CLAROS MORTGAGE TRUST, INC. Management report and analysis of the financial situation and operating results. (Form 10-Q)
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 to Claros Mortgage Trust, Inc.and its subsidiaries unless the context specifically require otherwise. CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS We make forward-looking statements herein and will make forward-looking statements in future filings with the SEC, press releases or other written or oral communications within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). For these statements, 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; the severity and duration of the COVID-19 pandemic; actions taken by governmental authorities to contain the COVID-19 pandemic or treat its impact; the efficacy of the vaccines or other remedies and the speed of their distribution and administration; the impact of the COVID-19 pandemic 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 the U.S.government and governments outside of the 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 for U.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 the SEC, 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 senior and subordinate loans on transitional CRE assets located in major U.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 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 32 -------------------------------------------------------------------------------- that we generally intend to hold to maturity. We focus primarily on originating loans ranging from $50 millionto $300 millionon transitional CRE assets located in major markets with attractive fundamental characteristics supported by macroeconomic tailwinds. We were organized as a Marylandcorporation on April 29, 2015and commenced operations on August 25, 2015, and are traded on the New York Stock Exchange, or NYSE, under the symbol "CMTG". We have elected and believe we have qualified to be taxed as a REIT for U.S.federal income tax purposes commencing with our taxable year ended December 31, 2015. We are externally managed and advised by our Manager, an investment adviser registered with the SECpursuant to the Investment Advisers Act of 1940, as amended. We operate our business in a manner that permits us to maintain our exclusion from registration under the 1940 Act.
I. Main 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 ended
June 30, 2022, we had net income per share of $0.45, Distributable Earnings per share of $0.43, Distributable Earnings excluding realized losses per share of $0.51, and declared dividends of $0.37per share. As of June 30, 2022, our book value per share was $18.00, our adjusted book value per share was $18.59, our Net-Debt-to-Equity Ratio was 1.9x, and our Total Leverage Ratio was 2.3x. We use Net Debt-to-Equity Ratio and Total Leverage Ratio, financial measures which are not prepared in accordance with GAAP, to evaluate our financial leverage, which in the case of our Total Leverage Ratio, makes certain adjustments that we believe provide a more conservative measure of our financial condition.
Net earnings per share and dividends declared per share
The following table sets forth the calculation of basic and diluted net income per share and dividends declared per share ($ in thousands, except share and per share data): Three Months Ended June 30, 2022 March 31, 2022 Basic and diluted earnings
$29,412 Weighted average number of common shares outstanding, basic and diluted
Basic and diluted net income per share of common stock $ 0.45 $ 0.21 Dividends declared per share of common stock $ 0.37 $ 0.37 Distributable Earnings Distributable Earnings is a non-GAAP measures 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 as determined in accordance with GAAP, excluding (i) non-cash stock-based compensation expense (income), (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 mortgage REITs' ability to cover their 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 of directors 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 and should not be considered as an alternative to GAAP net income, 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 33 --------------------------------------------------------------------------------
the calculation of distributable income may differ from methodologies employed by other companies to calculate the same or similar supplemental performance measures and, therefore, our reported distributable income may not be comparable to distributable income reported by other companies.
While Distributable Earnings excludes the impact of our unrealized current provision for credit losses, 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
June 30, 2022, we recorded an $8.5 millionincrease in the CECL reserve, which has been excluded from Distributable Earnings. In determining distributable earnings per share, the dilutive effect of unvested RSUs are considered. The weighted-average diluted shares outstanding used for Distributable Earnings has been adjusted from weighted-average diluted shares under GAAP to include unvested RSUs. The table below summarizes the reconciliation from weighted-average diluted shares under GAAP to the weighted-average diluted shares used for Distributable Earnings: Three Months Ended Weighted-Averages June 30, 2022 March 31, 2022 Diluted Shares - GAAP 139,637,949 139,712,501 Unvested RSUs 407,565 -
Diluted shares – Distributable profit 140,045,514 139,712,501
The following table provides a reconciliation of net income attributable to common stock to Distributable Earnings ($ in thousands, except share and per share data): Three Months Ended June 30, 2022 March 31, 2022 Net income attributable to common stock: $ 63,234 $
Non-cash stock-based compensation expense 604
Provision for current expected credit loss reserve 8,530
Depreciation expense 1,998
Unrealized gain on interest rate cap (2,837 )
Distributable Earnings prior to principal charge-offs $ 71,529 $ 33,454 Principal charge-offs (11,500 ) - Distributable Earnings $ 60,029 $ 33,454 Weighted average diluted shares - Distributable Earnings 140,045,514
Diluted Distributable Earnings per share prior to principal charge-offs $ 0.51 $
Diluted Distributable Earnings per share $ 0.43 $ 0.24 Book Value Per Share We believe that presenting book value per share adjusted for the general allowance for loan losses 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. 34 -------------------------------------------------------------------------------- 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): June 30, 2022 December 31, 2021 Total Stockholders' Equity
$ 2,590,406$ 2,604,267 Non-controlling interest (38,456 ) (37,636 ) Stockholders' Equity, net of non-controlling interest $ 2,551,950$
Number of Shares Common Stock Outstanding and unvested RSUs at Period End 141,779,358
139 840 088
Book Value per share(1)
$ 18.00$ 18.35 Add back: accumulated depreciation on real estate owned 0.08 0.05 Add back: general CECL reserve 0.51 0.48 Adjusted Book Value per share $ 18.59$ 18.88 (1)
Calculated as (i) total equity less non-controlling interest divided by (ii) number of common shares outstanding at the end of the period.
