The information contained in this section should be read in conjunction with our consolidated financial statements and notes thereto appearing elsewhere in this Quarterly Report. Dollar amounts are in thousands, except for share and per share data, percentages and as otherwise indicated. In addition, some of the statements in this quarterly report (including in the following discussion) constitute forward-looking statements, which relate to future events or the future performance or financial condition of Ares Commercial Real Estate Corporation (except where the context suggests otherwise, together with our consolidated subsidiaries, the "Company," "ACRE," "we," "us," or "our"). The forward-looking statements contained in this quarterly report involve a number of risks and uncertainties, including statements concerning:

† use of proceeds from our initial public offering (the "IPO");

† our business and investment strategy;

† our projected operating results;

†          the timing of cash flows, if any, from our investments;



†          the state of the U.S. economy generally or in specific geographic
regions;

† defaults by borrowers in paying debt service on outstanding items;

† actions and initiatives of the U.S. Government and changes to U.S. Government policies;

† our ability to obtain financing arrangements;

† the amount of commercial mortgage loans requiring refinancing;

† financing and advance rates for our target investments;

† our expected leverage;

† general volatility of the securities markets in which we may invest;

† the impact of a protracted decline in the liquidity of credit markets on our business;

† the uncertainty surrounding the strength of the U.S. economic recovery;

† the return or impact of current and future investments;

† allocation of investment opportunities to us by Ares Commercial Real Estate Management LLC (our "Manager" or "ACREM");

† changes in interest rates and the market value of our investments;

† effects of hedging instruments on our target investments;

† rates of default or decreased recovery rates on our target investments;

† the degree to which our hedging strategies may or may not protect us from interest rate volatility;

† changes in governmental regulations, tax law and rates, and similar matters (including interpretation thereof);

† our ability to maintain our qualification as a real estate investment trust ("REIT");

† our ability to maintain our exemption from registration under the Investment Company Act of 1940 ("1940 Act");

† availability of investment opportunities in mortgage-related and real estate-related investments and securities;

† the ability of our Manager to locate suitable investments for us, monitor, service and administer our investments and execute our investment strategy;

† availability of qualified personnel;

† estimates relating to our ability to make distributions to our stockholders in the future;

† our understanding of our competition; and

† market trends in our industry, interest rates, real estate values, the debt securities markets or the general economy.

We use words such as "anticipates," "believes," "expects," "intends," "will," "should," "may" and similar expressions to identify forward-looking statements, although not all forward-looking statements include these words. Our actual results and condition could differ materially from those projected in the forward-looking statements for any reason, including the factors set forth in "Risk Factors" below and in the final prospectus relating to our IPO (the "Prospectus"), dated April 25, 2012, filed with the Securities and Exchange Commission ("SEC") in accordance with Rule 424(b) of the Securities Act of 1933, as amended (the "Securities Act"), on April 27, 2012.

We have based the forward-looking statements included in this Quarterly Report on information available to us on the date of this Quarterly Report, and we assume no obligation to update any such forward-looking statements. Although we undertake no obligation to revise or update any forward-looking statements, whether as a result of new information, future events or otherwise, you are advised to consult any additional disclosures that we may make directly to you or through reports that we have filed or in the future may file with the SEC, including registration statements on Forms S-11 or S-3, annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K.

Overview

We are a recently organized specialty finance company focused on originating, investing in and managing middle-market commercial real estate loans and other commercial real estate (or "CRE") related investments. We target borrowers whose capital needs are not being met in the market by offering customized financing solutions. We implement a strategy focused on direct origination combined with experienced portfolio management through our Manager's servicer, which is a Standard & Poor's-ranked commercial primary servicer and commercial special servicer that is included on S&P's Select Servicer List, to meet our borrowers' and sponsors' needs.

Our investment objective is to generate attractive risk-adjusted returns for our stockholders, primarily through dividends and distributions and secondarily through capital appreciation. We believe the availability of capital in the CRE middle-market is limited and borrowers and sponsors have the greatest need for customized solutions in this segment of the market. We act as a single "one stop" financing source by providing our customers with one or more of our customized financing solutions. Our customized financing solutions are comprised of our "target investments," which include the following:

† "Transitional senior" mortgage loans that provide strategic, flexible, short-term financing solutions on transitional CRE middle-market assets. These assets are typically properties that are the subject of a business plan that is expected to enhance the value of the property. The mortgage loans are usually funded over time as the borrower's business plan for the property is executed. They also typically have a lower initial loan-to-value ratios as compared to "stretch senior" mortgage loans, with the loan-to-value ratios increasing as the loan is further funded over time;

