UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2022
OR
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 001-40993
Claros Mortgage Trust, Inc.
(Exact Name of Registrant as Specified in its Charter)
Maryland
47-4074900
(State or other jurisdiction of
incorporation or organization)
(I.R.S. EmployerIdentification No.)
c/o Mack Real Estate Credit Strategies, L.P.
60 Columbus Circle, 20th Floor, New York, NY
10023
(Address of principal executive offices)
(Zip Code)
Registrant’s telephone number, including area code: (212) 484-0050
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading
Symbol(s)
Name of each exchange on which registered
Common Stock, $0.01 par value per share
CMTG
New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of November 8, 2022, the registrant had 138,376,144 shares of common stock, $0.01 par value per share, outstanding.
Table of Contents
Page
PART I.
FINANCIAL INFORMATION
3
Item 1.
Financial Statements (Unaudited)
Consolidated Balance Sheets
Consolidated Statements of Operations
4
Consolidated Statements of Changes in Stockholders’ Equity
5
Consolidated Statements of Cash Flows
7
Notes to Consolidated Financial Statements
9
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
34
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
53
Item 4.
Controls and Procedures
56
PART II.
OTHER INFORMATION
Legal Proceedings
57
Item 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
Defaults Upon Senior Securities
Mine Safety Disclosures
Item 5.
Other Information
Item 6.
Exhibits
58
Signatures
60
2
PART I—FINANCIAL INFORMATION
Item 1. Financial Statements.
(unaudited, in thousands, except share data)
September 30, 2022
December 31, 2021
Assets
Cash and cash equivalents
$
225,556
310,194
Restricted cash
37,110
23,942
Loan principal payments held by servicer
7,651
154,600
Loans receivable held-for-investment
7,329,411
6,407,305
Less: current expected credit loss reserve
(59,188
)
(67,010
Loans receivable held-for-investment, net
7,270,223
6,340,295
Equity method investment
40,731
-
Interests in loans receivable held-for-investment, net
161,850
Real estate owned, net
402,830
406,887
Other assets
73,803
57,503
Total assets
8,057,904
7,455,271
Liabilities and Stockholders' Equity
Repurchase agreements
3,993,720
3,489,511
Loan participations sold, net
263,656
167,744
Notes payable, net
123,841
48,000
Secured term loan, net
737,516
739,762
Debt related to real estate owned, net
289,258
289,806
Other liabilities
52,581
54,457
Dividends payable
52,219
51,741
Management fee payable - affiliate
9,928
9,983
Total liabilities
5,522,719
4,851,004
Commitments and contingencies - Note 14
Stockholders' Equity
Common stock, $0.01 par value, 500,000,000 shares authorized, 140,055,714 and 140,055,714 shares issued and 138,970,498 and 139,840,088 shares outstanding at September 30, 2022 and December 31, 2021, respectively
1,400
Additional paid-in capital
2,716,376
2,726,190
Dividends declared
(982,008
(825,659
Retained earnings
799,417
664,700
Total Claros Mortgage Trust, Inc. equity
2,535,185
2,566,631
Non-controlling interests
37,636
Total stockholders' equity
2,604,267
Total liabilities and stockholders' equity
The accompanying notes are an integral part of these consolidated financial statements.
(unaudited, in thousands, except share and per share data)
Three Months Ended
Nine Months Ended
September 30, 2021
Revenue
Interest and related income
126,520
103,876
316,207
314,326
Less: interest and related expense
67,985
45,430
154,436
138,187
Net interest income
58,535
58,446
161,771
176,139
Revenue from real estate owned
17,882
8,550
41,813
15,620
Total revenue
76,417
66,996
203,584
191,759
Expenses
Management fees - affiliate
9,944
9,789
29,594
29,152
General and administrative expenses
4,819
1,330
13,910
5,393
Stock-based compensation expense
3,426
(186
4,030
(376
Operating expenses from real estate owned
11,366
7,948
29,682
16,739
Interest expense on debt related to real estate owned
3,903
2,640
9,206
13,001
Depreciation on real estate owned
2,064
1,940
6,002
5,173
Total expenses
35,522
23,461
92,424
69,082
Realized gain on sale of loan
30,090
Unrealized gain on interest rate cap
2,776
5,613
Gain on foreclosure of real estate owned
1,430
Income from equity method investment
929
Other income
5,855
(Provision) reversal of current expected credit loss reserve
(2,352
9,306
(12,984
17,413
Income before income taxes
42,248
52,841
134,808
147,375
Income tax benefit
6,025
Net income
153,400
Net income (loss) attributable to non-controlling interests
177
(40
91
(118
Net income attributable to preferred stock
12
Net income attributable to common stock
42,071
52,877
134,717
153,506
Net income per share of common stock:
Basic and diluted
0.30
0.40
0.95
1.15
Weighted-average shares of common stock outstanding:
139,430,153
133,433,487
139,592,500
133,491,390
Additional
Non-
Total
Common Stock
Repurchased
Paid-In
Dividends
Retained
controlling
Stockholders'
Shares
Par Value
Capital
Declared
Earnings
Interests
Equity
Balance at December 31, 2021
140,055,714
(215,626
Repurchased shares
(186,289
(3,179
Contributions from non-controlling interests
539
Offering costs
(30
Dividends declared on common stock
(51,672
Net income (loss)
29,412
(41
29,371
Balance at March 31, 2022
(401,915
2,722,981
(877,331
694,112
38,134
2,579,296
(33,721
(592
367
Dividends declared on common stock and participating securities
(52,458
604
63,234
(45
63,189
Balance at June 30, 2022
(435,636
2,722,993
(929,789
757,346
38,456
2,590,406
(649,580
(10,092
(52,219
3,475
Deconsolidation of subsidiary
(38,633
Balance at September 30, 2022
(1,085,216
Redeemable
Preferred Stock
Common
Stock
Balance at December 31, 2020
125
125,541,736
1,255
2,491,836
(573,677
526,205
35,286
2,481,030
141,356
Adoption of ASU 2016-13
(73,975
(4,276
(7,394
897
(28
(2
Dividends paid/accrued on preferred stock
(4
Dividends declared on common stock, redeemable common stock and vested restricted stock units
(47,262
(2,738
Accrued dividends on unvested restricted stock units
389
Accretion of redeemable common stock
81
(81
55,400
(37
55,367
3,208
Balance at March 31, 2021
2,484,495
(620,550
507,630
36,146
2,409,101
137,467
Issuance of common stock
584,767
6
(6
1,452
(300
(63
63
39,720
39,683
2,301
Balance at June 30, 2021
126,126,503
1,261
2,485,878
(668,112
547,350
36,644
2,403,146
137,093
Restricted stock units earned
(147
(202
(12
Dividends declared/paid on common stock, redeemable common stock and vested restricted stock units
Dividends declared on unvested restricted stock units
(5
49,981
49,945
2,896
Balance at September 30, 2021
2,485,534
(715,317
597,331
37,143
2,406,077
137,234
(unaudited, in thousands)
Cash flows from operating activities
Adjustments to reconcile net income to net cash provided by operating activities:
Accretion of origination fees on loans receivable
(19,351
(18,677
Accretion of origination fees on interests in loans receivable
(204
(849
Amortization of financing costs
14,651
16,277
Non-cash stock-based compensation
4,079
(5,855
(5,613
(929
Distribution from equity method investment
408
(30,090
(1,430
Non-cash advances on loans receivable in lieu of interest
(51,842
(55,792
Non-cash advances on interests in loans receivable in lieu of interest
(2,427
(15,149
Non-cash advances on secured financings in lieu of interest
155
15,161
Repayment of non-cash advances on loans receivable in lieu of interest
20,128
97,087
Repayment of non-cash advances on interests in loans receivable in lieu of interest
13,178
363
Repayment of non-cash advances on secured financings in lieu of interest
(22,285
Provision (reversal) of current expected credit loss reserve
12,984
(17,413
Changes in operating assets and liabilities:
(12,981
(13,356
8,038
8,506
10
(60
Incentive fee payable - affiliate
(187
Net cash provided by operating activities
91,004
144,538
Cash flows from investing activities
(515
Loan originations, acquisitions and advances, net of fees
(2,394,662
(1,272,396
Advances of interests in loans receivable
(14,653
(86,022
Repayments of loans receivable
1,458,389
1,046,111
Repayments of interests in loans receivable
165,468
2,977
Proceeds from sale of mortgage loan receivable
132,151
Extension and exit fees received from loans receivable
5,963
8,066
Extension and exit fees received from interests in loans receivable
502
Cash, cash equivalents and restricted cash from foreclosure of properties
9,580
Foreclosure of real estate owned
(11,463
Reserves and deposits held for loans receivable
(1,575
659
Capital expenditures on real estate owned
(1,945
Net cash used in investing activities
(650,877
(302,488
Cash flows from financing activities
Repurchase of common stock
(13,863
906
1,975
Dividends paid on common stock and restricted stock units
(155,871
(141,792
Dividends paid on redeemable common stock
(8,208
Dividends paid on preferred stock
(8
Proceeds from secured financings
1,927,139
1,014,627
Payment of financing costs
(16,498
(14,335
Payment of exit fees on secured financings
(443
Repayments of secured financings
(1,247,390
(849,141
Repayments of secured term loan
(5,720
(5,837
Repayments of debt related to real estate owned
(10,000
Net cash provided by (used in) financing activities
488,403
(13,192
Net increase (decrease) in cash, cash equivalents and restricted cash
(71,470
(171,142
Cash, cash equivalents and restricted cash, beginning of period
334,136
430,974
Cash, cash equivalents and restricted cash, end of period
262,666
259,832
Cash and cash equivalents, beginning of period
427,512
Restricted cash, beginning of period
3,462
Cash and cash equivalents, end of period
235,596
Restricted cash, end of period
24,236
Supplemental disclosure of cash flow information:
Cash paid for interest
141,497
121,257
Supplemental disclosure of non-cash investing and financing activities:
Dividends accrued
53,196
252,946
Accrued financing costs
3,750
6,251
Accrued offering costs
2,231
Deposits applied against sale proceeds
14,761
Deconsolidation of subsidiary:
Loan receivable
78,507
17
(130
(65
Net carrying value of deconsolidated subsidiary's net assets
78,329
Working capital consolidated
(18,546
Settlement of loan receivable
103,901
Real estate acquired in settlement of loan receivable
414,000
Assumption of debt related to real estate owned
(300,000
Conversion of restricted stock units to common shares - common stock
Conversion of restricted stock units to common shares - additional paid in capital
8
(unaudited)
Note 1. Organization
Claros Mortgage Trust, Inc. (referred to throughout this report as the “Company,” “we”, “us” and “our”) is a Maryland Corporation formed on April 29, 2015 for the purpose of creating a diversified portfolio of income-producing loans collateralized by institutional quality commercial real estate. We commenced operations on August 25, 2015 (“Commencement of Operations”) and generally conduct our business through wholly-owned subsidiaries. Unless the context requires otherwise, any references to the Company refer to the Company and its consolidated subsidiaries. The Company is traded on the New York Stock Exchange, or NYSE, under the symbol “CMTG”.
We elected and intend to maintain our qualification to be taxed as a real estate investment trust (“REIT”) under the requirements of the Internal Revenue Code of 1986, as amended (the "Internal Revenue Code"), for U.S. federal income tax purposes. As such, we generally are not subject to U.S. federal income tax on that portion of our income that we distribute to stockholders. See Note 13 – Income Taxes regarding taxes applicable to the Company.
We are externally managed by Claros REIT Management LP (the “Manager”), our affiliate, through a management agreement (the "Management Agreement") pursuant to which the Manager provides a management team and other professionals who are responsible for implementing our business strategy, subject to the supervision of our board of directors (the "Board"). In exchange for its services, the Manager is entitled to management fees and incentive fees. See Note 11 – Related Party Transactions regarding the Management Agreement.
Note 2. Summary of Significant Accounting Policies
Basis of Presentation and Principles of Consolidation
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”).
References to common stock in 2021 include redeemable common stock.
These unaudited consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2021, as filed with the Securities and Exchange Commission. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) necessary for a fair statement of our financial position, results of operations and cash flows have been included. Our results of operations for the three and nine months ended September 30, 2022 are not necessarily indicative of the results to be expected for the full year or any other future period. The consolidated balance sheet at December 31, 2021 was derived from the audited annual financial statements but does not contain all of the footnote disclosures from the annual financial statements.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Estimates that are particularly susceptible to our judgment include, but are not limited to, the adequacy of allowance for loan losses, the determination of effective yield for recognition of interest income and interest expense, and impairment of certain assets.
The novel coronavirus (“COVID-19”) pandemic has evolved since its onset during the first quarter of 2020, and while the global economy has begun to recover, uncertainty around future developments remain. The ongoing pandemic state has also affected global supply chains, the labor market, and inflation, which continue to impact many industries, including the collateral underlying certain of our loans. In response, the Federal Reserve has begun raising interest rates in 2022 and has indicated that it foresees further interest rate increases through the end of the year. The overall impact to the global economy will depend largely on the recovery of disrupted supply chains and industries, the extent of the labor market interruptions, the result of the Federal Reserves’ policies, and other government interventions. The current and future financial, economic and capital markets environment could remain uneven, and presents uncertainty and risk with respect to the performance of our loans receivable and real estate owned, our financial condition, results of operations, liquidity, and ability to pay dividends.