II. Our portfolio
The below table summarizes our loan portfolio as of
June 30, 2022($ in thousands): Weighted Average(2) Term to Fully Unpaid Extended Number of Principal Yield to Maturity (in Loans Loan Commitment(1) Balance Maturity(3) years) (4) LTV(5) Senior loans 69 $ 8,544,463 $ 6,877,2606.1 % 3.6 66.9 % Subordinate loans 5 265,046 262,311 7.2 % 2.4 68.1 % Total / Weighted Average 74 $ 8,809,509 $ 7,139,5716.1 % 3.6 67.8 % (1) Loan commitment represents principal outstanding plus remaining unfunded loan commitments. (2) Weighted averages are based on unpaid principal balance. (3) 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 of June 30, 2022. (4) Fully extended maturity assumes all extension options are exercised by the borrower upon satisfaction of the applicable conditions. (5) 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.
Portfolio activity and overview
The following table summarizes changes in unpaid principal balance within our portfolio, for both our loans and for our interests in loans (i.e., loans in which we have acquired an interest in a loan for which the transferor did not account for the transaction as a sale under GAAP) for the three and six months ended
June 30, 2022($ in thousands): 35 --------------------------------------------------------------------------------
Three Months Ended June 30, 2022 Six Months Ended June 30, 2022 Interests Interests Loans in Loans Loans in Loans Receivable Receivable
Total Receivable Receivable Total Principal Outstanding Balance, Beginning of Period
$ 7,080,932 $ 152,841$
Initial Loan Funding
623,747 - 623,747 1,308,536 - 1,308,536 Advances on loans 171,725 - 171,725 295,211 17,080 312,291 Loan repayments (609,313 ) (152,841 )
(762,154 ) (777,894 ) (178,646 ) (956,540 ) Sale of a loan receivable
(116,020 ) - (116,020 ) (116,020 ) - (116,020 ) Principal charge-offs (11,500 ) - (11,500 ) (11,500 ) - (11,500 ) Total net fundings
$ 58,639 $ (152,841 ) $ (94,202 ) $ 698,333 $ (161,566 ) $ 536,767Unpaid principal balance, end of period $ 7,139,571$ - $ 7,139,571 $ 7,139,571$ - $ 7,139,571
The following table details our loan investments individually based on outstanding principal balances as of
Principal with Extended Loan Number Loan Type Date Originated Loan Commitment(1) Balance Value Maturity(2) Property Type Construction(5) Location Risk Rating
1 Senior 11/1/2019 390,000 390,000 388,622 11/1/2026 Multifamily - NY 3 2 Senior 12/16/2021 405,000 385,743 382,705 6/16/2027 Multifamily - CA 3 3 Senior 7/12/2018 290,000 290,000 291,353 8/1/2023 Hospitality - NY 4 4 Senior 10/18/2019 303,080 263,249 262,597 10/18/2024 For Sale Condo Y CA 3 5(3) Senior 12/30/2021 257,963 257,963 256,758 12/30/2026 Multifamily - VA 1 6 Senior 6/30/2022 227,000 211,222 208,271 6/30/2029 Hospitality - CA 3 7 Senior 12/27/2018 210,000 207,548 207,548 2/1/2025 Mixed-use - NY 4 8 Senior 10/4/2019 263,000 202,051 201,582 10/1/2025 Mixed-use Y DC 3 9 Senior 7/26/2021 225,000 200,529 198,908 7/26/2026 Hospitality - GA 3 10 Senior 9/7/2018 192,600 192,600 192,208 10/18/2024 Land - NY 3 11 Senior 1/14/2022 170,000 170,000 168,564 1/14/2027 Multifamily - CO 3 12 Senior 4/14/2022 193,400 166,700 164,900 4/14/2027 Multifamily - MI 3 13 Senior 9/27/2019 258,400 155,668 154,081 9/26/2026 Office - GA 4 14 Senior 2/28/2019 150,000 150,000 149,750 2/28/2024 Office - CT 3 15 Senior 2/15/2022 262,500 149,423 146,961 2/15/2027 Multifamily Y CA 3 16 Senior 1/9/2018 148,500 148,500 148,182 1/9/2024 Hospitality - VA 3 17 Senior 12/30/2021 147,500 147,500 147,072 12/30/2025 Multifamily - PA 3 18 Senior 9/20/2019 225,000 145,685 143,941 12/31/2025 For Sale Condo Y FL 3 19 Senior 8/8/2019 154,999 136,093 135,416 8/8/2026 Multifamily - CA 3 20 Senior 9/2/2021 166,812 133,705 131,624 9/2/2026 Other Y GA 3 21 Senior 4/26/2022 151,698 133,059 131,295 4/26/2027 Multifamily - TX 3 22 Senior 12/10/2021 130,000 130,000 129,095 12/10/2026 Multifamily - VA 3 23 Subordinate 12/9/2021 125,000 125,000 124,724 1/1/2027 Office - IL 3 24 Senior 9/24/2021 127,535 122,535 121,562 9/24/2028 Hospitality - TX 