that its plan to sell TRS Holdings met the criteria for discontinued operations. As a result, the operating results and the assets and liabilities of ACRE Capital, which formerly comprised the Mortgage Banking segment, are presented separately in the Company’s consolidated financial statements as discontinued operations held for sale. Net assets and net liabilities related to discontinued operations are included in the line items “Assets of discontinued operations held for sale” and “Liabilities of discontinued operations held for sale” in the consolidated balance sheets for all periods presented. The value of ACRE Capital's assets and liabilities are presented at the lower of carrying value or fair value less cost to sell. The fair value less cost to sell of ACRE Capital's assets and liabilities is greater than the carrying value; therefore, the Company did not recognize any impairment losses when the Company reclassified the assets and liabilities to discontinued operations held for sale. The results of discontinued operations are included in the line item “Net income from discontinued operations held for sale, net of income taxes” in the consolidated statements of operations for all periods presented. Summarized financial information for the discontinued Mortgage Banking segment is shown in Note 16 included in these consolidated financial statements.

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. FASB 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 15 included in these consolidated financial statements for further discussion of the Company’s VIEs.

Segment Reporting

The Company previously had two reportable business segments: Principal Lending and Mortgage Banking. As a result of the expected sale of TRS Holdings, the operations of the Mortgage Banking segment have been reclassified as discontinued operations held for sale in all periods presented. After giving effect to the expected divestiture of TRS Holdings, the Company will no longer provide segment reporting. See Notes 1 and 16 included in these consolidated financial statements for further discussion of the sale of the Mortgage Banking segment.

Reclassifications

Certain prior period amounts have been reclassified to conform to the current period presentation. Amortization of convertible notes issuance costs and accretion of convertible notes have been reclassified into amortization of deferred financing costs in the consolidated statements of cash flows. As of June 30, 2016 and December 31, 2015, the Company no longer presents amortization of convertible notes issuance costs and accretion of convertible notes in its consolidated statements of cash flows.

The Company presents, in discontinued operations, the results of operations that have either been disposed of or are classified as held for sale and for which the disposition represents a strategic shift that has or will have a significant effect on the Company's operations and financial results. As a result of this presentation, retroactive reclassifications that change prior period numbers have been made. See Notes 1 and 16 included in these consolidated financial statements for further discussion of the sale of the Mortgage Banking segment.

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, unless the loans are deemed impaired. Impairment occurs when it is deemed probable that the Company will not be able to collect all amounts due according to the contractual terms of the loan. If a loan is considered to be impaired, the Company will record an allowance to reduce the carrying value of the loan to the present value of expected future cash flows discounted at the loan’s contractual effective rate.

Each loan classified as held for investment is evaluated for impairment on a quarterly basis. Loans are 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 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 impairment 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.

In addition, the Company evaluates the entire portfolio to determine whether the portfolio has any impairment that requires a valuation allowance on the remainder of the loan portfolio. As of June 30, 2016 and December 31, 2015, the Company did not recognize any impairment charges with respect to its loans held for investment.

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.

Preferred equity investments, which are subordinate to any loans but senior to common equity, are accounted for as loans held for investment and are carried at cost, net of unamortized loan fees and origination costs, unless the loans are deemed impaired, and are included within loans held for investment in the Company’s consolidated balance sheets. The Company accretes or amortizes any discounts or premiums over the life of the related loan held for investment utilizing the effective interest method.

Loans Held for Sale

Through its subsidiaries, including ACRE Capital, ACRC Lender W TRS LLC ("ACRC W TRS") and ACRC Lender U TRS LLC ("ACRC U TRS"), the Company originates mortgage loans held for sale, which are recorded at fair value and accounted for under FASB ASC Topic 860, Transfers and Servicing. The holding period for loans originated by ACRE Capital is approximately 30 days. The carrying value of the mortgage loans sold is reduced by the value allocated to the associated retained MSRs based on relative fair value at the time of the sale. Gains or losses on sales of mortgage loans are recognized based on the difference between the selling price and the adjusted value of the related mortgage loans sold. See Notes 1 and 16 included in these consolidated financial statements for further discussion of the sale of the Mortgage Banking segment.

Although the Company generally holds its target investments as long‑term investments within its principal lending business, the Company may occasionally classify some of its investments as held for sale. Investments held for sale will be carried at fair value within loans held for sale in the Company’s consolidated balance sheets, with changes in fair value recorded through earnings. The fees received are deferred and recognized as part of the gain or loss on sale. As of June 30, 2016 and December 31, 2015, the Company did not have any loans held for sale in its principal lending business.

Mortgage Servicing Rights

When a mortgage loan is sold, ACRE Capital retains the right to service the loan and recognizes the MSR at fair value. The initial fair value represents expected net cash flows from servicing, as well as interest earnings on escrows and interim cash balances, borrower prepayment penalties, delinquency rates, late charges along with ancillary fees that are discounted at a rate that reflects the credit and liquidity risk of the MSR over the estimated life of the underlying loan. After initial recognition, changes in the MSR fair value are included within net income from discontinued operations held for sale, net of income taxes, in the Company’s consolidated statements of operations for the period in which the change occurs. See Notes 1 and 16 included in these consolidated financial statements for further discussion of the sale of the Mortgage Banking segment.

Allowance for Loss Sharing

When a loan is sold under the Fannie Mae DUS program, ACRE Capital undertakes an obligation to partially guarantee the performance of the loan. The date ACRE Capital commits to make a loan to a borrower, a liability for the fair value of the obligation undertaken in issuing the guarantee is recognized. Subsequent to the initial commitment date, the Company monitors the performance of each loan for events or circumstances which may signal an additional liability to be recognized if there is a probable and estimable loss. The initial fair value of the guarantee is estimated by examining historical loss share experienced in the ACRE Capital Fannie Mae DUS portfolio over the most recent 10-year period. The initial fair value of the guarantee is included within net income from discontinued operations held for sale, net of income taxes, in the Company’s consolidated statements of operations. These historical loss shares serve as a basis to derive a loss share rate which

is then applied to the current ACRE Capital DUS portfolio (net of specifically identified impaired loans that are subject to a separate loss share reserve analysis). See Notes 1 and 16 included in these consolidated financial statements for further discussion of the sale of the Mortgage Banking segment.

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.

A reconciliation of the Company's interest income from loans held for investment, excluding non-controlling interests, to the Company's interest income from loans held for investment as included within its consolidated statements of operations for the three and six months ended June 30, 2016 and 2015 is as follows ($ in thousands):



	For the three months ended June 30,				For the six months ended June 30,
	2016		2015		2016		2015
Interest income from loans held for investment, excluding non-controlling interests	$	17,640	$	18,706	$	35,101	$	39,633
Interest income from non-controlling interest investment held by third parties	1,289		2,306		2,578		4,549
Interest income from loans held for investment	$	18,929	$	21,012	$	37,679	$	44,182

Servicing fees are earned for servicing mortgage loans, including all activities related to servicing the loans, and are recognized as services are provided over the life of the related mortgage loan. Also included in servicing fees are the net fees earned on borrower prepayment penalties and interest earned on borrowers’ escrow payments and interim cash balances, along with other ancillary fees and reduced by write-offs of MSRs for loans that are prepaid, changes in the fair value of the servicing fee payable (defined below) and interest expense related to escrow accounts. ACRE Capital provides additional payments to certain personnel by providing them with a percentage of the servicing fee revenue that is earned by ACRE Capital, which is initially recorded as a liability when ACRE Capital commits to make a loan to a borrower (the “servicing fee payable”). Servicing fees, net are included within net income from discontinued operations held for sale, net of income taxes, in the Company’s consolidated statements of operations.