Current Expected Credit Losses
The current expected credit loss (“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, 2021 was reflected as a direct charge to retained earnings on our consolidated statements of changes in stockholders’ equity. Subsequent changes to the CECL allowance are recognized through net income 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 forecasts for the duration of each respective loan.
General CECL Allowance
Our loans are typically collateralized by real estate, or in the case of mezzanine loans, by an equity interest in an entity that owns real estate. We consider key credit quality indicators in underwriting loans and estimating credit losses, including, but not limited to: the capitalization of borrowers and sponsors; the expertise of the borrowers and sponsors in a particular real estate sector and geographic market; collateral type; geographic region; use and occupancy of the property; property market value; loan-to-value (“LTV”) ratio; loan amount and lien position; our risk rating for the same and similar loans; and prior experience with the borrower and sponsor. This information is used to assess the financial and operating capability, experience and profitability of the borrower/sponsor. Ultimate repayment of our loans is sensitive to interest rate changes, general economic conditions, liquidity, LTV ratio, existence of a liquid investment sales market for commercial properties, and availability of replacement short-term or long-term financing.
We regularly evaluate on a loan-by-loan basis, the extent and impact of any credit deterioration associated with the performance and/or value of the underlying collateral property, the financial and operating capability of the borrower/sponsor, the financial strength of loan guarantors, if any, and the overall economic environment, real estate sector, and geographic sub-market in which the borrower operates, at least quarterly. Such analyses are completed and reviewed by asset management personnel and evaluated by senior management, who utilize various data sources, including, to the extent available (i) periodic financial data such as property occupancy, tenant profile, rental rates, operating expenses, the borrower’s exit plan, and capitalization and discount rates, (ii) site inspections, (iii) sales and financing comparables, (iv) current credit spreads for refinancing and (v) other market data.
Commencing the third quarter of 2022, we arrived at our general CECL reserve using the Weighted Average Remaining Maturity, or WARM method, which has been identified as an acceptable loss-rate method for estimating CECL reserves by the Financial Accounting Standards Board ("FASB"). 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 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 September 30, 2022.
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, which is considered in the estimate of the general CECL reserve. This
component of the general CECL reserve will similarly impact our consolidated net income. 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.
We evaluate the credit quality of each of our loans receivable on an individual basis and assign a risk rating at least quarterly. We have developed a loan grading system for all of our outstanding loans receivable that are collateralized directly or indirectly by real estate. Grading criteria include as-is or as-stabilized debt yield, term of loan, property type, loan type and other more subjective variables that include property or collateral location, as-is or as-stabilized collateral value, market conditions, industry conditions and sponsor’s financial stability. We utilize the grading system to determine each loan’s risk of loss and to provide a determination as to whether an individual loan is impaired and whether a special loan loss allowance is necessary. Based on a 5-point scale, the loans are graded “1” through “5,” from less risk to greater risk, which gradings are defined as follows:
Specific CECL Allowance
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, 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 a 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.
For such loan we would measure the specific allowance of each loan separately by using the fair value of the collateral or the net present value of its expected future cash flows. If the fair value of the collateral is less than the carrying value of the loan, an asset-specific allowance is created as a component of our overall allowance for loan losses (following the adoption of CECL, or as a loan loss allowance prior to the adoption of CECL). Specific allowances are equal to the excess of a loan’s carrying value to the present value of its expected cash flows discounted at the loan’s effective rate or the fair value of the collateral, less estimated costs to sell, if recovery of our investment is expected solely from the collateral.
If we have determined that a loan or a portion of a loan is uncollectible, we will write off the loan through a charge to our current expected credit loss reserve based on the present value of expected future cash flows or the fair value of the collateral less costs to sell, if repayment is expected solely from the collateral. 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.
For additional information on our General and Specific CECL Allowance please refer to Note 3—"Loans Portfolio—Current Expected Credit Losses”.
Real Estate Owned (and Associated Debt)
We may assume legal title or physical possession of the underlying collateral of a defaulted loan through foreclosure. If we intend to hold, operate or develop the property for a period of at least 12 months, the asset is classified as real estate owned, net. If we intend to market a property for sale in the near subsequent term, the asset is classified as real estate held for sale. Real estate owned is initially recorded at estimated fair value and is subsequently presented net of accumulated depreciation. Depreciation is computed using a straight-line method over the estimated useful lives.
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 net of anticipated capital proceeds generated by the real estate asset. If the sum of such estimated cash flows are less than the fair value of the real estate, 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.
11
Debt assumed in an acquisition/foreclosure of real estate is recorded at its estimated fair value at the time of the acquisition. Debt related to real estate owned is non-recourse to us.
Equity Method Investment
We account for our investments in entities in which we have the ability to influence, but do not have a controlling interest, by using the equity method of accounting. Under the equity method for which we have not elected a fair value option, the investment, originally recorded at cost, is adjusted to recognize our share of earnings or losses as they occur and for additional contributions made or distributions received. We look at the nature of the cash distributions received to determine the proper character of cash flow distributions on the accompanying consolidated statement of cash flows as either returns on investment, which would be included in operating activities, or returns of investment, which would be included in investing activities.
At each reporting period we assess whether there are any indicators of impairment of our equity investments. There were no impairments of our equity method investment as of and for the three and nine months ended September 30, 2022.
Derivative Financial Instruments
In the normal course of business, we are exposed to the effect of interest rate changes and may undertake a strategy to limit these risks through the use of derivatives. We may use derivatives primarily to reduce the impact that increases in interest rates will have on our floating rate liabilities, which may consist of interest rate swaps, interest rate caps, collars, and floors.
We recognize all derivatives on the consolidated balance sheets at fair value within other assets. To determine the fair value of derivative instruments, we use a variety of methods and assumptions that are based on market conditions as of the balance sheet date, such as discounted cash flows and option-pricing models.
We have not designated derivatives as hedges to qualify for hedge accounting for financial reporting purposes and fluctuations in the fair value of these derivatives have been recognized currently as unrealized gain on interest rate cap in the accompanying consolidated statements of operations.
Other Assets
Other assets include interest receivable, miscellaneous receivables, prepaid expenses, deferred tax asset (net of any valuation allowance), deposits funded relating to unclosed transactions, deferred financing costs related to our repurchase agreements and acquisition facility, derivative financial instruments, and repurchased shares not yet settled.
Other Liabilities
Other liabilities include interest payable, accounts payable and accrued expenses, our general CECL reserve related to our unfunded loan commitments, reserves held for loans receivable, and deposits held.
Revenue Recognition
Interest income from loans receivable is recorded on the accrual basis based on the outstanding principal amount and the contractual terms of the loans. Recognition of fees, premiums, discounts and direct costs associated with these investments is deferred until the loan is advanced and is then amortized or accreted into interest income over the term of the loan as an adjustment to yield using the effective interest method based on expected cash flows through the expected recovery period. Income accrual may be suspended for loans when we determine that the payment of income and principal is no longer probable. Factors considered when making this determination include our assessment of the underlying collateral value, delinquency in excess of 90 days, and overall market conditions. While on non-accrual status, based on our estimation as to collectability of principal, loans are either accounted for on a cash basis, where interest income is recognized only upon actual receipt of cash, or on a cost-recovery basis, where all cash receipts reduce a loan's carrying value. If and when a loan is brought back into compliance with its contractual terms, and our Manager has determined that the borrower has demonstrated an ability and willingness to continue to make contractually required payments related to the loan, we resume accrual of interest.
Revenue from real estate owned represents revenue associated with the operations of hotel properties classified as real estate owned. Revenue from the operations of the hotel properties is recognized when guestrooms are occupied, services have been rendered or fees have been earned. Revenues are recorded net of any discounts and sales and other taxes collected from customers. Revenues consist of room sales, food and beverage sales and other hotel revenues.
Reportable Segments
We evaluate the operating performance of our investments as a whole. We previously determined that we had two operating segments and one reporting segment as a result of the foreclosure of the hotel portfolio on February 8, 2021. In the first quarter of 2022, we had a change in our Chief Operating Decision Maker (CODM) who determined that we evaluate the operating performance of our investments as a whole and make operating decisions accordingly. Therefore, we have one operating segment and one reporting segment, with activities related to investing in income-producing loans collateralized by institutional quality commercial real estate. This change has been applied retrospectively to all periods presented.
Reclassifications
Certain prior period amounts in the accompanying consolidated financial statements have been reclassified to conform with the current period presentation. These reclassifications had no effect on the results of operations or financial position for any period presented.
Recent Accounting Guidance
On March 31, 2022, the FASB issued ASU 2022-02, “Financial Instruments – Credit Losses (Topic 326), Troubled Debt Restructurings and Vintage Disclosures”, (“ASU 2022-02”). The standard eliminates the recognition and measurement guidance for troubled debt restructurings (“TDRs”) for creditors that have adopted ASU 2016-13 Financial Instruments – Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments, ("CECL"). In addition to eliminating the TDR accounting guidance, ASU 2022-02 changes existing disclosure requirements and introduces new disclosures related to certain modifications of instruments with borrowers experiencing financial difficulty. The standard is effective for periods beginning after December 15, 2022, with early adoption permitted. During the second quarter of 2022, we adopted this standard effective January 1, 2022 and the adoption did not have a material impact on our financial statements.
The FASB issued ASU 2019-12, Income Taxes (Topic 740), (“ASU 2019-12”). ASU 2019-12 simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. ASU 2019-12 also improves the consistent application of, and simplifies, GAAP for other areas of Topic 740 by clarifying and amending existing guidance. The standard is effective for financial statements issued for fiscal years beginning after December 15, 2021, with early adoption permitted. We adopted ASU 2019-12 on January 1, 2022 and the adoption of ASU 2019-12 did not have a material impact on our consolidated financial statements.
The FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, (“ASU 2020-04”). ASU 2020-04 provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships and other transactions that reference the London Interbank Offering Rate ("LIBOR") or another reference rate expected to be discontinued because of reference rate reform. ASU 2020-04 is effective upon issuance of ASU 2020-04 for contract modifications and hedging relationships on a prospective basis. We have not adopted any of the optional expedients or exceptions through September 30, 2022, but will continue to evaluate the possible adoption of any such expedients or exceptions during the effective period as circumstances evolve.
13
Note 3. Loans Portfolio
Loans Receivable
Our loans receivable portfolio as of September 30, 2022 was comprised of the following loans ($ in thousands, except for number of loans):
Number ofLoans
Loan Commitment(4)
Unpaid Principal Balance
CarryingValue
Weighted Average Spread(2)
Weighted Average Interest Rate(3)
Loans receivable held-for-investment:
Variable:
Senior loans(1)
69
8,920,827
7,156,048
7,105,113
+ 4.02%
7.10
%
Subordinate loans
61,500
59,481
59,602
+ 11.57%
14.71
71
8,982,327
7,215,529
7,164,715
+ 4.08%
7.17
Fixed:
41,787
39,050
39,049
N/A
7.61
125,927
125,647
8.49
167,714
164,977
164,696
8.28
Total/Weighted Average
77
9,150,041
7,380,506
7.19
Current expected credit loss reserve
Our loans receivable portfolio as of December 31, 2021 was comprised of the following loans ($ in thousands, except for number of loans):
Loan Commitment(5)
Weighted Average Interest Rate(4)
Senior loans(1,3)
51
7,163,032
6,119,619
6,085,351
+ 4.06%
5.16
137,079
133,119
133,552
+ 10.38%
11.37
54
7,300,111
6,252,738
6,218,903
+ 4.19%
5.29
62,573
62,782
10.09
125,620
188,500
188,402
9.02
59
7,488,611
6,441,238
5.40
14
Certain loans receivable held by us include LIBOR/SOFR floors, which establish the minimum interest rate a borrower may pay on a loan. The weighted average LIBOR/SOFR floor in place based on unpaid principal balance on floating rate loans is 0.85% as of September 30, 2022.
