The Company makes forward-looking statements herein and will make forward-looking statements in future filings with the Securities and Exchange Commission ("SEC"), press releases or other written or oral communications within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act), and Section 21E of the Securities Exchange Act of 1934, as amended, (the "Exchange Act"). For these statements, the Company claims the protections of the safe harbor for forward-looking statements contained in such Section. Forward-looking statements are subject to substantial risks and uncertainties, many of which are difficult to predict and are generally beyond the Company's control. These forward-looking statements include information about possible or assumed future results of the Company's business, financial condition, liquidity, results of operations, plans and objectives. When the Company uses the words "believe," "expect," "anticipate," "estimate," "plan," "continue," "intend," "should," "may" or similar expressions, it intends to identify forward-looking statements. Statements regarding the following subjects, among others, may be forward-looking: market trends in the Company's industry, interest rates, real estate values, the debt securities markets or the general economy or the demand for commercial real estate loans; the Company's business and investment strategy; operating results and potential asset performance; actions and initiatives of the U.S. government and changes to U.S. government policies and the execution and impact of these actions, initiatives and policies; the state of the U.S. economy generally or in specific geographic regions; economic trends and economic recoveries; the Company's ability to obtain and maintain financing arrangements, including securitizations; the anticipated shortfall of debt financing from traditional lenders; the volume of short-term loan extensions; the demand for new capital to replace maturing loans; expected leverage; general volatility of the securities markets in which the Company participates; changes in the value of the Company's assets; the scope of the Company's target assets; interest rate mismatches between the Company's target assets and any borrowings used to fund such assets; changes in interest rates and the market value of the Company's target assets; changes in prepayment rates on the Company's target assets; effects of hedging instruments on the Company's target assets; rates of default or decreased recovery rates on the Company's target assets; the degree to which hedging strategies may or may not protect the Company from interest rate volatility; impact of and changes in governmental regulations, tax law and rates, accounting guidance and similar matters; the Company's ability to maintain its qualification as a real estate investment trust ("REIT") for U.S. federal income tax purposes; the Company's ability to maintain its exemption from registration under the Investment Company Act of 1940 (the "1940 Act"); the availability of opportunities to acquire commercial mortgage-related, real estate-related and other securities; the availability of qualified personnel; estimates relating to the Company's ability to make distributions to its stockholders in the future; and the Company's understanding of its competition.

The forward-looking statements are based on the Company's beliefs, assumptions and expectations of its future performance, taking into account all information currently available to it. Forward-looking statements are not predictions of future events. These beliefs, assumptions and expectations can change as a result of many possible events or factors, not all of which are known to the Company. See Item "1A - Risk Factors" of the Company's annual report on Form 10-K. These and other risks, uncertainties and factors, including those described in the annual, quarterly and current reports that the Company files with the SEC, could cause its actual results to differ materially from those included in any forward-looking statements the Company makes. All forward-looking statements speak only as of the date they are made. New risks and uncertainties arise over time and it is not possible to predict those events or how they may affect us. Except as required by law, the Company is not obligated to, and does not intend to, update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Overview

The Company is a REIT that primarily originates, acquires, invests in and manages performing commercial first mortgage loans, CMBS, subordinate financings and other commercial real estate-related debt investments in the United States. These asset classes are referred to as the Company's target assets.

The Company is externally managed and advised by ACREFI Management, LLC (the "Manager"), an indirect subsidiary of Apollo Global Management, LLC, together with its subsidiaries, ("Apollo"), a leading global alternative investment manager with a contrarian and value oriented investment approach in private equity, credit-oriented capital markets and real estate. Apollo had total assets under management of approximately $105 billion as of June 30, 2012.

The Manager is led by an experienced team of senior real estate professionals who have significant experience in commercial property investing, financing and ownership. The Manager benefits from the investment, finance and managerial expertise of Apollo's private equity, credit-oriented capital markets and real estate investment professionals. The Company believes its relationship with Apollo provides the Company with significant advantages in sourcing, evaluating, underwriting and managing investments in the Company's target assets.

