CIM REAL ESTATE FINANCE TRUST, INC. The following discussion and analysis should be read in conjunction with the accompanying condensed consolidated financial statements and notes thereto appearing elsewhere in this Quarterly Report on Form 10-Q. We make statements in this section that are forward-looking statements within the meaning of the federal securities laws. Certain risks may cause our actual results, performance or achievements to differ materially from those expressed or implied by the following discussion. For a complete discussion of such risk factors, see Item 1A - Risk Factors of this Quarterly Report on Form 10-Q and the Company's Annual Report on Form 10-K for the year endedDecember 31, 2021 . Capitalized terms used herein, but not otherwise defined, shall have the meaning ascribed to those terms in "Part I - Financial Information" of this Quarterly Report on Form 10-Q, including the notes to the condensed consolidated financial statements contained therein, and the terms "we," "us," "our" and the "Company" refer toCIM Real Estate Finance Trust, Inc. Forward-Looking Statements This Quarterly Report on Form 10-Q includes "forward-looking statements" (within the meaning of the federal securities laws, 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")) that reflect our expectations and projections about our future results, performance, prospects and opportunities. We have attempted to identify these forward-looking statements by the use of words such as "may," "will," "seek," "expects," "anticipates," "believes," "targets," "intends," "should," "estimates," "could," "continue," "assume," "projects," "plans" or similar expressions. These forward-looking statements are based on information currently available to us and are subject to a number of known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements. These factors include, among other things, those discussed below. In addition, these risks and uncertainties include those associated with (i) the scope, severity and duration of the current pandemic of COVID-19 and actions taken to contain the pandemic or mitigate its impact, (ii) the potential adverse effect of the COVID-19 pandemic on the financial condition, results of operations, cash flows and performance of the Company and its tenants, the real estate market and the global economy and financial markets, among others, and (iii) general economic, market and other conditions. We intend for all such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in Section 27A of the Securities Act and Section 21E of the Exchange Act, as applicable by law. We do not undertake to publicly update or revise any forward-looking statements, whether as a result of changes in underlying assumptions or new information, future events or otherwise, except as may be required to satisfy our obligations under federal securities law. The forward-looking statements should be read in light of the risk factors identified in Item 1A - Risk Factors of this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the year endedDecember 31, 2021 . The following are some, but not all, of the assumptions, risks, uncertainties and other factors that could cause our actual results to differ materially from those presented in our forward-looking statements:
•We may be unable to renew leases, lease vacant space or re-lease space as leases expire on favorable terms or at all.
•We are subject to risks associated with tenant, geographic and industry concentrations with respect to our investments and properties.
•Our properties, intangible assets and other assets, as well as the property securing our loans or other investments, may be subject to impairment charges.
•We could be subject to unexpected costs or unexpected liabilities that may arise from dispositions.
•We are subject to competition in the acquisition and disposition of properties and in the leasing of our properties and we may suffer delays or be unable to acquire, dispose of, or lease properties on advantageous terms.
•We are subject to risks associated with bankruptcies or insolvencies of our borrowers and tenants and from borrower or tenant defaults generally.
•Our credit and real estate investments subject us to the political, economic, capital markets and other conditions inthe United States , including with respect to the effects of the COVID-19 pandemic and other events that impactthe United States .
•We are subject to fluctuations in interest rates which could reduce our ability to generate income on our credit investments.
•We are subject to an increase in inflation that could increase our credit and real estate portfolio related costs at a higher rate than our rental income and other revenue and adversely impact demand for rental space and future extensions of our tenants' leases.
•We are subject to competition from entities engaged in lending which may impact the availability of origination and acquisition opportunities acceptable to us.
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•We have substantial indebtedness, which may affect our ability to pay distributions and expose us to interest rate fluctuation risk and the risk of default under our debt obligations.
•We are subject to risks associated with the incurrence of additional secured or unsecured debt.
•We may not be able to maintain profitability.
•We may not generate cash flows sufficient to pay our distributions to stockholders or meet our debt service obligations.
•Our continued compliance with debt covenants depends on many factors and could be impacted by current or future economic conditions associated with the COVID-19 pandemic.
•We may be affected by risks resulting from losses in excess of insured limits.
•We may fail to remain qualified as a REIT for
•We may be unable to successfully reposition our portfolio or list our shares on a national securities exchange in the timeframe we expect or at all.
Definitions
We use certain defined terms throughout this Quarterly Report on Form 10-Q that have the following meanings:
The phrase "annualized rental income" refers to the straight-line rental revenue under our leases on operating properties owned as of the respective reporting date, which includes the effect of rent escalations and any tenant concessions, such as free rent, and excludes any contingent rent, such as percentage rent. Management uses annualized rental income as a basis for tenant, industry and geographic concentrations and other metrics within the portfolio. Annualized rental income is not indicative of future performance. Under a "net lease," the tenant occupying the leased property (usually as a single tenant) does so in much the same manner as if the tenant were the owner of the property. The tenant generally agrees that it will either have no ability or only limited ability to terminate the lease or abate rent prior to the expiration of the term of the lease as a result of real estate driven events such as casualty, condemnation or failure by the landlord to fulfill its obligations under the lease. There are various forms of net leases, most typically classified as either triple-net or double-net. Triple-net leases typically require the tenant to pay all expenses associated with the property (e.g., real estate taxes, insurance, maintenance and repairs, including roof, structure and parking lot). Double-net leases typically hold the landlord responsible for the capital expenditures for the roof and structure, while the tenant is responsible for all lease payments and remaining operating expenses associated with the property (e.g., real estate taxes, insurance and maintenance).
Overview
We are primarily focused on originating, acquiring, financing and managing shorter duration senior secured loans, other related credit investments and core commercial real estate. Our investment strategy allows us to adapt over time in order to respond to evolving market conditions and to capitalize on investment opportunities that may arise at different points in the economic and real estate investment cycle. We are continuing our strategy as a credit focused REIT, balancing our existing core of necessity commercial real estate assets leased to creditworthy tenants under long-term net leases with a portfolio of commercial mortgage loans and other credit investments. Assuming the successful repositioning of our portfolio and subject to market conditions, we then expect to pursue a listing of our common stock on a national securities exchange, though we can provide no assurances that a listing will happen on that timeframe or at all. We were formed onJuly 27, 2010 , and we elected to be taxed, and conduct our operations to qualify, as a REIT forU.S. federal income tax purposes. We have no paid employees and are externally managed by CMFT Management and, with respect to investments in securities and certain other of our investments, our Investment Advisor, each of which is an affiliate of CIM, a community-focused real estate and infrastructure owner, operator, lender and developer. As ofJune 30, 2022 , we owned 402 properties, which consisted of 378 retail properties, 13 industrial properties, 10 office properties, and one anchored shopping center, representing 33 industry sectors and comprising 12.1 million rentable square feet of commercial space located in 45 states. As ofJune 30, 2022 , we owned condominium developments with a net book value of$152.5 million .