The following table presents the range of LIBOR/SOFR floors held in our loan portfolio as of September 30, 2022 based on outstanding principal ($ in thousands):
One-month LIBOR/SOFR Floor Range
UnpaidPrincipalBalance
% ofTotal
Cumulative%
2.00% - 2.50%
782,123
1.50% - 1.99%
1,569,759
21
32
1.00% - 1.49%
738,591
42
0.50% - 0.99%
342,086
47
< 0.50%
3,135,761
89
No floor
647,209
98
Total Floating Rate Loans
Total Fixed Rate Loans
100
Total Loans
The following table presents the carrying value and significant characteristics of our loans receivable on non-accrual status as of September 30, 2022 ($ in thousands):
Origination Date
Initial Maturity Date
Date Through Which Interest Collected
Risk Rating
Carrying Value
SpecificCECL Reserve
Net Carrying Value
Interest Recognition Method(1)
8/2/2019
10/30/2021
11/1/2021
67,000
Cash Basis
7/1/2019
12/30/2020
7/1/2020
3,500
Cost Recovery
Total non-accrual(2)
70,500
Carrying value of associated financings
(33,500
Net carrying value
37,000
The following table presents the carrying value and significant characteristics of our loans receivable on non-accrual status as of December 31, 2021 ($ in thousands):
Interest Recognition Method
5/5/2017
1/1/2023
12/1/2021
11,533
(333
11,200
7/10/2018
12/10/2023
77,530
81,380
Total current
89,063
92,913
88,730
9/21/2018
10/1/2020
2/1/2020
116,211
116,020
3/29/2018
1/26/2021
7/9/2020
76,069
75,579
15,000
(6,000
9,000
Total delinquent
274,280
273,599
268,280
Total non-accrual(1)
363,343
366,512
(6,333
357,010
(122,450
234,560
15
Activity relating to the loans receivable portfolio for the nine months ended September 30, 2022 ($ in thousands):
Deferred Fees
Carrying Value (1)
(33,933
6,400,972
Initial funding of new loan originations and acquisitions
1,996,086
Advances on existing loans
429,901
Non-cash advances in lieu of interest
50,876
966
51,842
Origination fees, extension fees and exit fees
(37,288
(1,389,947
Repayments of non-cash advances in lieu of interest
(20,128
Accretion of fees
19,351
Sale proceeds
(146,912
Gain (loss) on sale
30,892
(191
30,701
(5,205
Principal charge-offs
(11,500
11,500
(51,095
(38
7,329,373
(59,150
In the second quarter of 2022, we sold a senior loan with a carrying value of $116.2 million and recognized a realized gain of $30.1 million. The financial asset was legally isolated, the transferee has the ability to pledge the assets without constraint and control has been transferred to the transferee. We have determined the transaction constituted a sale.
Through CMTG/TT Mortgage REIT LLC ("CMTG/TT"), a previously consolidated joint venture, we held a 51.0% interest in $78.5 million of subordinate loans secured by land in New York, which had been on non-accrual status since October 2021. During the third quarter of 2022, we directly acquired the senior position of the loan of $73.5 million and converted the whole loan from a land loan into a construction loan to finance the development of a hotel. The borrower simultaneously committed additional equity to the project. Immediately following the conversion of the loan, we own $115.3 million of total loan commitments, of which $75.0 million has been funded and is included in loans receivable held-for-investments on our consolidated balance sheet as of September 30, 2022, as well as 51.0% of the remaining $78.5 million of subordinate loans held through CMTG/TT which is accounted for under the equity method of accounting on our consolidated financial statements. See Note 4 - Equity Method Investment for further detail. The new loans accrue interest at the new contractual rates.
In the second quarter of 2022, we modified a loan with a borrower who was experiencing financial difficulties, resulting in a decrease in the index rate floor from 1.57% to 1.00% and modified extension requirements. As of September 30, 2022, the loan had an amortized cost basis of $87.8 million and represents approximately 1.21% of total loans receivable held-for-investment, net. The loan is considered as part of the general CECL allowance. The borrower is current on all contractually obligated payments.
Interests in Loans Receivable Held-for-Investment
We had no interests in loans receivable as of September 30, 2022.
Our interests in loans receivable portfolio as of December 31, 2021 was comprised of the following loan ($ in thousands):
Loan Commitment(3)
Stated Rate (2)
Interest Rate (4)
1
200,727
161,566
161,864
L + 4.25%
5.50%
(14
16
Activity relating to the interests in loans receivable portfolio for the nine months ended September 30, 2022 ($ in thousands):
298
Advances on existing interests in loans receivable
14,653
2,427
(502
(165,468
Repayment of non-cash advances in lieu of interest
(13,178
Accretion of origination fees, net
204
The following table details overall statistics for our loans receivable and interests in loans receivable portfolio ($ in thousands):
Interests in Loans Receivable
Weighted average yield to maturity
7.7
5.6
6.7
Weighted average term to fully extended maturity
3.5 years
3.3 years
1.6 years
Concentration of Risk
The following table presents our loans receivable and interests in loans receivable portfolio by loan type, as well as property type and geographic location of the properties collateralizing these loans as of September 30, 2022 and December 31, 2021 ($ in thousands):
Loan Type
Percentage
7,144,162
97
6,309,997
96
185,249
259,172
6,569,169
(67,024
6,502,145
Property Type
Office
1,064,017
1,113,805
Mixed-use(2)
641,365
734,613
Hospitality
1,519,301
1,176,842
18
Land
441,894
631,713
Multifamily
3,019,352
41
1,986,628
30
For Sale Condo
466,299
710,660
Other
177,183
214,908
Geographic Location
United States
Northeast
1,994,376
28
2,734,550
Mid Atlantic
815,889
1,235,527
19
Midwest
454,945
309,298
Southeast
941,867
836,904
Southwest
692,144
269,461
West
2,423,852
33
1,156,896
6,338
0
26,533
Interest Income and Accretion
The following table summarizes our interest and accretion income from loans receivable held-for-investment, from interests in loans receivable held-for-investment, and from interest on cash balances, for the three and nine months ended September 30, 2022 and 2021, respectively ($ in thousands):
Coupon interest
116,435
96,913
295,080
294,771
Interest on cash and cash equivalents
1,229
1,572
29
8,856
6,961
19,555
19,526
Total interest and related income(1)
Loan Risk Ratings
As further described in Note 2 – Summary of Significant Accounting Policies, we evaluate the credit quality of our loan portfolio on a quarterly basis. In conjunction with our quarterly loan portfolio review, we assess the risk factors of each loan and assign a risk rating based on several factors. Factors considered in the assessment include, but are not limited to, current loan-to-value, debt yield, structure, cash flow volatility, exit plan, current market environment and sponsorship level. Loans are rated “1” (less risk) through “5” (greater risk), which ratings are defined in Note 2 – Summary of Significant Accounting Policies.
The following tables allocate the principal balance and carrying value of the loans receivable and interests in loans receivable based on our internal risk ratings ($ in thousands):
Number of Loans
% of Total of Unpaid Principal Balance
0%
927
907
67
6,558,513
6,510,965
89%
814,728
811,201
11%
35,721
35,699
1%
705,886
703,714
10%
4,678,785
4,649,076
71%
1,155,879
1,154,147
18%
6,602,804
As of September 30, 2022 and December 31, 2021 , the average risk rating of our portfolio was 3.1 and 3.1, respectively, weighted by unpaid principal balance.
The current expected credit loss reserve required under GAAP reflects our current estimate of potential credit losses related to loans receivable, interests in loans receivable, accrued interest receivable and unfunded loan commitments. See Note 2 for further discussion of our allowance for loan losses.
During the nine months ended September 30, 2022, we recorded a principal charge-off of $11.5 million against 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 million and a specific CECL reserve of $6.0 million, resulting in a carrying value of $9.0 million. Following the charge-off, the loan's carrying value is $3.5 million, which represents estimated collection. The loan is on non-accrual status and is in maturity default.
In December of 2021, we received principal repayments of $81.7 million on 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 September 30, 2022 and December 31, 2021, the loan had a specific loan loss allowance of $38,000 and $0.3 million, respectively, which represents additional collectible interest through the maturity date. Subsequent to September 30, 2022, this loan was repaid in full.
During the three months ended September 30, 2022, we recorded a net provision of $2.4 million in the allowance for credit losses. The total allowance for loan losses increased to $75.0 million as of September 30, 2022. The increase was primarily attributable to the increase in the size of our loan portfolio and changes in macroeconomic conditions.
20
The following table illustrates the quarterly changes in the current expected credit loss reserve for the nine months ended September 30, 2022 and 2021, respectively ($ in thousands):
Specific CECL Allowance (1)
Loans Receivable Held-for-Investment
Accrued Interest Receivable
Unfunded Loan Commitments (2)
Total current expected credit loss reserve, December 31, 2020
6,000
Initial CECL allowance, January 1, 2021
64,274
406
357
13,214
78,251
Increase (reversal) in current credit loss reserve
1,547
(141
(1,577
(185
Total current expected credit loss reserve, March 31, 2021
65,821
265
343
11,637
84,066
500
(3,954
270
(33
(4,705
(7,922
Total current expected credit loss reserve, June 30, 2021
6,500
61,867
535
310
6,932
76,144
2,000
(11,154
(306
(64
218
(9,306
Total current expected credit loss reserve, September 30, 2021
8,500
50,713
229
246
7,150
66,838
Total current expected credit loss reserve, December 31, 2021
6,333
60,677
6,286
73,528
(133
(1,269
(218
3,694
2,102
Total current expected credit loss reserve, March 31, 2022
6,200
59,408
9,980
75,630
5,405
(113
(42
3,280
8,530
Total current expected credit loss reserve, June 30, 2022
105
59,295
13,260
72,660
(67
(145
2,564
2,352
Total current expected credit loss reserve, September 30, 2022
38
59,150
15,824
75,012
Percent of Unpaid Principal Balance at September 30, 2022
1.0
Our primary credit quality indicator is our internal risk ratings, which are further discussed above. The following table presents the amortized cost basis of our loans receivable as of September 30, 2022 by year of origination and risk rating ($ in thousands):
Amortized Cost Basis by Origination Year
Amortized Cost Basis
2022
2021
2020
2019
2018
2017
2,019,264
1,853,294
91,736
1,649,447
799,735
97,489
199,660
224,903
386,638
17,838
2,838
Charge-offs
291,396
1,877,850
1,187,280
100,327
Note 4. Equity Method Investment
On June 8, 2016, we acquired a 51% interest in CMTG/TT upon commencement of its operations. During its active investment period, CMTG/TT originated loans collateralized by institutional quality commercial real estate. CMTG/TT has been consolidated in our financial statements from its inception through July 31, 2022. On August 1, 2022, the sole remaining loan held by this joint venture was converted to a new construction loan. In connection with the conversion, we amended the operating agreement of CMTG/TT. Effective August 1, 2022, we are not deemed to be the primary beneficiary of CMTG/TT in accordance with ASC 810 and do not consolidate the joint venture. We did not recognize a gain or loss as this transaction occured simultaneously with the conversion of the aforementioned loan, and thus there was no change in the underyling value of our 51% equity interest in CMTG/TT. See Note 3 for further details. As of September 30, 2022, the carrying value of our 51% equity interest in CMTG/TT approximated $40.7 million.
Note 5. 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 a $103.9 million mezzanine loan held by us. The loan was in default as a result of the borrower failing to pay debt service. A $300.0 million securitized senior mortgage held by a third party was in default as well. The securitized senior mortgage is non-recourse to us. We recorded a gain of $1.4 million resulting from the foreclosure of the loan, which was based upon the estimated fair value of the hotel properties as determined by a third-party appraisal. The fair value of $414.0 million was determined using discount rates ranging from 8.50% to 8.75% and a terminal capitalization rate of 6.00%.
On June 2, 2021, terms of the securitized senior mortgage were modified to include an extension of the maturity date to February 9, 2024, a principal repayment of $10.0 million, and the payment of $7.6 million of fees and modification costs, which included among other items, $6.3 million of interest, $1.1 million of general and administrative expenses, and $0.2 million of debt issuance costs.
The following table presents additional detail related to our real estate owned, net as of September 30, 2022 and December 31, 2021 ($ in thousands):
123,100
Building
284,400
Capital improvements
1,945
Furniture, fixtures and equipment
Real estate assets
415,945
Less: accumulated depreciation
(13,115
(7,113
Note 6. Repurchase Agreements, Loan Participations Sold, Net, Notes Payable, Net, Secured Term Loan, Net, Debt Related to Real Estate Owned, Net, and Acquisition Facility
As of September 30, 2022 and December 31, 2021, we financed certain of our loans receivables using repurchase agreements, the sale of loan participations, and notes payable. The financings bear interest at a rate equal to LIBOR/SOFR plus a credit spread or at a fixed rate. Financing agreements generally contain covenants that include certain financial requirements, including maintenance of minimum liquidity, minimum tangible net worth, maximum debt to tangible net worth ratio, and minimum debt service coverage ratio as defined in agreements. As of September 30, 2022 and December 31, 2021, we are in compliance with all covenants under our financing agreements.
The following table summarizes our portfolio financings as of September 30, 2022 and December 31, 2021 ($ in thousands):
Capacity
Borrowing Outstanding
WeightedAverageSpread(1)
4,700,000
3,781,687
+ 2.16%
4,065,000
3,274,508
+ 2.00%
Repurchase agreements - Side Car
271,171
212,033
+ 4.51%
215,003
+ 4.50%
Loan participations sold
264,252
+ 3.77%
168,322
+ 3.79%
Notes payable
383,898
127,764
+ 3.09%
+ 4.00%
Secured Term Loan
756,997
762,717
Debt related to real estate owned
290,000
+ 2.78%
Total / weighted average
6,666,318
5,432,733
+ 2.71%
5,605,210
4,758,550
+ 2.65%
22
Repurchase Agreements
The following table summarizes our repurchase agreements by lender as of September 30, 2022 ($ in thousands):
Lender
InitialMaturity
FullyExtendedMaturity (1)
MaximumCapacity
BorrowingOutstanding
UndrawnCapacity
JP Morgan Chase Bank, N.A. - Main Pool
6/29/2025
6/29/2027
1,500,000
1,235,227
264,773
JP Morgan Chase Bank, N.A. - Side Car
5/27/2023
5/27/2024
59,138
Morgan Stanley Bank, N.A.