Market Overview

In the first half of 2012, the commercial real estate lending market continued to slowly recover from the downturn experienced as part of the correction in the global financial markets which began in mid-2007. The Company estimates that from 2012 to 2015, there is in excess of $1 trillion of commercial real estate debt that is scheduled to mature and this presents a compelling opportunity for the Company to invest capital in its target assets at attractive risk adjusted returns. While the volume of impending maturities and the need for refinancing is significant, the demand for new capital to refinance maturing commercial mortgage debt continues to be somewhat tapered by the granting of extensions by lenders across the commercial mortgage loan industry. The Company believes that the significant long-term opportunity still remains for lenders to capitalize on the impending maturity wall despite the fact that the volume of loan modifications has had a meaningful impact on the timing of the maturities and the related opportunity.

Recent action by the Federal Reserve has sent spreads to post-crisis lows and will likely result in a wave of refinancing and new issue during the remainder of 2012 and into the beginning of 2013. In the first nine months of 2012, approximately $31 billion of CMBS was issued in the United States, an increase of approximately 15% over the same period in 2011. In the third quarter alone, approximately $13 billion of CMBS was issued. Since early 2010, approximately $75 billion of CMBS has been issued in the United States. While this is significantly less than the $229 billion that was issued in 2007, it is clear evidence that the lending market for commercial real estate has begun to stabilize and continues to grow.

Despite the recent strength of the CMBS market, the pace of CMBS issuance is still moderate relative to the peak of the market, and lenders still appear to be more focused on stabilized cash flowing assets with lower loan-to-value ratios. This should continue to provide the Company with increased opportunities to originate mezzanine financings with respect to those parts of the financing capital structure which are unsuitable to be sold as part of CMBS.

Critical Accounting Policies

A summary of the Company's accounting policies is set forth in its annual report on Form 10-K for the year ended December 31, 2011 under Item 7 - Management Discussion and Analysis - Critical Accounting Policies.

Financial Condition and Results of Operations

(in thousands-except share and per share data)

Investment Activity

Commercial mortgage loans. During March 2012, the Company closed a $15,000 mezzanine loan secured by a pledge of the equity interest in a borrower that owns a 226-room hotel in midtown Manhattan. The mezzanine loan is part of a $70,000, four-year (two-year initial term with two one-year extension options) floating-rate whole loan originated on February 15, 2012 to refinance the property. The interest rate on the mezzanine loan is one-month LIBOR+11.00% with a 0.50% LIBOR floor and 0.50% fee for the second extension. The mezzanine loan has been underwritten to generate an IRR of approximately 12.8%. See "-Investments" for a discussion of how IRR is calculated.

During April 2012, the Company purchased two senior sub-participation interests (an aggregate face of $23,844) in a first mortgage loan (the "Loan") with a current balance of $120,000 which is secured by over 20 acres of land in South Boston, Massachusetts. The land is currently used as parking with approximately 3,325 spaces, but the various parcels that comprise the site are entitled for over 5.8 million of buildable square feet. The two senior sub-participation interests have a 27.5% LTV (based on a current appraisal) and a debt yield of 8.2% (based on the Manager's underwritten net operating income for the parking operations).

The aggregate purchase price of the two senior sub-participation interests was $18,599 (including a 3% brokerage fee which will be expensed during the period ending June 30, 2012). The senior sub-participations each have an interest rate of one-month LIBOR + 1.72% and mature in December 2012. Upon the repayment of $33,000 of the Loan (of which the Company will receive its pro-rata share) and the payment of an extension fee equal to 0.50% of the outstanding balance of the Loan, the Loan, including the senior sub participation interests, can be extended through December 2013. Assuming the extension occurs, the senior sub-participation interests have been underwritten to generate an IRR of approximately 21.7%. See "-Investments" for a discussion of how IRR is calculated.

During April 2012, a $24,000 two-year fixed rate first mortgage loan on a 155-room boutique hotel in midtown Manhattan was repaid. The loan had an interest rate of 8.00%. The Company repaid $15,444 of borrowings under the JPMorgan Facility in conjunction with this repayment.