† "Stretch senior" mortgage loans that provide flexible "one stop" financing on quality CRE middle-market assets. These assets are typically stabilized or near-stabilized properties with healthy balance sheets and steady cash flows, with the mortgage loans having higher leverage (and thus higher loan-to-value ratios) than conventional mortgage loans and are typically fully funded at closing and non-recourse to the borrower (as compared to conventional mortgage loans, which are usually recourse to the borrower);

† "Subordinate debt" mortgage loans (including subordinate tranches of first lien mortgages, or B-Notes) and mezzanine loans, both of which provide subordinate financing on quality CRE middle-market assets; and

† "Other CRE debt and preferred equity investments," together with selected other income-producing equity investments.

We are externally managed and advised by our Manager pursuant to the terms of a management agreement. Our Manager is an affiliate of Ares Management LLC ("Ares Management"), a global alternative asset manager and SEC registered investment adviser.

We are a Maryland corporation that commenced investment operations on December 9, 2011. We completed our IPO on May 1, 2012.

We are an "emerging growth company," as defined in the Jumpstart Our Business Startups Act of 2012 (the "JOBS Act"), and we are eligible to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not "emerging growth companies" including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a non-binding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. We have not made a decision whether to take advantage of any or all of these exemptions. If we do take advantage of any of these exemptions, we do not know if some investors will find our common stock less attractive as a result. The result may be a less active trading market for our common stock and our stock price may be more volatile.

In addition, Section 107 of the JOBS Act also provides that an "emerging growth company" can take advantage of the extended transition period provided in
Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. However, we are choosing to "opt out" of such extended transition period, and as a result, we will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies. Section 107 of the JOBS Act provides that our decision to opt out of the extended transition period for complying with new or revised accounting standards is irrevocable.

We could remain an "emerging growth company" for up to five years, or until the earliest of (i) the last day of the first fiscal year in which our annual gross revenues exceed $1 billion, (ii) the date that we become a "large accelerated filer" as defined in Rule 12b-2 under the Exchange Act, which would occur if the market value of our common stock that is held by non-affiliates exceeds $700 million as of the last business day of our most recently completed second fiscal quarter, or (iii) the date on which we have issued more than $1 billion in non-convertible debt during the preceding three year period.

Factors Impacting Our Operating Results

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

Changes in Fair Value of Our Assets. We generally hold our target investments as long-term investments. We evaluate our investments for impairment on at least a quarterly basis and impairments will be recognized when it is probable that we 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, or if repayment is expected solely from the collateral, the fair value of the collateral.

Loans are collateralized by real estate and as a result, the extent and impact of any credit deterioration associated with the performance and/or value of the underlying collateral property, as well as the financial and operating capability of the borrower, are regularly evaluated. 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.

As of June 30, 2012 and December 31, 2011, all loans were paying in accordance with their terms. There were no impairments during the six months ended June 30, 2012.

Although we generally hold our target investments as long-term investments, we may occasionally classify some of our investments as available-for-sale. Investments classified as available-for-sale will be carried at their fair value, with changes in fair value recorded through accumulated other comprehensive income, a component of stockholders' equity, rather than through earnings. We do not expect to hold any of our investments for trading purposes.

Changes in Market Interest Rates. With respect to our proposed business operations, increases in interest rates, in general, may over time cause:

† the interest expense associated with our borrowings to increase;

† the value of our mortgage loans to decline;

† coupons on our mortgage loans to reset to higher interest rates; and

† to the extent we enter into interest rate swap agreements as part of our hedging strategy, the value of these agreements to increase.

Conversely, decreases in interest rates, in general, may over time cause:

† the interest expense associated with our borrowings to decrease, subject to any applicable floors;

† the value of our mortgage loan portfolio to increase, subject to any applicable floors;

† to the extent we enter into interest rate swap agreements as part of our hedging strategy, the value of these agreements to decrease; and

† coupons on our floating rate mortgage loans to reset to lower interest rates.

Credit Risk. We are subject to varying degrees of credit risk in connection with our target investments. Our Manager seeks to mitigate this risk by seeking to originate or acquire investments of higher quality at appropriate prices given anticipated and unanticipated losses, by employing a comprehensive review and selection process and by proactively monitoring originated or acquired investments. Nevertheless, unanticipated credit losses could occur that could adversely impact our operating results and stockholders' equity.