1/26/2023
1/26/2025
1,000,000
875,493
124,507
Goldman Sachs Bank USA
5/31/2023
5/31/2025
500,000
393,398
106,602
Wells Fargo Bank, N.A.
9/29/2023
9/29/2026
800,000
745,603
54,397
Barclays Bank PLC
12/20/2022
12/20/2025
186,383
313,617
Deutsche Bank AG, New York Branch(2)
6/26/2023
6/26/2026
400,000
345,583
54,417
4,971,171
977,451
The following table summarizes our repurchase agreements by lender as of December 31, 2021 ($ in thousands):
JP Morgan Chase Bank, N.A. - Main Pool(2)
1,250,000
1,173,280
76,720
56,168
Morgan Stanley Bank, N.A.(3)
1/26/2024
5/31/2022
750,000
410,551
339,449
193,884
306,116
Deutsche Bank AG, New York Branch
6/26/2022
265,000
211,372
53,628
300,000
285,421
14,579
4,336,171
846,660
Liabilities under our repurchase agreements as of September 30, 2022 are summarized as follows ($ in thousands):
WeightedAverageTerm(1)
CarryingValue ofCollateral
2.2
1,738,886
0.5
456,176
1.9
1,345,991
594,591
2.4
949,591
1.2
287,009
2.0
559,846
5,932,090
23
Liabilities under our repurchase agreements as of December 31, 2021 are summarized as follows ($ in thousands):
1.6
1,626,719
0.9
436,325
1,709,758
1.3
589,825
1.4
283,716
2.3
327,671
2.8
362,742
5,336,756
The repurchase facilities are partially recourse to us. The maximum guarantees under our repurchase agreements range from 25% to 50% of borrowings outstanding.
Loan Participations Sold
Our loan participations sold as of September 30, 2022 are summarized as follows ($ in thousands):
ContractualMaturityDate
MaximumExtensionDate
CarryingValue ofCollateral(1)
8/1/2023
138,322
280,983
10/18/2023
10/18/2024
105,930
105,559
192,282
12/31/2024
12/31/2025
20,000
19,775
149,628
622,893
Our loan participations sold as of December 31, 2021 are summarized as follows ($ in thousands):
8/1/2022
148,322
148,133
290,783
19,611
130,061
420,844
Notes Payable
Our notes payable as of September 30, 2022 are summarized as follows ($ in thousands):
103,592
102,327
6/30/2025
6/30/2026
4,777
4,348
7,137
2/2/2026
2/2/2027
19,395
18,400
23,225
9/2/2026
9/2/2027
(1,234
(1,763
178,227
24
Our notes payable as of December 31, 2021 are summarized as follows ($ in thousands):
1/4/2022 (2)
1/4/2022
116,512
Secured Term Loan, Net
On August 9, 2019, we entered into a $450.0 million secured term loan. On December 1, 2020, the secured term loan was modified to increase the aggregate principal amount by $325.0 million, increase the interest rate, and to increase the quarterly amortization payment. On December 2, 2021, we entered into a modification of our secured term loan which reduced the interest rate to the greater of (i) one-month term SOFR plus a 0.10% credit spread adjustment, and (ii) 0.50%, plus a credit spread of 4.50%.
The secured term loan as of September 30, 2022 is summarized as follows ($ in thousands):
Contractual
Stated
Borrowing
Maturity Date
Rate (1)
Interest Rate
Outstanding
8/9/2026
S + 4.50%
7.64%
The secured term loan as of December 31, 2021 is summarized as follows ($ in thousands):
5.00%
The secured term loan is partially amortizing, with principal payments of $1.9 million due in quarterly installments.
Debt Related to Real Estate Owned, Net
On February 8, 2021 we assumed a $300.0 million securitized senior mortgage in connection with a UCC foreclosure on a portfolio of seven limited service hotels. On June 2, 2021, we entered into an agreement to amend the terms of the securitized senior mortgage which included an extension of the maturity date to February 9, 2024, a principal repayment of $10.0 million, and the payment of $7.6 million of fees and modification costs, which included among other items, $6.3 million of interest expense, $1.1 million of general and administrative expenses, and $0.2 million of debt issuance costs.
Our debt related to real estate owned as of September 30, 2022 is summarized as follows ($ in thousands):
February 9, 2024
L + 2.78%
5.78
Our debt related to real estate owned as of December 31, 2021 is summarized as follows ($ in thousands):
3.53
25
Acquisition Facility
On June 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 on June 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 of September 30, 2022, the outstanding balance of the facility is $0.
Interest Expense and Amortization
The following table summarizes our interest and amortization expense on secured financings, debt related to real estate owned and on the secured term loan for the three and nine months ended September 30, 2022 and 2021, respectively ($ in thousands):
Interest on secured financings
49,893
28,401
107,051
86,990
Interest on secured term loan
13,052
11,749
32,910
34,954
Interest on debt related to real estate owned (1)
5,040
5,280
14,475
16,243
Total interest and related expense
71,888
48,070
163,642
151,188
Note 7. Derivatives
As part of the agreement to amend the terms of our debt related to real estate owned on June 2, 2021, we acquired an interest rate cap with a notional amount of $290.0 million and a maturity date of February 15, 2024 for $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. The fair value of the interest rate cap is $5.6 million at September 30, 2022.
Note 8. Fair Value Measurements
ASC 820, “Fair Value Measurement and Disclosures” establishes a framework for measuring fair value as well as disclosures about fair value measurements. It emphasizes that fair value is a market-based measurement, not an entity-specific measurement. Therefore, a fair value measurement should be determined based on the assumptions that market participants would use when pricing an asset or liability. As a basis for considering market participant assumptions in fair value measurements, the standards establish a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy).
Level 1 inputs utilize unadjusted quoted prices in active markets for identical assets or liabilities that we have the ability to access. Level 2 inputs are inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs may include quoted prices for similar assets and liabilities in active markets, as well as inputs that are observable for the asset or liability other than quoted prices, such as interest rates, foreign exchange rates, and yield curves that are observable at commonly quoted intervals. Level 3 inputs are unobservable inputs for the asset or liability which are typically based on an entity’s own assumptions, as there is little, if any, related market activity. In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement fall is based on the lowest level input that is significant to the fair value measurement in its entirety. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.
Financial Instruments Reported at Fair Value
The fair value of our interest rate cap is determined by using the market standard methodology of discounting the future expected cash receipts that would occur if variable interest rates rise above the strike rate of the interest rate cap. The variable interest rates used in the calculation of projected receipts on the interest rate cap are based on a third-party expert's expectation of future interest rates
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derived from observable market interest rate curves and volatilities. Our interest rate cap is classified as Level 2 in the fair value hierarchy and is valued at $5.6 million at September 30, 2022 and $0 at December 31, 2021.
Financial Instruments Not Reported at Fair Value
The carrying value and estimated fair value of financial instruments not recorded at fair value on a recurring basis but required to be disclosed at fair value were as follows ($ in thousands):
Fair Value Hierarchy Level
Fair Value
Level 1
Level 2
Level 3
7,244,522
260,619
126,820
724,825
280,040
6,434,157
Interests in loans receivable held-for- investment, net
161,883
3,484,834
168,738
281,723
Note 9. Equity
Our charter provides for the issuance of up to 500,000,000 shares of common stock with a par value of $0.01 per share. We had 140,055,714 common shares issued and 138,970,498 and 139,840,088 common shares outstanding as of September 30, 2022 and December 31, 2021, respectively.
The following table provides a summary of the number of common shares outstanding during the nine months ended September 30, 2022 and 2021, respectively, including redeemable common stock:
Common Stock Outstanding
Beginning balance
139,840,088
132,848,720
Conversion of fully vested restricted stock units to common shares
Repurchase of common shares
(869,590
Ending balance
138,970,498
Repurchased Shares
We entered into an agreement (the “10b5-1 Purchase Plan”) with Morgan Stanley & Co. LLC, pursuant to which Morgan Stanley & Co. LLC, as our agent, will buy in the open market up to $25.0 million of our common stock in the aggregate during the period beginning on December 6, 2021 and ending at the earlier of 12 months and the date on which all the capital committed to the 10b5-1 Purchase Plan is expended. The 10b5-1 Purchase Plan will require Morgan Stanley & Co. LLC to purchase shares of our common stock on our behalf when the market price per share is below the book value per common share, subject to certain daily limits prescribed by
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the 10b5-1 Purchase Plan. For the period from December 6, 2021 through September 30, 2022, we repurchased 1,085,216 shares of common stock under the repurchase program at an average price per share of $16.09 for a total of $17.5 million.
The following table details our dividend activity for common and preferred stock ($ in thousands, except per share data):
For the Quarter Ended
March 31, 2022
June 30, 2022
Amount
Per Share
Dividends declared - common stock
51,672
0.37
51,659
51,419
Record Date - common stock
Payment Date - common stock
April 15, 2022
July 15, 2022
October 14, 2022
March 31, 2021
June 30, 2021
50,000
Dividends declared - preferred stock(1)
0.03
March 19, 2021
June 16, 2021
September 17, 2021
April 1, 2021
July 7, 2021
October 7, 2021
Note 10. Earnings Per Share
We calculate basic earnings per share (“EPS”) using the two-class method, which defines unvested share-based payment awards that contain nonforfeitable rights to dividends as participating securities. Under the two-class method, earnings (distributed and undistributed) are allocated to common stock and participating securities based on their respective rights. Basic EPS is calculated by dividing our net income attributable to common stockholders minus participating securities' share in earnings by the weighted average number of shares of common stock outstanding during each period.
Diluted EPS is calculated under the more dilutive of the treasury stock or the two-class method. Under the treasury stock method, diluted EPS is calculated by dividing net income attributable to common stockholders by the weighted average number of shares of common stock outstanding plus the incremental potential shares of common stock assumed issued during the period if they are dilutive.
As of September 30, 2022 and 2021, we had no dilutive securities. As a result, basic and diluted EPS are the same. The calculation of basic and diluted EPS is as follows ($ in thousands, except for share and per share data):
Net income attributable to common stockholders
Dividends on participating securities
(799
(1,598
Participating securities' share in earnings
Basic earnings
41,272
Weighted average number of common stock, basic and diluted
Net income per share of common stock, basic and diluted
For the nine months ended September 30, 2022 and 2021, 863,524 and 0 weighted average unvested restricted stock units ("RSUs"), respectively, were excluded from the calculation of diluted EPS because the effect was anti-dilutive. For the three months ended September 30, 2022 and 2021, 2,159,280 and 0 weighted average unvested RSUs, respectively, were excluded from the calculation of diluted EPS because the effect was anti-dilutive.
Note 11. Related Party Transactions
The activities of the Company are managed by the Manager. Pursuant to the terms of the Management Agreement, the Manager is responsible for originating investment opportunities, providing asset management services and administering the day-to-day operations of the Company. The Management Agreement will remain in-place until August 25, 2025 unless terminated at an earlier date upon the occurrence of certain events. The Manager is entitled to receive a management fee, an incentive fee and a termination fee as defined below.
The following table summarizes our management fees ($ in thousands):
Management fees
Management Fees
Effective October 1, 2015, the Manager earns a base management fee in an amount equal to 1.50% per annum of Stockholders’ Equity. Management fees are reduced by our pro rata share of any management fees and incentive fees (if incentive fees are not incurred by us) paid to the Manager by CMTG/TT. Management fees are paid quarterly, in arrears. Management fees of $9.9 million and $10.0 million were accrued and were included in management fee payable – affiliate, in the consolidated balance sheets at September 30, 2022 and December 31, 2021.
On August 2, 2022 our Management Agreement was amended and restated, primarily to provide for reimbursement of allocable costs, including compensation of the Manager’s non-investment professionals, to provide for automatic one-year renewals of the
agreement following its original expiration date, unless it is otherwise terminated by our Board, and to remove historical provisions that are no longer relevant to our business and certain reporting requirements that are not customary for a public company.
Incentive Fees
The Manager is entitled to an incentive fee equal to 20% of the excess of our Core Earnings on a rolling four-quarter basis, as defined in the Management Agreement, over a 7.00% return on Stockholders’ Equity, as defined in the Management Agreement of the Company. Incentive fees are reduced by our pro rata share of any incentive fees paid to the Manager by CMTG/TT.
The Manager is entitled to an incentive fee equal to 3.33% of the excess of CMTG/TT’s Core Earnings on a rolling four-quarter basis, as defined in the Management Agreement, over a 7.00% return on Unitholders’ Equity of CMTG/TT.
There were no accrued incentive fees on the consolidated balance sheets at September 30, 2022 and December 31, 2021, respectively.
Termination Fees
If we elect to terminate the Management Agreement, we are required to pay the Manager a termination fee equal to three times the sum of the average total annual amount of management fees and the average annual incentive fee paid by us over the prior two years.