3 25 Senior 9/30/2019 122,500 122,500 122,319 2/9/2027 Office - NY 3 26 Senior 4/29/2019 120,000 119,377 119,377 4/29/2024 Mixed-use - NY 3 27 Senior 3/1/2022 122,000 118,600 117,649 2/28/2027 Multifamily - TX 3 28 Senior 7/20/2021 113,500 113,500 113,083 7/20/2026 Multifamily - IL 3 29 Senior 2/13/2020 124,810 111,604 111,097 2/13/2025 Office - CA 4 30 Senior 6/17/2022 127,250 108,096 106,505 6/17/2027 Multifamily - TX 3 31(4) Senior 6/8/2018 104,250 104,250 105,343 1/15/2022 Land - NY 4 32 Senior 12/15/2021 103,000 103,000 102,242 12/15/2026 Multifamily - TN 3 33 Senior 10/11/2017 97,500 97,500 97,457 10/31/2023 Hospitality - CA 3 34 Senior 8/2/2021 100,000 95,474 94,852 8/2/2026 Office - CA 3 35 Senior 1/27/2022 100,800 94,749 93,981 1/27/2027 Multifamily - NV 3 36 Senior 3/31/2020 87,750 87,750 87,750 2/9/2025 Office - TX 4 37 Senior 4/1/2020 141,084 81,807 80,614 4/1/2026 Office Y TN 3 36
Unpaid Fully Principal Extended
Loan Number Loan Type Date Originated Loan Commitment(1) Balance Book Value Maturity(2) Property Type Construction(5) Location Risk Rating
38 Senior 7/10/2018 78,825 78,825 75,525 7/10/2025 Hospitality - CA 4 39(4) Subordinate 3/29/2018 77,619 77,619 78,109 1/26/2021 Land - NY 4 40 Senior 4/5/2019 75,500 75,500 75,359 4/5/2024 Mixed-use - NY 3 41 Senior 12/14/2018 75,000 74,996 74,918 12/14/2023 Multifamily - DC 3 42 Senior 8/26/2021 84,810 69,869 69,206 8/27/2026 Office - GA 3 43(4) Senior 8/2/2019 67,000 67,000 67,000 1/30/2022 Land - NY 4 44 Senior 12/22/2021 76,350 63,276 62,610 12/22/2026 Multifamily - TX 3 45 Senior 12/30/2021 63,005 63,005 62,706 12/30/2025 For Sale Condo - VA 3 46 Senior 8/29/2018 60,000 60,000 59,975 8/31/2023 Hospitality - NY 3 47 Senior 1/19/2022 73,677 51,563 50,897 1/19/2027 Hospitality - TN 3 48 Senior 3/15/2022 53,300 49,844 49,370 3/15/2027 Multifamily - AZ 3 49 Senior 6/3/2021 79,600 46,700 46,065 6/3/2026 Other - MI 3 50 Senior 3/22/2021 110,135 45,764 45,023 3/22/2026 Other Y MA 3 51 Senior 11/2/2021 77,115 42,376 41,649 11/2/2026 Multifamily Y FL 3 52 Senior 2/4/2022 44,768 37,083 36,679 2/4/2027 Multifamily - TX 3 53(4) Subordinate 12/21/2018 31,300 31,300 31,456 6/21/2022 Land - NY 3 54 Senior 4/18/2019 30,000 30,000 29,875 5/1/2023 Office - MA 3 55 Subordinate 7/2/2021 30,200 27,465 27,368 7/2/2024 Land - FL 3 56 Senior 1/10/2022 130,461 25,925 24,625 1/9/2027 Life Sciences Y PA 3 57 Senior 8/2/2019 24,930 24,930 25,109 2/2/2024 For Sale Condo - NY 3 58 Senior 12/30/2021 141,791 24,684 23,305 12/30/2026 Mixed-use Y FL 3 59 Senior 2/17/2022 28,479 23,924 23,674 2/17/2027 Multifamily - TX 3 60 Senior 3/9/2018 26,200 21,586 21,271 5/31/2023 For Sale Condo - NY 4 61 Senior 4/29/2021 17,500 17,500 17,646 4/29/2023 Land - PA 3 62 Senior 2/2/2022 90,000 10,170 9,274 2/2/2027 Office Y WA 3 63 Senior 5/5/2017 5,705 5,705 5,705 1/1/2023 Other - Other 5 64 Senior 11/24/2021 60,255 5,659 5,062 11/24/2026 Multifamily Y NV 3 65 Senior 1/31/2022 34,641 5,226 4,884 1/31/2027 Other Y FL 3 66 Senior 6/30/2022 48,500 4,670 4,186 6/30/2026 Other Y NV 3 67(4) Senior 7/1/2019 3,500 3,500 3,500 12/30/2020 Other - Other 5 68 Subordinate 8/2/2018 927 927 927 8/2/2023 Other - NY 2 69 Senior 1/4/2022 32,795 - (328 ) 1/4/2027 Other Y GA 3 70 Senior 2/18/2022 32,083 - (321 ) 2/18/2027 Other Y FL 3 71 Senior 2/25/2022 53,984 - (540 ) 2/25/2027 Other Y GA 3 72 Senior 4/19/2022 23,378 - (234 ) 4/19/2027 Other Y GA 3 73 Senior 4/19/2022 24,245 - (242 ) 4/19/2027 Other Y GA 3 74 Senior 5/13/2022 202,500 - (2,025 ) 5/13/2027 Mixed-use Y VA 3 Total 8,809,509 7,139,571 7,089,256 CECL Allowance (59,400 ) Grand Total/Weighted Average 8,809,509 7,139,571 7,029,856 27.5% (1) Loan commitment represents principal outstanding plus remaining unfunded loan commitments. (2) Fully extended maturity assumes all extension options are exercised by the borrower upon satisfaction of the applicable conditions. (3) Subsequent to
June 30, 2022, this loan was repaid in full. (4) We are actively pursuing resolutions to these loans. (5) Weighted average is based on loan commitment as of June 30, 2022.
