Overview
We are a specialty finance company primarily engaged in originating and investing in commercial real estate ("CRE") loans and related investments. We are externally managed by ACREM, a subsidiary of Ares Management Corporation (NYSE: ARES) ("Ares Management"), a publicly traded, leading global alternative asset manager, pursuant to the terms of the management agreement datedApril 25, 2012 , as amended, between us and our Manager (the "Management Agreement"). From the commencement of our operations in late 2011, we have been primarily focused on directly originating and managing a diversified portfolio of CRE debt-related investments for our own account. We were formed and commenced operations in late 2011. We are aMaryland corporation and completed our initial public offering inMay 2012 . We have elected and qualified to be taxed as a REIT forUnited States federal income tax purposes under the Internal Revenue Code of 1986, as amended, commencing with our taxable year endedDecember 31, 2012 . We generally will not be subject toUnited States federal income taxes on our REIT taxable income as long as we annually distribute to stockholders an amount at least equal to our REIT taxable income prior to the deduction for dividends paid and comply with various other requirements as a REIT. We also operate our business in a manner that is intended to permit us to maintain our exemption from registration under the 1940 Act.
Developments During the Second Quarter of 2021:
•ACRE originated a$19.5 million senior mortgage loan on a student housing property located inAlabama . •ACRE originated a$15.0 million mezzanine loan on a portfolio of self storage properties located inNew Jersey . Subsequent to the origination of the$15.0 million mezzanine loan, ACRE purchased a$40.5 million senior mortgage loan on the same portfolio of self storage properties from the Ares Warehouse Vehicle. •ACRE purchased a$53.3 million senior mortgage loan on a residential condominium property located inNew York from a third party. At the purchase date, ACRE already owned the corresponding$18.6 million mezzanine loan. •ACRE purchased a$100.7 million senior mortgage loan on an industrial property located inIllinois from the Ares Warehouse Vehicle. •ACRE originated a$37.5 million senior mortgage loan on a multifamily property located inSouth Carolina . •ACRE purchased a$44.7 million senior mortgage loan on an industrial property located inNew Jersey from the Ares Warehouse Vehicle. •ACRE Commercial Mortgage 2017-FL3 Ltd. (the "FL3 Issuer") and ACRE Commercial Mortgage 2017-FL3 LLC (the "FL3 Co-Issuer") entered into a First Supplement to Amended and Restated Indenture (the "2021 Amended Indenture") withWells Fargo Bank, National Association , as advancing agent and note administrator, andWilmington Trust, National Association , as trustee, which governs the FL3 collateralized loan obligation securitization debt ("FL3 CLO Securitization"). The purpose of the 2021 Amended Indenture was to, among other things, extend the reinvestment period toMarch 31, 2024 , extend the date on and after which the FL3 Issuer may redeem the Notes held by third parties toMarch 17, 2025 (the "Redemption Date"), and eliminate the prepayment fee due on the Redemption Date. •ACRE entered into an underwriting agreement (the "Underwriting Agreement") in which ACRE agreed to sell an aggregate of 6,500,000 shares of ACRE's common stock, par value$0.01 per share. The public offering generated net proceeds of approximately$101.6 million , after deducting transaction expenses.
Factors Impacting Our Operating Results
The results of our operations are affected by a number of factors and primarily depend on, among other things, the level of our net interest income, the market value of our assets and the supply of, and demand for, commercial mortgage loans, CRE debt and other financial assets in the marketplace. Our net interest income, which reflects the amortization of origination fees and direct costs, is recognized based on the contractual rate and the outstanding principal balance of the loans we originate. Interest rates will vary according to the type of investment, conditions in the financial markets, creditworthiness of our borrowers, competition and other factors, none of which can be predicted with any certainty. Our operating results may also be impacted by credit losses in excess of initial anticipations or unanticipated credit events experienced by borrowers.
Loans Held for Investment Portfolio
As ofJune 30, 2021 , our portfolio included 53 loans held for investment, excluding 106 loans that were repaid, sold or converted to real estate owned since inception. As ofJune 30, 2021 , the aggregate originated commitment under these loans at closing was approximately$2.3 billion and outstanding principal was$2.0 billion . During the six months endedJune 30, 2021 , 38
--------------------------------------------------------------------------------
Table of Contents
we funded approximately$471.6 million of outstanding principal and received repayments of$255.3 million of outstanding principal. As ofJune 30, 2021 , 97.2% of our loans have LIBOR floors, with a weighted average floor of 1.36%, calculated based on loans with LIBOR floors. References to LIBOR or "L" are to 30-day LIBOR (unless otherwise specifically stated).