Reimbursable Expenses
The Manager or its affiliates are entitled to reimbursement for certain documented costs and expenses incurred by them on our behalf, as set forth in the Management Agreement, excluding any expenses specifically required to be borne by the Manager under the Management Agreement. For the three months ended September 30, 2022 and 2021, we had $0.3 million and $0 of reimbursements of out-of-pocket costs incurred on our behalf by our Manager, respectively, which are included in general and administrative expenses. For the nine months ended September 30, 2022 and 2021, we reimbursed $0.4 million and $0.2 million of out-of-pocket costs incurred on our behalf by our Manager, respectively, which are included in general and administrative expenses.
As of September 30, 2022 and December 31, 2021, we have one loan with an outstanding principal balance of $92.8 million and $54.0 million, respectively, and a loan commitment of $141.1 million, whereby the borrower is an affiliate of a shareholder of our common stock who owns approximately 10.9% of common stock outstanding as of September 30, 2022 .
Note 12. Stock-Based Compensation
We are externally managed and do not currently have any employees. On March 30, 2016, we adopted the 2016 Incentive Award Plan (the “Plan”) to promote the success and enhance the value of the Company by linking the individual interests of employees of the Manager and its affiliates to those of our stockholders. The maximum number of shares that may be issued under the Plan is equal to 8,281,594 shares.
On April 4, 2019, the Board granted 877,498 time-based RSUs pursuant to the Plan which immediately became vested. Dividend equivalent payments accrued as if those shares were outstanding for all dividends declared during the period beginning August 25, 2015. The fair value of time-based RSUs was recognized immediately. The fair value of the 877,498 RSUs was determined to be $20.00 per share on the grant date based on our share issuances proximate to the grant date. On April 4, 2021, 584,767 fully vested RSUs were delivered and converted to common shares. During the nine months ended September 30, 2021, 292,731 time-based RSUs were forfeited prior to their delivery, resulting in the reversal of $5.9 million of previously recognized stock-based compensation expense which is included as other income in the consolidated statements of operations.
On April 4, 2019, the Board granted 1,622,499 performance-based RSUs pursuant to the Plan of which 0% to 100% were scheduled to vest at the conclusion of a three-year performance period commencing on January 1, 2019, at varying levels, if we achieved a minimum cumulative Total Stockholder Return Percentage in excess of 18% over that period. Total Stockholder Return Percentage is equal to the quotient of (i) the sum of (A) the tangible net book value per common share as of December 31, 2021 less $19.84 and (B) the aggregate amount of dividends paid with respect to common stock during the performance period, (ii) and $19.84, calculated on a fully diluted basis. Dividend equivalents were scheduled to accrue and be paid to participants at the conclusion of the performance period based on the number of RSUs that vested. The fair value of the 1,622,499 performance-based RSUs was determined to be $20.00 per share on the grant date based on our share issuances proximate to the grant date. In the event that a change in control or an initial public offering (“IPO”) had occurred prior to the completion of the performance period, the RSUs would have immediately vested prior
to such change in control or IPO and dividend equivalents would have become payable. Upon completion of our IPO in November 2021, 1,097,293 RSUs immediately vested and dividend equivalents of $4.9 million were paid.
On May 24, 2022, we adopted the Deferred Compensation Plan to provide our directors and certain executives with an opportunity to defer payment of their equity-based compensation or RSUs and director cash fees, if applicable, pursuant to the terms of the Deferred Compensation Plan.
The Board awards time-based RSUs to eligible non-employee Board members on an annual basis as part of such Board members’ annual compensation in accordance with the Non-Employee Director Compensation Program. The time-based awards are generally issued in the second quarter on the date of the annual meeting of our stockholders, in conjunction with the director’s election to the Board, and the awards vest on the earlier of (x) the one-year anniversary of the grant date and (y) the date of the next annual meeting of our stockholders following the grant date, subject to the applicable participants' continued service through such vesting date. In June 2022, the eligible non-employee members of the Board were automatically granted an aggregate of 29,280 time-based RSUs under the Plan. Each RSU was granted with the right to receive dividend equivalents. Additionally, certain directors elected to defer their RSUs pursuant to the terms of the Deferred Compensation Plan. Such deferred awards will become payable on the earliest to occur of the participant’s separation from service or a change in control. The fair value of the 29,280 RSUs was determined to be $20.49 per share on the grant date based on the closing price of common stock on such date.
Under our Deferred Compensation Plan, certain of our Board members elected to receive the annual fees and/or time-based RSUs to which they are entitled under our Non-Employee Director Compensation Program in the form of deferred RSUs. Accordingly, we issued 2,894 of deferred RSUs in lieu of cash fees to such directors, and recognized a related expense of $49,000, during the three and nine months ended September 30, 2022, which is classified in general and administrative expenses.
On June 14, 2022, the Board granted an aggregate of 2,130,000 time-based RSUs to employees of the Manager or its affiliates, which vest in three equal installments on each of the first, second and third anniversaries of July 1, 2022, subject to the applicable participant’s continued service through each vesting date. Each RSU was granted with the right to receive dividend equivalents. The fair value of the 2,130,000 RSUs was determined to be $18.72 per share on the grant date based on the closing price of common stock on such date.
For the three and nine months ended September 30, 2022 we recognized $3.4 million and $4.0 million, respectively, of stock-based compensation expense related to the RSUs. For the three and nine months ended September 30, 2021, we recognized a net reversal of previously recognized compensation expense of $0.2 million and $0.4 million, respectively. Stock-based compensation expense is considered non-cash compensation expense for the three and nine months ended September 30, 2022 and 2021.
Stock-based compensation expense is recognized in earnings on a straight-line basis over the applicable award’s vesting period. Forfeitures of stock-based compensation awards are recognized as they occur. As of September 30, 2022, total unrecognized compensation expense was $36.4 million based on the grant date fair value of RSUs granted. This expense is expected to be recognized over a remaining period of 2.7 years from September 30, 2022.
The following table details the time-based RSU activity during the nine months ended September 30, 2022 and 2021:
Time-based Restricted Stock Units
Performance-based Restricted Stock Units
Weighted-Average
Number of
Grant Date Fair
Restricted Shares
Value Per Share
Unvested, December 31, 2021
Granted
2,159,280
18.74
Unvested, September 30, 2022
Unvested, December 31, 2020
1,622,499
20.00
Forfeited/cancelled
(525,206
Unvested, September 30, 2021
1,097,293
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Note 13. Income Taxes
We have elected to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code commencing with our taxable year ended December 31, 2015 and expect to continue to operate so as to qualify as a REIT. As a result, we will generally not be subject to federal and state income tax on that portion of our income that we distribute to stockholders if we distribute at least 90% of our taxable income, determined without regard to the deduction for dividends paid and excluding any net capital gains and activity conducted within our taxable REIT subsidiary (“TRS”), and comply with certain other requirements to qualify as a REIT. Since Commencement of Operations, we have been in compliance with all REIT requirements and we plan to continue to operate so that we meet the requirements for taxation as a REIT. Therefore, other than amounts relating to our TRS, as described below, we have not provided for current income tax expense related to our REIT taxable income for the nine months ended September 30, 2022 and 2021, respectively. Additionally, no provision has been made for federal or state income taxes in the accompanying financial statements, as we believe we have met the prescribed requisite requirements.
Our real estate owned is held in a TRS. A TRS is a corporation that is owned directly or indirectly by a REIT and has jointly elected with the REIT to be treated as a TRS for tax purposes. TRSs provide REITs the flexibility to hold, up to 20% of their total assets, entities or investments that otherwise would not be permissible in the REIT structure. 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. No current or deferred tax benefit or expense was recorded for the three and nine months ended September 30, 2022. We recorded a deferred income tax benefit of $0 and $6.0 million during the three and nine months ended September 30, 2021.
We did not have any deferred tax assets or deferred tax liabilities at September 30, 2022 or December 31, 2021 due to a full valuation allowance that was established against our deferred tax assets.
We recognize tax benefits for uncertain tax positions only if it is more likely than not that the position is sustainable based on its technical merits. Interest and penalties on uncertain tax positions are included as a component of the provision for income taxes in our consolidated statements of income. As of September 30, 2022 and December 31, 2021, we have not recorded any amounts for uncertain tax positions.
Our tax returns are subject to audit by taxing authorities. Tax years 2018 through 2021 remain open to examination by major taxing jurisdictions to which we are subject to taxes.
Note 14. Commitments and Contingencies
We hold a 51% interest in CMTG/TT as a result of committing to invest $124.9 million in CMTG/TT. Distributions representing repayment proceeds from CMTG/TT’s loans may be recalled by CMTG/TT, if the repayment occurred at least six months prior to the loan’s initial maturity date. As of September 30, 2022 and December 31, 2021, we contributed $163.1 million and $162.1 million, respectively, to CMTG/TT and have received return of capital distributions of $123.6 million, of which $111.1 million were recallable. As of September 30, 2022 and December 31, 2021, CMTG’s remaining capital commitment to CMTG/TT was $72.9 million and $73.8 million, respectively.
As of September 30, 2022 and December 31, 2021, we had aggregate unfunded loan commitments of $1.8 billion and $1.1 billion respectively, which amounts will generally be funded to finance lease-related or capital expenditures by our borrowers, subject to borrowers achieving certain conditions precedent to such funding. These future commitments will expire over the remaining term of the loans, none of which exceed five years.
Based on the fully extended maturity of our underlying loans, the contractual payments under all borrowings were as follows as of September 30, 2022 ($ in thousands):
Year
1,907
2023(1)
386,660
2024
1,077,086
2025
730,406
2026 and thereafter
3,236,674
In the normal course of business, we may enter into contracts that contain a variety of representations and provide for general indemnifications. Our maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against us that have not yet occurred. However, based on experience, we expect the risk of loss to be remote.
Note 15. Subsequent Events
We have evaluated subsequent events through the filing of this Quarterly Report on Form 10-Q and determined that the following events or transactions have occurred:
1. We originated two floating rate loan with an aggregate loan commitment of $246.5 million, of which $34.4 million was funded at closing.
2. We received the full repayment of two loans with an unpaid principal balance of $20.3 million at September 30, 2022.
3. We entered into a master participation and administration agreement with JP Morgan to finance certain of our mortgage loans. The facility has a maximum facility amount of $1.0 billion, of which $400.0 million was committed at closing. The financing is non-mark-to-market and matures five years after the date on which the last asset is financed under the facility.
4. On November 8, 2022 our Board of Directors authorized a share repurchase program that authorizes the repurchase of up to $100 million shares of our common stock. Under the share repurchase program, repurchases can be made from time to time using a variety of methods, which may include open market purchases, privately negotiated transactions, accelerated share repurchase programs, or otherwise.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
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 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 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 a Maryland corporation on April 29, 2015 and 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 SEC pursuant 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. 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 ended September 30, 2022, we had net income per share of $0.30, Distributable Earnings per share of $0.33, and declared dividends of $0.37 per share. As of September 30, 2022, our book value per share was $17.96, our adjusted book value per share was $18.58, our Net-Debt-to-Equity Ratio was 2.0x, and our Total Leverage Ratio was 2.4x. We use Net Debt-to-Equity Ratio and Total Leverage Ratio, financial measures which are not prepared in accordance with GAAP, to evaluate our financial leverage, which in the case of our Total Leverage Ratio, makes certain adjustments that we believe provide a more conservative measure of our financial condition.
Net Income Per Share and Dividends Declared Per Share
The following table sets forth the calculation of basic and diluted net income per share and dividends declared per share ($ in thousands, except share and per share data):
Basic and diluted earnings
62,404
Weighted average shares of common stock outstanding, basic and diluted
139,637,949
Basic and diluted net income per share of common stock
0.45
Dividends declared per share of common stock
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 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 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 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.
35
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 September 30, 2022, we recorded a $2.4 million increase in the CECL reserve, which has been excluded from Distributable Earnings.
In determining distributable earnings per share, the dilutive effect of unvested RSUs are considered. The weighted-average diluted shares outstanding used for Distributable Earnings has been adjusted from weighted-average diluted shares under GAAP to include unvested RSUs.
The table below summarizes the reconciliation from weighted-average diluted shares under GAAP to the weighted-average diluted shares used for Distributable Earnings:
Weighted-Averages
Diluted Shares - GAAP
Unvested RSUs
407,565
Diluted Shares - Distributable Earnings
141,589,433
140,045,514
The following table provides a reconciliation of net income attributable to common stock to Distributable Earnings ($ in thousands, except share and per share data):
Net income attributable to common stock:
Adjustments:
Non-cash stock-based compensation expense
Provision for current expected credit loss reserve
Depreciation expense
1,998
(2,776
(2,837
Distributable Earnings prior to principal charge-offs
47,137
71,529
60,029
Weighted average diluted shares - Distributable Earnings
Diluted Distributable Earnings per share prior to principal charge-offs
0.33
0.51
Diluted Distributable Earnings per share
0.43
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.
