CLAROS MORTGAGE TRUST, INC. The following discussion should be read in conjunction with our unaudited consolidated financial statements and notes thereto appearing elsewhere in this quarterly report on Form 10-Q. References herein to "Claros Mortgage Trust ," "Company", "we", "us" or "our" refer toClaros Mortgage Trust, Inc. and its subsidiaries unless the context specifically requires otherwise. References to "Sponsor" refer toMack Real Estate Credit Strategies, L.P. ("MRECS"), the CRE lending and debt investment business affiliated withMack Real Estate Group, LLC ("MREG"). Although MRECS and MREG are distinct legal entities, for convenience, references to our "Sponsor" are deemed to include references to MRECS and MREG, individually or collectively, as appropriate for the context and unless otherwise indicated. CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS We make forward-looking statements herein and will make forward-looking statements in future filings with theSEC , press releases or other written or oral communications within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). For these statements, we claim the protections of the safe harbor for forward-looking statements contained in such Sections. Forward-looking statements are subject to substantial risks and uncertainties, many of which are difficult to predict and are generally beyond our control. These forward-looking statements include information about possible or assumed future results of our business, financial condition, liquidity, results of operations, plans and objectives. When we use the words "believe," "expect," "anticipate," "estimate," "plan," "continue," "intend," "should," "may" or similar expressions, it intends to identify forward-looking statements. Statements regarding the following subjects, among others, may be forward-looking: the macro- and micro-economic impact of the COVID-19 pandemic and secondary effects thereof on our financial condition, results of operations, liquidity and capital resources; market trends in our industry, interest rates, real estate values, the debt securities markets or the general economy; the demand for commercial real estate loans; our business and investment strategy; our operating results; actions and initiatives of theU.S. government and governments outside ofthe United States , changes to government policies and the execution and impact of these actions, initiatives and policies; the state of the economy generally or in specific geographic regions; economic trends and economic recoveries; our ability to obtain and maintain financing arrangements, including secured debt arrangements and securitizations; the timing and amount of expected future fundings of unfunded commitments; the availability of debt financing from traditional lenders; the volume of short-term loan extensions; the demand for new capital to replace maturing loans; expected leverage; general volatility of the securities markets in which we participate; changes in the value of our assets; the scope of our target assets; interest rate mismatches between our target assets and any borrowings used to fund such assets; changes in interest rates and the market value of our target assets; changes in prepayment rates on our target assets; effects of hedging instruments on our target assets; rates of default or decreased recovery rates on our target assets; the degree to which hedging strategies may or may not protect us from interest rate volatility; impact of and changes in governmental regulations, tax law and rates, accounting, legal or regulatory issues or guidance and similar matters; our continued maintenance of our qualification as a REIT forU.S. federal income tax purposes; our continued exclusion from registration under the Investment Company Act of 1940, as amended (the "1940 Act"); the availability of opportunities to acquire commercial mortgage-related, real estate-related and other securities; the availability of qualified personnel; estimates relating to our ability to make distributions to our stockholders in the future; our present and potential future competition; and unexpected costs or unexpected liabilities, including those related to litigation. The forward-looking statements are based on our beliefs, assumptions and expectations of our future performance, taking into account all information currently available to us. Forward-looking statements are not predictions of future events. These beliefs, assumptions and expectations can change as a result of many possible events or factors, not all of which are known to us. See "Item 1A. Risk Factors" of this Quarterly Report on Form 10-Q and our Annual Report. These and other risks, uncertainties, and factors, including those described in the annual, quarterly and current reports that we file with theSEC , could cause our actual results to differ materially from those included in any forward-looking statements we make. All forward-looking statements speak only as of the date they are made. New risks and uncertainties arise over time and it is not possible to predict those events or how they may affect us. Except as required by law, we are not obligated to, and do not intend to, update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Introduction We are a CRE finance company focused primarily on originating loans on transitional CRE assets located in majorU.S. markets, including mortgage loans secured by a first priority or subordinate mortgage on transitional CRE assets, and subordinate loans including mezzanine loans secured by a pledge of equity ownership interests in the direct or indirect property owner rather than directly in the underlying commercial properties. These loans are subordinate to a mortgage loan but senior to the property owner's equity ownership interests. Transitional CRE assets are properties that require repositioning, renovation, rehabilitation, leasing, development or redevelopment or other value-added elements in order to maximize value. We believe our Sponsor's real estate development, ownership and operations experience and infrastructure differentiates us in lending on these transitional CRE assets. Our objective is to be a premier 29 -------------------------------------------------------------------------------- provider of debt capital for transitional CRE assets and, in doing so, to generate attractive risk-adjusted returns for our stockholders over time, primarily through dividends. We strive to create a diversified investment portfolio of CRE loans that we generally intend to hold to maturity. We focus primarily on originating loans ranging from$50 million to$300 million on transitional CRE assets located in major markets with attractive fundamental characteristics supported by macroeconomic tailwinds. We were organized as aMaryland corporation onApril 29, 2015 and commenced operations onAugust 25, 2015 , and are traded on theNew York Stock Exchange , or NYSE, under the symbol "CMTG". We have elected and believe we have qualified to be taxed as a REIT forU.S. federal income tax purposes commencing with our taxable year endedDecember 31, 2015 . We are externally managed and advised by our Manager, an investment adviser registered with theSEC pursuant to the Investment Advisers Act of 1940, as amended (the "Advisers Act"). We operate our business in a manner that permits us to maintain our exclusion from registration under the Investment Company Act of 1940, as amended (the "1940 Act").
I. Key Financial Measures and Indicators
As a CRE finance company, we believe the key financial measures and indicators for our business are net income per share, dividends declared per share, Distributable Earnings per share, book value per share, adjusted book value per share, Net Debt-to-Equity Ratio and Total Leverage Ratio. During the three months endedMarch 31, 2023 , we had net income per share of$0.26 , dividends declared per share of$0.37 , and Distributable Earnings per share of$0.29 . As ofMarch 31, 2023 , our book value per share was$17.26 , our adjusted book value per share was$17.96 , our Net-Debt-to-Equity Ratio was 2.2x, and our Total Leverage Ratio was 2.6x. We use Net Debt-to-Equity Ratio and Total Leverage Ratio, financial measures which are not prepared in accordance with GAAP, to evaluate our financial leverage, which in the case of our Total Leverage Ratio, makes certain adjustments that we believe provide a more conservative measure of our financial condition.
Net Income Per Share and Dividends Declared Per Share
The following table sets forth the calculation of basic and diluted net income
(loss) per share and dividends declared per share ($ in thousands, except share
and per share data):
Three Months Ended
March 31, 2023 December 31, 2022
Net income (loss) attributable to common stock $ 36,678 $ (22,653 )
Weighted average shares of common stock outstanding, 138,385,810
138,457,076
basic and diluted
Basic and diluted net income (loss) per share of $ 0.26 $ (0.17 )
common stock
Dividends declared per share of common stock $ 0.37 $ 0.37
Distributable Earnings
Distributable Earnings is a non-GAAP measure used to evaluate our performance
excluding the effects of certain transactions, non-cash items and GAAP
adjustments, as determined by our Manager, that we believe are not necessarily
indicative of our current performance and operations. Distributable Earnings is
a non-GAAP measure, which we define as net income in accordance with GAAP,
excluding (i) non-cash stock-based compensation expense, (ii) real estate
depreciation and amortization, (iii) any unrealized gains or losses from
mark-to-market valuation changes (other than permanent impairments) that are
included in net income for the applicable period, (iv) one-time events pursuant
to changes in GAAP and (v) certain non-cash items, which in the judgment of our
Manager, should not be included in Distributable Earnings. Pursuant to the
Management Agreement, we use Core Earnings, which is substantially the same as
Distributable Earnings excluding incentive fees, to determine the incentive fees
we pay our Manager. Distributable Earnings is substantially the same as Core
Earnings, as defined in the Management Agreement, for the periods presented.
Distributable Earnings, and other similar measures, have historically been a
useful indicator of a mortgage REITs' ability to cover its dividends, and to
mortgage REITs themselves in determining the amount of any dividends.