Gains from mortgage banking activities includes the initial fair value of MSRs, loan origination fees, gain on the sale of loans originated, interest income and fees earned on loans held for sale, changes to the fair value of derivative financial instruments attributable to the loan commitments and forward sale commitments and reduced by the expense related to the initial fair value of the servicing fee payable and the interest expense related to the Warehouse Lines of Credit (as defined in Note 5 included in these consolidated financial statements). The initial fair value of MSRs, loan origination fees, gain on the sale of loans originated, certain direct loan origination costs for loans held for sale and the expenses related to the initial fair value of the servicing fee payable are recognized when ACRE Capital commits to make a loan to a borrower. When the Company settles a sale agreement and transfers the mortgage loan to the buyer, the Company recognizes a MSR asset equal to the present value of the expected net cash flows associated with the servicing of loans sold. Gains from mortgage banking activities are included within net income from discontinued operations held for sale, net of income taxes, in the Company’s consolidated statements of operations.

See Notes 1 and 16 included in these consolidated financial statements for further discussion of the sale of the Mortgage Banking segment.

Net Interest Margin and Interest Expense

Net interest margin within the consolidated statements of operations is a measure that is specific to the Company's principal lending business and 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, securitizations debt, the Secured Term Loan and the 2015 Convertible Notes (individually defined in Note 5 included in these consolidated financial statements) in net interest margin. For the three and six months ended June 30, 2016 and 2015, interest expense is comprised of the following ($ in thousands):



	For the three months ended June 30,				For the six months ended June 30,
	2016		2015		2016		2015
Secured funding agreements and securitizations debt	$	6,657	$	7,085	$	13,425	$	15,674
Secured term loan	1,758		—		3,515		—
Convertible notes	—		1,616		—		3,205
Interest expense	$	8,415	$	8,701	$	16,940	$	18,879

Comprehensive Income

For the three and six months ended June 30, 2016 and 2015, comprehensive income equaled net income; therefore, a separate consolidated statement of comprehensive income is not included in the accompanying consolidated financial statements.

Recent Accounting Pronouncements

In May 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606). The guidance in this ASU supersedes the revenue recognition requirements in Revenue Recognition (Topic 605). Under the new guidance, an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The amendments in ASU No. 2014-09 are effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. In March 2016, the FASB issued ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal Versus Agent Considerations, which clarifies the guidance in ASU No. 2014-09 and has the same effective date as the original standard. In April 2016, the FASB issued ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing, an update on identifying performance obligations and accounting for licenses of intellectual property. Additionally, in May 2016, the FASB issued ASU No. 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients, which includes amendments for enhanced clarification of the guidance. Early application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. The Company is currently evaluating the impact of adopting this ASU on its consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The guidance in this ASU supersedes the leasing guidance in Leases (Topic 840). Under the new guidance, lessees are required to recognize lease assets and lease liabilities on the balance sheet for those leases previously classified as operating leases. The amendments in ASU No. 2016-02 are effective for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period, with early adoption permitted. The Company is currently evaluating the impact of adopting this ASU on its consolidated financial statements.

In March 2016, the FASB issued ASU No. 2016-09, Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The standard is intended to simplify several areas of accounting for share-based compensation arrangements, including the income tax impact, classification on the statement of cash flows and forfeitures. ASU No. 2016-09 is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period, with early adoption permitted. The Company is currently evaluating the impact of adopting this ASU on its consolidated financial statements.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The standard will replace the incurred loss impairment methodology pursuant to GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. ASU No. 2016-13 is effective for annual reporting periods beginning after December 15, 2019, including interim periods within that reporting period, with early adoption permitted after December 15, 2018, including interim periods within that reporting period. The Company is currently evaluating the impact of adopting this ASU on its consolidated financial statements.

3. LOANS HELD FOR INVESTMENT

As of June 30, 2016, the Company had originated or co-originated 33 loans held for investment, excluding 34 loans that were repaid or sold since inception. The aggregate originated commitment under these loans at closing was approximately $1.2 billion and outstanding principal was $1.1 billion, excluding non-controlling interests held by third parties, as of June 30, 2016. During the six months ended June 30, 2016, the Company funded approximately $197.9 million of outstanding principal

and received repayments of $229.4 million of outstanding principal, excluding non-controlling interests held by third parties, as described in more detail in the tables below. Such investments are referred to herein as the Company’s "investment portfolio." As of June 30, 2016, 69.0% of the Company’s loans have London Interbank Offered Rates ("LIBOR") floors, with a weighted average floor of 0.23%, 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 June 30, 2016 and December 31, 2015 ($ in thousands):



	As of June 30, 2016
	Carrying Amount (1)		Outstanding Principal (1)		Weighted Average Interest Rate		Weighted Average Unleveraged Effective Yield (2)		Weighted Average Remaining Life (Years)
Senior mortgage loans	$	927,991	$	931,662	4.4	%	5.1	%	1.4
Subordinated debt and preferred equity investments	168,397		170,668		10.7	%	11.2	%	5.2
Total loans held for investment portfolio (excluding non-controlling interests held by third parties)	$	1,096,388	$	1,102,330	5.3	%	6.1	%	2.0



	As of December 31, 2015
	Carrying Amount (1)		Outstanding Principal (1)		Weighted Average Interest Rate		Weighted Average Unleveraged Effective Yield (2)		Weighted Average Remaining Life (Years)
Senior mortgage loans	$	961,395	$	965,578	4.4	%	5.1	%	1.4
Subordinated debt and preferred equity investments	166,417		168,264		10.6	%	11.2	%	5.1
Total loans held for investment portfolio (excluding non-controlling interests held by third parties)	$	1,127,812	$	1,133,842	5.3	%	6.0	%	1.9

_______________________________________________________________________________

(1)

The difference between the Carrying Amount and the Outstanding Principal face amount of the loans held for investment consists of unamortized purchase discount, deferred loan fees and loan origination costs. The tables above exclude non-controlling interests held by third parties. A reconciliation of the Carrying Amount of loans held for investment portfolio, excluding non-controlling interests, to the Carrying Amount of loans held for investment, as included within the Company's consolidated balance sheets, is presented below.

(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, premium or discount) 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 June 30, 2016 and December 31, 2015 as weighted by the Outstanding Principal balance of each loan.

A reconciliation of the Company's loans held for investment portfolio, excluding non-controlling interests held by third parties, to the Company's loans held for investment as included within its consolidated balance sheets is as follows ($ in thousands):



	As of June 30, 2016
	Carrying Amount		Outstanding Principal
Total loans held for investment portfolio (excluding non-controlling interests held by third parties)	$	1,096,388	$	1,102,330
Non-controlling interest investment held by third parties	46,579		46,579
Loans held for investment	$	1,142,967	$	1,148,909



	As of December 31, 2015
	Carrying Amount		Outstanding Principal
Total loans held for investment portfolio (excluding non-controlling interests held by third parties)	$	1,127,812	$	1,133,842
Non-controlling interest investment held by third parties	46,579		46,579
Loans held for investment	$	1,174,391	$	1,180,421

A more detailed listing of the Company’s investment portfolio, excluding non-controlling interests, based on information available as of June 30, 2016 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

$82.9

$82.7

L+5.00%

6.3%

Jan 2017

I/O

Retail

75.9

75.7

L+4.00%

4.9%

Aug 2017

I/O

Mixed-use

65.6

65.1

L+4.16%

5.1%

Apr 2019

I/O

Hotel

56.0

55.5

L+4.75%

5.9%

Feb 2019

I/O

Mixed-use

60.5

60.0

L+3.60%

4.5%

Oct 2018

I/O

Multifamily

44.7

L+3.75%

4.7%

Sep 2016

I/O

(5)

Healthcare

41.6

41.5

L+5.00%

6.0%

Dec 2016

I/O

Industrial

MO/KS

37.1

37.0

L+4.30%

5.3%

Jan 2017

P/I

(6)

Hotel

36.5

36.3

L+4.75%

5.7%

June 2018

I/O

Hotel

35.2

35.1

L+4.15%

4.8%

July 2017

I/O

Office

34.0

33.9

L+3.65%

4.3%

Oct 2017

I/O

Industrial

32.5

32.4

L+4.20%

5.0%

May 2018

I/O

(6)