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):
Total Stockholders’ Equity
Non-controlling interest
(37,636
Stockholders’ Equity, net of non-controlling interest
Number of shares common stock outstanding and RSUs
141,129,778
Book Value per share(1)
17.96
18.35
Add back: accumulated depreciation on real estate owned
0.09
0.05
Add back: general CECL reserve
0.53
0.48
Adjusted Book Value per share
18.58
18.88
36
II. Our Portfolio
The below table summarizes our loan portfolio as of September 30, 2022 ($ in thousands):
Weighted Average(2)
Loan Commitment(1)
Yield to Maturity(3)
Term toFullyExtendedMaturity (in years) (4)
LTV(5)
Senior and subordinate loans
3.5
67.8
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 nine months ended September 30, 2022 ($ in thousands):
Three Months Ended September 30, 2022
Nine Months Ended September 30, 2022
Interestsin Loans Receivable
Unpaid principal balance, beginning of period
7,139,571
Initial funding of loans
687,550
Advances on loans
185,566
480,777
17,080
497,857
Loan repayments
(632,181
(1,410,075
(178,646
(1,588,721
Sale of loan receivable
(116,020
Total net fundings
240,935
939,268
(161,566
777,702
Unpaid principal balance, end of period
37
The following table details our loan investments individually based on unpaid principal balances as of September 30, 2022 ($ in thousands):
Loan Number
Loan type
Fully Extended Maturity(2)
Construction(4)
Location
Senior
12/16/2021
405,000
396,420
393,600
6/16/2027
CA
11/1/2019
390,000
388,770
11/1/2026
NY
6/13/2018
280,000
10/18/2019
279,549
239,733
239,569
Y
10/4/2019
263,000
217,089
216,684
10/1/2025
Mixed-Use
DC
6/30/2022
227,000
211,222
208,568
6/30/2029
12/27/2018
210,000
207,548
2/1/2025
8/17/2022
235,000
205,000
202,800
8/17/2027
7/21/2021
225,000
200,529
199,143
7/26/2026
GA
9/7/2018
192,600
2/15/2022
262,500
172,020
169,691
2/14/2027
1/14/2022
170,000
168,705
1/14/2027
CO
4/14/2022
193,400
166,700
165,061
4/14/2027
MI
9/27/2019
258,400
159,340
157,903
9/26/2026
9/20/2019
151,285
FL
2/28/2019
150,000
149,844
2/28/2024
CT
1/9/2018
148,500
148,341
1/9/2024
VA
9/8/2022
160,000
146,945
9/8/2027
AZ
12/30/2021
147,500
147,144
12/30/2025
PA
8/8/2019
154,999
137,713
137,165
8/8/2026
151,698
133,059
131,453
4/26/2027
TX
12/10/2021
130,000
129,187
12/10/2026
Subordinate
12/9/2021
125,000
124,740
1/1/2027
IL
9/23/2021
127,535
122,535
121,637
9/24/2028
9/30/2019
122,500
122,346
2/9/2027
4/29/2019
120,000
119,510
119,261
4/29/2024
3/1/2022
122,000
118,600
117,714
2/28/2027
8/8/2022
115,000
113,960
8/8/2027
7/20/2021
113,500
113,178
7/19/2026
2/13/2020
124,810
112,341
111,910
2/13/2025
6/17/2022
127,250
110,265
108,781
6/17/2027
6/8/2018
104,250
105,342
1/15/2022
12/15/2021
103,000
102,319
12/13/2026
TN
10/11/2017
97,500
10/31/2023
8/2/2021
100,000
95,969
95,398
8/2/2026
1/27/2022
100,800
95,633
94,918
1/27/2027
NV
4/1/2020
141,084
92,841
4/1/2026
3/31/2020
87,750
2/9/2025
39
76,499
73,748
7/10/2025
40
4/5/2019
75,500
75,406
4/5/2024
12/14/2018
75,000
74,961
12/14/2023
115,250
74,998
74,639
7/30/2026
43
7/27/2022
76,000
72,426
71,894
7/27/2027
UT
44
8/26/2021
84,810
69,869
69,252
8/27/2026
45
1/30/2022
46
12/22/2021
76,350
64,097
63,483
12/22/2026
8/29/2018
60,000
59,862
8/31/2023
48
3/22/2021
148,303
57,160
56,106
3/22/2026
MA
49
1/19/2022
73,677
52,716
52,091
1/19/2027
50
11/2/2021
77,115
52,647
51,967
11/2/2026
6/3/2021
79,600
52,560
51,966
6/3/2026
52
3/15/2022
53,300
49,844
49,415
3/15/2027
44,661
44,391
1/10/2022
130,461
40,841
39,538
1/9/2027
55
2/4/2022
44,768
38,002
37,628
2/4/2027
12/21/2018
31,300
31,456
6/21/2022
4/18/2019
30,000
29,913
5/1/2023
7/2/2021
30,200
28,181
28,146
7/2/2024
141,791
25,856
24,491
12/30/2026
Mixed-use
2/2/2022
90,000
24,122
WA
61
2/17/2022
28,479
23,924
23,698
2/17/2027
62
20,660
20,861
2/2/2024
11/24/2021
60,255
20,070
19,478
11/22/2026
64(3)
4/9/2021
17,500
17,668
4/29/2023
65
1/31/2022
34,641
12,667
12,332
1/31/2027
66
3/9/2018
14,789
12,052
11,850
48,500
7,614
68
69(3)
70
32,795
2,396
2,069
1/4/2027
8/2/2018
7/9/2023
72
2/18/2022
32,083
913
592
2/18/2027
73
4/19/2022
23,378
689
455
4/19/2027
74
2/25/2022
53,984
525
(15
2/25/2027
75
24,245
(242
76
5/16/2022
202,500
(2,025
5/13/2027
9/2/2022
176,257
CECL Allowance
Grand Total/Weighted Average
28.0%
3.1
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 balance sheet and, as of September 30, 2022, was encumbered by a $290.0 million securitized senior mortgage, which is included as a liability on our balance sheet. 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 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.
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 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 September 30, 2022.
On January 1, 2021, we adopted ASU 2016-13, which implemented the CECL accounting model. Following adoption, we recorded a $78.3 million cumulative effect adjustment to retained earnings.
During the second quarter of 2022, we recorded a principal charge-off of $11.5 million against 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 million and 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 September 30, 2022, we recorded a provision of $2.4 million in the allowance for credit losses, bringing our total reserve to $75.0 million as of September 30, 2022.
In December 2021, we received a partial principal repayment of $81.7 million on 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 September 30, 2022, the loan had an unpaid principal balance of $2.8 million and a specific CECL reserve of $38,000. Subsequent to September 30, 2022 this loan was repaid in full.
Portfolio Financing
Our portfolio financing arrangements include repurchase facilities, asset-specific financing structures, mortgages on real estate owned and Secured Term Loan borrowings.
The following table summarizes our loan portfolio financing ($ in thousands):
We finance certain of our loans using secured revolving repurchase facilities. As of September 30, 2022, aggregate borrowings outstanding under our secured revolving repurchase facilities totaled $4.0 billion, with a weighted average coupon of one-month LIBOR or one-month term SOFR plus 2.29% per annum. All weighted averages are based on unpaid principal balance. As of September 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 3.7 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 experienced a diminution in value. Since inception through September 30, 2022, we have not received any margin calls under any of our repurchase facilities.
We finance certain investments via the sale of a participation in loans receivable that we own, and we present the loan participation sold as a liability on our consolidated balance sheet when such arrangement does not qualify as a sale 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 collateral. As of September 30, 2022, three of our loans were financed with loan participations sold.
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 September 30, 2022, four of our loans were financed with notes payable.
We have a secured term loan of $757.0 million which we originally entered into on August 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.
On December 2, 2021, we entered into a modification of our secured term loan which reduced the interest rate to the greater of (i) one-month term SOFR plus a 0.10% credit spread adjustment and (ii) 0.50%, plus a credit spread of 4.50%. The secured term loan matures on August 9, 2026. As of September 30, 2022, our secured term loan has an unpaid principal balance of $757.0 million and a carrying value of $737.5 million.
Debt Related to Real Estate Owned
On February 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 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 million of 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 September 30, 2022 has an outstanding principal balance of $290.0 million, a carrying value of $289.3 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 our interest rate cap.
Derivatives
As part of the agreement to amend the terms of our debt related to real estate owned on June 2, 2021, we acquired an interest rate cap with a notional amount of $290.0 million and a maturity date of February 15, 2024 for $275,000. The fair value of the interest rate cap is $5.6 million at September 30, 2022.
The interest rate cap effectively limits the maximum interest rate of our debt related to real estate owned to 5.78%. Increases or decreases in the fair value of our interest rate cap are recorded as an unrealized gain or loss on interest rate cap on our consolidated statements of operations and the fair value is recorded in other assets on our consolidated balance sheets.
As of September 30, 2022, we were in compliance with all financial covenants under our financing.
Non-Consolidated Senior Interests Sold and Non-Consolidated Senior Interests Held by Third Parties
In certain instances, we use structural leverage through the non-recourse syndication of a match-term senior loan interest to a third party which qualifies for sale accounting under GAAP, or through the acquisition of a subordinate loan for which a non-recourse senior interest is retained by a third party. In such instances, the senior loan is not included on our consolidated balance sheet.
The following table summarizes our non-consolidated senior interests and related retained subordinate interests as of September 30, 2022 ($ in thousands):
Non-Consolidated Senior Interests
LoanCount
LoanCommitment
Spread(1)
Term toFullyExtendedMaturity(in years)(2)(3)
Floating rate non-consolidated senior loans
111,000
107,014
L + 5.05%
Retained floating rate subordinate loans
59,603
L + 11.57%
0.8
Fixed rate non-consolidated senior loans
861,073
859,660
3.47%
4.1
Retained fixed rate subordinate loans
8.49%
4.2
Floating 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 one-month term SOFR. As of September 30, 2022, 97.8% 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 $1.8 billion of net floating rate exposure.
The following table details our net floating rate exposure as of September 30, 2022 ($ in thousands):
Net FloatingRate Exposure(1)
Floating rate assets
Floating rate liabilities
(5,412,733
Net floating rate exposure
1,802,796
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 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 have begun and expect to continue to utilize alternative rates referenced in our agreements or negotiate a replacement reference rate for LIBOR.
We have an interest rate cap with a notional amount of $290.0 million and a maturity date of February 15, 2024 on our debt related to real estate owned. The interest rate cap effectively limits the maximum interest rate of our debt related to real estate owned to 5.78%. We have not employed other interest rate derivatives (interest rate swaps, caps, collars or swaptions) to hedge our loan portfolio’s cash flow or fair value exposure to increases in interest rates, but we may do so in the future.
Results of Operations – Three Months Ended September 30, 2022 and June 30, 2022
As previously disclosed, beginning with our Quarterly Report on Form 10-Q for the quarter ended September 30, 2021, and for all subsequent reporting periods, we have elected to present results of operations by comparing to the immediately preceding period, as well as the same year to date period in the prior year. Given the dynamic nature of our business and the sensitivity to the real estate and capital markets, we believe providing analysis of results of operations by comparing to the immediately preceding period is more meaningful to our stockholders in assessing the overall performance of our current business.
Operating Results
The following table sets forth information regarding our consolidated results of operations for the three months ended September 30, 2022, and June 30, 2022 ($ in thousands, except per share data):
$ Change
% Change
98,993
27,527
46,871
21,114
52,122
6,413
17,118
764
69,240
7,177
9,843
101
4,748
2,822
467
Operating expenses on real estate owned
10,536
830
Interest expense from debt related to real estate owned
2,719
1,184
30,448
5,074
-100
2,837
(61
-2
(8,530
6,178
-72
(20,941
-33
222
-493
(21,163
Net income per share of common stock - basic and diluted
(0.15
Comparison of the three months ended September 30, 2022 and June 30, 2022
Revenue increased $7.2 million during the three months ended September 30, 2022, compared to the three months ended June 30, 2022. The increase is primarily due to an increase in net interest income of $6.4 million for the comparative period, which was driven by an increase in interest income earned of $27.5 million primarily as a result of reference rate increases, interest income earned on new originations and follow on fundings, and accelerated OID recognized during the third quarter of 2022, offset in part by an increase in interest expense of $21.1 million primarily as a result of reference rate increases and interest expense owed on new financings during the third quarter of 2022. Additionally, the increase in revenue was driven by an increase in revenue from real estate owned of $0.8 million due to higher occupancy during the third quarter of 2022.
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 $5.1 million during the three months ended September 30, 2022 as compared to the three months ended June 30, 2022, primarily due to:
(i) an increase in stock based compensation expense of $2.8 million due to a full quarter of stock-based compensation expense incurred on restricted stock units granted in June of 2022;
(ii) an increase in interest expense from debt related to real estate owned of $1.2 million due to reference rate increases during the third quarter of 2022;
(iii) an increase in operating expenses from real estate owned of $0.8 million, due to increased variable operating expenses in connection with the higher occupancy levels.
During the three months ended June 30, 2022, we realized a gain on the sale of a loan of $30.1 million. No loans were sold during the three months ended September 30, 2022.
Unrealized gain on interest rate cap was $0.06 million lower during the comparative period. The fair value of the interest rate cap generally continues to increase as interest rates increase, offset in part by the impact of shorter duration of the cap remaining.
During the three months ended September 30, 2022, we recognized income from our equity method investment of $0.9 million as a result of us accounting for our investment in CMTG/TT as an equity method investment commencing in the third quarter of 2022. We did not hold any equity method investments during the three months ended June 30, 2022.