As of
In furtherance of our strategy, during the six months endedJune 30, 2022 , we disposed of 112 properties and an outparcel of land, encompassing 10.6 million gross rentable square feet. OnDecember 20, 2021 , certain subsidiaries of the Company 45
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entered into the Purchase and Sale Agreement to sell 79 shopping centers and two single-tenant properties, for which we were to receive, in the aggregate, approximately$1.32 billion in total consideration at closing. During the six months endedJune 30, 2022 , the sale of 80 properties closed under the Purchase and Sale Agreement for total consideration of$1.3 billion , as further discussed in Note 4 - Real Estate Assets to the condensed consolidated financial statements in this Quarterly Report on Form 10-Q. The remaining property is classified as held for sale in the condensed consolidated balance sheets as ofJune 30, 2022 with a carrying value of$66.2 million . The sale of the final property closed for total consideration of$68.3 million subsequent toJune 30, 2022 , as further discussed in Note 17 - Subsequent Events to the condensed consolidated financial statements in this Quarterly Report on Form 10-Q. Our operating results and cash flows are primarily influenced by rental and other property income from our commercial properties, interest income from our credit investments, interest expense on our indebtedness and investment and operating expenses. As 99.2% of our rentable square feet was under lease, including any month-to-month agreements, as ofJune 30, 2022 , with a weighted average remaining lease term of 10.6 years, we believe our exposure to changes in commercial rental rates on our portfolio is substantially mitigated, except for vacancies caused by tenant bankruptcies or other factors, including due to circumstances related to COVID-19. Our manager regularly monitors the creditworthiness of our tenants by reviewing each tenant's financial results, any available credit rating agency reports on the tenant or guarantor, the operating history of the property with such tenant, the tenant's market share and track record within its industry segment, the general health and outlook of the tenant's industry segment and other information for changes and possible trends. If CMFT Management identifies significant changes or trends that may adversely affect the creditworthiness of a tenant, it will gather a more in-depth knowledge of the tenant's financial condition and, if necessary, attempt to mitigate the tenant credit risk by evaluating the possible sale of the property or identifying a possible replacement tenant should the current tenant fail to perform on the lease. In addition, our manager reviews our investment portfolios and is in regular contact with our borrowers, monitoring performance of the collateral and enforcing our rights as necessary.
COVID-19
We are closely monitoring the negative impacts that the COVID-19 pandemic and the efforts to mitigate its spread are having on the economy, our tenants and our business. The extent to which the COVID-19 pandemic continues to impact our operations and those of our tenants will depend on future developments, including, among other factors, the duration, spread and resurgences of the virus, including certain variants thereof, along with related travel advisories and restrictions, the recovery time of the disrupted supply chains and industries, the impact of labor market interruptions, the impact of government interventions, the pace, scope and efficacy of vaccination programs, and general uncertainty as to the impact of COVID-19, including related variants, on the global economy. Macroeconomic Environment TheU.S. Federal Reserve's recent actions to increase interest rates in order to control inflation have created further uncertainty for the economy and for our borrowers and tenants. Although the majority of our business model is such that rising interest rates will, all else being equal, correlate to increases in our net income, increases in interest rates may adversely affect our existing borrowers, tenants and owned property values. It is difficult to predict the full impact of recent changes and any future changes in interest rates or inflation. 46
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Operating Highlights and Key Performance Indicators
Activity from
Operating Results:
•Net income attributable to the Company of
•Declared aggregate distributions of
Credit Portfolio Activity:
•Invested
•Invested
•Invested
•Converted
•Invested
Real Estate Portfolio Activity:
•Disposed of 112 properties and an outparcel of land for an aggregate sales
price of
•Disposed of condominium units for an aggregate sales price of
Financing Activity:
•Increased total debt by
•Entered into a new repurchase agreement and increased maximum financing amounts on two existing repurchase facilities to provide up to$1.25 billion and$750.0 million , respectively, to finance a portfolio of existing and future commercial real estate mortgage loans and CMBS.
Portfolio Information
The following table shows the carrying value of our portfolio by investment type
as of
As of June 30,
2022 2021
Asset Count Carrying Value Asset Count Carrying Value
Loan Held-For-Investment
First mortgage loans 28 $ 3,171,155 48.5 % 10 $ 872,188 19.1 %
Liquid senior loans 309 684,866 10.4 % 237 484,059 10.6 %
Corporate senior loans 4 55,218 0.8 % - - - %
Less: Current expected credit losses (23,935) (0.4) % (13,011) (0.3) %
Total loans held-for-investment and related
receivable, net 341 3,887,304 59.3 % 247 1,343,236 29.4 %
Real Estate-Related Securities
CMBS and equity security 11 274,382 4.2 % 3 42,071 0.9 %
Real Estate
Total real estate assets and intangible
lease liabilities, net 402 2,397,206 36.5 % 469 3,181,245 69.7 %
Total Investment Portfolio 754 $ 6,558,892 100.0 % 719 $ 4,566,552 100.0 %
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Credit Portfolio Information
The following table details overall statistics for our credit portfolio as of
First Mortgage Liquid Senior CMBS and Equity Corporate
Loans (1) Loans Security Senior Loans
Number of investments 28 309 11 4
Principal balance $ 3,196,721 $ 688,965 $ 317,550 $ 55,801
Net book value $ 3,158,080 $
674,677
$ 364,221 $
2,031 $ -
4.5 % 5.1 % 5.7 % 7.8 %
Weighted-average maximum years to
maturity (2) 4.1 5.0 7.2 5.3
____________________________________
(1)As of
(2)Maximum maturity date assumes all extension options are exercised by the borrower; however, our CRE loans may be repaid prior to such date.