Retail

30.4

30.2

L+3.25%

4.1%

Sep 2018

I/O

Multifamily

28.7

28.6

L+3.75%

4.7%

Oct 2017

I/O

Office

29.2

29.0

L+3.75%

4.7%

Oct 2018

I/O

Mixed-use

28.3

L+4.25%

5.1%

Aug 2017

I/O

Office

25.5

25.4

L+5.00%

6.1%

Oct 2017

I/O

Multifamily

25.0

24.9

L+3.65%

4.6%

Jan 2017

I/O

Multifamily

24.2

24.1

L+3.80%

4.5%

Jan 2019

I/O

Multifamily

23.1

L+3.85%

5.0%

May 2017

I/O

Multifamily

22.1

22.0

L+4.25%

5.5%

Sep 2017

I/O

(5)

Office

19.5

19.4

L+3.95%

4.9%

Dec 2017

I/O

Office

15.9

L+3.75%

4.6%

July 2016

I/O

Office

14.9

15.0

L+4.50%

5.1%

July 2018

I/O

Multifamily

15.3

L+3.85%

4.7%

Nov 2017

I/O

Mixed-use

14.6

14.5

L+3.95%

5.0%

Sep 2017

I/O

Multifamily

12.4

12.3

L+3.75%

4.9%

Apr 2017

I/O

Subordinated Debt and Preferred Equity Investments:

Multifamily

GA/FL

40.8

40.4

L+11.85%

(7)

12.6%

June 2021

I/O

Multifamily

33.3

33.2

L+8.07%

8.8%

Jan 2019

I/O

Office

17.0

16.3

12.00%

12.8%

Jan 2026

I/O

(6)

Office

14.3

9.50%

9.5%

Aug 2017

I/O

Mixed-use

16.8

11.50%

(8)

12.1%

Nov 2016

I/O

Various

Diversified

(9)

48.5

47.5

10.95%

11.7%

Dec 2024

I/O

Total/Weighted Average

$1,102.3

$1,096.4

6.1%

_______________________________________________________________________________


(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, premium or discount) and assumes no dispositions, early prepayments or defaults. Unleveraged Effective Yield for each loan is calculated based on LIBOR as of June 30, 2016 or the LIBOR floor, as applicable. The Weighted Average Unleveraged Effective Yield is calculated based on the average of Unleveraged Effective Yield of all loans held by the Company as of June 30, 2016 as weighted by the Outstanding Principal balance of each loan.

(3)

Certain loans are subject to contractual extension options that 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 in connection with loan modifications.


(4)	I/O = interest only, P/I = principal and interest.


(5)	In June 2016, the Company extended the maturity dates on the senior Texas and Arizona loans to September 2016 and September 2017, respectively, in accordance with the loan agreements.

(6)

In January 2015, amortization began on the senior Missouri/Kansas loan, which had an outstanding principal balance of $37.1 million as of June 30, 2016. In May 2017, amortization will begin on the senior Ohio loan, which had an outstanding principal balance of $32.5 million as of June 30, 2016. In February 2021, amortization will begin on the subordinated New Jersey loan, which had an outstanding principal balance of $17.0 million as of June 30, 2016. The remainder of the loans in the Company’s principal lending portfolio are non-amortizing through their primary terms.


(7)	The preferred return is L+11.85% with 2.00% as payment-in-kind ("PIK"), to the extent cash flow is not available. There is no capped dollar amount on accrued PIK.


(8)	The interest rate is 11.50% with a 9.00% current pay and up to a capped dollar amount as PIK based on the borrower’s election. In July 2015, the Company entered into an amendment to increase the loan commitment and outstanding principal by $650 thousand at an interest rate of 15.00% on the increased commitment and outstanding principal only.


(9)	The preferred equity investment is in an entity whose assets are comprised of multifamily, student housing and medical office properties.

For the six months ended June 30, 2016, the activity in the Company's loan portfolio was as follows ($ in thousands):



Balance at December 31, 2015	$	1,174,391
Initial funding	179,022
Origination fees and discounts, net of costs	(1,924		)
Additional funding	18,912
Amortizing payments	(309		)
Loan payoffs	(229,138		)
Origination fee accretion	2,013
Balance at June 30, 2016	$	1,142,967

No impairment charges have been recognized during the three and six months ended June 30, 2016 and 2015.

4. MORTGAGE SERVICING RIGHTS

MSRs represent servicing rights retained by ACRE Capital for loans it originates and sells. The servicing fees are collected from the monthly payments made by the borrowers. ACRE Capital generally receives other remuneration including rights to various loan fees such as late charges, collateral re-conveyance charges, loan prepayment penalties, and other ancillary fees. In addition, ACRE Capital is also generally entitled to retain the interest earned on funds held pending remittance related to its collection of loan principal and escrow balances. As of June 30, 2016, ACRE Capital had a servicing portfolio (excluding ACRE’s loans held for investment portfolio; see Note 13 included in these consolidated financial statements) consisting of 950 loans with an unpaid principal balance of $4.9 billion, which includes 925 GSE / HUD loans with an unpaid principal balance of $4.2 billion and 25 other loans (managed by an affiliate of the manager of ACRE) with an unpaid principal balance of $695.5 million. As of December 31, 2015, ACRE Capital had a servicing portfolio (excluding ACRE’s loans held for investment portfolio; see Note 13 included in these consolidated financial statements) consisting of 973 loans with an unpaid principal balance of $4.9 billion, which includes 953 GSE / HUD loans with an unpaid principal balance of $4.3 billion and 20 other loans (managed by an affiliate of the manager of ACRE) with an unpaid principal balance of $554.8 million. As of June 30, 2016 and December 31, 2015, the carrying value of ACRE Capital’s MSRs for the GSE and HUD loan portfolio was approximately $60.2 million and $61.8 million, respectively.

Activity related to MSRs as of and for the six months ended June 30, 2016 and 2015 was as follows ($ in thousands):



Balance at December 31, 2015	$	61,800
MSRs purchased	323
Additions, following sale of loan	4,386
Changes in fair value	(3,895		)
Prepayments and write-offs	(2,397		)
Balance at June 30, 2016 (1)	$	60,217



Balance at December 31, 2014	$	58,889
Additions, following sale of loan	7,526
Changes in fair value	(5,183		)
Prepayments and write-offs	(1,155		)
Balance at June 30, 2015 (1)	$	60,077

_________________________________________________________________________

(1)

MSRs are included in mortgage servicing rights at fair value as of June 30, 2016 and December 31, 2015 in the reconciliation of the carrying amounts of major classes of assets and liabilities of the discontinued operations held for sale to assets and liabilities of discontinued operations held for sale that are presented separately in the consolidated balance sheets. See Note 16 included in these consolidated financial statements for more information.

As discussed in Note 2 included in these consolidated financial statements, the Company determines the fair values of the MSRs based on discounted cash flow models that calculate the present value of estimated future net servicing income. The fair values of ACRE Capital’s MSRs are subject to changes in discount rates. For example, a 100 basis point increase or decrease in the weighted average discount rate would decrease or increase, respectively, the fair value of ACRE Capital’s MSRs outstanding as of June 30, 2016 and December 31, 2015 by approximately $1.9 million and $2.0 million, respectively.

See Notes 1 and 16 included in these consolidated financial statements for further discussion of the sale of the Mortgage Banking segment.