The provision for current expected credit loss reserves was $6.2 million lower than the provision for current expected credit loss reserves during the comparative period, due to a specific CECL reserve of $11.5 million on one loan which was charged-off during the three months ended June 30, 2022. Additional reserves of $2.4 million incurred during the three months ended September 30, 2022 relate primarily to the increase in the size of the portfolio and worsening economic conditions.
Results of Operations – Nine Months Ended September 30, 2022, and September 30, 2021
The following table sets forth information regarding our consolidated results of operations for nine months ended September 30, 2022 and 2021 ($ in thousands, except per share data):
1,881
16,249
(14,368
-8
26,193
168
11,825
442
8,517
158
Stock-based compensation
4,406
1172
12,943
(3,795
-29
829
23,342
(30,397
-175
(12,567
-9
(6,025
(18,592
-12
209
(18,789
(0.20
-17
Comparison of the nine months ended September 30, 2022 and September 30, 2021
Revenue increased $11.8 million during the nine months ended September 30, 2022, compared to the nine months ended September 30, 2021. The increase is primarily due to an increase in revenue from real estate owned of $26.2 million due 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 $14.4 million for the comparative period, which was driven by an increase in interest expense of $16.3 million, as a result of reference rate increases and increased borrowing levels, offset in part by a increase in interest income of $1.9 million, as a result of reference rate increases and accelerated OID recognized over the nine months ended September 30, 2022.
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 $23.3 million, during the nine months ended September 30, 2022, as compared to the nine months ended September 30, 2021, primarily due to:
(i) an increase in operating expenses from real estate owned of $12.9 million during 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 $8.5 million during 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 stock based compensation of $4.4 million during the comparative period, due to restricted stock units granted during the second quarter of 2022;
(iv) offset by a decrease in interest expense on debt related to real estate owned of $3.8 million primarily as a result of additional interest expense on debt related to real estate owned incurred in connection with the modification of debt during the nine months ended September 30, 2021, offset in part by the reference rate increases and the debt related to real estate owned being outstanding for longer during the nine months ended September 30, 2022.
During the nine months ended September 30, 2022, we realized a gain on the sale of a loan of $30.1 million. There were no loans sold during the nine months ended September 30, 2021.
Unrealized gain on interest rate cap was $5.6 million higher during the comparative period due to the recognition of a $5.6 million increase in the fair value of the interest rate cap during the nine months ended September 30, 2022 as a result of rising interest rates.
During the nine months ended September 30, 2021, we recognized a gain of $1.4 million on the foreclosure of a portfolio of seven limited-service hotel properties located in New York, New York. This gain was based upon the estimated fair value of the hotel properties of $414.0 million as 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.
During the nine months ended September 30, 2022, we recognized income from equity method investment of $0.9 million as a result of us accounting for our investment in CMTG/TT as an equity method investment during the third quarter of 2022. We did not hold any equity method investments during the three months ended June 30, 2022.
During the nine months ended September 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.
During the nine months ended September 30, 2022, we recorded a provision of current expected credit loss reserves of $13.0 million compared to a reversal of current expected credit loss reserves of $17.4 million during the nine months ended September 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 million lower 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 nine months ended September 30, 2022.
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 of September 30, 2022, we had 138,970,498 shares of our common stock outstanding, representing $2.5 billion of stockholders’ equity and we also had $5.4 billion of outstanding borrowings under our secured financings, our Secured Term Loan, our debt related to real estate owned, and our acquisition facility. As of September 30, 2022, our secured financings consisted of six secured revolving repurchase facilities for loan investments with capacity of $5.0 billion and an outstanding balance of $4.0 billion, seven asset-specific financings for loan investments with capacity $648.2 million and an outstanding
balance of $392.0 million and an acquisition facility with a capacity of $150.0 million and no outstanding balance. As of September 30, 2022, our Secured Term Loan had an outstanding balance of $757.0 million and our debt related to real estate owned had an outstanding balance of $290.0 million.
Net Debt-to-Equity Ratio and Total Leverage Ratio
Net Debt-to-Equity Ratio and Total Leverage Ratio are non-GAAP measures that we use to evaluate our financial leverage, which in the case of our Total Leverage Ratio, makes certain adjustments that we believe provide a more conservative measure of our financial condition.
Net Debt-to-Equity Ratio is calculated as the ratio of asset specific debt (repurchase agreements, loan participations sold, net, notes payable, net, and debt related to real estate owned, net) and secured term loan, less cash and cash equivalents to total equity.
Total Leverage Ratio is similar to Net Debt-to-Equity Ratio, however it includes non-consolidated senior interests sold and non-consolidated senior interests held by third parties. Non-consolidated senior interests sold and non-consolidated senior interests held by third parties, as applicable, are secured by the same collateral as our loan and are structurally senior in repayment priority relative to our loan. We believe the inclusion of non-consolidated senior interests sold and non-consolidated senior interests held by third parties provides a meaningful measure of our financial leverage.
The following table presents our Net Debt-to-Equity and Total Leverage Ratios as of September 30, 2022 and December 31, 2021 ($ in thousands):
Asset specific debt
4,670,475
3,995,061
Total debt
5,407,991
4,734,823
Less: cash and cash equivalents
(225,556
(310,194
Net Debt
5,182,435
4,424,629
Net Debt-to-Equity Ratio
2.0x
1.7x
Non-consolidated senior loans
966,674
1,063,939
Total Leverage
6,149,109
5,488,568
Total Leverage Ratio
2.4x
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 September 30, 2022 and December 31, 2021, our sources of available liquidity ($ in thousands):
Loan principal payments held by servicer(1)
4,198
67,100
Approved and undrawn credit capacity
276,818
19,283
Total sources of liquidity
506,572
396,577
We have $535.0 million unpaid principal balance of unencumbered loans at September 30, 2022. 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 September 30, 2022, we had aggregate unfunded loan commitments of $1.8 billion which comprise funding for capital expenditures and construction, leasing costs, and interest and carry costs, and their funding will vary depending on the progress of capital projects, leasing, and cash flows at the properties securing our loans. Therefore, the exact timing and amounts of such future loan fundings are uncertain and will depend on the current and future performance of the underlying collateral assets. We expect to fund our loan commitments over the remaining maximum term of the related loans, which have a weighted-average future funding period of 4.2 years.
Contractual Obligations and Commitments
Our contractual obligations and commitments as of September 30, 2022 were as follows ($ in thousands):
Payment Timing
TotalObligations
Less than1 year
1 to3 years
3 to5 years
More than5 years
Unfunded loan commitments(1)
1,769,535
897,745
790,643
81,147
Secured financings, term loan agreement, and debt related to real estate owned— principal and interest(2)
6,399,839
514,251
1,768,560
3,867,734
249,294
8,169,374
1,411,996
2,559,203
3,948,881
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.
Loan Maturities
The following table summarizes the future scheduled repayments of principal based on fully extended maturity dates for the loan portfolio as of September 30, 2022 ($ in thousands):
UnpaidPrincipalBalance(1)
LoanCommitment(1)
—
2023
575,817
578,554
974,684
1,017,009
1,044,673
1,179,220
2026
1,847,763
2,447,957
Thereafter
2,731,519
3,721,251
7,174,456
8,943,991
Cash Flows
The following table provides a breakdown of the net change in our cash and cash equivalents and restricted cash for the nine months ended September 30, 2022 and 2021, respectively ($ in thousands):
Net cash flows provided by operating activities
Net cash flows (used in) investing activities
Net cash flows provided by financing activities
Net decrease in cash and cash equivalents and restricted cash
We experienced a net decrease in cash and cash equivalents and restricted cash of $71.5 million during the nine months ended September 30, 2022, compared to a net decrease of $171.1 million during the nine months ended September 30, 2021.
During the nine months ended September 30, 2022, we made initial fundings of $2.0 billion of new loans and $444.6 million of advances on existing loans and made repayments on financings arrangements of $1.3 billion. We received $1.9 billion of proceeds from borrowings under our financing arrangements, received $1.6 billion from loan repayments and received $132.2 million of sales proceeds.
Income Taxes
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 September 30, 2022, 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 September 30, 2022, we had no off-balance sheet arrangements.
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.
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, 2021 is 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 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. 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.
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 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 loan's risk rating, a loan's purpose, or 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, which contains historical loss rates from January 1, 1999 through September 30, 2022. 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 strongest correlation of the data. 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. Additionally, we assess the obligation to extend credit through our unfunded loan commitments over each loan’s contractual period, which is considered in the estimate of the general CECL reserve. This component of the general CECL reserve will similarly impact our consolidated net income. 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.
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.
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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Interest Rate Risk
Rising interest rates will generally increase our net interest income, while declining interest rates will generally decrease our net interest income. Rising interest rates will not result in an increase of net interest income to the extent that borrowers are already bearing interest at a contractual rate with a floor in excess of the benchmark rate. Our net interest income may decrease in such circumstances due to an increase in the interest expense of our borrowings, absent a corresponding increase of interest income, until such time as benchmark rates exceed the applicable rate floors.
During 2022, the Federal Reserve began a campaign to combat inflation by increasing interest rates. In the first nine months of 2022, the Federal Reserve approved a cumulative 3.0% rate increase. In November 2022, the Federal Reserve raised rates another 0.75% and signaled further increases in coming quarters. Higher interest rates imposed by the Federal Reserve may increase our interest expense and may impact the ability of our borrowers to servicer our debt.
The following table illustrates the impact on our interest income and interest expense for the twelve-month period following September 30, 2022, assuming a decrease in LIBOR or SOFR of 50, an increase in LIBOR or SOFR of 50, 100 and 150 basis points in the applicable interest rate benchmark (based on one-month LIBOR of 3.14% and one-month term SOFR of 3.04% as of September 30, 2022 ($ in thousands):
Decrease
Increase
Assets (Liabilities)Subject to Interest Rate Sensitivity
Change in
50 Basis Points
100 Basis Points
150 Basis Points
(9,093
10,129
20,258
30,387
Net interest income per share
(0.06
0.07
0.14
0.22
LIBOR Transition
On March 5, 2021, the Financial Conduct Authority of the U.K. (the “FCA”), which regulates LIBOR, announced (the “FCA Announcement”) that all relevant LIBOR tenors will cease to be published or will no longer be representative after June 30, 2023. The FCA Announcement coincides with the March 5, 2021 announcement of LIBOR’s administrator, the ICE Benchmark Administration Limited (the “IBA”), indicating that, as a result of not having access to input data necessary to calculate relevant LIBOR tenors on a representative basis after June 30, 2023, the IBA would have to cease publication of such LIBOR tenors immediately after the last publication on June 30, 2023. Further, on March 15, 2022, the Consolidated Appropriations Act of 2022, which includes the Adjustable Interest Rate (LIBOR) Act, was signed into law in the United States. This legislation establishes a uniform benchmark replacement process for financial contracts maturing after June 30, 2023 that do not contain clearly defined or practicable fallback provisions. The legislation also creates a safe harbor that shields lenders from litigation if they choose to utilize a replacement rate recommended by the Board of Governors of the Federal Reserve.
The United States Federal Reserve has also advised banks to cease entering into new contracts that use USD LIBOR as a reference rate. The Federal Reserve, in conjunction with the Alternative Reference Rate Committee, a committee convened by the Federal Reserve that includes major market participants, has identified the Secured Overnight Financing Rate, or SOFR, a new index calculated by short-term repurchase agreements, backed by Treasury securities, as its preferred alternative rate for LIBOR. There are significant differences between LIBOR and SOFR, such as LIBOR being an unsecured lending rate while SOFR is a secured lending rate, and SOFR is an overnight rate while LIBOR reflects term rates at different maturities. If our LIBOR-based borrowings are converted to SOFR, the differences between LIBOR and SOFR, could result in higher interest costs for us, which could have a material adverse effect on our operating results. Although SOFR is the ARRC’s recommended replacement rate, it is also possible that lenders may instead choose alternative replacement rates that may differ from LIBOR in ways similar to SOFR or in other ways that would result in higher interest costs for us. We cannot predict the effect of the decision not to sustain LIBOR, or the potential transition to SOFR or another alternative reference rate as LIBOR’s replacement.
Regardless, there can be no assurances as to what additional alternative base rates may be and whether such base rate will be more or less favorable than LIBOR and any other unforeseen impacts of the discontinuation of LIBOR. We are actively assessing and
monitoring the risks associated with the planned discontinuation or unavailability of certain reference rates, including LIBOR, and the transition to alternative reference rates, but can provide no assurances regarding the impact of the discontinuation of LIBOR
Credit Risk
Our loans and other investments are also subject to credit risk, including the risk of default. By its very nature, our investment strategy emphasizes prudent risk management and capital preservation by primarily originating senior loans utilizing underwriting techniques resulting in relatively conservative loan-to-value ratio levels to insulate us from loan losses absent a significant diminution in collateral value. In addition, we seek to manage credit risk through performance of extensive due diligence on our collateral, borrower and guarantors, as applicable, that evaluates, among other things, title, environmental and physical condition of collateral, comparable sales and leasing analysis of similar collateral, the quality of and alternative uses for the real estate collateral being underwritten, submarket trends, our borrower’s track record and the reasonableness of the borrower’s projections prior to originating a loan. Subsequent to loan origination, we also manage credit risk through proactive investment monitoring and, whenever possible, limiting our own leverage to partial recourse or non-recourse, match-funding financing. Notwithstanding these efforts, there can be no assurance that we will be able to avoid losses in all circumstances. The performance and value of our loans and investments depend upon the borrower’s ability to improve and operate the properties that serve as our collateral so that they produce cash flows adequate to pay interest and principal due to us. To monitor this risk, our Sponsor’s asset management team monitors the performance of our loan portfolio and our Sponsor’s asset management and origination teams maintain regular contact with borrowers, co-lenders and local market experts to monitor the performance of the underlying loan collateral, anticipate borrower, property and market issues and, to the extent necessary or appropriate, enforce our rights as the lender.