Real Estate Portfolio Information
As ofJune 30, 2022 , we owned 402 properties located in 45 states, the gross rentable square feet of which was 99.2% leased, including any month-to-month agreements, with a weighted average lease term remaining of 10.6 years. As ofJune 30, 2022 , no single tenant accounted for greater than 10% of our 2022 annualized rental income. As ofJune 30, 2022 , we had certain geographic and industry concentrations in our property holdings. In particular, we had properties located inOhio , which accounted for 11% of our 2022 annualized rental income. In addition, we had tenants in the health and personal care stores and sporting goods, hobby and musical instruments store industries, which accounted for 12% and 10%, respectively, of our 2022 annualized rental income. During the six months endedJune 30, 2022 , we disposed of 112 properties and an outparcel of land, for an aggregate gross sales price of$1.55 billion . Additionally, during the six months endedJune 30, 2022 , we sold condominium units for an aggregate gross sales price of$22.5 million . The following table shows the property statistics of our real estate assets as ofJune 30, 2022 and 2021: As ofJune 30, 2022 2021 Number of commercial properties 402
469
Rentable square feet (in thousands) (1) 12,079 18,564
Percentage of rentable square feet leased 99.2 % 93.1 %
Percentage of investment-grade tenants (2) 38.7 % 38.8 %
____________________________________
(1) Includes square feet of buildings on land parcels subject to ground leases.
(2) Investment-grade tenants are those with a credit rating of BBB- or higher byStandard & Poor's or a credit rating of Baa3 or higher by Moody's Investor Service, Inc. ("Moody's"). The ratings may reflect those assigned byStandard & Poor's or Moody's to the lease guarantor or the parent company, as applicable. The weighted average credit rating is weighted based on annualized rental income and is for only those tenants rated byStandard & Poor's .
During the six months ended
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Table of Contents Results of Operations Overview We are not aware of any material trends or uncertainties, other than those listed in the risk factors set forth in our Annual Report on Form 10-K for the year endedDecember 31, 2021 and this Quarterly Report on Form 10-Q, the effects of the COVID-19 pandemic, and national economic conditions affecting real estate in general that may reasonably be expected to have a material impact on our results from the acquisition, management and operation of properties. Currently, we are unable to predict the impact that the COVID-19 pandemic will have on our financial condition, results of operations and cash flows in future periods due to numerous uncertainties. Same Store Analysis Our results of operations are influenced by the timing of acquisitions and the operating performance of our real estate assets. We review our stabilized operating results, measured by net operating income, from properties that we owned for the entirety of both the current and prior year reporting periods, referred to as "same store" properties, and we believe that the presentation of operating results for same store properties provides useful information to stockholders. Net operating income is a supplemental non-GAAP financial measure of a real estate company's operating performance. Net operating income is considered by management to be a helpful supplemental performance measure, as it enables management to evaluate the impact of occupancy, rents, leasing activity and other controllable property operating results at our real estate properties, and it provides a consistent method for the comparison of our properties. We define net operating income as operating revenues less operating expenses, which exclude (i) depreciation and amortization, (ii) interest expense and other non-property related revenue and expense items such as (a) general and administrative expenses, (b) expense reimbursements to related parties, (c) management fees, (d) transaction-related expenses, (e) real estate impairment, (f) increase in provision for credit losses, (g) gain on disposition of real estate and condominium developments, net, (h) merger-related expenses, net and (i) interest income. Our calculation of net operating income may not be comparable to that of other REITs and should not be considered to be more relevant or accurate in evaluating our operating performance than the current GAAP methodology used in calculating net income. In determining the same store property pool, we include all properties that were owned for the entirety of both the current and prior reporting periods, except for properties during the current or prior year that were under development or redevelopment.
Comparison of the Three Months Ended
The following table reconciles net income, calculated in accordance with GAAP, to net operating income (in thousands):
For the
Three Months Ended
2022 2021 Change
Net income $ 73,613 $ 57,787 $ 15,826
Loss on extinguishment of debt 5,369 1,478 3,891
Interest expense and other, net 34,460 16,460 18,000
Gain on investment in unconsolidated entities (1,323) - (1,323)
Operating income 112,119 75,725 36,394
Gain on disposition of real estate and condominium developments, net
(81,107) (46,469) (34,638)
Increase in provision for credit losses 4,942 123 4,819
Real estate impairment 15,996 77 15,919
Depreciation and amortization 18,015 24,647 (6,632)
Transaction-related expenses 446 27 419
Management fees 13,351 11,755 1,596
Expense reimbursements to related parties 3,777 3,210 567
General and administrative expenses 3,680 3,605 75
Interest income (44,984) (16,460) (28,524)
Net operating income $ 46,235 $ 56,240 $ (10,005) Our operating segments include credit and real estate. Refer to Note 16 - Segment Reporting to our condensed consolidated financial statements in this Quarterly Report on Form 10-Q for further discussion of our operating segments.
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Table of Contents Credit Segment Interest Income The increase in interest income of$28.5 million for the three months endedJune 30, 2022 , as compared to the same period in 2021, was due to an increase in the overall size of our investment portfolio. As ofJune 30, 2022 , we held investments in CRE loans held-for-investment of$3.2 billion , liquid senior loans of$684.9 million , corporate senior loans of$55.2 million , and CMBS and other securities of$274.4 million . As ofJune 30, 2021 , we held investments in CRE loans held-for-investment of$872.2 million , liquid senior loans of$484.1 million , and CMBS of$42.1 million .
Increase in Provision for Credit Losses
The increase in provision for credit losses of$4.8 million during the three months endedJune 30, 2022 , as compared to the same period in 2021, was primarily due to the increased number of loan investments entered into during the three months endedJune 30, 2022 , as compared to the same period in 2021.
Real Estate Segment
A total of 307 properties were acquired beforeApril 1, 2021 and represent our "same store" properties during the three months endedJune 30, 2022 and 2021. "Non-same store" properties, for purposes of the table below, includes properties acquired or disposed of on or afterApril 1, 2021 .