Distributable Earnings is a key factor, among others, considered by the Board in
setting the dividend and as such we believe Distributable Earnings is useful to
investors. Accordingly, we believe providing Distributable Earnings on a
supplemental basis to our net income as determined in accordance with GAAP is
helpful to our stockholders in assessing the overall performance of our
business.
We believe that Distributable Earnings provides meaningful information to
consider in addition to our net income and cash flows from operating activities
determined in accordance with GAAP. We believe Distributable Earnings helps us
to evaluate our performance excluding the effects of certain transactions,
non-cash items and GAAP adjustments, as determined by our Manager, that we
believe are not necessarily indicative of our current performance and
operations. Distributable Earnings does not represent net income or cash flows
from operating activities as determined in accordance with GAAP and should not
be considered as an alternative to GAAP net income,
30
--------------------------------------------------------------------------------
an indication of our cash flows from operating activities, a measure of our
liquidity or an indication of funds available for our cash needs. In addition,
our methodology for calculating Distributable Earnings may differ from the
methodologies employed by other companies to calculate the same or similar
supplemental performance measures and, accordingly, our reported Distributable
Earnings may not be comparable to the Distributable Earnings reported by other
companies.
While Distributable Earnings excludes the impact of our unrealized provision for
or reversal of current expected credit loss reserves, loan losses are charged
off and recognized through Distributable Earnings when deemed non-recoverable.
Non-recoverability is determined (i) upon the resolution of a loan (i.e., when
the loan is repaid, fully or partially, or in the case of foreclosure, when the
underlying asset is sold), or (ii) with respect to any amount due under any
loan, when such amount is determined to be non-collectible. During the three
months ended March 31, 2023 , we recorded a $3.2 million reversal in the CECL
reserve, which has been excluded from Distributable Earnings. During the three
months ended December 31, 2022 , we recorded a $71.4 million provision for CECL
reserve, which has been excluded from Distributable Earnings.
In determining Distributable Earnings per share, the dilutive effect of unvested
RSUs is considered. The weighted-average diluted shares outstanding used for
Distributable Earnings has been adjusted from weighted-average diluted shares
under GAAP to include unvested RSUs.
The table below summarizes the reconciliation from weighted-average diluted
shares under GAAP to the weighted-average diluted shares used for Distributable
Earnings:
Three Months Ended
Weighted-Averages March 31, 2023 December 31, 2022
Diluted Shares - GAAP 138,385,810 138,457,076
Unvested RSUs 2,183,169 2,159,280
Diluted Shares - Distributable Earnings 140,568,979 140,616,356
The following table provides a reconciliation of net income (loss) attributable
to common stock to Distributable Earnings ($ in thousands, except share and per
share data):
Three Months Ended
March 31, 2023 December 31, 2022
Net income (loss) attributable to common $ 36,678 $ (22,653 )
stock:
Adjustments:
Non-cash stock-based compensation expense 3,366 3,427
(Reversal of) provision for current (3,239 )
71,377
expected credit loss reserve Depreciation expense 2,058
2,039
Unrealized loss (gain) on interest rate 1,404 (429 ) cap Distributable Earnings prior to principal $ 40,267 $ 53,761 charge-offs Principal charge-offs - (27 ) Distributable Earnings $ 40,267 $ 53,734 Weighted average diluted shares - 140,568,979
140,616,356
Distributable Earnings Diluted Distributable Earnings per share $ 0.29 $
0.38
prior to principal charge-offs
Diluted Distributable Earnings per share $ 0.29 $ 0.38
31--------------------------------------------------------------------------------
Book Value Per Share
We believe that presenting book value per share adjusted for the general current
expected credit loss reserve and accumulated depreciation is useful for
investors as it enhances the comparability across the industry. We believe that
our investors and lenders consider book value excluding these items as an
important metric related to our overall capitalization.
The following table sets forth the calculation of our book value and our
adjusted book value per share ($ in thousands, except share and per share data):
March 31, 2023 December 31, 2022
Equity $ 2,444,154 $ 2,456,471
Number of shares of common stock outstanding and RSUs 141,632,654 140,542,274
Book Value per share(1) $ 17.26 $ 17.48
Add back: accumulated depreciation on real estate owned 0.12 0.11
Add back: general CECL reserve 0.58 0.61
Adjusted Book Value per share $ 17.96 $ 18.20
(1)Calculated as (i) total equity divided by (ii) number of shares of common stock outstanding and RSUs at period end.
II. Our Portfolio
The below table summarizes our loan portfolio as ofMarch 31, 2023 ($ in thousands): Weighted Average(3) Term to Fully Extended Number of Carrying Yield to Maturity (in Loans Loan Commitment(1) Value (2) Maturity(4) years) (5) LTV(6) Senior and 76 $ 9,314,595$ 7,550,320 8.9 % 3.1 68.9 % subordinate loans (1) Loan commitment represents principal outstanding plus remaining unfunded loan commitments. (2) Net of specific CECL reserve of$60.3 million . (3) Weighted averages are based on unpaid principal balance. (4) All-in yield represents the weighted average annualized yield to initial maturity of each loan, inclusive of coupon, and fees received, based on the applicable floating benchmark rate/floors (if applicable), in place as ofMarch 31, 2023 . For loans placed on non-accrual, the annualized yield to initial maturity used in calculating the weighted average annualized yield to initial maturity is 0%. (5) Fully extended maturity assumes all extension options are exercised by the borrower upon satisfaction of the applicable conditions. (6) LTV represents "loan-to-value" or "loan-to-cost", which is calculated as our total loan commitment from time to time, as if fully funded, plus any financings that are pari passu with or senior to our loan, divided by our estimate of either (1) the value of the underlying real estate, determined in accordance with our underwriting process (typically consistent with, if not less than, the value set forth in a third-party appraisal) or (2) the borrower's projected, fully funded cost basis in the asset, in each case as we deem appropriate for the relevant loan and other loans with similar characteristics. Underwritten values and projected costs should not be assumed to reflect our judgment of current market values or project costs, which may have changed materially since the date of origination. LTV is updated only in connection with a partial loan paydown and/or release of collateral, material changes to expected project costs, the receipt of a new appraisal (typically in connection with financing or refinancing activity) or a change in our loan commitment. Totals represent weighted average based on loan commitment, including non-consolidated senior interests and pari passu interests. Loans with specific CECL reserves are reflected as 100% LTV.