Other than as set forth in Note 3 to our consolidated financial statements
included in this quarterly report on Form 10-Q, as of
Our loans held for investment are accounted for at amortized cost. The following
table summarizes our loans held for investment as of
As of June 30, 2021 Weighted Average Carrying Amount Outstanding Weighted Average Unleveraged Effective Remaining Life (1) Principal (1) Yield (Years) Senior mortgage loans$ 2,001,488 $ 2,011,128 5.8 % (2) 5.9 % (3)
1.3
Subordinated debt and preferred equity investments 30,920 31,416 15.8 % (2) 15.8 % (3)
2.5
Total loans held for investment portfolio
6.0 % (2) 6.1 % (3)
1.3
_______________________________
(1)The difference between the Carrying Amount and the Outstanding Principal amount of the loans held for investment consists of unamortized purchase discount, deferred loan fees and loan origination costs. (2)Unleveraged Effective Yield is the compounded effective rate of return that would be earned over the life of the investment based on the contractual interest rate (adjusted for any deferred loan fees, costs, premiums or discounts) and assumes no dispositions, early prepayments or defaults. The total Weighted Average Unleveraged Effective Yield is calculated based on the average of Unleveraged Effective Yield of all loans held by us as ofJune 30, 2021 as weighted by the outstanding principal balance of each loan. (3)Unleveraged Effective Yield is the compounded effective rate of return that would be earned over the life of the investment based on the contractual interest rate (adjusted for any deferred loan fees, costs, premiums or discounts) and assumes no dispositions, early prepayments or defaults. The total Weighted Average Unleveraged Effective Yield is calculated based on the average of Unleveraged Effective Yield of all interest accruing loans held by us as ofJune 30, 2021 as weighted by the total outstanding principal balance of each interest accruing loan (excludes loans on non-accrual status as ofJune 30, 2021 ).
Critical Accounting Policies
Our consolidated financial statements have been prepared in accordance with generally accepted accounting principles ("GAAP"), which require management to make estimates and assumptions that affect reported amounts. The estimates and assumptions are based on historical experience and other factors management believes to be reasonable. Actual results may differ from those estimates and assumptions. There have been no significant changes to our critical accounting policies as disclosed in our Annual Report on Form 10-K. See Note 2 to our consolidated financial statements included in this quarterly report on Form 10-Q, which describes factors which may impact management's estimates and assumptions and the recently issued accounting pronouncements that were adopted or not yet required to be adopted by us.
RECENT DEVELOPMENTS
OnJuly 1, 2021 , we purchased a$78.3 million pari-passu participation in a$227.1 million senior mortgage loan on a mixed use property located inNew York from an Ares Management managed investment vehicle. At the purchase date, the outstanding principal balance was$75.0 million . The loan has a per annum interest rate of LIBOR plus 3.65%.
On
On
39
--------------------------------------------------------------------------------
Table of Contents
OnJuly 16, 2021 , we purchased a fully funded$3.2 million senior mortgage loan on a self storage property located inColorado from a third party. The loan has a per annum interest rate of LIBOR plus 2.90%. OnJuly 16, 2021 , we purchased an$8.6 million senior mortgage loan on a self storage property located inArizona from a third party. At the purchase date, the outstanding principal balance was approximately$8.3 million . The loan has a per annum interest rate of LIBOR plus 2.90%. OnJuly 16, 2021 , we purchased a fully funded$7.4 million senior mortgage loan on a self storage property located inArizona from a third party. The loan has a per annum interest rate of LIBOR plus 2.90%. Our Board of Directors declared a regular cash dividend of$0.33 per common share and a supplemental cash dividend of$0.02 per common share for the third quarter of 2021. The third quarter 2021 and supplemental cash dividends will be payable onOctober 15, 2021 to common stockholders of record as ofSeptember 30, 2021 . RESULTS OF OPERATIONS
The following table sets forth a summary of our consolidated results of
operations for the three and six months ended
For the three months ended June For the six months ended June 30, 30, 2021 2020 2021 2020 Total revenue$ 23,531 $ 17,982 $ 44,754 $ 39,116 Total expenses 9,391 8,063 17,929 19,333
Provision for current expected credit losses (3,883) (4,007)
(7,123) 23,111 Unrealized losses on loans held for sale - 3,998 - 3,998 Income (loss) before income taxes 18,023 9,928 33,948 (7,326) Income tax expense, including excise tax 408 160 593 169 Net income (loss) attributable to common stockholders$ 17,615 $ 9,768 $ 33,355 $ (7,495)
The following tables set forth select details of our consolidated results of
operations for the three and six months ended
Net Interest Margin
For the three months ended June For the six months ended June 30, 30, 2021 2020 2021 2020 Interest income$ 30,859 $ 29,835 $ 61,564 $ 61,283 Interest expense (11,092) (13,042) (23,231) (28,576) Net interest margin$ 19,767 $
16,793
For the three months endedJune 30, 2021 and 2020, net interest margin was approximately$19.8 million and$16.8 million , respectively. For the three months endedJune 30, 2021 and 2020, interest income of$30.9 million and$29.8 million , respectively, was generated by weighted average earning assets of$2.0 billion and$1.9 billion , respectively, offset by$11.1 million and$13.0 million , respectively, of interest expense, unused fees and amortization of deferred loan costs. The weighted average borrowings under the Wells Fargo Facility, the Citibank Facility, the CNB Facility, the MetLife Facility and the Morgan Stanley Facility (individually defined below and collectively, the "Secured Funding Agreements"), Notes Payable (as defined below and excluding the Note Payable on the hotel property that is recognized as real estate owned in our consolidated balance sheets), the Secured Term Loan, Secured Borrowings and securitization debt (as defined below) were$1.5 billion for the three months endedJune 30, 2021 and$1.6 billion for the three months endedJune 30, 2020 (which included two facilities which were subsequently paid in full). The increase in net interest margin for the three months endedJune 30, 2021 compared to the three months endedJune 30, 2020 primarily relates to the benefit received from the impact of LIBOR floors on our loans held for investment due to a decrease in 30-day LIBOR for the three months endedJune 30, 2021 . As ofJune 30, 2021 , 97.2% of our loans held for investment as measured by outstanding principal balance have LIBOR floors, with a weighted average floor of 1.36%, calculated based on loans with LIBOR floors, while 13.0% of our borrowings have LIBOR floors, with a 40