The following table details the components of net operating income broken out between same store and non-same store properties (in thousands):
Total Same Store Non-Same Store
For the Three Months Ended June 30, For the Three Months Ended June 30, For
the Three Months Ended
2022 2021 Change 2022 2021 Change 2022 2021 Change
Rental and other
property income $ 53,508 $ 75,302 $ (21,794) Property operating expenses 5,249 11,356 (6,107) 914 1,076 (162) 4,335 10,280 (5,945) Real estate tax expenses 2,024 7,706 (5,682) 1,207 1,209 (2) 817 6,497 (5,680) Total property operating expenses 7,273 19,062 (11,789) 2,121 2,285 (164) 5,152 16,777 (11,625)
Net operating income
Loss on Extinguishment of Debt
The increase in loss on extinguishment of debt of$3.9 million for the three months endedJune 30, 2022 , as compared to the same period in 2021, was primarily due to the increase in terminations of certain mortgage notes in connection with the disposition of the underlying properties during the three months endedJune 30, 2022 , as compared to the same period in 2021.
Gain on Investment in Unconsolidated Entities
The increase in gain on investment in unconsolidated entities of
Interest Expense and Other, Net
Interest expense and other, net also includes amortization of deferred financing costs.
The increase in interest expense and other, net, of$18.0 million for the three months endedJune 30, 2022 , as compared to the same period in 2021, was primarily due to an increase in the three-month average aggregate amount of debt outstanding from$2.2 billion as ofJune 30, 2021 to$4.1 billion as ofJune 30, 2022 as a result of entering into and upsizing additional repurchase agreements, originating the Mortgage Loan and Class A Notes, and assuming the CIM Income NAV Credit Facility as part of the CIM Income NAV Merger subsequent toJune 30, 2021 . In addition, interest expense and other, net was further increased by the unrealized loss on the Company's equity security of$4.1 million during the three months endedJune 30, 2022 . 50
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Gain on Disposition of Real Estate and Condominium Developments, Net
The increase in gain on disposition of real estate and condominium developments, net, of$34.6 million during the three months endedJune 30, 2022 , as compared to the same period in 2021, was due to the disposition of 43 properties and an outparcel of land for a gain of$81.2 million , partially offset by the disposition of condominium units for a loss of$74,000 during the three months endedJune 30, 2022 , compared to the disposition of 46 properties for a gain of$45.0 million during the three months endedJune 30, 2021 .
Real Estate Impairment
The increase in real estate impairments of$15.9 million during the three months endedJune 30, 2022 , as compared to the same period in 2021, was due to 11 properties and certain condominium units that were deemed to be impaired, resulting in impairment charges of$16.0 million during the three months endedJune 30, 2022 , compared to one property that was deemed to be impaired, resulting in impairment charges of$77,000 during the three months endedJune 30, 2021 .
Depreciation and Amortization
The decrease in depreciation and amortization of$6.6 million during the three months endedJune 30, 2022 , as compared to the same period in 2021, was primarily due to the disposition of 182 properties subsequent toJune 30, 2021 , partially offset by the acquisition of 115 properties through the CIM Income NAV Merger that closed inDecember 2021 .
Transaction-Related Expenses
The increase in transaction-related expenses of$419,000 during the three months endedJune 30, 2022 , as compared to the same period in 2021, was primarily due to escrow holdbacks that were deemed uncollectible as ofJune 30, 2022 and were therefore written off. No such write-offs occurred during the same period in 2021. Management Fees We pay CMFT Management a management fee pursuant to the Management Agreement, payable quarterly in arrears, equal to the greater of (a)$250,000 per annum ($62,500 per quarter) and (b) 1.50% per annum (0.375% per quarter) of the Company's Equity (as defined in the Management Agreement). Furthermore, as discussed in Note 12 - Related-Party Transactions and Arrangements to our condensed consolidated financial statements in this Quarterly Report on Form 10-Q, pursuant to the Investment Advisory and Management Agreement, for management of investments in the Managed Assets (as defined in the Investment Advisory and Management Agreement),CMFT Securities pays the Investment Advisor the Investment Advisory Fee, payable quarterly in arrears, equal to 1.50% per annum (0.375% per quarter) ofCMFT Securities' Equity (as defined in the Investment Advisory and Management Agreement). Because the Managed Assets are excluded from the calculation of management fees payable by the Company to CMFT Management pursuant to the Management Agreement, the total management and advisory fees payable by the Company to its external advisors are not increased as a result of the Investment Advisory and Management Agreement. In addition, pursuant to the Sub-Advisory Agreement, in connection with providing investment management services with respect to the corporate credit-related securities held byCMFT Securities , on a quarterly basis, the Investment Advisor designates 50% of the sum of the Investment Advisory Fee payable to the Investment Advisor as sub-advisory fees. The increase in management fees of$1.6 million during the three months endedJune 30, 2022 , as compared to the same period in 2021, was primarily due to increased equity from the issuance of common stock in connection with the CIM Income NAV Merger that closed inDecember 2021 .
Expense Reimbursements to Related Parties
Pursuant to the Investment Advisory and Management Agreement,CMFT Securities reimburses the Investment Advisor for costs and expenses incurred by the Investment Advisor on its behalf. Additionally, we may be required to reimburse certain expenses incurred by CMFT Management in providing management services, subject to limitations as set forth in the Management Agreement (as discussed in Note 12 - Related-Party Transactions and Arrangements to our condensed consolidated financial statements in this Quarterly Report on Form 10-Q). The increase in expense reimbursements to related parties of$567,000 during the three months endedJune 30, 2022 , as compared to the same period in 2021, was primarily due to increased operating expense reimbursements due to CMFT Management, primarily as a result of increased allocated payroll resulting from increased portfolio activity. 51
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General and Administrative Expenses
The primary general and administrative expense items are legal and accounting fees, banking fees and transfer agency and board of directors costs.
General and administrative expenses remained generally consistent during the
three months ended
Net Operating Income
Same store property net operating income increased$1.4 million during the three months endedJune 30, 2022 , as compared to the same period in 2021. The increase was partially due to an increase in same store occupancy to 98.9% as ofJune 30, 2022 from 98.8% as ofJune 30, 2021 . Non-same store property net operating income decreased$11.4 million during the three months endedJune 30, 2022 , as compared to the same period in 2021. The decrease was primarily due to the disposition of 182 properties subsequent toJune 30, 2021 , partially offset by an increase in net operating income due to the acquisition of 115 properties in connection with the CIM Income NAV Merger that closed inDecember 2021 .