Portfolio Activity and Overview
The following table summarizes changes in unpaid principal balance within our
loan portfolio for the three months ended
32
--------------------------------------------------------------------------------
Unpaid principal balance, beginning of period
101,059
Advances on loans 226,492
Loan repayments (210,787 )
Total net fundings/(payoffs) 116,764
Unpaid principal balance, end of period
The following table details our loan investments individually based on unpaid
principal balances as of
Unpaid Fully
Principal Carrying Extended
Loan Number Loan type Origination Date Loan Commitment(1) Balance Value(2) Maturity(3) Property Type Construction(4) Location Risk Rating
1 Senior 12/16/2021 405,000 400,765 398,377 6/16/2027 Multifamily - CA 3
2 Senior 11/1/2019 390,000 390,000 389,065 11/1/2026 Multifamily - NY 3
3 Senior 7/12/2018 280,000 280,000 281,263 8/1/2023 Hospitality - NY 3
4 Senior 7/26/2021 225,000 225,000 224,084 7/26/2026 Hospitality - GA 3
5 Senior 10/18/2019 253,631 215,264 215,264 10/18/2024 For Sale Condo Y CA 3
6 Senior 8/17/2022 235,000 212,310 210,560 8/17/2027 Hospitality - CA 3
7 Senior 6/30/2022 227,000 212,229 210,171 6/30/2029 Hospitality - CA 3
8 Senior 12/27/2018 210,000 208,797 166,790 2/1/2025 Mixed-Use - NY 5
9 Senior 2/15/2022 262,500 205,452 203,429 2/15/2027 Multifamily Y CA 3
10 Senior 10/4/2019 223,062 197,116 196,854 10/1/2025 Mixed-Use Y DC 3
11 Senior 9/7/2018 192,600 192,600 192,428 10/18/2024 Land - NY 3
12 Senior 1/14/2022 170,000 170,000 168,989 1/14/2027 Multifamily - CO 3
13 Senior 9/26/2019 258,400 167,305 166,217 9/26/2026 Office - GA 4
14 Senior 4/14/2022 193,400 166,913 165,597 4/14/2027 Multifamily - MI 3
15 Senior 9/20/2019 160,000 158,135 156,676 12/31/2025 For Sale Condo Y FL 2
16 Senior 9/8/2022 160,000 152,793 151,503 9/8/2027 Multifamily - AZ 3
17 Senior 2/28/2019 150,000 150,000 149,656 2/28/2024 Office - CT 3
18 Senior 1/9/2018 148,592 148,592 148,592 1/9/2024 Hospitality - VA 4
19 Senior 12/30/2021 147,500 147,500 147,286 12/30/2025 Multifamily - PA 3
20 Senior 8/8/2019 154,979 138,729 120,015 8/8/2026 Multifamily - CA 5
21 Senior 4/26/2022 151,698 133,630 132,340 4/26/2027 Multifamily - TX 3
22 Senior 12/10/2021 130,000 130,000 129,371 12/10/2026 Multifamily - VA 3
23 Subordinate 12/9/2021 125,000 125,000 124,771 1/1/2027 Office - IL 3
24 Senior 9/24/2021 127,535 122,535 121,787 9/24/2028 Hospitality - TX 3
25 Senior 9/30/2019 122,500 122,500 122,400 2/9/2027 Office - NY 3
26 Senior 4/29/2019 120,000 119,510 119,411 4/29/2024 Mixed-Use - NY 3
27 Senior 3/1/2022 122,000 118,600 117,844 2/28/2027 Multifamily - TX 3
28 Senior 8/8/2022 115,000 115,000 114,291 8/8/2027 Multifamily - CO 3
29 Senior 7/20/2021 113,500 113,500 113,367 7/20/2026 Multifamily - IL 3
30 Senior 6/17/2022 127,250 112,841 111,574 6/17/2027 Multifamily - TX 3
31 Senior 2/13/2020 124,810 112,442 112,163 2/13/2025 Office - CA 4
32 Senior 4/1/2020 141,084 104,628 103,758 4/1/2026 Office Y TN 3
33 Senior 6/7/2018 104,250 104,250 105,343 1/15/2022 Land - NY 4
34 Senior 12/15/2021 103,000 103,000 102,473 12/15/2026 Multifamily - TN 3
35 Senior 3/21/2023 101,059 101,059 100,572 4/1/2028 Hospitality - CA 3
36 Senior 8/2/2021 100,000 97,005 96,534 8/2/2026 Office - CA 4
37 Senior 1/27/2022 100,800 96,159 95,551 1/27/2027 Multifamily - NV 3
33--------------------------------------------------------------------------------
Unpaid Fully
Principal Carrying Extended Loan Number Loan type Origination Date Loan Commitment(1) Balance Value(2) Maturity(3) Property Type Construction(4) Location Risk Rating
38 Senior 3/31/2020 87,750 87,750 87,750 2/9/2025 Office - TX 3
39 Senior 12/21/2018 87,741 87,741 87,947 6/21/2022 Land - NY 3
40 Senior 3/22/2021 148,303 79,732 78,912 3/22/2026 Other Y MA 3
41 Senior 8/1/2022 115,250 78,500 78,248 7/30/2026 Hospitality Y NY 4
42 Senior 7/10/2018 76,370 76,370 74,720 7/10/2025 Hospitality - CA 4
43 Senior 4/5/2019 75,500 75,500 75,500 4/5/2024 Mixed-Use - NY 3
44 Senior 7/27/2022 76,000 75,185 74,767 7/27/2027 Multifamily - UT 3
45 Senior 8/27/2021 84,810 70,137 69,613 8/27/2026 Office - GA 4
46 Senior 11/2/2021 77,115 67,211 66,653 11/2/2026 Multifamily Y FL 3
47 Senior 7/31/2019 67,000 67,000 67,000 10/31/2021 Land - NY 4
48 Senior 12/22/2021 76,350 65,843 65,334 12/22/2026 Multifamily - TX 3
49 Senior 6/3/2021 79,600 64,821 64,333 6/3/2026 Other - MI 3
50 Senior 1/10/2022 130,461 61,141 59,863 1/9/2027 Other Y PA 3
51 Senior 8/29/2018 60,000 60,000 59,938 8/31/2023 Hospitality - NY 3
52 Senior 1/19/2022 73,677 56,004 55,466 1/19/2027 Hospitality - TN 3
53 Senior 11/4/2022 140,000 51,996 50,642 11/9/2026 Other Y MA 3
54 Senior 3/15/2022 53,300 49,844 49,504 3/15/2027 Multifamily - AZ 3
55 Senior 2/2/2022 90,000 42,253 41,347 2/2/2027 Office Y WA 3
56 Senior 2/4/2022 44,768 38,291 37,978 2/4/2027 Multifamily - TX 3
57 Senior 11/24/2021 60,255 36,235 35,671 11/24/2026 Multifamily Y NV 3
58 Senior 6/30/2022 48,500 32,374 31,938 6/30/2026 Other Y NV 2
59 Senior 12/30/2021 32,002 32,002 31,792 12/30/2025 For Sale Condo - VA 3
60 Senior 12/30/2021 141,791 30,155 28,808 12/30/2026 Mixed-use Y FL 3
61 Senior 4/18/2019 30,000 30,000 29,988 5/1/2023 Office - MA 3
62 Subordinate 7/2/2021 30,200 29,407 29,496 7/2/2024 Land - FL 3
63 Senior 5/13/2022 202,500 26,994 24,983 5/13/2027 Mixed-Use Y VA 3
64 Senior 1/31/2022 34,641 26,571 26,278 1/31/2027 Other Y FL 3
65 Senior 2/17/2022 28,479 24,525 24,348 2/17/2027 Multifamily - TX 3
66 Senior 8/2/2019 20,313 20,313 20,500 2/2/2024 For Sale Condo - NY 3
67 Senior 10/13/2022 106,500 17,304 16,246 10/13/2026 Other Y NV 3
68 Senior 1/4/2022 32,795 5,731 5,413 1/4/2027 Other Y GA 3
69 Senior 2/25/2022 53,984 4,428 3,890 2/25/2027 Other Y GA 3
70 Senior 4/19/2022 23,378 4,168 3,937 4/19/2027 Other Y GA 3
71 Senior 7/1/2019 3,500 3,500 3,500 12/30/2020 Other - Other 5
72 Senior 2/18/2022 32,083 2,764 2,445 2/18/2027 Other Y FL 3
73 Senior 4/19/2022 24,245 1,413 1,171 4/19/2027 Other Y GA 3
74 Subordinate 8/2/2018 927 927 919 7/9/2023 Other - NY 2
75 Senior 12/21/2022 112,100 - (1,121 ) 12/21/2027 Multifamily Y WA 3
76 Senior 9/2/2022 176,257 - (1,763 ) 9/2/2027 Multifamily Y UT 3
Total 9,314,595 7,655,289 7,550,320
General CECL reserve (67,326 )
Grand Total/Weighted Average 9,314,595 7,655,289 7,482,994 30.0% 3.2
(1)
Loan commitment represents principal outstanding plus remaining unfunded loan
commitments.
(2)
Net of specific CECL reserve on applicable loans.
(3)
Fully extended maturity assumes all extension options are exercised by the
borrower upon satisfaction of the applicable conditions.
(4)
Percent of total construction loans based on loan commitments, as of March 31,
2023 .