--------------------------------------------------------------------------------
Table of Contents
weighted average floor of 1.22%. In addition, inJanuary 2021 , we issued$540.5 million of securitization debt, a portion of the proceeds of which were used to pay down debt with a higher cost of funds than the issued securitization debt. For the six months endedJune 30, 2021 and 2020, net interest margin was approximately$38.3 million and$32.7 million , respectively. For the six months endedJune 30, 2021 and 2020, interest income of$61.6 million and$61.3 million , respectively, was generated by weighted average earning assets of$1.9 billion and$1.9 billion , respectively, offset by$23.2 million and$28.6 million , respectively, of interest expense, unused fees and amortization of deferred loan costs. The weighted average borrowings under the Secured Funding Agreements, Notes Payable (excluding the Note Payable on the hotel property that is recognized as real estate owned in our consolidated balance sheets), the Secured Term Loan, Secured Borrowings and securitization debt were$1.5 billion for the six months endedJune 30, 2021 and$1.5 billion for the six months endedJune 30, 2020 . The increase in net interest margin for the six months endedJune 30, 2021 compared to the six months endedJune 30, 2020 primarily relates to the benefit received from the impact of LIBOR floors on our loans held for investment due to a decrease in 30-day LIBOR for the six months endedJune 30, 2021 . In addition, inJanuary 2021 , we issued$540.5 million of securitization debt, a portion of the proceeds of which were used to pay down debt with a higher cost of funds than the issued securitization debt.
Revenue From Real Estate Owned
OnMarch 8, 2019 , we acquired legal title to a hotel property through a deed in lieu of foreclosure. Prior toMarch 8, 2019 , the hotel property collateralized a$38.6 million senior mortgage loan that we held that was in maturity default due to the failure of the borrower to repay the outstanding principal balance of the loan by theDecember 2018 maturity date. In conjunction with the deed in lieu of foreclosure, we derecognized the$38.6 million senior mortgage loan and recognized the hotel property as real estate owned. For the three months endedJune 30, 2021 and 2020, revenue from real estate owned was$3.8 million and$1.2 million , respectively. Revenues consist of room sales, food and beverage sales and other hotel revenues. The increase in revenue from real estate owned for the three months endedJune 30, 2021 compared to the three months endedJune 30, 2020 is primarily due to the ongoing recovery from the impact of the COVID-19 pandemic as occupancy and overall revenue at the hotel property increased for the three months endedJune 30, 2021 . For both the six months endedJune 30, 2021 and 2020, revenue from real estate owned was$6.4 million . Operating Expenses For the three months ended For the six months ended June June 30, 30, 2021 2020 2021 2020
Management and incentive fees to affiliate
615 660 1,400 1,563 General and administrative expenses 1,195 959 2,351 1,827 General and administrative expenses reimbursed to affiliate 788 1,038 1,540 2,089 Expenses from real estate owned 3,842 3,254 7,120 9,930 Total expenses$ 9,391 $ 8,063 $ 17,929 $ 19,333 See the Related Party Expenses, Other Expenses and Expenses from Real Estate Owned discussions below for the cause of the increase in operating expenses for the three months endedJune 30, 2021 compared to the three months endedJune 30, 2020 and the cause of the decrease in operating expenses for the six months endedJune 30, 2021 compared to the six months endedJune 30, 2020 .
Related Party Expenses
For the three months endedJune 30, 2021 , related party expenses included$3.0 million in management and incentive fees due to our Manager pursuant to the Management Agreement, which consisted of$2.3 million in management fees and$0.7 million in incentive fees. For the three months endedJune 30, 2021 , related party expenses also included$0.8 million for our share of allocable general and administrative expenses for which we were required to reimburse our Manager pursuant to the Management Agreement. For the three months endedJune 30, 2020 , related party expenses included$2.2 million in management and incentive fees due to our Manager pursuant to the Management Agreement, which consisted of$1.8 million in management fees and$0.3 million in incentive fees. For the three months endedJune 30, 2020 , related party expenses also included$1.0 million for our share of allocable general and administrative expenses for which we were required to reimburse our Manager pursuant to the Management Agreement. The increase in management fees for the three months endedJune 30, 2021 compared to the three months endedJune 30, 2020 primarily relates to an increase in our weighted average stockholders' 41
--------------------------------------------------------------------------------
Table of Contents
equity for the three months endedJune 30, 2021 as a result of the public offering of 7,000,000 shares of our common stock inMarch 2021 , which generated net proceeds of approximately$100.7 million , and the public offering of 6,500,000 shares of our common stock inJune 2021 , which generated net proceeds of approximately$101.6 million . The increase in incentive fees for the three months endedJune 30, 2021 compared to the three months endedJune 30, 2020 , primarily relates to our Core Earnings (as defined below) for the twelve months endedJune 30, 2021 exceeding the 8% minimum return by a higher margin than the twelve months endedJune 30, 2020 . "Core Earnings" is defined in the Management Agreement as GAAP net income (loss) computed in accordance with GAAP, excluding non-cash equity compensation expense, the incentive fee, depreciation and amortization (to the extent that any of our target investments are structured as debt and we foreclose on any properties underlying such debt), any unrealized gains, losses or other non-cash items recorded in net income (loss) for the period, regardless of whether such items are included in other comprehensive income or loss, or in net income (loss), and one-time events pursuant to changes in GAAP and certain non-cash charges after discussions between our