5. DEBT

Financing Agreements

The Company, through its subsidiary ACRE Capital, borrows funds under the ASAP Line of Credit and the BAML Line of Credit (individually defined below and together, the “Warehouse Lines of Credit”). The Company also borrows funds under the Wells Fargo Facility, the Citibank Facility, the BAML Facility, the CNB Facilities, the MetLife Facility and the UBS Facilities (individually defined below and collectively, the "Secured Funding Agreements") and the Secured Term Loan (defined below). The Company refers to the Warehouse Lines of Credit, the Secured Funding Agreements and the Secured Term Loan as the “Financing Agreements.” As of June 30, 2016 and December 31, 2015, the outstanding balances and total commitments under the Financing Agreements consisted of the following ($ in thousands):




	June 30, 2016						December 31, 2015
	Outstanding Balance			Total Commitment			Outstanding Balance		Total Commitment
Wells Fargo Facility	$	147,681		$	325,000		$	101,473	$	225,000
Citibank Facility	225,523			250,000			112,827		250,000
BAML Facility	—			50,000			—		50,000
March 2014 CNB Facility	35,100			50,000			—		50,000
July 2014 CNB Facility	—			75,000			66,200		75,000
MetLife Facility	111,196			180,000			109,474		180,000
April 2014 UBS Facility	82,294			140,000			75,558		140,000
December 2014 UBS Facility	—		(1)	—		(1)	57,243		57,243
Secured Term Loan	75,000			155,000			75,000		155,000
ASAP Line of Credit	—			80,000		(2)	—		80,000		(2)
BAML Line of Credit	46,431			135,000			24,806		135,000
Total	$	723,225		$	1,440,000		$	622,581	$	1,397,243

______________________________________________________________________________


(1)	The December 2014 UBS Facility (defined below) has been repaid in full and its terms were not extended.


(2)	The commitment amount is subject to change at any time at Fannie Mae's discretion. See Note 17 included in these consolidated financial statements for more information on a subsequent event relating to the ASAP Line of Credit.

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 (excluding the Warehouse Lines of Credit, where ACRE Capital is the borrower). 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 arranged by Wells Fargo Bank, National Association ("Wells Fargo") (as amended and restated, the “Wells Fargo Facility”), which allows the Company to borrow up to $325.0 million. In June 2016, the Company amended the Wells Fargo Facility to increase the facility's size from $225.0 million to $325.0 million and extend the maturity date to December 14, 2017. The Company has two 12-month extensions at its option assuming no existing defaults under the Wells Fargo Facility and applicable extension fees are paid. 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. Beginning on December 14, 2015, new advances under the Wells Fargo Facility accrue interest at a per annum rate equal to the sum of (i) 30 day LIBOR plus (ii) a pricing margin range of 1.75% to 2.35%. Advances on loans made prior to December 14, 2015 under the Wells Fargo Facility continue to accrue interest at a per annum rate equal to the sum of (i) 30 day LIBOR plus (ii) a pricing margin range of 2.00% to 2.50%. The Company incurs a non-utilization fee of 25 basis points on the daily available balance of the Wells Fargo Facility to the extent less than 75% of the Wells Fargo Facility is utilized. For the three and six months ended June 30, 2016, the Company incurred a non-utilization fee of $80 thousand and $146 thousand, respectively. For both the three and six months ended June 30, 2015, the Company incurred a non-utilization fee of $55 thousand.

Citibank Facility

The Company is party to a $250.0 million master repurchase facility (the “Citibank Facility”) with Citibank, N.A. 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, N.A. in its sole discretion. Advances under the Citibank Facility accrue interest at a per annum rate equal to 30 day LIBOR plus a pricing margin of 2.00% to 2.50%, subject to certain exceptions. The maturity date of the Citibank Facility is December 8, 2016, subject to three 12-month extensions at the Company's option assuming no existing defaults under the Citibank Facility and applicable extension fees are paid. The Company incurs a non-utilization fee of 25 basis points on the daily available balance of the Citibank Facility. For the three and six months ended June 30, 2016, the Company incurred a non-utilization fee of $25 thousand and $93 thousand, respectively. For the three and six months ended June 30, 2015, the Company incurred a non-utilization fee of $97 thousand and $194 thousand, respectively. See Note 17 for more information on a subsequent event with respect to the Citibank Facility as included in these consolidated financial statements.

BAML Facility

The Company is party to a $50.0 million Bridge Loan Warehousing Credit and Security Agreement (the “BAML Facility”) with Bank of America, N.A. Under the BAML Facility, the Company may obtain advances secured by eligible commercial mortgage loans collateralized by healthcare facilities and other multifamily properties. In February 2016, the Company amended the BAML Facility to expand the eligible assets to include loans secured by general and affordable multifamily properties. Bank of America, N.A. may approve the loans on which advances are made under the BAML Facility in its sole discretion. In May 2016, the Company amended the BAML Facility to extend the period during which the Company may request individual loans under the facility to May 25, 2017. Individual advances under the BAML Facility generally have 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. In addition, in May 2016, the final maturity date of individual loans under the BAML Facility was extended to May 25, 2020. Advances under the BAML Facility accrue interest at a per annum rate equal to one-month LIBOR plus a spread ranging from 2.25% to 2.75% depending upon the type of asset securing such advance. The Company incurs a non-utilization fee of 12.5 basis points on the average daily available balance of the BAML Facility. For the three and six months ended June 30, 2016, the Company incurred a non-utilization fee of $16 thousand and $32 thousand, respectively. For both the three and six months ended June 30, 2015, the Company incurred a non-utilization fee of $5 thousand.

City National Bank Facilities

March 2014 CNB Facility

The Company is party to a $50.0 million secured revolving funding facility with City National Bank (the “March 2014 CNB Facility”). The Company is permitted to borrow funds under the March 2014 CNB Facility to finance investments and for other working capital and general corporate needs. In February 2016, the Company amended the March 2014 CNB Facility to extend the maturity date to March 11, 2017. The Company has one 12-month extension at its option provided that certain conditions are met and applicable extension fees are paid, which, if exercised, would extend the final maturity of the March 2014 CNB Facility to March 10, 2018. Advances under the March 2014 CNB Facility accrue interest at 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%; provided that in no event shall the interest rate be less than 3.00%. Unless at least 75% of the March 2014 CNB Facility is used on average, unused commitments under the March 2014 CNB Facility accrue unused line fees at the rate of 0.375% per annum. For the three and six months ended June 30, 2016, the Company incurred a non-utilization fee of $2 thousand and $45 thousand, respectively. For the three and six months ended June 30, 2015, the Company incurred a non-utilization fee of $47 thousand and $84 thousand, respectively.

July 2014 CNB Facility

The Company and certain of its subsidiaries are party to a $75.0 million revolving funding facility (the “July 2014 CNB Facility” and together with the March 2014 CNB Facility, the "CNB Facilities") with City National Bank. The Company is permitted to borrow funds under the July 2014 CNB Facility to finance investments and for other working capital and general corporate needs. The maturity date of the July 2014 CNB Facility is July 31, 2016. Advances under the July 2014 CNB Facility accrue interest at a per annum rate equal, at the Company’s option, to either (a) LIBOR for a one, two, three, six or, if available to all lenders, 12 month interest period plus 1.50% 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 0.25%; provided that in no event shall the interest rate be less than 1.50%. Unless at least 75% of the July 2014 CNB Facility is used on average, unused commitments under the July 2014 CNB Facility accrue unused line fees at the rate of 0.125% per annum. For the three and six months ended June 30, 2016, the Company incurred a non-utilization fee of $20 thousand and $26 thousand, respectively. For the three and six months ended June 30, 2015, the Company did not incur a non-utilization fee. See Note 13 included in these consolidated financial statements for more information on a credit support fee agreement and Note 17 included in these consolidated financial statements for more information on a subsequent event with respect to the July 2014 CNB Facility.

MetLife Facility

The Company and certain of its subsidiaries are party to a $180.0 million revolving master repurchase facility (the “MetLife Facility”) with Metropolitan Life Insurance Company (“MetLife”), 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 maturity date of the MetLife Facility is August 12, 2017, subject to two 12-month extensions at the Company’s option provided that certain conditions are met and applicable extension fees are paid. Advances under the MetLife Facility accrue interest at a per annum rate of 30 day LIBOR plus 2.35%. The Company will pay MetLife, if applicable, an annual make-whole fee equal to the amount by which the aggregate price differential paid over the term of the MetLife Facility is less than the defined minimum price differential, unless certain conditions are met.