Comparison of the Six Months Ended
The following table reconciles net income, calculated in accordance with GAAP, to net operating income (in thousands):
For the Six
Months Ended
2022 2021 Change
Net income $ 112,714 $ 55,034 $ 57,680
Loss on extinguishment of debt 16,240 1,478 14,762
Interest expense and other, net 65,497 36,482 29,015
Gain on investment in unconsolidated entities (6,663) - (6,663)
Operating income 187,788 92,994 94,794
Gain on disposition of real estate and condominium developments, net
(113,681) (46,469) (67,212)
Increase in provision for credit losses 9,651 691 8,960
Real estate impairment 19,287 4,377 14,910
Depreciation and amortization 37,156 50,385 (13,229)
Transaction-related expenses 453 31 422
Management fees 26,698 23,332 3,366
Expense reimbursements to related parties 7,471 5,871 1,600
General and administrative expenses 7,155 8,033 (878)
Interest income (76,447) (28,413) (48,034)
Net operating income $ 105,531 $ 110,832 $ (5,301)
Credit Segment
Interest Income
The increase in interest income of $48.0 million for the six months ended
June 30, 2022 , as compared to the same period in 2021, was due to an increase in
the overall size of our investment portfolio. As of June 30, 2022 , we held
investments in CRE loans held-for-investment of $3.2 billion , liquid senior
loans of $684.9 million , corporate senior loans of $55.2 million , and CMBS and
other securities of $274.4 million . As of June 30, 2021 , we held investments in
CRE loans held-for-investment of $872.2 million , liquid senior loans of $484.1
million , and CMBS of $42.1 million .
Increase in Provision for Credit Losses
The increase in provision for credit losses of
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Real Estate Segment
A total of 307 properties were acquired before
The following table details the components of net operating income broken out between same store and non-same store properties (in thousands):
Total Same Store Non-Same Store
For the Six Months Ended June 30, For the Six Months Ended June 30, For the Six Months Ended June 30,
2022 2021 Change 2022 2021 Change 2022 2021 Change
Rental and other
property income $ 127,244 $ 152,232 $ (24,988) $ 63,150 $ 62,040 $ 1,110 $ 64,094 $ 90,192 $ (26,098)
Property operating
expenses 12,976 21,475 (8,499) 1,727 1,915 (188) 11,249 19,560 (8,311)
Real estate tax
expenses 8,737 19,925 (11,188) 2,414 2,556 (142) 6,323 17,369 (11,046)
Total property
operating expenses 21,713 41,400 (19,687) 4,141 4,471 (330) 17,572 36,929 (19,357)
Net operating income $ 105,531 $ 110,832 $
(5,301)
46,522
Loss on Extinguishment of Debt
The increase in loss on extinguishment of debt of
Gain on Investment in Unconsolidated Entities
The increase in gain on investment in unconsolidated entities of$6.7 million for the six months endedJune 30, 2022 , as compared to the same period in 2021, was due to the Company's investment inCIM UII Onshore and NP JV Holdings , neither of which were invested in by the Company during the six months endedJune 30, 2021 .
Interest Expense and Other, Net
The increase in interest expense and other, net, of$29.0 million for the six months endedJune 30, 2022 , as compared to the same period in 2021, was primarily due to an increase in the six-month average aggregate amount of debt outstanding from$2.4 billion as ofJune 30, 2021 to$4.2 billion as ofJune 30, 2022 as a result of entering into and upsizing additional repurchase agreements, originating the Mortgage Loan and Class A Notes, and assuming the CIM Income NAV Credit Facility as part of the CIM Income NAV Merger subsequent toJune 30, 2021 . In addition, interest expense and other, net was further increased by the unrealized loss on the Company's equity security of$6.4 million during the six months endedJune 30, 2022 .
Gain on Disposition of Real Estate and Condominium Developments, Net
The increase in gain on disposition of real estate and condominium developments, net, of$67.2 million during the six months endedJune 30, 2022 , as compared to the same period in 2021, was primarily due to the disposition of 112 properties and one outparcel of land for a gain of$110.4 million and the disposition of condominium units for a gain of$3.3 million during the six months endedJune 30, 2022 , compared to the disposition of 47 properties for a gain of$45.0 million during the six months endedJune 30, 2021 .
Real Estate Impairment
The increase in impairments of$14.9 million during the six months endedJune 30, 2022 , as compared to the same period in 2021, was due to 18 properties and certain condominium units that were deemed to be impaired, resulting in impairment charges of$19.3 million during the six months endedJune 30, 2022 , compared to five properties that were deemed to be impaired, resulting in impairment charges of$4.4 million during the six months endedJune 30, 2021 . 53
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Depreciation and Amortization
The decrease in depreciation and amortization of$13.2 million during the six months endedJune 30, 2022 , as compared to the same period in 2021, was primarily due to the disposition of 182 properties subsequent toJune 30, 2021 , partially offset by the acquisition of 115 properties through the CIM Income NAV Merger that closed inDecember 2021 .
Transaction-Related Expenses
The increase in transaction-related expenses of$422,000 during the six months endedJune 30, 2022 , as compared to the same period in 2021, was primarily due to escrow holdbacks that were deemed uncollectible as ofJune 30, 2022 and were therefore written off. No such write-offs occurred during the same period in 2021. Management Fees
The increase in management fees of
Expense Reimbursements to Related Parties
The increase in expense reimbursements to related parties of$1.6 million during the six months endedJune 30, 2022 , as compared to the same period in 2021, was primarily due to increased operating expense reimbursements due to CMFT Management, primarily as a result of increased allocated payroll resulting from increased portfolio activity.
General and Administrative Expenses
The decrease in general and administrative expenses of$878,000 for the six months endedJune 30, 2022 , compared to the same period in 2021, was primarily due to increased legal expenses incurred during the six months endedJune 30, 2021 related to the foreclosure completed inJanuary 2021 to take control of the assets which previously secured the Company's mezzanine loans, as discussed in Note 8 - Loans Held-For-Investment to our condensed consolidated financial statements in this Quarterly Report on Form 10-Q. Such foreclosure activity did not occur during the six months endedJune 30, 2022 . The overall decrease was partially offset by increased expenses related to the assumption of the CIM Income NAV Credit Facility in connection with the CIM Income NAV Merger completed inDecember 2021 .