Manager and our independent directors and after approval by a majority of our independent directors. The decrease in allocable general and administrative expenses due to our Manager for the three months endedJune 30, 2021 compared to the three months endedJune 30, 2020 , primarily relates to a decrease in the percentage of time allocated to us by employees of our Manager due to changes in transaction activity year over year. For the six months endedJune 30, 2021 , related party expenses included$5.5 million in management and incentive fees due to our Manager pursuant to the Management Agreement, which consisted of$4.2 million in management fees and$1.4 million in incentive fees. For the six months endedJune 30, 2021 , related party expenses also included$1.5 million for our share of allocable general and administrative expenses for which we were required to reimburse our Manager pursuant to the Management Agreement. For the six months endedJune 30, 2020 , related party expenses included$3.9 million in management and incentive fees due to our Manager pursuant to the Management Agreement, which consisted of$3.6 million in management fees and$0.3 million in incentive fees. For the six months endedJune 30, 2020 , related party expenses also included$2.1 million for our share of allocable general and administrative expenses for which we were required to reimburse our Manager pursuant to the Management Agreement. The increase in management fees for the six months endedJune 30, 2021 compared to the six months endedJune 30, 2020 primarily relates to an increase in our weighted average stockholders' equity for the six months endedJune 30, 2021 as a result of the public offering of 7,000,000 shares of our common stock inMarch 2021 , which generated net proceeds of approximately$100.7 million , and the public offering of 6,500,000 shares of our common stock inJune 2021 , which generated net proceeds of approximately$101.6 million . The increase in incentive fees for the six months endedJune 30, 2021 compared to the six months endedJune 30, 2020 primarily relates to our Core Earnings for the twelve months endedJune 30, 2021 exceeding the 8% minimum return by a higher margin than the twelve months endedJune 30, 2020 . The decrease in allocable general and administrative expenses due to our Manager for the six months endedJune 30, 2021 compared to the six months endedJune 30, 2020 primarily relates to a decrease in the percentage of time allocated to us by employees of our Manager due to changes in transaction activity year over year.
Other Expenses
For the three months endedJune 30, 2021 and 2020, professional fees were$0.6 million and$0.7 million , respectively. The decrease in professional fees for the three months endedJune 30, 2021 compared to the three months endedJune 30, 2020 primarily relates to a decrease in our use of third-party professionals due to changes in transaction activity year over year. For the three months endedJune 30, 2021 and 2020, general and administrative expenses were$1.2 million and$1.0 million , respectively. The increase in general and administrative expenses for the three months endedJune 30, 2021 compared to the three months endedJune 30, 2020 primarily relates to an increase in stock-based compensation expense due to new restricted stock and restricted stock unit grants awarded afterJune 30, 2020 . For the six months endedJune 30, 2021 and 2020, professional fees were$1.4 million and$1.6 million , respectively. The decrease in professional fees for the six months endedJune 30, 2021 compared to the six months endedJune 30, 2020 primarily relates to a decrease in our use of third-party professionals due to changes in transaction activity year over year. For the six months endedJune 30, 2021 and 2020, general and administrative expenses were$2.4 million and$1.8 million , respectively. The increase in general and administrative expenses for the six months endedJune 30, 2021 compared to the six months endedJune 30, 2020 primarily relates to an increase in stock-based compensation expense due to new restricted stock and restricted stock unit grants awarded afterJune 30, 2020 . 42
--------------------------------------------------------------------------------
Table of Contents
Expenses From Real Estate Owned
For the three and six months ended
For the three months ended For the six months ended June June 30, 30, 2021 2020 2021 2020 Hotel operating expenses$ 3,202 $ 2,611 $ 5,846 $ 8,654 Interest expense on note payable 415 419 825 831 Depreciation expense 225 224 449 445 Expenses from real estate owned$ 3,842 $ 3,254
For the three months endedJune 30, 2021 and 2020, hotel operating expenses were$3.2 million and$2.6 million , respectively. Hotel operating expenses consist primarily of expenses incurred in the day-to-day operation of our hotel property, including room expense, food and beverage expense and other operating expenses. Room expense includes housekeeping and front office wages and payroll taxes, reservation systems, room supplies, laundry services and other costs. Food and beverage expense primarily includes the cost of food, the cost of beverages and associated labor costs. Other operating expenses include labor and other costs associated with administrative departments, sales and marketing, repairs and maintenance, real estate taxes, insurance, utility costs and management and incentive fees paid to the hotel property manager. The increase in hotel operating expenses for the three months endedJune 30, 2021 compared to the three months endedJune 30, 2020 is primarily due to the ongoing recovery from the impact of the COVID-19 pandemic as occupancy and overall expenses at the hotel property increased for the three months endedJune 30, 2021 . For both the three months endedJune 30, 2021 and 2020, interest expense on our note payable was$0.4 million . For both the three months endedJune 30, 2021 and 2020, depreciation expense was$0.2 million . For the six months endedJune 30, 2021 and 2020, hotel operating expenses were$5.8 million and$8.7 million , respectively. The decrease in hotel operating expenses for the six months endedJune 30, 2021 compared to the six months endedJune 30, 2020 is primarily due to the six months endedJune 30, 2020 including two months of hotel operations that were not significantly impacted by the COVID-19 pandemic, which significantly reduced occupancy and forced us to implement plans to reduce overall operating expenses at the hotel property. For both the six months endedJune 30, 2021 and 2020, interest expense on our note payable was$0.8 million . For both the six months endedJune 30, 2021 and 2020, depreciation expense was$0.4 million .