Real Estate Owned, Net
On February 8, 2021 , we acquired legal title to a portfolio of hotel properties
located in New York, NY through a foreclosure. Prior to February 8, 2021 , the
hotel portfolio represented the collateral for the $103.9 million mezzanine loan
that we held, which was in default as a result of the borrower failing to pay
debt service. The hotel portfolio appears as real estate owned, net on our
consolidated balance sheets and, as of March 31, 2023 , was encumbered by a
$290.0 million securitized senior mortgage, which is included as a liability on
our consolidated balance sheets. Refer to Note 5 to our consolidated financial
statements for additional details.
Asset Management
Our Manager proactively manages the loans in our portfolio from closing to final
repayment and our Sponsor has dedicated asset management employees to perform
asset management services. Following the closing of an investment, the asset
management team rigorously monitors the loan, with an emphasis on ongoing
financial, legal, market condition and quantitative analyses. Through the final
repayment of a loan, the asset management team maintains regular contact with
borrowers, servicers and local market experts monitoring performance of the
collateral, anticipating borrower, property and market issues, and enforcing our
rights and remedies when appropriate.
From time to time, some of our borrowers may experience delays in the execution
of their business plans. As a transitional lender, we work with our borrowers to
execute loan modifications which could include additional equity contributions
from borrowers,
34
--------------------------------------------------------------------------------
repurposing of reserves, temporary deferrals of interest or principal, or
partial deferral of coupon interest as payment-in-kind interest. We have
completed a number of loan modifications to date, and we may continue to make
additional modifications depending on the business plans, financial condition,
liquidity and results of operations of our borrowers.
Our Manager reviews our loan portfolio at least quarterly, undertakes an
assessment of the performance of each loan, and assigns it a risk rating between
"1" and "5," from least risk to greatest risk, respectively. The weighted
average risk rating of our total loan portfolio was 3.2 at
Current Expected Credit Losses
During the three months endedMarch 31, 2023 , we recorded a reversal of current expected credit losses of$3.2 million , resulting in a total current expected credit loss reserve of$143.1 million as ofMarch 31, 2023 . The decrease was primarily attributable to seasoning of our loan portfolio and a reduction in our loan portfolio's total commitments. During the three months endedDecember 31, 2022 , we recorded a specific CECL reserve of$42.0 million in connection with a senior loan with an unpaid principal balance and carrying value prior to any specific CECL reserve of$208.8 million and an initial maturity date ofFebruary 1, 2023 . The loan is collateralized by a mixed-use building inNew York, NY . As ofMarch 31, 2023 andDecember 31, 2022 , this loan is on non-accrual status. During the three months endedDecember 31, 2022 , we recorded a specific CECL reserve of$18.3 million in connection with a senior loan with an unpaid principal balance of$138.8 million , a carrying value prior to any specific CECL reserve of$138.3 million and an initial maturity date ofAugust 8, 2024 . The loan, which is comprised of a portfolio of uncrossed loans, is collateralized by a portfolio of multifamily properties located inSan Francisco, CA. As ofMarch 31, 2023 andDecember 31, 2022 , this loan is on non-accrual status. Fair market values used to determine specific CECL reserves are calculated using a discounted cash flow model, a sales comparison approach, or a market capitalization approach. Estimates of fair market values include assumptions of property specific cash flows over estimated holding periods, discount rates approximating 6.0%, and market capitalization rates ranging from 4.5% to 6.0%. These assumptions are based upon the nature of the properties, recent sales and lease comparables, and anticipated real estate and capital market conditions. During the three months endedMarch 31, 2022 , we recorded a provision for current expected credit losses of$2.1 million , resulting in a total current expected credit loss of$75.6 million as ofMarch 31, 2022 . The increase was primarily attributable to the increase in size of our portfolio and unfunded loan commitments. Additionally, we recorded a specific CECL reserve of$0.2 million on a senior loan with an outstanding principal balance of$8.6 million . During the fourth quarter of 2022, this loan was repaid, resulting in a principal charge off of$27,000 .
Portfolio Financing
Our financing arrangements include repurchase agreements, a term participation
facility, asset-specific financing structures, mortgages on real estate owned,
and Secured Term Loan borrowings.
The following table summarizes our loan portfolio financing ($ in thousands):
March 31, 2023
Weighted
Borrowing Average
Capacity Outstanding Spread(1)
Repurchase agreements and term participation $ 5,859,683 $ 4,201,457 + 2.52%
facility
Repurchase agreements - Side Car 361,488 250,701 + 5.23%
Loan participations sold 264,252 264,252 + 3.64%
Notes payable 450,435 181,522 + 3.05%
Secured term loan 753,183 753,183 + 4.50%
Debt related to real estate owned 290,000 290,000 + 2.78%
Total / weighted average $ 7,979,041 $ 5,941,115 + 2.96%
(1)
Weighted average spread over the applicable benchmark is based on unpaid
principal balance. One-month LIBOR and SOFR as of
35
--------------------------------------------------------------------------------Refer to Note 6 to our consolidated financial statements for additional details on our financings.
Repurchase Agreements and Term Participation Facility
We finance certain of our loans using repurchase agreements and a term participation facility. As ofMarch 31, 2023 , aggregate borrowings outstanding under our repurchase agreements and term participation facility totaled$4.5 billion , with a weighted average coupon of one-month LIBOR or one-month term SOFR plus 2.67% per annum. All weighted averages are based on unpaid principal balance. As ofMarch 31, 2023 , outstanding borrowings under these facilities had a weighted average term to fully extended maturity (assuming we exercise all extension options and our counterparty agrees to such extension options) of 3.2 years. Each repurchase agreement contains "margin maintenance" provisions, which are designed to allow the counterparty to require the delivery of cash or other assets to de-lever assets that are determined to have experienced a diminution in value. Since inception throughMarch 31, 2023 , we have not received any margin calls under any of our repurchase agreements. Each repurchase agreement lender has the benefit of cross-collateralization across all of the loans in its facility. Our term participation facility lender also has the benefit of cross-collateralization across all of the loans in its facility. We present the term participation facility as a liability on our consolidated balance sheets. As ofMarch 31, 2023 , five of our loans were financed under the term participation facility.
Loan Participations Sold
We finance certain of our loans via the sale of a participation in such loans, and we present the loan participations sold as liabilities on our consolidated balance sheet when such arrangements do not qualify as sales under GAAP. In instances where we have multiple loan participations with the same lender, the financings are generally not cross-collateralized. Each of our loan participations sold is generally term-matched to its corresponding loan. As ofMarch 31, 2023 , three of our loans were financed with loan participations sold.
Notes Payable
We finance certain of our loans via secured financings on a term-matched basis that is generally non-recourse. We refer to such financings as notes payable and they are collateralized by the related loans receivable. As ofMarch 31, 2023 , six of our loans were financed with notes payable.
Secured Term Loan
We have a secured term loan of$753.2 million which we originally entered into onAugust 9, 2019 . Our secured term loan is presented net of any original issue discount and transaction expenses which are deferred and recognized as a component of interest expense over the life of the loan using the effective interest method. As ofMarch 31, 2023 , our secured term loan has an unpaid principal balance of$753.2 million and a carrying value of$736.2 million .
Debt Related to Real Estate Owned
OnFebruary 8, 2021 we assumed a$300.0 million securitized senior mortgage in connection with a Uniform Commercial Code foreclosure on a portfolio of seven limited service hotels located inNew York, New York . The securitized senior mortgage is non-recourse to us. Our debt related to real estate owned as ofMarch 31, 2023 has an unpaid principal balance of$290.0 million , a carrying value of$289.5 million and a stated rate of one-month LIBOR plus 2.78%, subject to a one-month LIBOR floor of 0.75%. See Derivatives below for further detail of the interest rate cap related to this financing.