UBS Facilities

April 2014 UBS Facility

The Company is party to a $140.0 million revolving master repurchase facility (the “April 2014 UBS Facility”) with UBS Real Estate Securities Inc. (“UBS”), pursuant to which the Company may sell, and later repurchase, commercial mortgage loans and, under certain circumstances, other assets meeting defined eligibility criteria that are approved by UBS in its sole discretion. The maturity date of the April 2014 UBS Facility is October 21, 2018, subject to annual extensions in UBS' sole discretion. The price differential (or interest rate) on the April 2014 UBS Facility is one-month LIBOR plus (a) 1.88% per annum, for assets that are subject to an advance for one year or less, (b) 2.08% per annum, for assets that are subject to an advance in excess of one year but less than two years, and (c) 2.28% per annum, for assets that are subject to an advance for greater than two years; in each case, excluding amortization of commitment and exit fees. Upon termination of the April 2014 UBS Facility, the Company will pay UBS, if applicable, the amount by which the aggregate price differential paid over the term of the April 2014 UBS Facility is less than the defined minimum price differential and an exit fee, in each case, unless certain conditions are met.

December 2014 UBS Facility

The Company was party to a global master repurchase agreement (the “December 2014 UBS Facility,” and together with the April 2014 UBS Facility, the "UBS Facilities") with UBS AG, pursuant to which the Company sold, and later repurchased, certain retained subordinate notes in the Company's commercial mortgage-backed securities ("CMBS") securitization (the “Purchased Securities”) for an aggregate purchase price equal to $57.2 million. The scheduled repurchase date of the December 2014 UBS Facility was July 6, 2016 (the “Repurchase Date”). The transaction fee (or interest rate), which was payable monthly on the December 2014 UBS Facility, was equal to one-month LIBOR plus 2.74% per annum on the outstanding amount. On June 17, 2016, the December 2014 UBS Facility was repaid in full and its terms were not extended. See Note 15 included in these consolidated financial statements for information on the termination of the CMBS securitization.

Secured Term Loan

The Company and certain of its subsidiaries are party to a $155.0 million Credit and Guaranty Agreement (the "Secured Term Loan") with Highbridge Principal Strategies, LLC, as administrative agent, and DBD Credit Funding LLC, as collateral agent. The Company made an initial draw of $75.0 million on December 9, 2015, the closing date. The remaining $80.0 million of the Secured Term Loan may be borrowed during the nine-month commitment period following the closing date, subject to the satisfaction of certain conditions. The Secured Term Loan carries a coupon of LIBOR plus 6.0% with a LIBOR floor of 1.0% on drawn amounts. The Secured Term Loan has a maturity date of December 9, 2018. The Company is subject to a monthly non-utilization fee equal to 1.0% per annum on the unused commitment amount during the nine-month commitment period following the closing date. For the three and six months ended June 30, 2016, the Company incurred a non-utilization fee of $202 thousand and $404 thousand, respectively. The original issue discount on the initial draw was $1.1 million, which represented 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. The estimated effective interest rate of the Secured Term Loan, which is equal to LIBOR (subject to a floor of 1.0%) plus the stated rate of 6.0% plus the accretion of the original issue discount and associated costs, was 8.5% for the three and six months ended June 30, 2016.

Warehouse Lines of Credit

ASAP Line of Credit

ACRE Capital is party to a multifamily as soon as pooled (“ASAP”) sale agreement with Fannie Mae (the “ASAP Line of Credit”) to finance installments received from Fannie Mae. To the extent the ASAP Line of Credit remains active through utilization, there is no expiration date. The commitment amount is subject to change at any time at Fannie Mae's discretion. Fannie Mae advances payment to ACRE Capital in two separate installments according to the terms as set forth in the ASAP sale agreement. The first installment is considered an advance to ACRE Capital from Fannie Mae and not a sale until the second advance and settlement is made. The ASAP Line of Credit is included in warehouse lines of credit as of June 30, 2016 and December 31, 2015 in the reconciliation of the carrying amounts of major classes of assets and liabilities of the discontinued operations held for sale to assets and liabilities of discontinued operations held for sale that are presented separately in the consolidated balance sheets. See Note 16 included in these consolidated financial statements for more information. See Note 17 included in these consolidated financial statements for more information on a subsequent event relating to the ASAP Line of Credit.

BAML Line of Credit

ACRE Capital is party to a $135.0 million line of credit agreement with Bank of America, N.A. (as amended and restated, the “BAML Line of Credit”), which is used to finance mortgage loans originated by ACRE Capital. The stated interest rate on the BAML Line of Credit is LIBOR Daily Floating Rate plus 1.60%. In June 2016, the Company amended the BAML Line of Credit to extend the maturity date to June 29, 2017. ACRE Capital incurs a non-utilization fee of 12.5 basis points on the daily available balance of the BAML Line of Credit to the extent less than 40% of the BAML Line of Credit is utilized. For the three and six months ended June 30, 2016, the Company incurred a non-utilization fee of $34 thousand and $57 thousand, respectively. For the three and six months ended June 30, 2015, the Company incurred a non-utilization fee of $17 thousand and $32 thousand, respectively. The BAML Line of Credit is included in warehouse lines of credit as of June 30, 2016 and December 31, 2015 in the reconciliation of the carrying amounts of major classes of assets and liabilities of the discontinued operations held for sale to assets and liabilities of discontinued operations held for sale that are presented separately in the consolidated balance sheets. See Note 16 included in these consolidated financial statements for more information. See Note 17 included in these consolidated financial statements for more information on a subsequent event relating to the BAML Line of Credit.

2015 Convertible Notes

In December 2012, the Company issued $69.0 million aggregate principal amount of unsecured 7.00% Convertible Senior Notes due 2015 (the "2015 Convertible Notes"). The 2015 Convertible Notes bore interest at a rate of 7.00% per year, payable semiannually in arrears on June 15 and December 15 of each year, beginning on June 15, 2013. The effective interest rate of the 2015 Convertible Notes, which was equal to the stated rate of 7.00% plus the accretion of the original issue discount and associated costs, was 9.4% for the three and six months ended June 30, 2015. For the three and six months ended June 30, 2015, the interest expense incurred on the 2015 Convertible Notes was $1.6 million and $3.2 million, respectively. The 2015 Convertible Notes matured on December 15, 2015 and were fully repaid at par.

6. ALLOWANCE FOR LOSS SHARING

Loans originated and sold by ACRE Capital to Fannie Mae under the Fannie Mae DUS program are subject to the terms and conditions of a Master Loss Sharing Agreement, which was amended and restated during 2012. Under the Master Loss Sharing Agreement, ACRE Capital is responsible for absorbing certain losses incurred by Fannie Mae with respect to loans originated under the DUS program, as described below in more detail. The compensation for this risk of loss is a component of servicing fees on the loan.

The losses incurred with respect to individual loans are allocated between ACRE Capital and Fannie Mae based on the loss level designation (“Loss Level”) for the particular loan. Loans are designated as Loss Level I, Loss Level II or Loss Level III. All loans are designated Loss Level I unless Fannie Mae and ACRE Capital agree upon a different Loss Level for a particular loan at the time of the loan commitment, or if Fannie Mae determines that the loan was not underwritten, processed or serviced according to Fannie Mae guidelines.

Losses on Loss Level I loans are shared 33.33% by ACRE Capital and 66.67% by Fannie Mae. The maximum amount of ACRE Capital’s risk-sharing obligation with respect to any Loss Level I loan is 33.33% of the original principal amount of the loan. Losses incurred in connection with Loss Level II and Loss Level III loans are allocated disproportionately to ACRE Capital until ACRE Capital has absorbed the maximum level of its risk-sharing obligation with respect to the particular loan. The maximum loss allocable to ACRE Capital for Loss Level II loans is 30% of the original principal amount of the loan, and for Loss Level III loans is 40% of the original principal amount of the loan.