Subordinate loans. During January 2012, the Company closed a $15,000 mezzanine loan secured by a pledge of the equity interests in a borrower that purchased a 165-room hotel in midtown Manhattan. The mezzanine loan is part of a $80,000, three-year (two year initial term with one one-year extension option) financing package split into a $65,000 first mortgage loan and a $15,000 mezzanine loan. The mezzanine loan is an interest-only fixed rate loan that bears interest at 12.00%, with a 1.00% origination fee, a 0.50% extension fee and a 1.50% exit fee. The mezzanine loan has an appraised LTV of approximately 60% and has been underwritten to generate an IRR of approximately 14.0%. See "-Investments" for a discussion of how IRR is calculated.

During June 2012, the Company modified the $40,000 subordinate loan secured by a ski resort in California. The modification was completed in connection with a modification of both the senior and junior loans in order to provide financial covenant relief to the borrower and included the addition of a 0.5% amendment fee and a 1.0% exit fee upon repayment of the loan. In addition, the interest rate on the mezzanine loan was increased by 0.75% to 14% until the earlier of
(i) the loan being back in compliance with its original covenants; or (ii) April 2014. As of September 30, 2012, the mezzanine loan was current on its interest payments to the Company. All of the additional remuneration will be recognized over the remaining life of the loan.

During July 2012, the Company closed a $6,525 mezzanine loan secured by a pledge of the equity interest in a borrower that owns a mixed use project, which consists of 55,585 square feet of Class-A retail and 114,476 square feet of Class-A office in Chapel Hill, North Carolina. The mezzanine loan is part of a new $40,000 10-year fixed-rate financing comprised of a $33,475 first mortgage and the $6,525 mezzanine loan. The whole loan amortizes on a 30-year schedule but all amortization is applied to the first mortgage. The mezzanine loan is an interest-only, fixed rate loan that has an interest rate of 11.1%. The mezzanine loan has an appraised LTV of approximately 77% and has been underwritten to generate an IRR of approximately 12%. See "-Investments" for a discussion of how IRR is calculated.

During September 2012, the Company originated a $10,000 mezzanine loan secured by a pledge of the equity interests in a borrower that owns an 845,241 square foot Class A office tower complex in downtown Kansas City, Missouri. The office tower complex is comprised of a 34-story office tower, a 10-story office building, a two story office building, two separate parking garages comprising 2,470 parking spaces and approximately 30,000 square feet of ground-floor retail. The mezzanine loan is part of a $70,000, 10-year fixed-rate financing with 30-year amortization that will be comprised of the mezzanine loan and a $60,000 first mortgage loan. The interest rate on the mezzanine loan is 11.75%. The mezzanine loan has an appraised loan to value of 72% and has been underwritten to generate an IRR of approximately 12.6%. See "-Investments" for a discussion of how IRR is calculated.

AAA-rated CMBS - During March 2012, the Company sold AAA-rated CMBS with an amortized cost of $137,423 resulting in net realized gains of $262. The sale generated proceeds of $14,621 after the repayment of $123,064 of debt under the Wells Facility.

Hilton CMBS - During June 2012, the Company purchased CMBS with a face amount of $74,854 for which the obligors are certain special purpose entities formed to hold substantially all of the assets of Hilton Worldwide, Inc. (the "Hilton CMBS"). The Hilton CMBS has a current interest rate of one-month LIBOR+1.75% which increases to LIBOR+2.30% on November 12, 2012, LIBOR+3.30% on November 12, 2013 and LIBOR+3.80% on November 12, 2014, and an estimated LTV of approximately 35% to 45%. The Hilton CMBS receives principal repayments according to a schedule that is approximately equivalent to a 16-year amortization schedule. The Hilton CMBS was purchased for $70,655 and financed with $49,459 of borrowings under the Wells Facility, which was amended to provide up to $100,000 of additional financing for the Hilton CMBS. This portion of the Wells Facility matures in November 2014 and may be extended for an additional year upon the payment of an extension fee equal to 0.50% on the then aggregate outstanding repurchase price for all such assets.