Derivatives
As part of the agreement to amend the terms of our debt related to real estate owned inJune 2021 , we acquired an interest rate cap with a notional amount of$290.0 million , strike rate of 3.00%, and a maturity date ofFebruary 15, 2024 for$275,000 . The fair value of the interest rate cap is$4.6 million atMarch 31, 2023 . The interest rate cap effectively limits the maximum interest rate of our debt related to real estate owned to 5.78%. Changes in the fair value of our interest rate cap are recorded as an unrealized gain or loss on interest rate cap on our consolidated statements of operations and the fair value is recorded in other assets on our consolidated balance sheets. Proceeds received from our counterparty related to the interest rate cap are recorded as proceeds from interest rate cap on our consolidated statements of operations. During the three months endedMarch 31, 2023 , we recognized$1.2 million as proceeds from interest rate cap. 36 --------------------------------------------------------------------------------
Acquisition Facility
OnJune 29, 2022 , we entered into a$150.0 million , full recourse credit facility. The facility generally provides interim financing for eligible loans for up to 180 days at an initial advance rate of 75%, which begins to decline after the 90th day. The facility matures onJune 29, 2025 and earns interest at a rate of one-month term SOFR, plus a 0.10% credit spread adjustment, plus a spread of 2.25%. With the consent of our lenders, and subject to certain conditions, the commitment of the facility may be increased up to$500.0 million . As ofMarch 31, 2023 , the outstanding balance of the facility is$0 .
Financial Covenants
Our financing agreements generally contain certain financial covenants that subject us to: (i) our ratio of earnings before interest, taxes, depreciation, and amortization, to interest charges, as defined in the agreements, shall be not less than 1.5 to 1.0; (ii) our tangible net worth, as defined in the agreements, shall not be less than$2.1 billion as of each measurement date plus 75% of proceeds from future equity issuances; (iii) cash liquidity shall not be less than the greater of (x)$50 million or (y) 5% of our recourse indebtedness; and (iv) our indebtedness shall not exceed 77.8% of our total assets. As ofMarch 31, 2023 andDecember 31, 2022 , we are in compliance with all covenants under our financing agreements. The foregoing requirements are based upon the most restrictive financial covenants in place as of the reporting date.
Non-Consolidated Senior Interests Sold and Non-Consolidated Senior Interests Held by Third Parties
In certain instances, we use structural leverage through the non-recourse syndication of a match-term senior loan interest to a third party which qualifies for sale accounting under GAAP, or through the acquisition of a subordinate loan for which a non-recourse senior interest is retained by a third party. In such instances, the senior loan is not included on our consolidated balance sheet.
The following table summarizes our non-consolidated senior interests and related
retained subordinate interests as of
Term to
Fully
Unpaid Weighted Extended
Non-Consolidated Senior Loan Loan Principal Carrying Average Maturity
Interests Count Commitment Balance Value Spread(1)(2) (in years)(3)
Floating rate 1 $ 57,300 $ 55,963 N/A + 4.35% 1.3
non-consolidated senior loans
Retained floating rate 1 $ 30,200 $ 29,407 $ 29,496 + 12.75% 1.3
subordinate loans
Fixed rate non-consolidated 2 $ 861,073 $ 859,660 N/A 3.47% 3.6
senior loans
Retained fixed rate 2 $ 125,927 $ 125,927 $ 125,690 8.49% 3.7
subordinate loans
(1)
Our non-consolidated senior interest is indexed to one-month LIBOR, which was
4.86% at March 31, 2023 .
(2)
Weighted average is based on unpaid principal balance.
(3)
Term to fully extended maturity is determined based on the maximum maturity of
each of the corresponding loans, assuming all extension options are exercised by
the borrower; provided, however, that our loans may be repaid prior to such
date.
Floating and Fixed Rate Portfolio
Our business model seeks to minimize our exposure to changing interest rates by originating floating rate loans and financing those floating rate loans with floating rate liabilities. Further, we seek to match the benchmark indices, typically one-month LIBOR or one-month term SOFR, in the floating rate loans we originate and the related floating rate financings. As ofMarch 31, 2023 , 98.0% of our loans based on unpaid principal balance were floating rate and the majority of our floating rate loans were financed with liabilities that require interest payments based on floating rates also determined by reference to one-month LIBOR or one-month term SOFR plus a spread, which resulted in approximately$1.6 billion of net floating rate exposure. The following table details our net floating rate exposure as ofMarch 31, 2023 ($ in thousands): Net Floating Rate Exposure(1) Floating rate assets$ 7,505,549 Floating rate liabilities (5,921,115 )
Net floating rate exposure
(1)
Our floating rate loans and related liabilities are all indexed to one-month
LIBOR or one-month term SOFR. One-month LIBOR and one-month term SOFR as of
37
--------------------------------------------------------------------------------
LIBOR has been the subject of national and international regulatory guidance and
proposals for reform. On March 5, 2021 , the Financial Conduct Authority of the
United Kingdom , or the FCA , which regulates LIBOR's administrator, ICE Benchmark
Administration Limited , or IBA, announced that all LIBOR tenors relevant to our
assets and liabilities will cease to be published or will no longer be
representative after June 30, 2023 (and that all other LIBOR tenors will cease
to be published or will no longer be representative either after December 31,
2021 , or after June 30, 2023 ). The U.S. Federal Reserve , in conjunction with the
Alternative Reference Rates Committee, a steering committee comprised of large
U.S. financial institutions, has identified the Secured Overnight Financing
Rate, or SOFR, a new index calculated using short-term repurchase agreements
backed by Treasury securities, as its preferred alternative rate for USD LIBOR.
Our agreements generally allow for a new interest rate index to be used if LIBOR
is no longer available. We are currently working with our borrowers and lenders
to transition our loans and financing arrangements to be indexed to one-month
SOFR.
We have an interest rate cap with a notional amount of $290.0 million and a
maturity date of February 15, 2024 on our debt related to real estate owned. The
interest rate cap effectively limits the maximum interest rate of our debt
related to real estate owned to 5.78%. We have not employed other interest rate
derivatives (interest rate swaps, caps, collars or floors) to hedge our asset or
liability portfolio, but we may do so in the future.
Refer to "Quantitative and Qualitative Disclosures About Market Risk-LIBOR Transition" below for additional information.
Results of Operations - Three Months Ended
As previously disclosed, beginning with our Quarterly Report on Form 10-Q for the quarter endedSeptember 30, 2021 , and for all subsequent reporting periods, we have elected to present results of operations by comparing to the immediately preceding period, as well as the same year to date period in the prior year. Given the dynamic nature of our business and the sensitivity to the real estate and capital markets, we believe providing analysis of results of operations by comparing to the immediately preceding period is more meaningful to our stockholders in assessing the overall performance of our current business.
Operating Results
The following table sets forth information regarding our consolidated results of operations for the three months endedMarch 31, 2023 , andDecember 31, 2022 ($ in thousands, except per share data): Three Months Ended March 31, 2023 December 31, $ Change % Change 2022 Revenue Interest and related income$ 164,166 $ 154,460 $ 9,706 6 % Less: interest and related expense 106,027 92,501 13,526 15 % Net interest income 58,139 61,959 (3,820 ) -6 % Revenue from real estate owned 10,963 21,657 (10,694 ) -49 % Total revenue 69,102 83,616 (14,514 ) -17 % Expenses Management fees - affiliate 9,656 9,867 (211 ) -2 % Incentive fees - affiliate 1,558 - 1,558 100 % General and administrative expenses 4,923 4,774 149 3 % Stock-based compensation expense 3,366 3,427 (61 ) -2 % Real estate owned: Operating expenses 10,000 12,301 (2,301 ) -19 % Interest expense 5,444 4,964 480 10 % Depreciation 2,058 2,039 19 1 % Total expenses 37,005 37,372 (367 ) -1 % Proceeds from interest rate cap 1,183 495 688 139 % Unrealized (loss) gain on interest (1,404 ) 429 (1,833 ) -427 % rate cap Income from equity method investment 1,563 1,556 7 0 % Reversal of (provision for) current 3,239 (71,377 ) 74,616 105 % expected credit loss reserve Net income (loss) $ 36,678$ (22,653 ) $ 59,331 262 % Net income (loss) per share of common stock: Basic and diluted $ 0.26$ (0.17 ) $ 0.43 253 % 38
--------------------------------------------------------------------------------
Comparison of the three months ended
Revenue
Revenue decreased$14.5 million during the three months endedMarch 31, 2023 , compared to the three months endedDecember 31, 2022 . The decrease is primarily due to a decrease in revenue from real estate owned of$10.7 million due to seasonally lower occupancy and revenue per available room ("RevPAR") levels and a decrease in net interest income of$3.8 million , which was driven by an increase in interest expense of$13.5 million , as a result of increased borrowing levels and reference rate increases, offset in part by an increase in interest income of$9.7 million as a result of an increased loans receivable balance and reference rate increases, partially offset by an increase in loans on non-accrual status over the three months endedMarch 31, 2023 .