Market Conditions. We believe that our target investments currently present attractive risk-adjusted return profiles. We believe that the U.S. CRE markets are currently in the initial stages of a recovery from the severe economic downturn that began in 2007. Following a dramatic decline in CRE lending in 2008 and 2009, debt capital has become more readily available for select stabilized, high quality assets in certain locations such as gateway cities, but remains limited for many other types of properties. For example, we currently anticipate a high demand for customized debt financing from borrowers or sponsors who are looking to refinance indebtedness that is maturing in the next two to five years or are seeking shorter-term debt solutions as they reposition their properties. In addition, we believe the uncertainty surrounding multifamily mortgage finance may provide us incremental lending opportunities in the future as Congress considers restructuring Fannie Mae and Freddie Mac, who have been the most significant sources of multifamily debt capital in recent years.

We believe that as a result of the aforementioned economic downturn and the subsequent banking regulatory reform, a number of lenders and finance companies who traditionally served the CRE middle-market, are burdened with legacy portfolio issues, balance sheet constraints or have otherwise exited the market. In particular, smaller and regional banks who represented a large portion of the CRE market prior to the downturn have sharply curtailed their CRE lending activities. We believe that this decreased competition will create a favorable investment environment for the foreseeable future. We also believe that we are well positioned to capitalize on the expected demand generated by the estimated $1.8 trillion of CRE debt maturing between 2012 and 2016 (as reported in Commercial Real Estate Outlook: Top Ten Issues in 2012 published by Deloitte & Touche LLP).

Results of Operations

We commenced operations on December 9, 2011 and completed our IPO on May 1, 2012. Therefore, we have no period to compare operating results for the three or six months ended June 30, 2012. In addition, the proceeds of our IPO were used in part to fully repay all outstanding balances on our various secured financing agreements, including all accrued interest due, and to fully redeem all of our issued and outstanding shares of Series A Convertible Preferred Stock, par value $0.01 per share ("Series A Preferred Stock"), including payment of all dividends due and applicable redemption premiums. As a result, at June 30, 2012, we had no outstanding debt under our various secured financing agreements, no issued and outstanding Series A Preferred Stock and $87,455 in unrestricted cash and cash equivalents. We are currently in the process of investing the proceeds of our IPO. Results for the initial period of our operations are not indicative of the results we expect when our investment strategy has been fully implemented.

For the three and six months ended June 30, 2012, our net income (loss) attributable to our common stockholders was ($225) and ($341), respectively or ($0.03) and ($0.09) per basic and diluted common share, respectively. For the three and six months ended June 30, 2012, we earned approximately $1,206 and $1,816, respectively in net interest margin. For the three and six months ended June 30, 2012, interest income of $1,559 and $2,508, respectively, was generated by average earning assets of $77.8 million and $62.1 million, respectively, offset by $353 and $692, respectively, of interest expense from average secured financing agreements of $15.6 million and $21.3 million, respectively. We had lower overall average debt balances as we fully repaid the debt on May 1, 2012, using the proceeds of our IPO.

For the three and six months ended June 30, 2012, we incurred expenses of $1,381 and $1,483, respectively. Related party expenses for the three and six months ended June 30, 2012 include $419 and $419, respectively in management fees due to our Manager and $308 and $319, respectively for our share of allocable general and administrative expenses. These expenses reflect the management contract that went into effect on May 1, 2012, the date of our IPO. Also included in general and administrative expenses reimbursed to our Manager for the three and six months ended June 30, 2012 are $6 and $17, respectively, of servicing fees. Servicing fees were charged to an affiliate of our Manager through May 1, 2012. Other expenses for the three and six months ended June 30, 2012, includes professional fees of $331 and $414, respectively, and general and administrative expenses of $323 and $331, respectively.

For the three and six months ended June 30, 2012, we paid $50 and $102, respectively, in dividends to the holders of Series A Preferred Stock. The Series A Preferred Stock was redeemed on May 1, 2012 using the proceeds of our IPO. For the six months ended June 30, 2012, we incurred $572 in accretion of redemption premium related to the Series A Preferred Stock.