Real estate, net
February 8, 2021, we acquired legal title to a portfolio of hotel properties located in New York, NYthrough a foreclosure. Prior to February 8, 2021, the hotel portfolio represented the collateral for the $103.9 millionmezzanine 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 balance sheet and, as of June 30, 2022, was encumbered by a $290.0 millionsecuritized senior mortgage, which is included as a liability on our balance sheet. Refer to Note 4 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 typically include additional equity contributions from borrowers, repurposing of reserves, temporary deferrals of interest or principal, and partial deferral of coupon interest as payment-in-kind interest. 37 --------------------------------------------------------------------------------
We have made a number of loan modifications to date and may continue to make additional modifications depending on the business plans, financial condition, liquidity and operating results of our borrowers.
Our Manager reviews our entire 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 exposure was 3.1 at
June 30, 2022.
Expected credit losses and current loan risk ratings
During the three months ended
June 30, 2022, we recorded a principal charge-off of $11.5 millionagainst a loan made to the personal estate of a former borrower. Prior to the charge-off, the loan had an unpaid principal balance $15.0 millionand a specific CECL reserve of $6.0 million, resulting in a carrying value of $9.0 million. Following the charge-off, the loan carrying value was $3.5 million, which represents estimated collection. The loan is on non-accrual status and is in maturity default. During three months ended June 30, 2022, we recorded a provision of $8.5 millionin the allowance for credit losses, which was offset by the principal charge-off of $11.5 million, bringing our total reserve to $72.7 millionas of June 30, 2022. In December 2021, we received a partial principal repayment of $81.7 millionon a senior loan with an outstanding principal balance of $95.0 million, and a maturity date of May 31, 2021, and recorded a principal charge-off of $1.8 million. Following the repayment, the maturity date of the loan was extended to January 1, 2023. As of June 30, 2022, the loan had a specific CECL reserve of $0.1 million. Portfolio Financing
Our portfolio financing arrangements include repurchase facilities, asset specific financing structures, mortgages on owned real estate and secured term loans.
The following table summarizes our loan portfolio financing ($ in thousands): June 30, 2022 Unpaid Weighted Principal Average Capacity Balance Spread(1) Repurchase agreements
$ 4,515,000 $ 3,703,306+ 2.05% Repurchase agreements - Side Car 271,171 215,397 + 4.51% Loan participations sold 274,252 274,252 + 3.84% Notes payable 229,950 100,512 + 3.04% Secured Term Loan 758,904 758,904 + 4.50%
Debts related to real estate assets held 290,000 290,000 +2.78% Total / weighted average
$ 6,339,277 $ 5,342,371+ 2.65% (1) Weighted average spread over the applicable benchmark is based on unpaid principal balance. One-month LIBOR as of June 30, 2022was 1.79%. Term SOFR as of June 30, 2022was 1.69%. Fixed rate loans are presented as a spread over the relevant floating benchmark rates.
We finance certain of our loans using secured revolving repurchase facilities. As of
June 30, 2022, aggregate borrowings outstanding under our secured revolving repurchase facilities totaled $3.9 billion, with a weighted average coupon of one-month LIBOR or Term SOFR plus 2.18% per annum. All weighted averages are based on unpaid principal balance. As of June 30, 2022, 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 3.9 years.
Each of the Secured Revolving Repurchase Facilities contains “margin maintenance” provisions, which are designed to allow the lender to require additional collateral to secure borrowings against assets that are determined to have suffered impairment. .
38 -------------------------------------------------------------------------------- The amount of margin that may be required is generally determined by multiplying the assessed diminution in value of the collateral by the then-current advance rate applicable to such collateral. Since inception through
June 30, 2022, we have not received any margin calls under any of our repurchase facilities.
Loan participations sold
We finance certain investments through the sale of an interest in loans receivable held by us, and we present the interest in loans sold as a liability on our Consolidated Balance Sheet when such an arrangement does not qualify as a sale under GAAP. In cases where we have multiple loan participations with the same lender, the financings are generally not cross-guaranteed. Each of our loan participations sold generally has a term attached to its corresponding loan guarantee. Of the
We finance certain investments on a match-term, non-recourse basis with such financings collateralized by our loans receivable, which we refer to as notes payable. Each of our notes payable is generally term-matched to its corresponding loan collateral. As of
June 30, 2022, two of our loans were financed with notes payable.
Guaranteed term loan
August 9, 2019, we entered into our secured term loan of $450.0 million. Our secured term loan is collateralized by a pledge of equity in certain subsidiaries and their related assets, as well as a first priority security interest in selected assets. On December 1, 2020, our secured term loan was modified to increase the aggregate principal amount by $325.0 million, increase the interest rate, and increase the quarterly amortization payment. 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. On December 2, 2021, we entered into a modification of our secured term loan which reduced the interest rate to the greater of (i) 1-month SOFR plus a 0.10% credit spread adjustment and (ii) 0.50%, plus a credit spread of 4.50%. The Secured Term matures on August 9, 2026. As of June 30, 2022, our Secured Term Loan has an unpaid principal balance of $758.9 millionand a carrying value of $738.2 million. Our Secured Term Loan includes various customary affirmative and negative covenants, including, but not limited to, reporting requirements and certain operational restrictions, including restrictions on dividends, distributions or other payments from our subsidiaries.