Net Operating Income
Same store property net operating income increased$1.4 million during the six months endedJune 30, 2022 , as compared to the same period in 2021. The increase was partially due to an increase in same store occupancy to 98.9% as ofJune 30, 2022 from 98.8% as ofJune 30, 2021 . Non-same store property net operating income decreased$6.7 million during the six months endedJune 30, 2022 , as compared to the same period in 2021. The decrease was primarily due to the disposition of 182 properties subsequent toJune 30, 2021 , partially offset by an increase in net operating income due to the acquisition of 115 properties in connection with the CIM Income NAV Merger that closed inDecember 2021 . Distributions
Prior to
Period Commencing Period Ending Daily Distribution Amount
April 14, 2012 December 31, 2012 $0.001707848
January 1, 2013 December 31, 2015 $0.001712523
January 1, 2016 December 31, 2016 $0.001706776
January 1, 2017 December 31, 2019 $0.001711452
January 1, 2020 March 31, 2020 $0.001706776
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OnApril 20, 2020 , our Board decided to make a determination as to the amount and timing of distributions on a monthly, instead of a quarterly, basis until such time that we had greater visibility into the impact that the COVID-19 pandemic would have on our tenants' ability to continue to pay rent on their leases on a timely basis or at all, the degree to which federal, state or local governmental authorities grant rent relief or other relief or amnesty programs applicable to our tenants, our ability to access the capital markets, and onthe United States and worldwide financial markets and economy. OnMarch 25, 2021 , the Board resumed declaring distributions on a quarterly basis, which are paid out on a monthly basis.
Since
Period Commencing Period Ending Monthly Distribution Amount
April 2020 May 2020 $0.0130
June 2020 June 2020 $0.0161
July 2020 July 2020 $0.0304
August 2020 December 2021 $0.0303
January 2022 September 2022 $0.0305 As of
The following table presents distributions and source of distributions for the periods indicated below (dollar amounts in thousands):
Six Months Ended June 30,
2022 2021
Amount Percent Amount Percent
Distributions paid in cash $ 60,834 76 % $ 59,166 90 %
Distributions reinvested 19,116 24 % 6,660 10 %
Total distributions $ 79,950 100 % $ 65,826 100 %
Sources of distributions:
Net cash provided by operating activities (1)(2) $ 79,950 100 % $ 65,347 99 %
Proceeds from the issuance of debt (3) - - % 479 1 %
Total sources $ 79,950 100 % $ 65,826 100 %
____________________________________
(1)Net cash provided by operating activities for the six months ended
(2)Our distributions covered by cash flows from operating activities for the six
months ended
(3)Net proceeds on the repurchase facilities, credit facilities and notes
payable for the six months ended
Share Redemptions
Our share redemption program permits our stockholders to sell their shares of
common stock back to us, subject to certain conditions and limitations. We will
limit the number of shares redeemed pursuant to our share redemption program as
follows: (1) we will not redeem in excess of 5% of the weighted average number
of shares outstanding during the trailing 12 months prior to the end of the
fiscal quarter for which the redemptions are being paid; and (2) funding for the
redemption of shares will be limited, among other things, to the net proceeds we
receive from the sale of shares under our DRIP, net of shares redeemed to date.
In an effort to accommodate redemption requests throughout the calendar year, we
will generally limit quarterly redemptions to approximately 1.25% of the
weighted average number of shares outstanding during the trailing 12-month
period ending on the last day of the fiscal quarter for which the redemptions
are being paid, and to the net proceeds we receive from the sale of shares in
the respective quarter under the Secondary DRIP Offering. Any of the foregoing
limits might prevent us from accommodating all redemption requests made in any
fiscal quarter or in any 12-month period. We will determine whether we have
sufficient funds and/or shares available as soon as practicable after the end of
each fiscal quarter, but in any event prior to the applicable payment date. If
we cannot purchase all shares presented for redemption in any fiscal quarter,
based upon insufficient cash available from DRIP and/or the limit on the number
of shares we may redeem during any quarter or year, we will give priority to the
redemption of deceased stockholders' shares. While deceased stockholders' shares
will be included in
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calculating the maximum number of shares that may be redeemed in any annual or quarterly period, they will not be subject to the annual or quarterly percentage caps; therefore, if the volume of requests to redeem deceased stockholders' shares in a particular quarter were large enough to cause the annual or quarterly percentage caps to be exceeded, even if no other redemption requests were processed, the redemptions of deceased stockholders' shares would be completed in full, assuming sufficient proceeds from the sale of shares under our DRIP, net of shares redeemed to date, were available. If sufficient proceeds from the sale of shares under our DRIP, net of shares redeemed to date, were not available to pay all such redemptions in full, the requests to redeem deceased stockholders' shares would be honored on a pro rata basis. We next will give priority to requests for full redemption of accounts with a balance of 250 shares or less at the time we receive the request, in order to reduce the expense of maintaining small accounts. Thereafter, we will honor the remaining redemption requests on a pro rata basis. Following such quarterly redemption period, if a stockholder would like to resubmit the unsatisfied portion of the prior request for redemption, such stockholder must submit a new request for redemption of such shares prior to the last day of the new quarter. Unfulfilled requests for redemption will not be carried over automatically to subsequent redemption periods. In addition, our management reserves the right, in its sole discretion at any time, and from time to time, to reject any request for redemption for any reason. Our Board may choose to amend the terms of, suspend or terminate our share redemption program at any time in its sole discretion if it believes that such action is in the best interest of us and our stockholders. Any material modifications or suspension of the share redemption program will be disclosed to our stockholders as promptly as practicable in our reports filed with theSEC and via our website. During the six months endedJune 30, 2022 , we received valid redemption requests under our share redemption program totaling approximately 49.6 million shares, of which we redeemed approximately 1.4 million shares as ofJune 30, 2022 for$10.0 million (at an average redemption price of$7.20 per share) and approximately 1.3 million shares subsequent toJune 30, 2022 for$9.4 million (at a redemption price of$7.20 per share). The remaining redemption requests relating to approximately 46.9 million shares went unfulfilled. A valid redemption request is one that complies with the applicable requirements and guidelines of the share redemption program then in effect. The share redemptions were funded with proceeds from the Secondary DRIP Offering and available borrowings.
Liquidity and Capital Resources
General
We expect to utilize proceeds from real estate dispositions, sales proceeds and principal payments received on credit investments, cash flows from operations and future proceeds from secured or unsecured financing to complete future acquisitions and loan originations, repayment of certain indebtedness and for general corporate uses. The sources of our operating cash flows will primarily be provided by interest income from our portfolio of credit investments and the rental and other property income received from current and future leased properties.