Our investment portfolio is comprised of the following at June 30, 2012:

                                                                       Investment
                                                                      Information
                                        Our Total      Carrying     Funded    Origination   Maturity    Interest
Property Type              Location    Commitment        Value      Amount       Date       Date(1)       Rate
Stretch Senior Mortgage
Loans
Boston CBD* Office
Building: 12-story
office building
(approximately
152,000 sq. ft.)          Boston MA    $    34,926 (2) $  34,623   $ 34,926      2/8/2012   3/1/2015   L+5.65%(3)

Transitional Senior
Mortgage Loans
Austin Office Building:
Two
properties consisting
of four
low-rise office
buildings (aggregate                                                                                   L+5.75%-
of approximately
270,000 sq. ft.)          Austin TX         37,950        29,648     29,976     2/13/2012   3/1/2015   L+5.25%(4)

Denver Tech Center
Office Building:
Low-rise office
building
(approximately 173,000
sq. ft.)                  Denver CO         11,000         6,031      6,123    12/29/2011   1/1/2015   L+5.50%(5)

Subordinated Debt
Investments
Fort Lauderdale CBD*
Office
Building: 28-story
office building                                                                                        L+10.75%-
(approximately 257,000    Ft.
sq. ft.)                  Lauderdale
                          FL                15,000 (6)     7,871      8,000     1/27/2012   2/1/2015   L+8.18%(7)

Total                                  $    98,876     $  78,173   $ 79,025

(2) This $35,000 loan was fully funded at origination. Subsequent to the initial funding through June 30, 2012, we received amortization payments on principal of $74, which reduced our total commitment and the funded amount accordingly.

(3) This loan was originated with a 1.0% origination fee, paid to us, and a 0.5% exit fee payable to us upon the earlier of repayment or the loan's maturity. The interest rate for this loan is L+5.65% with the LIBOR component subject to a minimum rate of 0.65%.

(4) This loan was originated with a 1.0% origination fee, paid to us, and a 1.0% exit fee payable to us upon the earlier of repayment or the loan's maturity. The initial interest rate for this loan of L+5.75% steps down based on performance hurdles to L+5.25%. The LIBOR component of the rate on this loan is subject to a minimum rate of 1.0%.

(5) This loan was originated with a 1.0% origination fee, paid to us, and a 1.0% exit fee payable to us upon the earlier of repayment or the loan's maturity. The interest rate for this loan is L+5.50% with the LIBOR component subject to a minimum rate of 1.0%.

(6) The total commitment we co-originated was a $37,000 first mortgage, of which a $22,000 A-Note was fully funded by Citibank, N.A. We retained a $15,000 B-Note.

(7) This loan was originated with a 1.0% origination fee, paid to us, and a 0.5% exit fee payable to us upon the earlier of repayment or the loan's maturity. The whole loan, consisting of the A-Note and our B-Note, was priced at L+5.25% on a cumulative basis with the LIBOR component subject to a minimum rate of 0.75%. The fully funded A-Note priced at L+3.25% (with the LIBOR component of the rate subject to a minimum rate of 0.75%) resulting in an interest rate on our B-Note at initial funding of $8,000 of L+10.75% (with the LIBOR component subject to a minimum rate of 0.75%). Upon the B-Note becoming fully funded at $15,000, its effective interest rate will decrease to L+8.18% (with the LIBOR component subject to a minimum rate of 0.75%).

* Central Business District

Liquidity and Capital Resources

Liquidity is a measure of our ability to meet potential cash requirements, including ongoing commitments to repay borrowings, fund and maintain our assets and operations, make distributions to our stockholders and meet other general business needs. We will use significant cash to purchase our target investments, repay principal and pay interest on our borrowings, make distributions to our stockholders and fund our operations, including base management fees, incentive management fees and reimbursements for expenses for our share of overhead expense incurred by our Manager. Our primary sources of cash will generally consist of unused borrowing capacity under our financing sources, the net proceeds of future offerings, payments of principal and interest we receive on our portfolio of assets and cash generated from our operating results. We expect that our primary sources of financing will be, to the extent available to us, through (a) credit facilities, (b) securitizations, (c) other sources of private financing, including warehouse and repurchase facilities and (d) public offerings of our equity or debt securities. In the future, we may utilize other sources of financing to the extent available to us.

Secured Financing Arrangements



The sources of financing for our target investments are described below.



                                       June 30, 2012                 December 31, 2011
                                Outstanding        Total        Outstanding         Total
(dollar amounts in millions)      Balance        Commitment       Balance        Commitment
Wells Fargo Facility           $           -    $      172.5   $           -    $        75.0
Citibank Facility                          -            86.2               -             50.0
Capital One Facility                       -            50.0               -                -
Total                          $           -    $      308.7   $           -    $       125.0

The secured financing arrangements are generally collateralized by assignments of specific loans held for investment originated by us. The secured financing arrangements are guaranteed by the Company.

Generally, the Company partially offsets interest rate risk by matching the interest index of loans held for investments with the secured financing agreement used to fund them.

Wells Fargo Facility

. . .