Expenses
Expenses are primarily comprised of base management fees payable to our Manager, incentive fees payable to our Manager, general and administrative expenses, stock-based compensation expense, operating expenses from real estate owned, interest expense from debt related to real estate owned, and depreciation on real estate owned. Expenses decreased by$0.4 million during the three months endedMarch 31, 2023 , as compared to the three months endedDecember 31, 2022 , primarily due to:
(i)
a decrease in operating expenses from real estate owned of
(ii)
offset by an increase in incentive fees of
(iii)
further offset by an increase in interest expense on debt related to real estate owned of$0.5 million primarily as a result of reference rate increases over the three months endedMarch 31, 2023 .
Proceeds from interest rate cap
Proceeds from interest rate cap were$0.7 million higher during the three months endedMarch 31, 2023 , as compared to the three months endedDecember 31, 2022 , due to increased one-month LIBOR rates, which continued to be in excess of our interest rate cap's 3% strike rate. Unrealized (loss) gain on interest rate cap During the three months endedMarch 31, 2023 , we recognized a$1.4 million unrealized loss on interest rate cap, compared to a$0.4 million unrealized gain on interest rate cap during the three months endedDecember 31, 2022 . The fair value of the interest rate cap increases as interest rates increase and generally decreases as the interest rate cap approaches maturity.
Income from equity method investment
During the three months ended
Reversal of (provision for) current expected credit loss reserve
During the three months endedMarch 31, 2023 , we recorded a reversal of current expected credit losses of$3.2 million , primarily attributable to seasoning of our loan portfolio and a reduction in our loan portfolio's total commitments. During the three months endedDecember 31, 2022 , we recorded a provision for current expected credit losses of$71.4 million , primarily attributable to specific CECL reserves of$60.3 million related to two loans, an increase in the size of our loan portfolio, and worsening macroeconomic forecasts. 39 --------------------------------------------------------------------------------
Results of Operations - Three Months Ended
The following table sets forth information regarding our consolidated results of operations for three months endedMarch 31, 2023 and 2022 ($ in thousands, except per share data): Three Months Ended March 31, 2023 March 31, 2022 $ Change % Change Revenue Interest and related income$ 164,166 $ 90,694 $ 73,472 81 % Less: interest and related expense 106,027 39,580 66,447 168 % Net interest income 58,139 51,114 7,025 14 % Revenue from real estate owned 10,963 6,813 4,150 61 % Total revenue 69,102 57,927 11,175 19 % Expenses Management fees - affiliate 9,656 9,807 (151 ) -2 % Incentive fees - affiliate 1,558 - 1,558 100 % General and administrative expenses 4,923 4,343 580 13 % Stock-based compensation expense 3,366 - 3,366 100 % Real estate owned: Operating expenses 10,000 7,780 2,220 29 % Interest expense 5,444 2,584 2,860 111 % Depreciation 2,058 1,940 118 6 % Total expenses 37,005 26,454 10,551 40 % Proceeds from interest rate cap 1,183 - 1,183 100 % Unrealized loss on interest rate cap (1,404 ) - (1,404 ) -100 % Income from equity method investment 1,563 - 1,563 100 % Reversal of (provision for) current 3,239 (2,102 ) 5,341 254 % expected credit loss reserve Net income $ 36,678$ 29,371 7,307 25 % Net loss attributable to $ - $ (41 )$ 41 100 %
non-controlling interests
Net income attributable to common stock $ 36,678
25 %
Net income per share of common stock:
Basic and diluted $ 0.26 $ 0.21 $ 0.05 24 %
Comparison of the three months ended
Revenue
Revenue increased$11.2 million during the three months endedMarch 31, 2023 , compared to the three months endedMarch 31, 2022 . The increase is primarily due to an increase in net interest income of$7.0 million for the comparative period, which was driven by an increase in interest income of$73.5 million , primarily as a result of an increased loans receivable balance and reference rate increases, partially offset by an increase in interest expense of$66.5 million as a result of increased borrowing levels and reference rate increases. Further, revenue from real estate owned increased$4.2 million compared to the prior period due to higher occupancy and RevPAR levels versus the first quarter of 2022 during which the Omicron variant of COVID-19 depressed occupancy.
Expenses
Expenses are primarily comprised of base management fees payable to our Manager, incentive fees payable to our Manager, general and administrative expenses, stock-based compensation expense, operating expenses from real estate owned, interest expense from debt related to real estate owned, and depreciation on real estate owned. Expenses increased by$10.6 million , during the three months endedMarch 31, 2023 , as compared to the three months endedMarch 31, 2022 , primarily due to:
(i)
an increase in stock-based compensation of
(ii)
an increase in interest expense on debt related to real estate owned of$2.9 million primarily as a result of reference rate increases over the comparative period;
(iii)
an increase in operating expenses from real estate owned of
(iv)
an increase in incentive fees of
40
--------------------------------------------------------------------------------Proceeds from interest rate cap
Proceeds from interest rate cap were$1.2 million higher during the comparative period due to one-month LIBOR exceeding our interest rate cap's 3% strike rate during the first quarter of 2023.
Unrealized (loss) gain on interest rate cap
Unrealized gain on interest rate cap was
Income from equity method investment
During the three months endedMarch 31, 2023 , we recognized income from equity method investment of$1.6 million as a result of us accounting for our investment in CMTG/TT as an equity method investment during the first quarter of 2023. We did not hold any equity method investments during the three months endedMarch 31, 2022 .
Reversal of (provision for) current expected credit loss reserve
During the three months endedMarch 31, 2023 , we recorded a reversal of current expected credit losses of$3.2 million , primarily attributable to seasoning of our loan portfolio and a reduction in our loan portfolio's total commitments. During the three months endedMarch 31, 2022 , we recorded a provision for current expected credit losses of$2.1 million , primarily attributable to an increase in the size of our portfolio.
Liquidity and Capital Resources
Capitalization
We have capitalized our business to date primarily through the issuance of shares of our common stock and borrowings under our secured financings and our Secured Term Loan. As ofMarch 31, 2023 , we had 138,376,144 shares of our common stock outstanding, representing$2.4 billion of equity and we also had$5.9 billion of outstanding borrowings under our secured financings, our Secured Term Loan, and our debt related to real estate owned. As ofMarch 31, 2023 , our secured financings consisted of six repurchase agreements with capacity of$5.2 billion and an outstanding balance of$4.1 billion , a term participation facility with a capacity of$1.0 billion and an outstanding balance of$340.2 million , nine asset-specific financings with capacity of$714.7 million and an outstanding balance of$445.8 million , and an acquisition facility with a capacity of$150.0 million and no outstanding balance. As ofMarch 31, 2023 , our Secured Term Loan had an outstanding balance of$753.2 million and our debt related to real estate owned had an outstanding balance of$290.0 million .
Net Debt-to-Equity Ratio and Total Leverage Ratio
Net Debt-to-Equity Ratio and Total Leverage Ratio are non-GAAP measures that we
use to evaluate our financial leverage, which in the case of our Total Leverage
Ratio, makes certain adjustments that we believe provide a more conservative
measure of our financial condition.
Net Debt-to-Equity Ratio is calculated as the ratio of asset specific debt
(repurchase agreements, term participation facility, loan participations sold,
net, notes payable, net, and debt related to real estate owned, net) and secured
term loan, less cash and cash equivalents to total equity.