Debt related to real estate owned
February 8, 2021we assumed a $300.0 millionsecuritized senior mortgage in connection with a Uniform Commercial Code foreclosure on a portfolio of seven limited service hotels located in New York, New York. In June 2021, we modified the securitized senior mortgage, which resulted in an extension of the contractual maturity date to February 9, 2024, a principal repayment of $10.0 million, and the payment of $7.6 millionof fees and modification costs, among other items. The securitized senior mortgage is non-recourse to us. Our debt related to real estate owned as of June 30, 2022has an outstanding principal balance of $290.0 million, a carrying value of $289.9 millionand a stated rate of L+2.78%, subject to a LIBOR floor of 0.75%.
As part of the agreement to amend the terms of our debt related to real estate owned on
June 2, 2021, we have an interest rate cap with a notional amount of $290.0 millionand a maturity date of February 15, 2024for $275,000. The interest rate cap effectively limits the maximum interest rate of our debt related to real estate owned to 5.78%. Increases or decreases in the fair value of our interest rate cap are recorded as an unrealized gain or loss on interest rate cap on our consolidated income statements and the fair value is recorded in other assets on our consolidated balance sheets.
Ease of acquisition
39 -------------------------------------------------------------------------------- On
June 29, 2022, we entered into a $150.0 millionfull 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 on June 29, 2025and earns interest at a rate of 1-month 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 of June 30, 2022, the outstanding balance of the facility is $0.
Divested unconsolidated first-tier interests and unconsolidated first-tier interests held by third parties
In some cases, we use structural leverage through the non-recourse syndication of an equal one-third term senior interest that qualifies for sale accounting under GAAP, or through the acquisition of a subordinated loan in which a non-recourse first-ranking interest is retained by a third party. In such cases, the Senior Loan is not included in our balance sheet.
The following table summarizes our unconsolidated senior interests and related retained subordinate interests at
Term to Fully Unpaid Extended Non-Consolidated Senior Loan Loan Principal Carrying Maturity Interests Count Commitment Balance
Value difference(1) (in years)(2)(3) Unconsolidated floating rate senior loans
$ 184,500 $ 178,656N/A L + 4.47% 0.6 Retained floating rate subordinate loans 3 139,119 136,384 136,933 L + 10.61% 0.4 Fixed rate non-consolidated senior loans 2 $ 867,000 $ 859,660N/A 3.47 % 4.4 Retained fixed rate subordinate loans 2 125,927 125,927 125,651 8.49 % 4.5 (1) Non-consolidated senior interests are indexed to one-month LIBOR, which was 1.79% at June 30, 2022. Weighted average is based on unpaid principal balance. (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. 40 --------------------------------------------------------------------------------
Variable and fixed rate portfolio
Our business model seeks to minimize our exposure to changing interest rates by originating floating rate loans and as much as possible, match-funding the duration of our financing of such loans and using the same benchmark indices, typically one-month LIBOR or Term SOFR. As of
June 30, 2022, 97.5% 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 Term SOFR plus a spread, which resulted in approximately $1.6 billionof net floating rate exposure. The following table details our net floating rate exposure as of June 30, 2022($ in thousands): Net Floating Rate Exposure Floating rate assets(1) $ 6,957,923Floating rate liabilities(1) (5,322,371 ) Net floating rate exposure $ 1,635,552(1) Our floating rate loans and related liabilities are all indexed to one-month LIBOR or Term SOFR. One-month LIBOR as of June 30, 2022was 1.79%. Term SOFR as of June 30, 2022was 1.69%. LIBOR and certain other floating rate benchmark indices to which our floating rate loans and other loan agreements are tied to, are the subject of recent national, international and 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 us 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 Treasurysecurities, as its preferred alternative rate for USD LIBOR.
Our agreements generally provide for the use of a new interest rate index if LIBOR is no longer available. We have started and plan to continue to use alternative rates referenced in our agreements or negotiate an alternative reference rate for LIBOR.
We have an interest rate cap with a notional amount of
$290.0 millionand a maturity date of February 15, 2024on our debt related to real estate owned. The interest rate cap effectively limits the maximum interest rate of our debt related to real estate owned to 5.78%. We have not employed other interest rate derivatives (interest rate swaps, caps, collars or swaptions) to hedge our loan portfolio's cash flow or fair value exposure to increases in interest rates, but we may do so in the future.
Results of operations – Quarters ended
As previously disclosed, beginning with our Quarterly Report on Form 10-Q for the quarter ended
September 30, 2021, and for all subsequent reporting periods, we have elected to present results of operations by comparing to the immediately preceding period, as well as the same year to date period in the prior year. Given the dynamic nature of our business and the sensitivity to the real estate and capital markets, we believe providing analysis of results of operations by comparing to the immediately preceding period is more meaningful to our stockholders in assessing the overall performance of our current business.