Provision for Current Expected Credit Losses
For the three months endedJune 30, 2021 and 2020, the provision for current expected credit losses was$(3.9) million and$(4.0) million , respectively. The decrease in the provision for current expected credit losses for the three months endedJune 30, 2021 compared to the three months endedJune 30, 2020 is primarily due to forecasted improvement in macroeconomic factors, shorter average remaining loan term and changes in the portfolio, including payoffs, during the three months endedJune 30, 2021 . For the six months endedJune 30, 2021 and 2020, the provision for current expected credit losses was$(7.1) million and$23.1 million , respectively. The decrease in the provision for current expected credit losses for the six months endedJune 30, 2021 compared to the six months endedJune 30, 2020 is primarily due to forecasted improvement in macroeconomic factors, shorter average remaining loan term and changes in the portfolio, including payoffs, during the six months endedJune 30, 2021 . The current expected credit loss reserve (the "CECL Reserve") takes into consideration the macroeconomic impact of the COVID-19 pandemic on CRE properties and is not specific to any loan losses or impairments on our loans held for investment. Additionally, the CECL Reserve is not an indicator of what we expect our CECL Reserve would have been absent the current and potential future impacts of the COVID-19 pandemic.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity is a measure of our ability to meet potential cash requirements, including ongoing commitments to repay borrowings, fund and maintain our assets and operations, make distributions to our stockholders and other general business
43
--------------------------------------------------------------------------------
Table of Contents
needs. We use significant cash to purchase our target investments, make principal and interest payments on our borrowings, make distributions to our stockholders and fund our operations.
Our primary sources of cash generally consist of unused borrowing capacity under our Secured Funding Agreements, the net proceeds of future offerings, payments of principal and interest we receive on our portfolio of assets and cash generated from our operating activities. Principal repayments from mortgage loans in securitizations where we retain the subordinate securities are applied sequentially, first used to pay down the senior notes, and accordingly, we will not receive any proceeds from repayment of loans in the securitizations until all senior notes are repaid in full. Due to the impact of the COVID-19 pandemic, we may experience borrowers who are unable to pay interest and principal payments timely, including at the maturity date of the borrower's loan, if at all, and expected prepayments by our borrowers may not occur, which could impact our liquidity. Our Secured Funding Agreements contains margin call provisions following the occurrence of certain mortgage loan credit events. If we are unable to make the required payment or if we fail to meet or satisfy any of the covenants in our Financing Agreements, we would be in default under these agreements, and our lenders could elect to declare outstanding amounts due and payable, terminate their commitments, require the posting of additional collateral, including cash to satisfy margin calls, and enforce their interests against existing collateral. We are also subject to cross-default and acceleration rights with respect to our Financing Agreements. Given the impact of the COVID-19 pandemic on the real estate industry and the potential impact on our borrowers, to mitigate the risk of future margin calls, we proactively engaged in discussions with certain of our lenders to modify the terms of our borrowings on certain assets within these facilities, in order to, among other things, reduce the amounts we are borrowing against such assets and/or increase the borrowing spreads. We may not receive financing from our Secured Funding Agreements with respect to our commitments to fund our loans held for investment in the future. See "Summary of Financing Agreements" below for a description of our Financing Agreements. We are focused on preserving our liquidity in order to satisfy our cash requirements, including future commitments to fund on our loans, make interest, principal and other payments pursuant to our financing obligations and to potentially originate new loans and make opportunistic new investments. Subject to maintaining our qualification as a REIT and our exemption from the 1940 Act, we expect that our primary sources of enhancing our liquidity will be financing, to the extent available to us, through credit, secured funding and other lending facilities, other sources of private financing, including warehouse and repurchase facilities, and public or private offerings of our equity or debt securities. OnJuly 19, 2019 , we filed a registration statement on Form S-3 with theSEC , which became effective onAugust 2, 2019 , in order to permit us to offer, from time to time, in one or more offerings or series of offerings up to$1.25 billion of our common stock, preferred stock, debt securities, subscription rights to purchase shares of our common stock, warrants representing rights to purchase shares of our common stock, preferred stock or debt securities, or units. The specifics of any future offerings, along with the use of proceeds of any securities offered, will be described in detail in a prospectus supplement, or other offering materials, at the time of any offering. We may also access liquidity through our "At the Market Stock Offering Program" which was established inNovember 2019 pursuant to which we may sell, from time to time, up to$100.0 million of shares of our common stock. Furthermore, we have sold, and may continue to sell certain of