Total Leverage Ratio is similar to Net Debt-to-Equity Ratio, however it includes
non-consolidated senior interests sold and non-consolidated senior interests
held by third parties. Non-consolidated senior interests sold and
non-consolidated senior interests held by third parties, as applicable, are
secured by the same collateral as our loan and are structurally senior in
repayment priority relative to our loan. We believe the inclusion of
non-consolidated senior interests sold and non-consolidated senior interests
held by third parties provides a meaningful measure of our financial leverage.
41
--------------------------------------------------------------------------------
The following table presents our Net Debt-to-Equity and Total Leverage Ratios as
of
March 31, 2023 December 31, 2022
Asset specific debt $ 5,182,328 $ 4,927,098
Secured term loan, net 736,190 736,853
Total debt 5,918,518 5,663,951
Less: cash and cash equivalents (426,503 ) (306,456 )
Net Debt $ 5,492,015 $ 5,357,495
Total Equity $ 2,444,154 $ 2,456,471
Net Debt-to-Equity Ratio 2.2x 2.2x
Non-consolidated senior loans 915,623 968,302
Total Leverage $ 6,407,638 $ 6,325,797
Total Leverage Ratio 2.6x 2.6x
Sources of Liquidity
Our primary sources of liquidity include cash and cash equivalents, interest
income from our loans, loan repayments, available borrowings under our
repurchase agreements, identified borrowing capacity related to our notes
payable and loan participations sold, borrowings under our Secured Term Loan,
and proceeds from the issuance of our common stock. As circumstances warrant, we
and our subsidiaries may also issue common equity, preferred equity and/or debt
or incur other debt, including term loans, from time to time on an opportunistic
basis, dependent upon market conditions and available pricing. The following
table sets forth, as of March 31, 2023 and December 31, 2022 , our sources of
available liquidity ($ in thousands):
March 31, 2023 December 31, 2022
Cash and cash equivalents $ 426,503 $ 306,456
Loan principal payments held by servicer(1) 912 - Approved and undrawn credit capacity 127,808 213,113 Total sources of liquidity$ 555,223 $ 519,569 (1)
Represents loan principal payments held in lockboxes or by our third-party loan servicer as of the balance sheet date which were remitted to us during the subsequent remittance cycle, net of the related secured debt balance.
We have$593.5 million unpaid principal balance of unencumbered loans atMarch 31, 2023 . Our ability to finance certain of these unencumbered loans is subject to one or more counterparties' willingness to finance such loans.
Liquidity Needs
In addition to our ongoing loan origination and acquisition activity, our primary liquidity needs include future fundings to our borrowers on our unfunded loan commitments, interest and principal payments on outstanding borrowings under our financings, operating expenses and dividend payments to our stockholders necessary to satisfy REIT dividend requirements. Additionally, our financing agreements require us to maintain minimum levels of liquidity in order to satisfy certain financial covenants. We currently maintain, and seek to maintain, cash and liquidity to comply with minimum liquidity requirements under our financings, and we also maintain and seek to maintain excess cash and liquidity to, if necessary, reduce borrowings under our secured financings, including our repurchase agreements. As ofMarch 31, 2023 , we had aggregate unfunded loan commitments of$1.7 billion which is comprised of funding for capital expenditures and construction, leasing costs, and interest and carry costs. The timing of these fundings will vary depending on the progress of capital projects, leasing, and cash flows at the properties securing our loans. Therefore, the exact timing and amounts of such future loan fundings are uncertain and will depend on the current and future performance of the underlying collateral assets. We expect to fund our loan commitments over the remaining maximum term of the related loans, which have a weighted-average future funding period of 3.8 years. We may from time to time utilize capital to retire, redeem or repurchase our equity or debt securities, term loans or other debt instruments through open market purchases, privately negotiated transactions or otherwise. Such repurchases, redemptions or retirements, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions or other factors. 42 --------------------------------------------------------------------------------
Contractual Obligations and Commitments
Our contractual obligations and commitments as ofMarch 31, 2023 were as follows ($ in thousands): Payment Timing Total Less than 1 to 3 to More than Obligations 1 year 3 years 5 years 5 years Unfunded loan commitments(1)$ 1,659,306 $ 926,914 $ 650,998 $ 81,394 $ - Secured financings, term loan - agreement, and debt 7,210,619 1,234,038
2,522,869 3,453,712
related to real estate owned - principal and interest(2) Total$ 8,869,925 $ 2,160,952 $ 3,173,867 $ 3,535,106 $ - (1) The allocation of our unfunded loan commitments is based on the earlier of our expected funding date and the commitment expiration date. As ofMarch 31, 2023 , we have$1.0 billion of expected or in-place financings to fund our remaining commitments. (2) The allocation of our secured financings and term loan agreement is based on the earlier of the fully extended maturity date of each individual borrowing or the maximum maturity date under the respective agreement, and assumes four loans with aggregate borrowings outstanding of$209.2 million that are in maturity default have an extended maturity date in 2023. (3) Amounts include the related future interest payment obligations, which are estimated by assuming the amounts outstanding under our secured financing agreements and one-month LIBOR or one-month term SOFR in effect as ofMarch 31, 2023 will remain constant into the future. This is only an estimate, as actual amounts borrowed and rates will vary over time. Our floating rate loans and related liabilities are indexed to one-month LIBOR or one-month term SOFR. Totals exclude non-consolidated senior interests. We are required to pay our Manager, in cash, a base management fee and incentive fees (to the extent earned) on a quarterly basis in arrears. The tables above do not include the amounts payable to our Manager under the Management Agreement as they are not fixed and determinable. As a REIT, we generally must distribute substantially all of our REIT taxable income, determined without regard to the deduction for dividends paid and excluding net capital gains, to stockholders in the form of dividends to comply with certain of the provisions of the Internal Revenue Code. To the extent that we satisfy this distribution requirement but distribute less than 100% of our REIT taxable income, we will be subject toU.S. federal income tax on our undistributed REIT taxable income. Our REIT taxable income does not necessarily equal our net income as calculated in accordance with GAAP or our Distributable Earnings as described previously.
Loan Maturities
The following table summarizes the future scheduled repayments of principal based on fully extended maturity dates for the loan portfolio as ofMarch 31, 2023 ($ in thousands): Unpaid Principal Loan Year Balance(1) Commitment(1) 2023 370,927 370,927 2024 951,186 990,836 2025 1,020,112 1,061,494 2026 2,063,475 2,694,437 2027 2,551,275 3,478,816 Thereafter 435,823 455,594 Total$ 7,392,798 $ 9,052,104 (1)
Excludes
43
--------------------------------------------------------------------------------Cash Flows
The following table provides a breakdown of the net change in our cash and cash equivalents and restricted cash for the three months endedMarch 31, 2023 and 2022, respectively ($ in thousands): Three Months Ended March 31, 2023 March 31, 2022 Net cash flows provided by operating activities $ 19,507 $ 22,620 Net cash flows used in investing activities (97,625 ) (456,588 ) Net cash flows provided by financing activities 196,060
566,972
Net increase in cash, cash equivalents, and restricted cash$ 117,942 $ 133,004 We experienced a net increase in cash and cash equivalents and restricted cash of$117.9 million during the three months endedMarch 31, 2023 , compared to a net increase of$133.0 million during the three months endedMarch 31, 2022 . During the three months endedMarch 31, 2023 , we made initial fundings of$101.1 million of new loans and$204.6 million of advances on existing loans and made repayments on financings arrangements of$350.9 million . We received$599.0 million of proceeds from borrowings under our financing arrangements and received$207.8 million from loan repayments.