Investments

The following table sets forth certain information regarding the Company's
investments at September 30, 2012:



                                                                                 Remaining
                                                                                 Weighted                                                                    Current         Levered
                                                                 Weighted         Average                                     Remaining                      Weighted        Weighted
                                     Face        Amortized       Average           Life                        Cost of        Debt Term      Equity at       Average         Average
Description                         Amount          Cost          Yield           (years)         Debt          Funds         (years)*          cost          IRR **         IRR ***
CMBS - AAA                         $ 219,706     $  223,781            4.2 %            2.1     $ 194,069           1.8 %            0.9     $   29,712           15.6 %          15.6 %
CMBS - Hilton                         74,054         70,521            5.6              3.1        48,898           2.6              3.1         21,623           11.7            11.7
First mortgages                      108,308        104,101           11.3              2.1             3           2.7              0.3        104,098           11.3            20.2
Subordinate loans                    196,401        196,177           13.2              5.4            -             -                -         196,177           13.9            13.9
Repurchase agreements                 10,975         10,975           13.0              1.5            -             -                -          10,975           13.7            13.7

Total                              $ 609,444     $  605,555            8.7 %            3.3     $ 242,970           1.9 %            1.3     $  362,585           13.1 %          14.9 %

* Assumes extension options on Wells Facility with respect to the Hilton CMBS are exercised. See "-Borrowings under Various Financing Arrangements" for a discussion of the Wells Facility.

** The internal rates of return ("IRR") for the investments shown in the above table reflect the returns underwritten by the Manager, calculated on a weighted average basis assuming no dispositions, early prepayments or defaults but assumes extensions as well as the cost of borrowings and derivative instruments under the Wells Facility. IRR is the annualized effective compounded return rate that accounts for the time-value of money and represents the rate of return on an investment over a holding period expressed as a percentage of the investment. It is the discount rate that makes the net present value of all cash outflows (the costs of investment) equal to the net present value of cash inflows (returns on investment). It is derived from the negative and positive cash flows resulting from or produced by each transaction (or for a transaction involving more than one investment, cash flows resulting from or produced by each of the investments), whether positive, such as investment returns, or negative, such as transaction expenses or other costs of investment, taking into account the dates on which such cash flows occurred or are expected to occur, and compounding interest accordingly. There can be no assurance that the actual IRRs will equal the underwritten IRRs shown in the table. See "Risk Factors - The Company may not achieve its targeted internal rate of return on its investments which may lead to future returns that may be significantly lower than anticipated" included in the Company's annual report on Form 10-K for the year ended December 31, 2011 for a discussion of some of the factors that could adversely impact the returns received by the Company from the investments shown in the table over time.

*** Substantially all of the Company's borrowings under the JPMorgan Facility were repaid upon the closing of the Company's Series A Preferred Stock offering in August 2012. The Company's ability to achieve its underwritten leveraged weighted average IRR with regard to its portfolio of first mortgage loans is additionally dependent upon the Company reborrowing approximately $53,000 under the JPMorgan Facility or any replacement facility. Without such reborrowing, the leveraged weighted average IRRs will be as indicated in the current weighted average IRR column above.

Net Interest Income

The following table sets forth certain information regarding the Company's net
investment income for the three and nine months ended September 30, 2012 and
2011:



                                              Three months ended September 30,                          Nine months ended September 30,
                                                                  Change        Change                                      Change        Change
                                       2012          2011        (amount)         (%)           2012          2011         (amount)         (%)
Interest income from:
Securities                           $  3,674      $  6,316      $  (2,642 )       41.8 %     $ 12,227      $  19,419      $  (7,192 )      (37.0 )%
Commercial mortgage loans               2,825         2,276            549         24.1 %        7,851          6,886            965         14.0 %
Subordinate loans                       6,144         3,784          2,360         62.4 %       17,316          8,861          8,455         95.4 %
Repurchase agreements                   2,361         1,576            785         49.8 %        5,920          3,188          2,732         85.7 %
Interest expense                       (1,768 )      (3,716 )        1,948        (52.4 )%      (6,939 )      (10,836 )        3,897        (36.0 )%

Net interest income                  $ 13,236      $ 10,236      $   3,000         29.3 %     $ 36,375      $  27,518      $   8,857         32.2 %

Net interest income for the three and nine months ended September 30, 2012, respectively, increased $3,000, or 29.3%, and $8,857, or 32.2%, from the same periods in 2011. The increase is primarily the result of additional interest income from subordinate loans and repurchase agreements offset by a decline in interest income from securities. The decline in interest from securities for the three and nine months ended September 30, 2012, respectively, of $2,642, or 41.8%, and $7,192, or 37.0%, is attributable to the repayment of these securities as they near maturity. The increase in interest income for the three and nine months ended September 30, 2012, related to subordinate loans and repurchase agreements of $2,360, or 62.4%, and $8,455, or 95.4%, respectively, is primarily attributable to the full deployment of capital raised from the Company's follow-on offering in July 2011 as well as the deployment of additional investable capital generated with the refinancing of the Company's TALF debt. The increase in interest income for the three and nine months ended September 30, 2012, related to repurchase agreements of $785, or 49.8%, and $2,732, or 85.7%, respectively, is primarily attributable to $1,817 of make-whole interest payments received during the nine months ended September 30, 2012.