our mortgage loans, or interests therein, in order to manage liquidity needs. Subject to maintaining our qualification as a REIT, we may also change our dividend practice, including by reducing the amount of, or temporarily suspending, our future dividends or making dividends that are payable in cash and shares of our common stock for some period of time. We are also able to access additional liquidity through the (i) reinvestment provisions in our FL3 CLO Securitization, which allows us to replace mortgage assets in our FL3 CLO Securitization which have repaid and (ii) future funding acquisition provisions in our FL4 collateralized loan obligation securitization debt ("FL4 CLO Securitization", together with our FL3 CLO Securitization, our "CLO Securitizations"), which allows us to use mortgage asset repayment funds to acquire additional funded pari-passu participations related to the mortgage assets then-remaining in our FL4 CLO Securitization; each subject to the satisfaction of certain reinvestment or acquisition conditions, which may include receipt of Rating Agency Confirmation and investor approval. There can be no assurance that the conditions for reinvestment or acquisition will be satisfied and whether our CLO Securitizations will acquire any additional mortgage assets or funded pari-passu participations. In addition, our CLO Securitizations contains certain senior note overcollateralization ratio tests. To the extent we fail to meet these tests, amounts that would otherwise be used to make payments on the subordinate securities that we hold will be used to repay principal on the more senior securities to the extent necessary to satisfy any senior note overcollateralization ratio and we may incur significant losses. Our sources of liquidity may be impacted to the extent we do not receive cash payments that we would otherwise expect to receive from the CLO Securitizations if these tests were met. Ares Management or one of its investment vehicles, including theAres Warehouse Vehicle, may originate mortgage loans and we may have the opportunity to purchase such loans that are determined by our Manager in good faith to be appropriate for us, once we have sufficient available liquidity. Ares Management or one of its investment vehicles may also acquire mortgage loans from us. 44
--------------------------------------------------------------------------------
Table of Contents
As ofJuly 29, 2021 , we had approximately$57 million in liquidity including$2 million of unrestricted cash and$55 million of availability under secured funding agreements. Equity Offerings OnMarch 15, 2021 , we entered into an underwriting agreement (the "March 2021 Underwriting Agreement"), by and among us, ACREM, andWells Fargo Securities, LLC ,BofA Securities, Inc. andMorgan Stanley & Co. LLC , as representatives of the several underwriters listed therein (collectively, the "March 2021 Underwriters"). Pursuant to the terms of theMarch 2021 Underwriting Agreement, we agreed to sell, and theMarch 2021 Underwriters agreed to purchase, subject to the terms and conditions set forth in theMarch 2021 Underwriting Agreement, an aggregate of 7,000,000 shares of our common stock, par value$0.01 per share. The public offering closed onMarch 18, 2021 and generated net proceeds of approximately$100.7 million , after deducting transaction expenses. We used the net proceeds from the public offering to repay indebtedness and to invest in mortgage loans and other target assets and investments consistent with our investment strategies and investment guidelines. OnJune 17, 2021 , we entered into an underwriting agreement (the "June 2021 Underwriting Agreement"), by and among us, ACREM, andWells Fargo Securities, LLC ,BofA Securities, Inc. andMorgan Stanley & Co. LLC , as representatives of the several underwriters listed therein (collectively, the "June 2021 Underwriters"). Pursuant to the terms of theJune 2021 Underwriting Agreement, we agreed to sell, and theJune 2021 Underwriters agreed to purchase, subject to the terms and conditions set forth in theJune 2021 Underwriting Agreement, an aggregate of 6,500,000 shares of the Company's common stock, par value$0.01 per share. The public offering closed onJune 22, 2021 and generated net proceeds of approximately$101.6 million , after deducting transaction expenses. We used the net proceeds from the public offering to repay indebtedness and to invest in mortgage loans and other target assets and investments consistent with our investment strategies and investment guidelines.
Cash Flows
The following table sets forth changes in cash and cash equivalents for the six
months ended
For the six months ended June
30, 2021 2020 Net income (loss) $
33,355
(13,574) 21,658 Net cash provided by (used in) operating activities 19,781 14,163 Net cash provided by (used in) investing activities (307,953) (193,035) Net cash provided by (used in) financing activities 289,067 246,224 Change in cash and cash equivalents $
895
During the six months ended
Operating Activities
For the six months endedJune 30, 2021 and 2020, net cash provided by operating activities totaled$19.8 million and$14.2 million , respectively. For the six months endedJune 30, 2021 , adjustments to net income related to operating activities primarily included the provision for current expected credit losses of$7.1 million , accretion of deferred loan origination fees and costs of$3.9 million , amortization of deferred financing costs of$4.5 million and change in other assets of$9.3 million . For the six months endedJune 30, 2020 , adjustments to net loss related to operating activities primarily included the provision for current expected credit losses of$23.1 million , accretion of deferred loan origination fees and costs of$3.6 million , amortization of deferred financing costs of$3.3 million and change in other assets of$4.7 million .