Sources of Liquidity
Our primary sources of liquidity include cash and cash equivalents and available
borrowings under our debt facilities, which are set forth in the following
table:
June 30, 2022 December 31, 2021
Cash and cash equivalents $ 173,417 $ 107,381
Unused borrowing capacity (1) 797,101 549,811
$ 970,518 $ 657,192
____________________________________
(1)Subject to borrowing availability.
See Note 10 - Repurchase Facilities, Credit Facilities and Notes Payable to our condensed consolidated financial statements in this Quarterly Report on Form 10-Q for additional details regarding our notes payable, credit facilities and repurchase facilities. The following table details our outstanding financing arrangements and borrowing capacity as ofJune 30, 2022 (in thousands): 56
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Portfolio
Financing
Outstanding Maximum Capacity
Principal Balance (1)
Notes payable - fixed rate debt $ 95,317 $ 95,317
Notes payable - variable rate debt 364,164 364,164
First lien mortgage loan 135,272 135,272
ABS mortgage notes 766,905 774,000
Credit facilities 734,000 975,000
Repurchase facilities 2,150,994 2,700,000 (2)
Total portfolio financing $
4,246,652
____________________________________
(1)Subject to borrowing availability.
(2)Facilities under the Master Repurchase Agreement with J.P. Morgan carry no maximum facility size.
Liquidity and Capital Resources
Our principal demands for funds will be for the acquisition of real estate-related securities, real estate and real estate-related assets and the payment of tenant improvements, acquisition-related expenses, operating expenses, distributions, redemptions and interest and principal on current and any future debt financings, including principal repayments of$504.2 million within the next 12 months,$228.3 million of which was paid down subsequent toJune 30, 2022 , as further discussed in Note 17 - Subsequent Events to our condensed consolidated financial statements in this Quarterly Report on Form 10-Q. Subsequent toJune 30, 2022 , we entered into a new credit agreement with JPMorgan Chase which provides for borrowings of$300.0 million , the proceeds of which were used to pay down the$212.5 million outstanding balance under the CIM Income NAV Credit Facility. We also exercised the Deutsche Bank Repurchase Facility's first extension option which was set to mature onOctober 8, 2022 , extending the date of maturity toOctober 8, 2023 . Generally, we expect to meet our liquidity requirements through cash proceeds from real estate asset dispositions, net cash provided by operations and proceeds from the Secondary DRIP Offering, as well as secured or unsecured borrowings from banks and other lenders to finance our future acquisitions and loan originations. We expect that substantially all net cash flows from operations will be used to pay distributions to our stockholders after certain capital expenditures, including tenant improvements and leasing commissions, are paid; however, we have used, and may continue to use, other sources to fund distributions, as necessary, including borrowings on our unencumbered assets. To the extent that cash flows from operations are lower, distributions paid to our stockholders may be lower. Operating cash flows are expected to increase as we complete future acquisitions. We expect that substantially all net cash flows from the Secondary DRIP Offering or debt financings will be used to fund acquisitions, loan originations, certain capital expenditures, repayments of outstanding debt or distributions and redemptions to our stockholders. We believe that the resources stated above will be sufficient to satisfy our operating requirements for the foreseeable future, and we do not anticipate a need to raise funds from sources other than those described above within the next 12 months. Management intends to use the proceeds from the disposition of properties to, among other things, acquire additional high-quality net-lease properties and credit investments in furtherance of our investment objectives and for other general corporate purposes.
Contractual Obligations
As ofJune 30, 2022 , we had debt outstanding with a carrying value of$4.2 billion and a weighted average interest rate of 3.3%. See Note 10 - Repurchase Facilities, Credit Facilities and Notes Payable to our condensed consolidated financial statements in this Quarterly Report on Form 10-Q for certain terms of our debt outstanding. 57
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Our contractual obligations as ofJune 30, 2022 were as follows (in thousands): Payments due by period (1) Less Than 1 More Than Total Year 1-3 Years 3-5 Years 5 Years
Principal payments - fixed rate debt
7,160 3,328 3,832 - -
Principal payments - variable rate
debt 364,164 49,261 - - 314,903
Interest payments - variable rate
debt (3) 55,963 10,813 21,529 21,500 2,121
Principal payments - first lien
mortgage loan 135,272 - 135,272 - -
Interest payments - first lien
mortgage loan (3) 9,020 8,109 911 - -
Principal payments - ABS mortgage
notes 766,905 7,740 645 - 758,520
Interest payments - ABS mortgage
notes (3) 165,253 21,313 42,801 42,743 58,396
Principal payments - credit
facilities 734,000 212,500 521,500 - -
Interest payments - credit facilities
(3) 46,105 19,399 26,706 - -
Principal payments - repurchase
facilities 2,150,994 218,433 1,932,561 - -
Interest payments - repurchase
facilities (3) 123,537 59,638 63,899 - -
Total $ 4,653,690 $ 626,772 $ 2,828,735 $ 64,243 $ 1,133,940 ____________________________________
(1)The table does not include amounts due to CMFT Management or its affiliates pursuant to our Management Agreement because such amounts are not fixed and determinable. The table also does not include$370.9 million of unfunded commitments related to our existing CRE loans held-for-investment and corporate senior loans held-for-investment and$115.7 million of unfunded commitments related to the NewPoint JV, which are subject to the satisfaction of borrower milestones. In addition, the table does not include$2.0 million of unfunded liquid senior loans and$22.4 million of unsettled liquid senior loan acquisitions, the unsettled amount of which is included in cash and cash equivalents in the accompanying condensed consolidated balance sheet. (2)As ofJune 30, 2022 , we had$15.8 million of variable rate debt effectively fixed through the use of interest rate swap agreements. We used the effective interest rates fixed under our interest rate swap agreements to calculate the debt payment obligations in future periods. (3)Interest payments on the variable rate debt, first lien mortgage loan, ABS mortgage notes, credit facilities and repurchase facilities have been calculated based on outstanding balances as ofJune 30, 2022 through their respective maturity dates. This is only an estimate as actual amounts borrowed and interest rates could vary over time. We expect to incur additional borrowings in the future to acquire additional properties and credit investments. There is no limitation on the amount we may borrow against any single improved property. As ofJune 30, 2022 , our ratio of debt to total gross assets net of gross intangible lease liabilities was 60.8% and our ratio of debt to the fair market value of our gross assets net of gross intangible lease liabilities was 60.5%. Fair market value of our first mortgage loans is based on the estimated market value as ofJune 30, 2022 . Fair market value of the remaining credit investments is based on the market value as ofJune 30, 2022 . Fair market value of our real estate assets is based on the estimated market value as ofMarch 31, 2021 that was used to determine our estimated per share NAV, and for those assets acquired fromApril 1, 2021 throughJune 30, 2022 is based on the purchase price.