The following table sets forth information regarding our consolidated results of operations for the three months ended
June 30, 2022, and March 31, 2022($ in thousands, except per share data): 41 --------------------------------------------------------------------------------
Three Months Ended June 30, 2022 March 31, 2022 $ Change % Change Revenue Interest and related income
$ 98,993 $ 90,694 $ 8,2999 % Less: interest and related expense 46,871 39,580 7,291 18 % Net interest income 52,122 51,114 1,008 2 % Revenue from real estate owned 17,118 6,813 10,305 151 % Total revenue 69,240 57,927 11,313 20 % Expenses Management fees - affiliate 9,843 9,807 36 0 % General and administrative expenses 4,748 4,343 405 9 % Stock based compensation expense 604 - 604 100 % Operating expenses on real estate owned 10,536 7,780 2,756 35 % Interest expense from debt related to real estate owned 2,719 2,584 135 5 % Depreciation on real estate owned 1,998 1,940 58 3 % Total expenses 30,448 26,454 3,994 15 % Realized gain on sale of loan 30,090 - 30,090 100 % Unrealized gain on interest rate cap 2,837 - 2,837 10 % (Provision) reversal of current expected credit loss reserve (8,530 ) (2,102 ) (6,428 ) 306 % Net income $ 63,189 $ 29,371 $ 33,818115 % Net loss attributable to non-controlling interests $ (45 ) $ (41 ) $ (4 )10 % Net income attributable to common stock $ 63,234 $ 29,412 $ 33,822115 % Net income per share of common stock - basic and diluted $ 0.45 $ 0.21 $ 0.24114 %
Comparison of the three months ended
$11.3 millionduring the three months ended June 30, 2022, compared to the three months ended March 31, 2022. The increase is primarily due to an increase in revenue from real estate owned of $10.3 milliondue to seasonally higher occupancy and rates during the second quarter, as well as a COVID-induced slowdown in travel in the first quarter. Additionally, the increase in revenue was driven by an increase in net interest income of $1.0 millionfor the comparative period, which was driven by an increase in interest income earned of $8.3 millionprimarily as a result of reference rate increases during the second quarter of 2022, offset in part by an increase in interest expense of $7.3 millionprimarily as a result of reference rate increases during the second quarter of 2022. Expenses Expenses are primarily comprised of base management 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 $4.0 millionduring the three months ended June 30, 2022as compared to the three months ended March 31, 2022, primarily due to: (i) an increase in operating expenses from real estate owned of $2.8 millionduring the comparative period, due to increased variable operating expenses in connection with the higher occupancy levels;
(ii) an increase in stock-based compensation expense of
(iii) an increase in general and administrative expenses of
Gain realized on the sale of the loan
During the three months ended
June 30, 2022, we realized a gain on the sale of a loan of $30.1 million. There were no loans sold during the three months ended March 31, 2022. 42 --------------------------------------------------------------------------------
Unrealized gain on interest rate ceiling
Unrealized gain on interest rate cap was
$2.8 millionhigher during the comparative period due to the recognition of a $2.8 milliongain resulting from an increase in the fair value of the interest rate cap during the three months ended June 30, 2022.
(Provision) reversal of the current reserve for expected credit losses
The provision for current expected credit loss reserves was
$6.4 milliongreater than the provision for current expected credit loss reserves during the comparative period, due to an increase to a specific CECL reserve on one loan which was charged-off, as well as an increase in the size of the portfolio and changes in macroeconomic conditions as of June 30, 2022, as compared to our loan portfolio as of March 31, 2022.
Results of operations – Half-year ended
The following table sets forth information regarding our consolidated results of operations for six months ended
June 30, 2022and 2021 ($ in thousands, except per share data): Six Months Ended June 30, 2022 June 30, 2021 $ Change % Change Revenue Interest and related income $ 189,687 $ 210,450 $ (20,763 )-10 % Less: interest and related expense 86,451 92,757 (6,306 ) -7 % Net interest income 103,236 117,693 (14,457 ) -12 % Revenue from real estate owned 23,931 7,070 16,861 238 % Total revenue 127,167 124,763 2,404 2 % Expenses Management fees - affiliate 19,650 19,363 287 1 % General and administrative expenses 9,091 4,063 5,028 124 % Stock based compensation 604 (190 ) 794 -418 % Operating expenses from real estate owned 18,316 8,791 9,525 108 % Interest expense on debt related to real estate owned 5,303 10,361 (5,058 ) -49 % Depreciation on real estate owned 3,938 3,233 705 22 % Total expenses 56,902 45,621 11,281 25 % Realized gain on sale of loan 30,090 - 30,090 100 % Unrealized gain on interest rate cap 2,837 - 2,837 100 % Gain on foreclosure of real estate owned - 1,430 (1,430 ) -100 % Other Income - 5,855 (5,855 ) -100 % (Provision) reversal of current expected credit loss reserve (10,632 ) 8,107 (18,739 ) -231 % Income before income taxes 92,560 94,534 (1,974 ) -2 % Income tax benefit - 6,025 (6,025 ) -100 % Net income $ 92,560 $ 100,559 $ (7,999 )-8 % Net loss attributable to non-controlling interests $ (86 ) $ (78 ) $ (8 )10 % Net income attributable to preferred stock $ - $
-8 % Net income per share of common stock - basic and diluted $ 0.66 $ 0.75
$ (0.09 )-12 %
Comparison of the six months ended
$2.4 millionduring the six months ended June 30, 2022, compared to the six months ended June 30, 2021. The increase is primarily due to an increase in revenue from real estate owned of $16.9 milliondue to improved travel and demand at the hotel portfolio for the comparative period. The increase was partially offset by a decrease in net interest income of $14.5 millionfor the comparative period, which was driven by a decrease in interest income earned of $20.8 million, primarily as a result of the replacement of higher yielding assets with floors with lower yielding assets, offset in part by a decrease in interest expense of $6.3 million, as a result of the repayment of higher cost financings in connection with the repayment of our assets. 43 --------------------------------------------------------------------------------
Expenses are primarily comprised of base management 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
$11.3 million, during the six months ended June 30, 2022, as compared to the six months ended June 30, 2021, primarily due to: (i) an increase in operating expenses from real estate owned of $9.5 millionduring the comparative period, due to increased variable operating expenses in connection with higher occupancy levels at the hotel portfolio during the comparative period; (ii) an increase in general and administrative expenses of $5.0 millionduring the comparative period, due primarily to an increase in general operating expenses incurred in connection with becoming a public company as of November 3, 2021;
(iii) an increase in the stock-based compensation of
(iv) the increases were partially offset by a decrease in interest expense on debt related to real estate owned of
$5.1 millionas a result of the agreement to amend the terms of the securitized senior mortgage in June of 2021, which included a principal repayment of $10.0 million, and the payment of $7.6 millionof fees and modification costs which included among other items, $6.3 millionof interest expense.