Investing Activities
For the six months endedJune 30, 2021 and 2020, net cash used in investing activities totaled$308.0 million and$193.0 million , respectively. This change in net cash used in investing activities was primarily as a result of the cash used for 45
--------------------------------------------------------------------------------
Table of Contents
the origination and funding of loans held for investment exceeding the cash
received from principal repayment of loans held for investment for the six
months ended
Financing Activities
For the six months endedJune 30, 2021 , net cash provided by financing activities totaled$289.1 million and primarily related to proceeds from our Secured Funding Agreements of$207.2 million , proceeds from the issuance of debt of consolidated VIEs of$540.5 million and proceeds from the sale of our common stock of$202.7 million , partially offset by repayments of our Secured Funding Agreements of$558.6 million , repayments of our Notes Payable of$27.9 million , repayments of our Secured Term Loan of$50.0 million and dividends paid of$25.4 million . For the six months endedJune 30, 2020 , net cash provided by financing activities totaled$246.2 million and primarily related to proceeds from our Secured Funding Agreements of$355.1 million , proceeds from Secured Borrowings of$48.1 million , proceeds from the sale of our common stock of$73.2 million , partially offset by repayments of our Secured Funding Agreements of$206.8 million and dividends paid of$20.6 million .
Summary of Financing Agreements
The sources of financing, as applicable in a given period, under our Secured Funding Agreements, Notes Payable and the Secured Term Loan (collectively, the "Financing Agreements") are described in the following table ($ in thousands): As of June 30, 2021 December 31, 2020 Total Outstanding Total Outstanding Commitment Balance Interest Rate Maturity Date Commitment Balance Interest Rate Maturity Date Secured Funding Agreements: Wells Fargo Facility$ 350,000 $ 238,414 LIBOR+1.50 to 2.75%December 14, 2022 (1)$ 350,000 $ 336,001 LIBOR+1.45 to 2.75%December 14, 2022 (1) Citibank Facility 325,000 44,730 LIBOR+1.50 to 2.25%December 13, 2021 (2) 325,000 117,506 LIBOR+1.50 to 2.25%December 13, 2021 (2) CNB Facility 50,000 - LIBOR+2.65%March 10, 2022 (3) 50,000 50,000 LIBOR+2.65%March 10, 2021 (3) MetLife Facility 180,000 20,648 LIBOR+2.10 to 2.50%August 13, 2022 (4) 180,000 104,124 LIBOR+2.10 to 2.50%August 13, 2022 (4) Morgan Stanley Facility 250,000 100,413 LIBOR+1.75 to 2.85%January 16, 2023 (5) 150,000 147,921 LIBOR+1.75 to 2.85%January 16, 2023 (5) Subtotal$ 1,155,000 $ 404,205 $ 1,055,000 $ 755,552 Notes Payable$ 51,755 $ 44,936 LIBOR+3.00 to 3.75% (6)$ 84,155 $ 63,122 LIBOR+2.50 to 3.75% (6) Secured Term Loan$ 60,000 $ 60,000 LIBOR+5.38%December 22, 2021 (7)$ 110,000 $ 110,000 LIBOR+5.00%December 22, 2021 (7) Total$ 1,266,755 $ 509,141 $ 1,249,155 $ 928,674
_____________________________
(1)The maturity date of the master repurchase funding facility withWells Fargo Bank, National Association (the "Wells Fargo Facility") is subject to three 12-month extensions at our option provided that certain conditions are met and applicable extension fees are paid. The maximum commitment may be increased to up to$500.0 million at our option, subject to the satisfaction of certain conditions, including payment of an upsize fee. (2)The maturity date of the master repurchase facility withCitibank, N.A . (the "Citibank Facility") is subject to two 12-month extensions at our option provided that certain conditions are met and applicable extension fees are paid. (3)InMarch 2021 , we exercised a 12-month extension option on the secured revolving funding facility withCity National Bank (the "CNB Facility"). The CNB Facility has an accordion feature that provides for, subject to approval byCity National Bank in its sole discretion, an increase in the commitment amount from$50.0 million to$75.0 million for up to a period of 120 days once per calendar year. (4)The maturity date of the revolving master repurchase facility withMetropolitan Life Insurance Company (the "MetLife Facility") is subject to two 12-month extensions at our option provided that certain conditions are met and applicable extension fees are paid. (5)The maturity date of the master repurchase and securities contract with Morgan Stanley (the "Morgan Stanley Facility") is subject to two 12-month extensions at our option provided that certain conditions are met and applicable extension fees are paid. The Morgan Stanley Facility has an accordion feature that provides for a$100.0 million permanent increase in the commitment amount from$150.0 million to$250.0 million , which may be exercised at our 46
--------------------------------------------------------------------------------
Table of Contents
option, subject to the satisfaction of certain conditions, including payment of an upsized commitment fee. InJune 2021 , we exercised the option to increase the commitment amount from$150.0 million to$250.0 million . (6)Certain of our consolidated subsidiaries are party to two separate note agreements (the "Notes Payable") with the lenders referred to therein, consisting of (1) a$28.3 million note that has a maturity date ofJune 10, 2024 and (2) a$23.5 million note that has an initial maturity date ofSeptember 5, 2022 , subject to two 12-month extensions at our option provided that certain conditions are met and applicable extension fees are paid. InMarch 2021 , the$32.4 million note, which was secured by a$40.5 million senior mortgage loan held by us on an industrial property located inNorth Carolina , was repaid in full and not extended. The outstanding principal on the note at the time of repayment was$27.9 million . (7)InDecember 2020 , we exercised the 12-month extension option on the Credit and Guaranty Agreement with the lenders referred to therein andCortland Capital Market Services LLC , as administrative agent and collateral agent for the lenders (the "Secured Term Loan"). During the extension period, the spread on advances under the Secured Term Loan increases every three months by 0.125%, 0.375% and 0.750% per annum, respectively, beginning after the third-month of the extension period. InMarch 2021 , we voluntarily elected to repay$50.0 million of outstanding principal at par on the Secured Term Loan prior to the scheduled maturity as permitted by the contractual terms of the Secured Term Loan. Our Financing Agreements contain various affirmative and negative covenants, including negative pledges, and provisions related to events of default that are normal and customary for similar financing agreements. As ofJune 30, 2021 , we were in compliance with all financial covenants of each respective Financing Agreement. We may be required to fund commitments on our loans held for investment in the future and we may not receive funding from our Secured Funding Agreements with respect to these commitments. See Note 6 to our consolidated financial statements included in this quarterly report on Form 10-Q for more information on our Financing Agreements.