In addition, we are exposed to the risks generally associated with the CRE market, including variances in occupancy rates, capitalization rates, absorption rates and other macroeconomic factors beyond our control. We seek to manage these risks through our underwriting, loan structuring, financing structuring and asset management processes.
In the event that we are forced to foreclose, our broader Sponsor platform includes professionals experienced in CRE development, ownership, property management and asset management which enables us to execute the workout of a troubled loan and protect investors’ capital in a way that we believe many non-traditional lenders cannot.
Prepayment Risk
Prepayment risk is the risk that principal will be repaid prior to initial maturity, which may require us to identify new investment opportunities to deploy such capital at a similar rate of return in order to avoid an overall reduction in our net interest income. We may structure our loans with spread maintenance, minimum multiples and make-whole provisions to protect against early repayment. Typically, investments are structured with the equivalent of 12 to 24 months’ spread maintenance or a minimum level of income that an investment must return. In general, an increase in prepayment rates accelerates the accretion of deferred income, including origination fees and exit fees, which increases interest income earned on the asset during the period of repayment. Conversely, if capital that is repaid is not subsequently redeployed into investment opportunities generating a similar return, future periods may experience reduced net interest income.
Extension Risk
Loans are expected to be repaid at maturity, unless the borrower repays early or meets contractual conditions to qualify for a maturity extension. We expect that the economic and market disruptions caused by the COVID-19 pandemic may lead to a decrease in prepayment rates and an increase in the number of our borrowers who exercise extension options or seek extensions outside of their existing agreements if certain conditions to exercising such extension options have not been achieved. This could have a negative impact on our results of operations and cash flows. However, in the case of a loan maturity extension, we are often entitled to extension fees, principal paydowns and/or spread increases. Our Manager computes the projected weighted average life of our assets based on the initial and fully extended scheduled maturity dates of loans in our portfolio. Higher interest rates imposed by the Federal Reserve may lead to an increase in the number of our borrowers who exercise extension options, which could extend beyond the term of certain secured financing agreements we use to finance our loan investments. This could have a negative impact on our results of operations, and in some situations, we may be forced to sell assets to maintain adequate liquidity, which could cause us to incur losses.
Capital Markets Risks
We are exposed to risks related to the equity and debt capital markets and our related ability to raise capital through the issuance of our common stock or other debt and equity instruments. As a REIT, we are required to distribute a significant portion of our REIT taxable income annually, which constrains our ability to retain and accumulate operating earnings and therefore requires us to utilize debt or equity capital to finance the growth of our business. We seek to mitigate these risks by monitoring the debt and equity capital
markets, the maturity profile of our in-place loan portfolio related to secured financings, and future loan funding requirements to inform our decisions on the amount, timing and terms of capital we raise.
Each of the secured revolving repurchase facilities involves “margin maintenance” provisions, which are designed to allow the repurchase lender to maintain a certain margin of credit enhancement against the loan assets which serve as collateral. The lender’s margin amount is typically based on a percentage of the market value of the loan asset and/or mortgaged property collateral. However, certain of our repurchase facilities permit valuation adjustments solely as a result of collateral-specific credit events, while other repurchase facilities contain provisions also allowing our lenders to make margin calls or require additional collateral upon the occurrence of adverse changes in the markets or interest rate or spread fluctuations, subject to minimum thresholds, among other factors. As of September 30, 2022, we have not received any margin calls under any of our repurchase facilities.
Counterparty Risk
The nature of our business requires us to hold cash and cash equivalents and obtain financing from various financial institutions. This exposes us to the risk that these financial institutions may not fulfill their obligations to us under these various contractual arrangements. We mitigate this exposure by depositing our cash and cash equivalents and entering into financing agreements with high credit-quality institutions.
The nature of our loans and other investments also exposes us to the risk that our loan counterparties are unable to execute their business plans, and as a result do not make required interest and principal payments on scheduled due dates, as well as the impact of our borrowers’ tenants not making scheduled rent payments when contractually due. We seek to manage this risk through a comprehensive credit analysis prior to making an investment and rigorous monitoring of our borrowers’ progress in executing their business plans as well as market conditions that may affect the underlying collateral, through our asset management process. Each loan is structured with various lender protections that are designed to prevent bad acts / fraudulent behavior by borrowers, as well as require borrowers to adhere to their stated business plans while the loan is outstanding. Such protections include, without limitation: cash management accounts, “bad boy” carveout guarantees, completion guarantees, guarantor minimum net worth and liquidity requirements, approval rights over major decisions, and performance tests throughout the loan term.
Our relationships with our repurchase agreement providers subject us to counterparty risks in the event a counterparty is unable to fund its undrawn credit capacity, particularly in the event of a counterparty’s bankruptcy. We seek to manage this risk by diversifying our financing sources across counterparties and financing types, and monitoring our counterparties’ financial condition and liquidity.
Currency Risk
To date, we have made no loans and hold no assets or liabilities denominated or payable in foreign currencies, although we may do so in the future.
We may in the future hold assets denominated or payable in foreign currencies, which would expose us to foreign currency risk. As a result, a change in foreign currency exchange rates may have a positive or an adverse impact on the valuation of our assets, as well as our income and dividends. Any such changes in foreign currency exchange rates may impact the measurement of such assets or income for the purposes of our REIT tests and may affect the amounts available for payment of dividends to our stockholders.
Although not required, if applicable, we may hedge any currency exposures in a prudent manner. However, such currency hedging strategies may not eliminate all of our currency risk due to, among other things, uncertainties in the timing and/or amount of payments received on the related investments and/or unequal, inaccurate or unavailability of hedges to perfectly offset changes in future exchange rates. Additionally, we may be required under certain circumstances to collateralize our currency hedges for the benefit of the hedge counterparty, which could adversely affect our liquidity.
Real Estate Risk
The market values of loans secured directly or indirectly by CRE assets are subject to volatility and may be adversely affected by a number of factors, including, but not limited to, the impacts of the COVID-19 pandemic discussed above, national, regional, local and foreign economic conditions (which may be adversely affected by industry slowdowns and other factors); regional or local real estate conditions; changes or continued weakness in specific industry segments; construction quality, age and design; demographic factors; and retroactive changes to building or similar codes and regulatory requirements. In addition, decreases in property values reduce the value of the loan collateral and the potential proceeds available to a borrower to repay the underlying loans, which could also cause us to suffer losses. We seek to manage these risks through our underwriting, loan structuring, financing structuring and asset management processes.
Financing Risk
We finance our business through a variety of means, including the syndication of non-consolidated senior interests, notes payable, borrowings under our repurchase facilities, the syndication of pari passu portions of our loans, the syndication of senior participations in our originated senior loans, and our secured term loan. Over time, as market conditions change, we may use other forms of financing in addition to these methods of financing. Weakness or volatility in the debt capital markets, the CRE and mortgage markets, changes in regulatory requirements, and the economy generally, in particular as a result of the current COVID-19 pandemic, could adversely affect one or more of our lenders or potential lenders and could cause one or more of our lenders or potential lenders to be unwilling or unable to provide us with financing or to increase the costs of that financing or otherwise offer unattractive terms for that financing. In addition, we may seek to finance our business through the issuance of our common stock or other equity or equity-related instruments, though there is no assurance that such financing will be available on a timely basis with attractive terms, or at all.
Item 4. Controls and Procedures.
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed with the SEC is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act of 1934) during the three months ended September 30, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
As of September 30, 2022 an evaluation was performed under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) under the Securities Exchange Act of 1934). Based on that evaluation, our management, including the Chief Executive Officer and Chief Financial Officer, concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of September 30, 2022.
PART II—OTHER INFORMATION
Item 1. Legal Proceedings.
From time to time, we may be involved in various claims and legal actions arising in the ordinary course of business. As of September 30, 2022, we were not involved in any material legal proceedings.
Item 1A. Risk Factors.
For a discussion of our potential risks and uncertainties, see the information under the heading “Risk Factors” in the Prospectus. There have been no material changes to our principal risks that we believe are material to our business, results of operations, and financial condition from the risk factors disclosed in our Annual Report file on Form 10-K, which is accessible on the SEC’s website at www.sec.gov.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
Facility Agreement
The information included in this Item 5 with respect to the Facility Agreement (as defined below) is provided in lieu of filing such information on a Current Report on Form 8-K under Item 1.01. Entry into a Material Definitive Agreement and Item 2.03 Creation of a Direct Financial Obligation or an Obligation under an Off-Balance Sheet Arrangement of a Registrant.
On November 4, 2022 (the “Closing Date”), CMTG JPM Term Holdco LLC (“Junior Participant”) and CMTG JPM Term Funding LLC (“Seller”), each wholly-owned subsidiaries of the Company, entered into a Master Participation and Administration Agreement (the “Facility Agreement”) with JPMorgan Chase Bank, N.A., as senior participant (“Senior Participant”). The Facility Agreement establishes a secured, term financing facility (the “Facility”) that will be used to fund certain investments and has a maximum amount of $1.0 billion. As of the Closing Date, the Senior Participant had committed $400.0 million towards three assets against which approximately $255.0 million was advanced at Closing. The addition of incremental assets to the Facility requires the consent of the Senior Participant. The Facility is non-mark to market and matures five years after the date of the last asset financed thereunder. Advances made by the Senior Participant under the Facility Agreement accrue interest at a per annum pricing rate equal to one-month SOFR, plus a specified spread set forth in the transaction documents related to each asset financed.
In connection with the Facility Agreement, the Company provided two guaranties: (i) a Guaranty of equity obligations (the “Equity Guaranty”) under which the Company guarantees the obligations of Seller to Senior Participant under the Facility Agreement up to the lesser of (A) the outstanding principal balance of the Facility and (B) the Junior Participant’s future funding obligations on the underlying loans, net of the Senior Participant’s future funding obligations with respect to such loans under the Facility and (ii) a Guarantee Agreement (the “Recourse Guaranty”, and, together with the Equity Guaranty, the “Guaranties”) which provides for full recourse for certain “bad boy” actions by the Company in connection with the Facility. The Facility Agreement and the Guaranties contain customary affirmative and negative covenants for transactions and facilities of this type, including but not limited to quarterly reporting requirements, compliance with certain financial covenants, and limitations on the incurrence of additional secured indebtedness.
The foregoing description is qualified in its entirety by reference to the Facility Agreement, a copy of which is included as Exhibit 10.2 hereto and is incorporated herein by reference
Share Repurchase Program
The information included in this Item 5 with respect to the the share repurchase program described below is provided in lieu of filing such information on a Current Report on Form 8-K under Item 8.01. Other Events.
On November 8, 2022 our Board of Directors authorized a share repurchase program that authorizes the repurchase of up to $100.0 million shares of our common stock. Under the share repurchase program, repurchases can be made from time to time using a variety of methods, which may include open market purchases, privately negotiated transactions, accelerated share repurchase programs, or otherwise.
Item 6. Exhibits.
Exhibit
Number
Description
Articles of Amendment and Restatement of Claros Mortgage Trust, Inc. (incorporated by referenced to Exhibit 3.1 to the Current Report on Form 8-K, dated November 5, 2021, filed by the Company, Commission File No. 001-40993)
3.2
Amended and Restated Bylaws of Claros Mortgage Trust, Inc. (incorporated by referenced to Exhibit 3.2 to the Current Report on Form 8-K, dated November 5, 2021, filed by the Company, Commission File No. 001-40993)
10.1
Amended and Restated Management Agreement of Claros Mortgage Trust, Inc. and Claros REIT Management LP, dated August 2, 2022 (incorporated by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q, dated August 2, 2022, filed by the Company, Commission File No. 001-40993)
10.2*
Master Participation and Administration Agreement, dated as of November 4, 2022, by and among JPMorgan Chase Bank, National Association, CMTG JPM Term Holdco LLC, CMTG JPM Term Funding LLC and Situs Asset Management LLC
31.1*
Certification of Principal Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*
Certification of Principal Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1*
Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2*
Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS
Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because XBRL tags are embedded within the Inline XBRL document.
101.SCH
Inline XBRL Taxonomy Extension Schema Document
101.CAL
Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE
Inline XBRL Taxonomy Extension Presentation Linkbase Document
104
Cover Page Interactive Data File (embedded within the Inline XBRL document)
*
Filed herewith
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: November 9, 2022
By:
/s/ Richard J. Mack
Richard J. Mack
Chief Executive Officer
(Principal Executive Officer)
/s/ Jai Agarwal
Jai Agarwal
Chief Financial Officer
(Principal Financial and Accounting Officer)