According to the Master Loss Sharing Agreement, Fannie Mae may unilaterally increase the amount of the risk-sharing obligation of ACRE Capital with respect to individual loans without regard to a particular Loss Level if (a) the loan does not meet specific underwriting criteria, (b) the loan is defaulted within 12 months after it is purchased by Fannie Mae, or (c) Fannie Mae determines that there was fraud, material misrepresentation or gross negligence by ACRE Capital in its underwriting, closing, delivery or servicing of the loan. Under certain limited circumstances, Fannie Mae may require ACRE Capital to absorb 100% of the losses incurred on a loan by requiring ACRE Capital to repurchase the loan.

The amount of loss incurred on a particular loan is determined at the time the loss is incurred, for example, at the time a property is foreclosed by Fannie Mae (whether acquired by Fannie Mae or a third party) or at the time a loan is modified in connection with a default. Losses may be determined by reference to the price paid by a third party at a foreclosure sale or by reference to an appraisal obtained by Fannie Mae in connection with the default on the loan.

In connection with the Company’s acquisition of ACRE Capital, Alliant, Inc., a Florida corporation, and The Alliant Company, LLC, a Florida limited liability company (the “Sellers”), are jointly and severally obligated to fund directly (if permitted) or to reimburse ACRE Capital for amounts due and owing after the closing date to Fannie Mae pursuant to ACRE Capital’s allowance for loss sharing with respect to settlement of certain DUS program mortgage loans originated and serviced by ACRE Capital, subject to certain limitations. In addition, the Sellers are jointly and severally obligated to indemnify ACRE Capital for, among other things, certain losses arising from Sellers’ failure to fulfill the funding or reimbursement obligations described above. As of both June 30, 2016 and December 31, 2015, the preliminary estimate of the portion of such contributions towards such losses relating to the allowance for loss sharing of ACRE Capital was $377 thousand. Additionally, with respect to the settlement of certain non-designated DUS program mortgage loans originated and serviced by ACRE Capital, the Sellers are jointly and severally obligated to fund directly (if permitted) or to reimburse ACRE Capital in each of the three 12-month periods following the closing date for eighty percent (80%) of amounts due and owing after the closing date to Fannie Mae pursuant to ACRE Capital’s allowance for loss sharing in excess of $2.0 million during such 12 month period; provided that in no event shall Sellers obligations exceed in the aggregate $3.0 million for the entire three year period.

ACRE Capital uses several tools to manage its risk-sharing obligation, including maintenance of disciplined underwriting and approval processes and procedures, and periodic review and evaluation of underwriting criteria based on

underlying multifamily housing market data and limitation of exposure to particular geographic markets and submarkets and to individual borrowers. In situations where payment under the guarantee is probable and estimable on a specific loan, the Company records an additional liability. The amount of the provision reflects the Company’s assessment of the likelihood of payment by the borrower, the estimated disposition value of the underlying collateral and the level of risk-sharing. Historically, among other factors, the loss recognition occurs at or before the loan becoming 60 days delinquent.

A summary of the Company’s allowance for loss sharing as of and for the six months ended June 30, 2016 and 2015 is as follows ($ in thousands):



Balance at December 31, 2015	$	8,969
Current period provision for loss sharing	(289		)
Settlements/Writeoffs	—
Balance at June 30, 2016 (1)	$	8,680



Balance at December 31, 2014	$	12,349
Current period provision for loss sharing	(991		)
Settlements/Writeoffs	(175		)
Balance at June 30, 2015 (1)	$	11,183

_________________________________________________________________________

(1)

Allowance for loss sharing is included in allowance for loss sharing as of June 30, 2016 and December 31, 2015 in the reconciliation of the carrying amounts of major classes of assets and liabilities of the discontinued operations held for sale to assets and liabilities of discontinued operations held for sale that are presented separately in the consolidated balance sheets. See Note 16 included in these consolidated financial statements for more information.

As of both June 30, 2016 and December 31, 2015, the maximum quantifiable allowance for loss sharing associated with the Company’s guarantees under the Fannie Mae DUS agreement was $1.1 billion from a total recourse at risk pool of $2.9 billion and $3.1 billion, respectively. Additionally, as of June 30, 2016 and December 31, 2015, the non-at risk pool was $55.1 million and $64.8 million, respectively. The at risk pool is subject to Fannie Mae’s Master Loss Sharing Agreement and the non-at risk pool is not subject to such agreement. The maximum quantifiable allowance for loss sharing is not representative of the actual loss the Company would incur. The Company would be liable for this amount only if all of the loans it services for Fannie Mae, for which the Company retains some risk of loss, were to default and all of the collateral underlying these loans was determined to be without value at the time of settlement.

7. COMMITMENTS AND CONTINGENCIES

As of June 30, 2016 and December 31, 2015, 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):



	As of
	June 30, 2016			December 31, 2015
Total commitments	$	1,188,858		$	1,232,163
Less: funded commitments	(1,102,330		)	(1,133,842		)
Total unfunded commitments	$	86,528		$	98,321

Commitments to extend credit by ACRE Capital are generally agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Occasionally, the commitments may expire without being drawn upon; therefore, the total commitment amounts do not necessarily represent future cash requirements. As of June 30, 2016 and December 31, 2015, ACRE Capital had the following commitments to sell and fund loans ($ in thousands):



	As of
	June 30, 2016		December 31, 2015
Commitments to sell loans	$	242,947	$	237,372
Commitments to fund loans	$	192,016	$	207,566

The Company from time to time may be party to litigation relating to claims arising in the normal course of business. As of June 30, 2016, the Company is not aware of any legal claims that could materially impact its business, financial condition or results of operations.

8. DERIVATIVES

Non-designated Hedges

Derivatives not designated as hedges are derivatives that do not meet the criteria for hedge accounting under GAAP or for which the Company has not elected to designate as hedges.

Loan commitments and forward sale commitments

Through its subsidiary, ACRE Capital, the Company enters into loan commitments with borrowers on loan originations whereby the interest rate on the prospective loan is determined prior to funding. In general, ACRE Capital simultaneously enters into forward sale commitments with investors in order to hedge against the interest rate exposure on loan commitments. The forward sale commitment with the investor locks in an interest rate and price for the sale of the loan. The terms of the loan commitment with the borrower and the forward sale commitment with the investor are matched with the objective of hedging interest rate risk. Loan commitments and forward sale commitments are considered undesignated derivative instruments. Accordingly, such commitments, along with any related fees received from potential borrowers, are recorded at fair value, with changes in fair value recorded in earnings. For the three and six months ended June 30, 2016, the Company entered into 13 and 19 loan commitments, respectively, and 13 and 19 forward sale commitments, respectively. For the three and six months ended June 30, 2015, the Company entered into 31 and 47 loan commitments, respectively, and 31 and 47 forward sale commitments, respectively.

As of June 30, 2016, the Company had nine loan commitments with a total notional amount of $192.0 million and 18 forward sale commitments with a total notional amount of $242.9 million, with maturities ranging from 20 days to 17 months that were not designated as hedges in qualifying hedging relationships. As of December 31, 2015, the Company had 16 loan commitments with a total notional amount of $207.6 million and 24 forward sale commitments with a total notional amount of $237.4 million, with maturities ranging from 25 days to 17 months that were not designated as hedges in qualifying hedging relationships.

MSR purchase commitments

In July 2015, ACRE Capital entered into a purchase agreement with a third party to purchase the servicing rights for a HUD loan (the "July 2015 HUD Loan"). Under the purchase agreement, the purchase price for the servicing rights was $325 thousand and ACRE Capital assumed the rights to service the loan in March 2016.