Cash Flow Analysis
Operating Activities. Net cash provided by operating activities decreased by$4.1 million for the six months endedJune 30, 2022 , as compared to the same period in 2021. The decrease was primarily due to the disposition of 182 properties subsequent toJune 30, 2021 , offset by the acquisition of 115 properties through the CIM Income NAV Merger. See "- Results of Operations" for a more complete discussion of the factors impacting our operating performance. Investing Activities. Net cash used in investing activities increased$14.0 million for the six months endedJune 30, 2022 , as compared to the same period in 2021. The change was primarily due to an increase in the net investment in loans held-for-investment of$676.6 million and an increase in the net investment of real estate-related securities of$257.0 million , partially offset by an increase in proceeds from disposition of real estate assets of$900.8 million . Financing Activities. Net cash provided by financing activities increased$62.6 million for the six months endedJune 30, 2022 , as compared to the same period in 2021. The change was primarily due to an increase in net proceeds on the repurchase 58
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facilities, notes payable and credit facilities of
Election as a REIT
We elected to be taxed, and operate our business to qualify, as a REIT for federal income tax purposes commencing with our taxable year endedDecember 31, 2012 . To maintain our qualification as a REIT, we must continue to meet certain requirements relating to our organization, sources of income, nature of assets, distributions of income to our stockholders and recordkeeping. As a REIT, we generally are not subject to federal income tax on taxable income that we distribute to our stockholders so long as we distribute at least 90% of our annual taxable income (computed without regard to the dividends paid deduction and excluding net capital gains). If we fail to maintain our qualification as a REIT for any reason in a taxable year and applicable relief provisions do not apply, we will be subject to tax on our taxable income at regular corporate rates. We will not be able to deduct distributions paid to our stockholders in any year in which we fail to maintain our qualification as a REIT. We also will be disqualified for the four taxable years following the year during which qualification was lost, unless we are entitled to relief under specific statutory provisions. Such an event could materially adversely affect our net income and net cash available for distribution to stockholders. However, we believe that we are organized and operate in such a manner as to maintain our qualification as a REIT for federal income tax purposes. No provision for federal income taxes has been made in our accompanying condensed consolidated financial statements. We are subject to certain state and local taxes related to the operations of properties in certain locations, which have been provided for in our accompanying condensed consolidated financial statements.
Critical Accounting Policies and Significant Accounting Estimates
Our accounting policies have been established to conform with GAAP. The preparation of financial statements in conformity with GAAP requires us to use judgment in the application of accounting policies, including making estimates and assumptions. These judgments affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Management believes that we have made these estimates and assumptions in an appropriate manner and in a way that accurately reflects our financial condition. We continually test and evaluate these estimates and assumptions using our historical knowledge of the business, as well as other factors, to ensure that they are reasonable for reporting purposes. However, actual results may differ from these estimates and assumptions. If our judgment or interpretation of the facts and circumstances relating to various transactions had been different, it is possible that different accounting policies would have been applied, thus resulting in a different presentation of the financial statements. Additionally, other companies may utilize different estimates that may impact comparability of our results of operations to those of companies in similar businesses. We believe the following critical accounting policies govern the significant judgments and estimates used in the preparation of our financial statements, which should be read in conjunction with the more complete discussion of our accounting policies and procedures included in Note 2 - Summary of Significant Accounting Policies to our audited consolidated financial statements in our Annual Report on Form 10-K for the year endedDecember 31, 2021 . We consider our critical accounting policies to be the following:
•Recoverability of Real Estate Assets;
•Allocation of Purchase Price of Real Estate Assets; and
•Current Expected Credit Losses.
A complete description of such policies and our considerations is contained in our Annual Report on Form 10-K for the year endedDecember 31, 2021 . The information included in this Quarterly Report on Form 10-Q should be read in conjunction with our audited consolidated financial statements as of and for the year endedDecember 31, 2021 and related notes thereto.
Related-Party Transactions and Agreements
We have entered into agreements with CMFT Management and our Investment Advisor
whereby we agree to pay certain fees to, or reimburse certain expenses of, CMFT
Management, the Investment Advisor or their affiliates. In addition, we have
invested in, and may continue to invest in, certain co-investments with funds
that are advised by an affiliate of CMFT Management. We may also originate loans
to third parties that use the proceeds to finance the acquisition of real estate
from funds that are advised by an affiliate of CMFT Management. See Note 12 -
Related-Party Transactions and Arrangements to our condensed consolidated
financial statements in this Quarterly Report on Form 10-Q for a discussion of
the various related-party transactions, agreements and fees.
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Conflicts of Interest
Richard S. Ressler , the chairman of our Board, chief executive officer and president, who is also a founder and principal of CIM and is an officer/director of certain of its affiliates, is the vice president of our manager. One of our directors,Avraham Shemesh , who is also a founder and principal of CIM and is an officer/director of certain of its affiliates, is the president and treasurer of our manager. Additionally, two of our directors,Jason Schreiber andEmily Vande Krol , are employees of CIM.Nathan D. DeBacker , our chief financial officer and treasurer, is a vice president of our manager and is an officer of certain of its affiliates. As such, there may be conflicts of interest where CMFT Management or its affiliates, while serving in the capacity as sponsor, general partner, officer, director, key personnel and/or advisor for CIM or another program sponsored or operated by affiliates of our manager, may be in conflict with us in connection with providing services to other real estate-related programs related to property acquisitions, property dispositions, and property management, among others. The compensation arrangements between affiliates of CMFT Management and these other real estate programs sponsored or operated by affiliates of our manager could influence the advice provided to us. See Part I, Item 1. Business - Conflicts of Interest in our Annual Report on Form 10-K for the year endedDecember 31, 2021 .
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