Income Taxes
We have elected and believe we have qualified to be taxed as a REIT forU.S. federal income tax purposes, commencing with our initial taxable year endedDecember 31, 2015 . We generally must distribute annually at least 90% of our REIT taxable income, determined without regard to the deduction for dividends paid and excluding net capital gain, to maintain our REIT status. To the extent that we satisfy this distribution requirement, but distribute less than 100% of our REIT taxable income, we will be subject toU.S. federal income tax on our undistributed REIT taxable income. In addition, we will be subject to a 4% nondeductible excise tax if the actual amount that we pay (or are treated as paying) out to our stockholders in a calendar year is less than a minimum amount specified underU.S. federal tax laws. Our real estate owned is held in a TRS. Our TRS is not consolidated forU.S. federal income tax purposes and is taxed separately as a corporation. For financial reporting purposes, a provision or benefit for current and deferred taxes is established for the portion of earnings or expense recognized by us with respect to our TRS. Our qualification as a REIT also depends on our ability to meet various other requirements imposed by the Internal Revenue Code, which relate to organizational structure, diversity of stock ownership and certain restrictions with regard to the nature of our assets and the sources of our income. Even if we qualify as a REIT, we may be subject to certainU.S. federal income and excise taxes and state and local taxes on our income and assets. If we fail to maintain our qualification as a REIT for any taxable year, we may be subject to material penalties as well as federal, state and local income tax on our REIT taxable income at regular corporate rates and we would not be able to qualify as a REIT for the subsequent four full taxable years. As ofMarch 31, 2023 , we were in compliance with all REIT requirements.
Refer to Note 13 to our consolidated financial statements for additional information about our income taxes.
Off-Balance Sheet Arrangements
As of
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires our Manager to make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. We believe that all of the decisions and estimates are reasonable, based upon the information available to us. We believe that the following accounting policies are those most critical to the judgments and estimates used in the preparation of our financial statements.
Refer to Note 2 to our consolidated financial statements for a description of our significant accounting policies.
44
--------------------------------------------------------------------------------Current Expected Credit Losses
The CECL reserve required under ASU 2016-13 "Financial Instruments - Credit
Losses - Measurement of Credit Losses on Financial Instruments (Topic 326)"
("ASU 2016-13"), reflects our current estimate of potential credit losses
related to our loan portfolio. Changes to the CECL reserve are recognized
through a provision for or reversal of current expected credit loss reserve on
our consolidated statements of operations. ASU 2016-13 specifies the reserve
should be based on relevant information about past events, including historical
loss experience, current portfolio, market conditions and reasonable and
supportable macroeconomic forecasts for the duration of each loan.
For our loan portfolio, we perform a quantitative assessment of the impact of
CECL using the Weighted Average Remaining Maturity, or WARM, method. The
application of the WARM method to estimate a general CECL reserve requires
judgment, including the appropriate historical loan loss reference data, the
expected timing and amount of future loan fundings and repayments, the current
credit quality of our portfolio, and our expectations of performance and market
conditions over the relevant time period.
The WARM method requires us to reference historical loan loss data from a
comparable data set and apply such loss rate to each of our loans over their
expected remaining term, taking into consideration expected economic conditions
over the forecasted timeframe. Our general CECL reserve reflects our forecast of
the current and future macroeconomic conditions that may impact the performance
of the commercial real estate assets securing our loans and the borrower's
ultimate ability to repay. These estimates include unemployment rates, price
indices for commercial properties, and market liquidity, all of which may
influence the likelihood and magnitude of potential credit losses for our loans
during their anticipated term. Additionally, further adjustments may be made
based upon loan positions senior to ours, the risk rating of a loan, whether a
loan is a construction loan, or the economic conditions specific to the property
type of a loan's underlying collateral.
To estimate an annual historical loss rate, we obtained historical loss rate
data for loans most comparable to our loan portfolio from a commercial
mortgage-backed securities database licensed by a third party, Trepp, LLC , which
contains historical loss rates from January 1, 1999 through March 31, 2023 .
When evaluating the current and future macroeconomic environment, we consider
the aforementioned macroeconomic factors. Historical data for each metric is
compared to historical commercial real estate loan losses in order to determine
the relationship between the two variables. We use projections of each
macroeconomic factor, obtained from a third party, to approximate the impact the
macroeconomic outlook may have on our loss rate. Selections of these economic
forecasts require judgement about future events that, while based on the
information available to us as of the balance sheet date, are ultimately
unknowable with certainty, and the actual economic conditions could vary
significantly from the estimates we made. Following a reasonable and supportable
forecast period, we use a straight-line method of reverting to the historical
loss rate. Additionally, we assess the obligation to extend credit through our
unfunded loan commitments over each loan's contractual period, adjusted for
projected fundings from interest reserves if applicable, which is considered in
the estimate of the general CECL reserve. For both the funded and unfunded
portions of our loans, we consider our internal risk rating of each loan as the
primary credit quality indicator underlying our assessment.
In certain circumstances we may determine that a loan is no longer suited for
the WARM method due to its unique risk characteristics, where we have deemed the
borrower/sponsor to be experiencing financial difficulty and the repayment of
the loan's principal is collateral-dependent. We may instead elect to employ
different methods to estimate loan losses that also conform to ASU 2016-13 and
related guidance.
For such loan we would separately measure the specific reserve for each loan by
using the fair value of the loan's collateral. If the fair value of the loan's
collateral is less than the carrying value of the loan, an asset-specific
reserve is created as a component of our overall current expected credit loss
reserve. Specific reserves are equal to the excess of a loan's carrying value to
the fair value of the collateral, less estimated costs to sell, if recovery of
our investment is expected from the sale of the collateral.
If we have determined that a loan or a portion of a loan is uncollectible, we
will write-off such portion of the loan through an adjustment to our current
expected credit loss reserve. Significant judgment is required in determining
impairment and in estimating the resulting credit loss reserve, and actual
losses, if any, could materially differ from those estimates.
45
--------------------------------------------------------------------------------Real estate owned, net
We may assume legal title or physical possession of the underlying collateral of
a defaulted loan through foreclosure. Foreclosed real estate owned, net is
initially recorded at estimated fair value and is presented net of accumulated
depreciation and impairment charges, if any, and the assets and liabilities are
presented separately when legal title or physical possession is assumed. If the
fair value of the foreclosed real estate is lower than the carrying value of the
loan, the difference, along with any previously recorded specific CECL reserves,
are recorded as a realized loss on foreclosure of real estate owned in the
consolidated statement of operations. Conversely, if the fair value of the
foreclosed real estate is greater than the carrying value of the loan, the
difference, along with any previously recorded specific CECL reserves, are
recorded as a realized gain on foreclosure of real estate owned in the
consolidated statement of operations.
Acquisition of real estate is accounted for using the acquisition method under
Accounting Standards Codification ("ASC") Topic 805, Business Combinations. We
recognize and measure identifiable assets acquired, liabilities assumed and any
noncontrolling interest in the acquiree, if applicable, based on their relative
fair values. If applicable, we recognize and measure intangible assets and
expense acquisition-related costs in the periods in which the costs are incurred
and the services are received.
Real estate assets that are acquired for investment are assumed at their
estimated fair value at acquisition and presented net of accumulated
depreciation and impairment charges, if any. Upon acquisition, we allocate the
value of acquired real estate assets based on the fair value of the acquired
land, building, furniture, fixtures and equipment, and intangible assets, if
applicable. Real estate assets are depreciated using the straight-line method
over estimated useful lives ranging from 5 to 40 years.
Real estate assets are evaluated for indicators of impairment on a quarterly
basis. Factors that we may consider in our impairment analysis include, among
others: (1) significant underperformance relative to historical or anticipated
operating results; (2) significant negative industry or economic trends; (3)
costs necessary to extend the life or improve the real estate asset; (4)
significant increase in competition; and (5) ability to hold and dispose of the
real estate asset in the ordinary course of business. A real estate asset is
considered impaired when the sum of estimated future undiscounted cash flows
expected to be generated by the real estate asset over the estimated remaining
holding period is less than the carrying amount of such real estate asset. Cash
flows include operating cash flows and anticipated capital proceeds generated by
the real estate asset. If the sum of such estimated cash flows is less than the
carrying amount of the real estate asset, an impairment charge is recorded equal
to the excess of the carrying value of the real estate asset over the fair
value.
When determining the fair value of a real estate asset, we make certain
assumptions including, but not limited to, consideration of projected operating
cash flows, comparable selling prices and projected cash flows from the eventual
disposition of the real estate asset based upon our estimate of a capitalization
rate and discount rate.
46--------------------------------------------------------------------------------
© Edgar Online, source