The table below presents the fair value of the Company’s derivative financial instruments as well as their classification within the Company’s consolidated balance sheets as of June 30, 2016 and December 31, 2015 ($ in thousands):



	As of
	June 30, 2016					December 31, 2015
	Balance Sheet Location		Fair Value			Balance Sheet Location		Fair Value
Derivatives not designated as hedging instruments
Loan commitments	Assets of discontinued operations held for sale	(1)	$	15,532		Assets of discontinued operations held for sale	(1)	$	8,450
Forward sale commitments	Assets of discontinued operations held for sale	(1)	73			Assets of discontinued operations held for sale	(1)	25
MSR purchase commitment	Assets of discontinued operations held for sale	(1)	—			Assets of discontinued operations held for sale	(1)	330
Forward sale commitments	Liabilities of discontinued operations held for sale	(1)	(7,541		)	Liabilities of discontinued operations held for sale	(1)	(1,868		)
Total derivatives not designated as hedging instruments			$	8,064				$	6,937

_________________________________________________________________________

(1)

Derivative financial instruments are included in other assets or other liabilities as of June 30, 2016 and December 31, 2015 in the reconciliation of the carrying amounts of major classes of assets and liabilities of the discontinued operations held for sale to assets and liabilities of discontinued operations held for sale that are presented separately in the consolidated balance sheets. See Note 16 included in these consolidated financial statements for more information.

9. EQUITY

Stock Buyback Program

In May 2015, the Company announced that the Company's board of directors authorized the Company to repurchase up to $20 million of the Company's outstanding common stock over a period of one year (the "Stock Buyback Program"). In February 2016, the Company's board of directors increased the size of the existing $20 million Stock Buyback Program to $30 million and extended the Stock Buyback Program through March 31, 2017. Purchases made pursuant to the Stock Buyback Program will be made in either the open market or in privately negotiated transactions, from time to time and as permitted by federal securities laws and other legal requirements. Repurchases may be suspended or discontinued at any time. In connection with this Stock Buyback Program, in March 2016, the Company entered into a Rule 10b5-1 plan to repurchase shares of the Company’s common stock in accordance with certain parameters set forth in the Stock Buyback Program. During the six months ended June 30, 2016, the Company repurchased a total of 129,916 shares of the Company's common stock in the open market for an aggregate purchase price of approximately $1.4 million, including expenses paid. The shares were repurchased at an average price of $11.06 per share, including expenses paid.

Common Stock

There were no shares issued in public or private offerings for the six months ended June 30, 2016. See "Equity Incentive Plan" below for shares issued under the plan.

Equity Incentive Plan

On April 23, 2012, the Company adopted an equity incentive plan (the “2012 Equity Incentive Plan”). Pursuant to the 2012 Equity Incentive Plan, the Company may grant awards consisting of restricted shares of the Company’s common stock, restricted stock units and/or other equity-based awards to the Company’s outside directors, employees, officers, ACREM and other eligible awardees under the plan, subject to an aggregate limitation of 690,000 shares of common stock (7.5% of the issued and outstanding shares of the Company’s common stock immediately after giving effect to the issuance of the shares sold in the IPO). Any restricted shares of the Company’s common stock and restricted stock units will be accounted for under FASB ASC Topic 718, Compensation—Stock Compensation, resulting in share-based compensation expense equal to the grant date fair value of the underlying restricted shares of common stock or restricted stock units.

Restricted stock 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 grant, classified as dividends paid, equal to the per-share dividends received by common stockholders.

The following table details the restricted stock grants awarded as of June 30, 2016:



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
Total		280,619

The following tables summarize the non-vested shares of restricted stock and the vesting schedule of shares of restricted stock for the Company's directors and officers and employees of ACRE Capital as of June 30, 2016:

Schedule of Non-Vested Share and Share Equivalents



	Restricted Stock Grants—Directors		Restricted Stock Grants—Officer		Restricted Stock Grants—Employees		Total
Balance as of December 31, 2015	16,945		4,686		62,563		84,194
Granted	34,680		—		—		34,680
Vested	(13,166	)	(3,124	)	(7,646	)	(23,936	)
Forfeited	(1,277	)	—		—		(1,277	)
Balance as of June 30, 2016	37,182		1,562		54,917		93,661

Future Anticipated Vesting Schedule



	Restricted Stock Grants—Directors	Restricted Stock Grants—Officer	Restricted Stock Grants—Employees (1)	Total
2016	15,668	1,562	30,381	47,611
2017	16,510	—	—	16,510
2018	3,336	—	—	3,336
2019	1,668	—	—	1,668
2020	—	—	—	—
Total	37,182	1,562	30,381	69,125

______________________________________________________________________________


(1)	Future anticipated vesting related to an employee of ACRE Capital that was granted restricted stock that vests in proportion to certain financial performance targets being met over a specified period of time is not included due to uncertainty in actual vesting date.

Non-Controlling Interests

The non-controlling interests held by third parties in the Company's consolidated balance sheets represent the equity interests in a limited liability company, ACRC KA Investor LLC ("ACRC KA") that are not owned by the Company. A portion

of ACRC KA's consolidated equity and net income are allocated to these non-controlling interests held by third parties based on their pro-rata ownership of ACRC KA. As of both June 30, 2016 and December 31, 2015, ACRC KA's total equity was $96.0 million, of which $49.0 million was owned by the Company and $47.0 million was allocated to non-controlling interests held by third parties. See Note 15 included in these consolidated financial statements for more information on ACRC KA.

10. EARNINGS PER SHARE

The following information sets forth the computations of basic and diluted earnings per common share from continuing operations and discontinued operations held for sale for the three and six months ended June 30, 2016 and 2015 ($ in thousands, except share and per share data):



	For the three months ended June 30,				For the six months ended June 30,
	2016		2015		2016		2015
Net income from continuing operations, less non-controlling interests	$	6,004	$	6,786	$	11,474	$	13,988
Net income from discontinued operations held for sale, net of income taxes	$	2,689	$	2,181	$	2,355	$	2,041
Divided by:
Basic weighted average shares of common stock outstanding:	28,428,703		28,491,711		28,479,015		28,488,022
Non-vested restricted stock	67,130		94,069		69,929		97,263
Diluted weighted average shares of common stock outstanding:	28,495,833		28,585,780		28,548,944		28,585,285
Basic earnings per common share (1):
Net income from continuing operations	$	0.21	$	0.24	$	0.40	$	0.49
Net income from discontinued operations held for sale	0.09		0.08		0.08		0.07
Net income	$	0.31	$	0.31	$	0.49	$	0.56
Diluted earnings per common share (1):
Net income from continuing operations	$	0.21	$	0.24	$	0.40	$	0.49
Net income from discontinued operations held for sale	0.09		0.08		0.08		0.07
Net income	$	0.31	$	0.31	$	0.48	$	0.56

______________________________________________________________________________

(1)

The Company has considered the impact of the 2015 Convertible Notes and the restricted shares on diluted earnings per common share. The number of shares of common stock that the 2015 Convertible Notes are convertible into were not included in the computation of diluted net income per common share because the inclusion of those shares would have been anti-dilutive for the three and six months ended June 30, 2015.

11. INCOME TAX

The Company established a taxable REIT subsidiary (“TRS”), TRS Holdings, in connection with the acquisition of ACRE Capital. In addition, in December 2013 and March 2014, the Company formed ACRC W TRS and ACRC U TRS, respectively, in order to issue and hold certain loans intended for sale. The TRS’ income tax provision (continuing and discontinued operations) consisted of the following for the three and six months ended June 30, 2016 and 2015 ($ in thousands):



	For the three months ended June 30,					For the six months ended June 30,
	2016			2015		2016			2015
Current - continuing operations	$	3		$	3	$	7		$	(18	)
Current - discontinued operations held for sale	(127		)	74		(402		)	(532		)
Deferred - continuing operations	—			—		—			—
Deferred - discontinued operations held for sale	1,159			683		682			668
Total income tax expense	$	1,035		$	760	$	287		$	118

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of the assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Deferred tax assets and liabilities are presented net by tax jurisdiction and are included within assets or liabilities of discontinued operations held for sale in the consolidated balance sheets. As of June 30, 2016 and December 31, 2015, TRS Holdings’ U.S. tax jurisdiction was in a net deferred tax liability position. The TRS’ are not currently subject to tax in any foreign tax jurisdictions.