Gain realized on the sale of the loan
During the six months ended
June 30, 2022, we realized a gain on the sale of a loan of $30.1 million. There were no loans sold during the six months ended June 30, 2021.
Unrealized gain on interest rate ceiling
Unrealized gain on interest rate cap was
$2.8 millionhigher during the comparative period due to the recognition of a $2.8 milliongain resulting from an increase in the fair value of the interest rate cap during the six months ended June 30, 2022.
Gain on seizure of owned real estate
During the six months ended
June 30, 2021, we recognized a gain of $1.4 millionon the foreclosure of a portfolio of seven limited-service hotel properties located in New York, New York. This gain is based upon the estimated fair value of the hotel properties of $414.0 millionas determined by a third-party appraisal, and our assumption of working capital and debt related to real estate owned, relative to our basis in the investment at the time of foreclosure. The fair value was determined using discount rates ranging from 8.50% to 8.75% and a terminal capitalization rate of 6.00% on projected net operating profits on the hotels. Other income During the six months ended June 30, 2021, 292,731 fully-vested time-based RSU awards were forfeited prior to their delivery pursuant to the terms of the RSU award documents, resulting in us reversing previously recognized compensation expense associated with these RSU awards.
(Provision) reversal of the current reserve for expected credit losses
During the six months ended
June 30, 2022, we recorded a provision of current expected credit loss reserves of $10.6 millioncompared to a reversal of current expected credit loss reserves of $8.1 millionduring the six months ended June 30, 2021. The provision is primarily attributable to an increase in size of the portfolio and changes in macroeconomic conditions during the comparative period.
Income tax benefit was
$6.0 millionlower during the comparative period. The change in the comparative periods is due to the recognition of a full valuation allowance of our deferred tax asset during the six months ended June 30, 2022. 44 --------------------------------------------------------------------------------
Cash and capital resources
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 of
June 30, 2022, we had 139,620,078 shares of our common stock outstanding, representing $2.6 billionof stockholders' equity and we also had $5.3 billionof outstanding borrowings under our secured financings, our Secured Term Loan, our debt related to real estate owned, and our acquisition Facility. As of June 30, 2022, our secured financings consisted of six secured revolving repurchase facilities for loan investments with capacity of $4.8 billionand an outstanding balance of $3.9 billion, five asset-specific financings for loan investments with an outstanding balance of $374.8 millionand an acquisition facility with a capacity of $150.0 millionand no outstanding balance. As of June 30, 2022, our Secured Term Loan had an outstanding balance of $758.9 millionand 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, 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.
The following table shows our net debt to equity and total leverage ratios at
June 30, 2022 December 31, 2021 Asset specific debt
$ 4,580,149$ 3,995,061 Secured term loan, net 738,180 739,762 Total debt 5,318,329 4,734,823 Less: cash and cash equivalents (461,002 ) (310,194 ) Net Debt $ 4,857,327$ 4,424,629 Total Stockholders' Equity $ 2,590,406$ 2,604,267 Net Debt-to-Equity Ratio 1.9x 1.7x Non-consolidated senior loans 1,038,316 1,063,939 Total Leverage $ 5,895,643$ 5,488,568 Total Leverage Ratio 2.3x 2.1x Sources of Liquidity Our primary sources of liquidity include cash and cash equivalents, interest income from our loans, loan repayments, available borrowings under our secured revolving repurchase facilities and 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. The following table sets forth, as of June 30, 2022and December 31, 2021, our sources of available liquidity ($ in thousands): June 30, 2022 December 31, 2021 Cash and cash equivalents $ 461,002$ 310,194 Loan principal payments held by servicer(1) 19,201 67,100 Acquisition facility(2) 150,000 - Total sources of liquidity $ 630,203$ 377,294 45
Represents loan principal repayments held in vaults or by our third-party loan servicer at the balance sheet date that were remitted to us during the next remittance cycle, net of the related secured debt balance.
The acquisition facility generally provides bridge financing for qualifying loans for up to 180 days.
$735.3 millionunpaid principal balance of unencumbered loans at June 30, 2022. In addition, we have $596.5 millionof undrawn capacity on existing secured financing commitments relating to both the current unpaid principal balance of our loan portfolio and our unfunded commitments. Such commitments are subject to pledging additional collateral that is subsequently approved by our financing counterparty. 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, repurchase and term loan agreements require us to maintain minimum levels of liquidity in order to satisfy certain financial covenants. We currently maintain, and seek to maintain, excess cash and liquidity to comply with minimum liquidity requirements under our financings, and if necessary, to reduce borrowings under our secured financings, including our repurchase agreements. As of June 30, 2022, we had aggregate unfunded loan commitments of $1.7 billionwhich comprise funding for capital expenditures and construction, leasing costs, and interest and carry costs, and their funding will vary depending on the progress of capital projects, leasing, and cash flows at the properties securing our loans. Therefore, the exact timing and amounts of such future loan fundings are uncertain and will depend on the current and future performance of the underlying collateral assets. We expect to fund our loan commitments over the remaining maximum term of the related loans, which have a weighted-average future funding period of 2.6 years.