Interest expense for the three and nine months ended September 30, 2012, respectively, decreased $1,948, or 52.4%, and $3,897, or 36.0%, from the same periods in 2011. The decrease is primarily the result of the refinancing of the Company's TALF debt with borrowings under the Wells Facility as well as the repayment of debt as the related CMBS have been repaid. In addition, the Company repaid substantially all of the borrowings outstanding under the JPMorgan Facility upon the close of the Company's Series A Preferred Stock offering in August 2012.

Operating Expenses

The following table sets forth the Company's operating expenses for the three
and nine months ended September 30, 2012 and 2011.



                                             Three months ended September 30,                      Nine months ended September 30,
                                                                 Change       Change                                  Change       Change
                                       2012         2011        (amount)        (%)          2012        2011        (amount)        (%)
General and administrative expense   $   1,154     $   879     $      275        31.3 %    $  3,985     $ 2,935     $    1,050        35.8 %
Stock-based compensation expense         1,276         418            858       205.3 %       3,244       1,154          2,090       181.1 %
Management fee expense                   1,518       1,241            277        22.3 %       4,099       3,430            669        19.5 %

Total operating expense              $   3,948     $ 2,538     $    1,410        55.6 %    $ 11,328     $ 7,519     $    3,809        50.7 %

General and administrative expense for the three and nine months ended September 30, 2012, respectively, increased $275, or 31.3%, and $1,050 or 35.8%, from the same periods in 2011. The increase is primarily attributable one-time expenses related to the closing of loans during the three and nine months ended September 30, 2012.

Stock-based compensation expense for the three and nine months ended September 30, 2012, respectively, increased $858, or 205.3%, and $2,090, or 181.1%, from the same periods in 2011. The increase is primarily attributable to the grant of 308,750 RSUs during August 2011 as well as the increase in the price of the Company's stock since the end of 2011. Share-based payments are discussed further in the accompanying consolidated financial statements - Note
11 - Share-Based Payments.

Management fee expense for the three and nine months ended September 30, 2012, respectively, increased $277, or 22.3%, and $669, or 19.5%, from the same periods in 2011. The increase is primarily attributable to increases in the Company's stockholders' equity (as defined in the Management Agreement) as a result of the Company's follow-on equity offering that was completed in July 2011 and to a lesser extent the Series A Preferred Stock offering that closed in August 2012. Management fees and the relationship between the Company and its Manager are discussed further in the accompanying consolidated financial statements - Note 10 - Related Party Transactions.

Realized and unrealized gain/loss

In order to mitigate interest rate risk resulting from the Company's floating-rate borrowings under the Wells Facility, the Company has entered into interest rate swaps and caps which are intended to economically hedge the a portion of its floating-rate borrowings through the expected maturity of the underlying collateral as well as the potential extension of the underlying collateral.

The Company has elected not to pursue hedge accounting for these derivative instruments and records the change in estimated fair value related to these interest rate agreements in earnings. The Company also elected to record the change in estimated fair value related to certain CMBS securing the Wells Facility in earnings by electing the fair value option. These elections allow the Company to align the change in the estimated fair value of the Wells Facility collateral and related interest rate derivatives without having to apply complex hedge accounting provisions.

During March 2012, the Company sold CMBS with an amortized cost of $137,423 resulting in net realized gains of $262. The sale generated proceeds of $14,621 after the repayment of $123,064 of debt under the Wells Facility.

The following amounts related to realized and unrealized gains (losses) on the Company's CMBS and derivative instruments are included in the Company's consolidated statement of operations for three and nine months ended September 30, 2012 and 2011:

. . .