As of June 30, 2016, TRS Holdings had a net operating loss carryforward of $7.8 million, which may be carried back to 2013 and forward 20 years. The following table presents the U.S. tax jurisdiction and the tax effects of temporary differences on the respective net deferred tax assets and liabilities of TRS Holdings ($ in thousands):



	As of
	June 30, 2016			December 31, 2015
Deferred tax assets
Mortgage servicing rights	$	5,374		$	4,083
Net operating loss carryforward	2,906			2,906
Other temporary differences	2,290			1,762
Sub-total-deferred tax assets	10,570			8,751
Deferred tax liabilities
Basis difference in assets from acquisition of ACRE Capital	(2,709		)	(2,709		)
Components of gains from mortgage banking activities	(11,782		)	(9,344		)
Amortization of intangible assets	(360		)	(297		)
Sub-total-deferred tax liabilities	(14,851		)	(12,350		)
Net deferred tax liability	$	(4,281	)	$	(3,599	)

Based on TRS Holdings’ assessment, it is more likely than not that the deferred tax assets will be realized through future taxable income.

For discontinued operations held for sale, the TRS’ recognize interest and penalties related to unrecognized tax benefits within net income from discontinued operations held for sale, net of income taxes, in the consolidated statements of operations. For discontinued operations held for sale, accrued interest and penalties, if any, are included within liabilities of discontinued operations held for sale in the consolidated balance sheets. For continuing operations, the TRS’ recognize interest and penalties related to unrecognized tax benefits within income tax expense in the consolidated statements of operations. For continuing operations, accrued interest and penalties, if any, are included within other liabilities in the consolidated balance sheets.

The following table is a reconciliation of the TRS' statutory U.S. federal income tax rate to the TRS' effective tax rate for the three and six months ended June 30, 2016 and 2015:



	For the three months ended June 30,				For the six months ended June 30,
	2016		2015		2016		2015
Federal statutory rate	35.0	%	35.0	%	35.0	%	35.0	%
State income taxes	3.6	%	2.4	%	3.6	%	2.4	%
Federal benefit of state tax deduction	(1.3	)%	(0.8	)%	(1.3	)%	(0.8	)%
Effective tax rate	37.3	%	36.6	%	37.3	%	36.6	%

As of June 30, 2016, tax years 2012 through 2015 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.

Intercompany Notes

In connection with the acquisition of ACRE Capital, the Company partially capitalized TRS Holdings with a $44.0 million note. In October 2014, the Company entered into an $8.0 million revolving promissory note with TRS Holdings (collectively, the two intercompany notes described above are referred to as, the “Intercompany Notes”). As of both June 30, 2016 and December 31, 2015, the outstanding principal balance of the Intercompany Notes was $51.9 million. The income statement effects of the Intercompany Notes are eliminated in consolidation for financial reporting purposes, but the interest income and expense from the Intercompany Notes will affect the taxable income of the Company and TRS Holdings.

12. FAIR VALUE OF FINANCIAL INSTRUMENTS

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 for a financial instrument in a current sale, which assumes an orderly transaction between market participants on the measurement date. The financial instruments recorded at fair value on a recurring basis in the Company’s consolidated financial statements are derivative instruments, MSRs and loans held for sale. 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 I-Quoted prices in active markets for identical assets or liabilities.


•	Level II-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 III-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 instruments, 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 instruments 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.

Financial Instruments Reported at Fair Value

The Company has certain assets and liabilities that are required to be recorded at fair value on a recurring basis in accordance with GAAP. Financial instruments reported at fair value in the Company's consolidated financial statements include MSRs, MSR purchase commitments, loan commitments, forward sale commitments and loans held for sale. Summarized

financial information for the discontinued Mortgage Banking segment is shown in Note 16 included in these consolidated financial statements, which includes the financial instruments noted above.

The following table summarizes the levels in the fair value hierarchy into which the Company’s financial instruments were categorized as of June 30, 2016 and December 31, 2015 ($ in thousands):



	Fair Value as of June 30, 2016
	Level I		Level II		Level III			Total
Loans held for sale	$	—	$	54,698	$	—		$	54,698
Mortgage servicing rights	—		—		60,217			60,217
Derivative assets:
Loan commitments	—		—		15,532			15,532
Forward sale commitments	—		—		73			73
Derivative liabilities:
Forward sale commitments	—		—		(7,541		)	(7,541		)



	Fair Value as of December 31, 2015
	Level I		Level II		Level III			Total
Loans held for sale	$	—	$	30,612	$	—		$	30,612
Mortgage servicing rights	—		—		61,800			61,800
Derivative assets:
Loan commitments	—		—		8,450			8,450
Forward sale commitments	—		—		25			25
MSR purchase commitment	—		—		330			330
Derivative liabilities:
Forward sale commitments	—		—		(1,868		)	(1,868		)

There were no transfers between the levels as of June 30, 2016 and December 31, 2015. Transfers between levels are recognized based on the fair value of the financial instrument at the beginning of the period.

Loan commitments and forward sale commitments are valued based on a discounted cash flow model that incorporates changes in interest rates during the period. The MSRs and the MSR purchase commitment are valued based on discounted cash flow models that calculate the present value of estimated future net servicing income. The model considers contractually specified servicing fees, prepayment assumptions, delinquency rates, late charges, other ancillary revenue, costs to service and other economic factors. The loans held for sale are valued based on discounted cash flow models that incorporate quoted observable prices from market participants. The valuation of derivative instruments are determined using widely accepted valuation techniques, including market yield analyses and discounted cash flow analysis on the expected cash flows of each derivative.

The following table summarizes the significant unobservable inputs the Company used to value financial instruments categorized within Level III as of June 30, 2016 ($ in thousands):

Unobservable Input

Fair

Primary

Weighted

Asset Category

Value

Valuation Technique

Input

Range

Average

Mortgage servicing rights

60,217

Discounted cash flow

Discount rate

8 - 14%

11.0%

Loan commitments and forward sale commitments

8,064

Discounted cash flow

Discount rate

8 - 12%

9.3%

The following table summarizes the significant unobservable inputs the Company used to value financial instruments categorized within Level III as of December 31, 2015 ($ in thousands):

Unobservable Input

Fair

Primary

Weighted

Asset Category

Value

Valuation Technique

Input

Range

Average

Mortgage servicing rights

61,800

Discounted cash flow

Discount rate

8 - 14%

11.1%

Loan commitments and forward sale commitments

6,607

Discounted cash flow

Discount rate

8 - 12%

8.2%

MSR purchase commitment

330

Discounted cash flow

Discount rate

8.0%

The tables above are not intended to be all-inclusive, but instead are intended to capture the significant unobservable inputs relevant to the Company’s determination of fair values. Changes in market yields, discount rates or EBITDA multiples, each in isolation, may have changed the fair value of the financial instruments. Generally, an increase in market yields or discount rates or a decrease in EBITDA multiples may have resulted in a decrease in the fair value of the financial instruments.

The Company’s management is responsible for the Company’s fair value valuation policies, processes and procedures related to Level III financial instruments. The Company’s management reports to the Company’s Chief Financial Officer, who has final authority over the valuation of the Company’s Level III financial instruments.

The following table summarizes the change in derivative assets and liabilities classified as Level III related to mortgage banking activities as of and for the six months ended June 30, 2016 and 2015 ($ in thousands):



Balance as of December 31, 2015	$	6,937
Settlements	(18,516		)
Realized gains (losses) recorded in net income (1)	11,579
Unrealized gains (losses) recorded in net income (1)	8,064
Balance as of June 30, 2016	$	8,064



Balance as of December 31, 2014	$	1,670
Settlements	(11,102		)
Realized gains (losses) recorded in net income (1)	9,432