Contractual obligations and commitments
Our contractual obligations and commitments as of
June 30, 2022were as follows ($ 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) $ 1,669,938 $ 47,524 $ 1,181,536 $ 440,878$ - Secured financings, term loan agreement, and debt related to real estate owned- principal and interest(2) 5,891,513 1,021,615 3,110,946 1,758,952 - Total $ 7,561,451 $ 1,069,139 $ 4,292,482 $ 2,199,830$ - (1) The allocation of our unfunded loan commitments is based on the earlier of the commitment expiration date and the initial loan maturity date, however we may be obligated to fund these commitments earlier than such date. (2) The allocation of our secured financings and term loan agreement is based on the current maturity date of each individual borrowing under the respective agreement and excludes the impact of any extension options. (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 Term SOFR in effect as of June 30, 2022will 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 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 to U.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. 46 --------------------------------------------------------------------------------
The following table summarizes the future scheduled repayments of principal based on initial maturity dates for the loan portfolio as of
June 30, 2022($ in thousands): Unpaid Principal Loan Year Balance (1) Commitment 2022 $ 744,172 $ 784,0072023 1,735,005 1,909,110 2024 2,241,955 2,737,594 2025 1,549,104 2,097,368 2026 460,666 872,761 Thereafter 125,000 125,000 Total $ 6,855,902 $ 8,525,840(1)
Excludes principal balance of defaulted loans.
The following table provides a breakdown of the net change in our cash and cash equivalents and restricted cash for the six months ended
June 30, 2022and 2021 ($ in thousands): June 30, 2022 June 30, 2021 Net cash flows provided by operating activities $ 72,118
Net cash flows (used) generated by investing activities (372,520 )
269,465 Net cash flows (used in) provided by financing activities 463,997 (294,301 )
Net increase in cash and cash equivalents
and restricted cash
$ 163,595 $ 65,800We experienced a net increase in cash and cash equivalents and restricted cash of $164.0 millionduring the six months ended June 30, 2022, compared to a net decrease of $65.8 millionduring the six months ended June 30, 2021. During the six months ended June 30, 2022, we made initial fundings of $1.3 billionof new loans and $312.2 millionof advances on existing loans and made repayments on financings arrangements of $920.3 million. We received $1.5 billionof proceeds from borrowings under our financing arrangements, received $1.0 billionfrom loan repayments and received $132.2 millionof sales proceeds.
We have elected and believe we have qualified to be taxed as a REIT for
U.S.federal income tax purposes, commencing with our initial taxable year ended December 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 to U.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 under U.S.federal tax laws. Our real estate owned is held in a TRS. Our TRS is not consolidated for U.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 certain U.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 of June 30, 2022, we were in compliance with all REIT requirements. 47 --------------------------------------------------------------------------------
Refer to Note 12 to our Consolidated Financial Statements for further information on our income taxes.
Off-balance sheet arrangements
Significant 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.
Current Expected Credit Losses (“CECL”)
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. The initial CECL allowance recorded on
January 1, 2021is reflected as a direct charge to retained earnings on our consolidated statements of changes in redeemable common stock and stockholders' equity. For our loan portfolio, we, with assistance from a third-party service provider, performed a quantitative assessment of the impact of CECL using the Expected Loss, or EL, approach and the Lifetime Loss Rate, or LLR, method depending on the allocated bucket. For transitional loans, steady & improving loans and stabilized loans, we have applied an EL approach because of the consistency in assessing credit risks and estimating expected credit losses. Due to the nature of construction loans, where repayment does not depend on the operating performance of the underlying property, we have applied a LLR approach to estimate the CECL impacts. In certain circumstances we may determine that a loan is no longer suited for the model-based approach due to its unique risk characteristics, or because 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. If the recovery of that loan's principal balance is entirely collateral-dependent, we may assess such an asset individually and elect to apply a practical expedient in accordance with ASU 2016-13. Our allowance for loan losses reflects our estimation of the current and future economic conditions that impact the performance of the commercial real estate assets securing our loans. These estimations include unemployment rates, interest rates, price indices for commercial property, and other macroeconomic factors that may influence the likelihood and magnitude of potential credit losses for our loans during their anticipated term. We license certain macroeconomic financial forecasts to inform our view of the potential future impact that broader economic conditions may have on its loan portfolio's performance. The forecasts are embedded in the licensed model that we use to estimate our allowance for loan losses as discussed below. Selection of these economic forecasts require significant judgment about future events that, while based on the information available to us as of the respective balance sheet dates, are ultimately unknowable with certainty, and the actual economic conditions impacting our loan portfolio could vary significantly from the estimates we made for the periods presented. Additionally, we assess the obligation to extend credit through our unfunded loan commitments over each loan's contractual period, which is considered in the estimation of the allowance for loan losses.
Real estate held, 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 and the assets and liabilities are presented separately when legal title or physical possession is assumed. If the fair value of the real estate is lower than the carrying value of the loan, the difference, along with any previously recorded Specific CECL Allowances, are recorded as a realized loss on investments in the consolidated statement of operations. Conversely, if the fair value of the real estate is greater than the carrying value of the loan, the difference, along with any previously recorded Specific CECL Allowances, are recorded as a realized gain on investments 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. 48 -------------------------------------------------------------------------------- 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 of up to 40 years for buildings and up to 8 years for furniture, fixtures and equipment. Renovations and/or replacements that improve or extend the life of the real estate asset are capitalized and depreciated over their estimated useful lives. The cost of ordinary repairs and maintenance are expensed as incurred. Real estate assets are evaluated for indicators of impairment on a quarterly basis. Factors that we may consider in its 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. 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. 49
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