Securitizations
As ofJune 30, 2021 , the carrying amount and outstanding principal of our CLO Securitizations was$979.8 million and$986.1 million , respectively. See Note 16 to our consolidated financial statements included in this quarterly report on Form 10-Q for additional terms and details of our CLO Securitizations.
Secured Borrowings
As ofJune 30, 2021 , the carrying amount and outstanding principal of our secured borrowings was$59.9 million and$60.2 million , respectively. See Note 7 to our consolidated financial statements included in this quarterly report on Form 10-Q for additional terms and details of our secured borrowings.
Leverage Policies
We intend to use prudent amounts of leverage to increase potential returns to our stockholders. To that end, subject to maintaining our qualification as a REIT and our exemption from registration under the 1940 Act, we intend to continue to use borrowings to fund the origination or acquisition of our target investments. Given current market conditions and our focus on first or senior mortgages, we currently expect that such leverage would not exceed, on a debt-to-equity basis, a 4-to-1 ratio. Our charter and bylaws do not restrict the amount of leverage that we may use. The amount of leverage we will deploy for particular investments in our target investments will depend upon our Manager's assessment of a variety of factors, which may include, among others, our liquidity position, the anticipated liquidity and price volatility of the assets in our loans held for investment portfolio, the potential for losses and extension risk in our portfolio, the gap between the duration of our assets and liabilities, including hedges, the availability and cost of financing the assets, our opinion of the creditworthiness of our financing counterparties, the impact of the COVID-19 pandemic onthe United States economy generally or in specific geographic regions and commercial mortgage markets, our outlook for the level and volatility of interest rates, the slope of the yield curve, the credit quality of our assets, the collateral underlying our assets, and our outlook for asset spreads relative to the LIBOR curve.
DIVIDENDS
We elected to be taxed as a REIT forUnited States federal income tax purposes and, as such, anticipate annually distributing to our stockholders at least 90% of our REIT taxable income, prior to the deduction for dividends paid. If we distribute less than 100% of our REIT taxable income in any tax year (taking into account any distributions made in a subsequent tax year under Sections 857(b)(9) or 858 of the Code), we will pay tax at regular corporate rates on that undistributed portion. Furthermore, if we distribute less than the sum of 1) 85% of our ordinary income for the calendar year, 2) 47
--------------------------------------------------------------------------------
Table of Contents
95% of our capital gain net income for the calendar year and 3) any undistributed shortfall from our prior calendar year (the "Required Distribution") to our stockholders during any calendar year (including any distributions declared by the last day of the calendar year but paid in the subsequent year), then we are required to pay non-deductible excise tax equal to 4% of any shortfall between the Required Distribution and the amount that was actually distributed. Any of these taxes would decrease cash available for distribution to our stockholders. The 90% distribution requirement does not require the distribution of net capital gains. However, if we elect to retain any of our net capital gain for any tax year, we must notify our stockholders and pay tax at regular corporate rates on the retained net capital gain. The stockholders must include their proportionate share of the retained net capital gain in their taxable income for the tax year, and they are deemed to have paid the REIT's tax on their proportionate share of the retained capital gain. Furthermore, such retained capital gain may be subject to the nondeductible 4% excise tax. If we determine that our estimated current year taxable income (including net capital gain) will be in excess of estimated dividend distributions (including capital gains dividends) for the current year from such income, we accrue excise tax on a portion of the estimated excess taxable income as such taxable income is earned. Before we make any distributions, whether forUnited States federal income tax purposes or otherwise, we must first meet both our operating requirements and debt service on our Financing Agreements and other debt payable. If our cash available for distribution is less than our REIT taxable income, we could be required to sell assets or borrow funds to make cash distributions or we may make a portion of the Required Distribution in the form of a taxable stock distribution or distribution of debt securities.
OFF-BALANCE SHEET ARRANGEMENTS
We have commitments to fund various senior mortgage loans, as well as subordinated debt and preferred equity investments in our portfolio. As a result of the COVID-19 pandemic, the progress of capital expenditures, construction and leasing is anticipated to be slower than otherwise expected, and the pace of the funding of our unfunded commitments may be slower. Other than as set forth in this quarterly report on Form 10-Q, we do not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured investment vehicles, special purpose entities or variable interest entities, established to facilitate off-balance sheet arrangements or other contractually narrow or limited purposes. Further, we have not guaranteed any obligations of unconsolidated entities or entered into any commitment or intend to provide additional funding to any such entities.
© Edgar Online, source