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, 2023
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
Former name, former address and former fiscal year, if changed since last report: N/A
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 October 31, 2023, the registrant had 138,728,690 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 Equity
5
Consolidated Statements of Cash Flows
6
Notes to Consolidated Financial Statements
8
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
33
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
52
Item 4.
Controls and Procedures
55
PART II.
OTHER INFORMATION
Legal Proceedings
56
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
57
Signatures
58
2
PART I—FINANCIAL INFORMATION
Item 1. Financial Statements.
(unaudited, in thousands, except share data)
September 30, 2023
December 31, 2022
Assets
Cash and cash equivalents
$
307,367
306,456
Restricted cash
23,183
41,703
Loan principal payments held by servicer
689
-
Loans receivable held-for-investment
7,155,231
7,489,074
Less: current expected credit loss reserve
(141,686
)
(128,647
Loans receivable held-for-investment, net
7,013,545
7,360,427
Equity method investment
42,515
41,880
Real estate owned, net
520,500
401,189
Other assets
140,631
89,858
Total assets
8,048,430
8,241,513
Liabilities and Equity
Repurchase agreements
3,813,612
3,966,859
Term participation facility
346,140
257,531
Loan participations sold, net
254,224
263,798
Notes payable, net
231,875
149,521
Secured term loan, net
713,276
736,853
Debt related to real estate owned, net
289,782
289,389
Other liabilities
57,981
59,223
Dividends payable
35,330
52,001
Management fee payable - affiliate
9,541
9,867
Total liabilities
5,751,761
5,785,042
Commitments and contingencies - Note 14
Equity
Common stock, $0.01 par value, 500,000,000 shares authorized, 138,728,690 and 140,055,714 shares issued and 138,728,690 and 138,376,144 shares outstanding at September 30, 2023 and December 31, 2022, respectively
1,400
Additional paid-in capital
2,720,688
2,712,316
Accumulated deficit
(425,419
(257,245
Total equity
2,296,669
2,456,471
Total liabilities and 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, 2022
Revenue
Interest and related income
182,044
126,520
526,945
316,207
Less: interest and related expense
123,611
67,985
349,314
154,436
Net interest income
58,433
58,535
177,631
161,771
Revenue from real estate owned
22,120
17,882
52,949
41,813
Total net revenue
80,553
76,417
230,580
203,584
Expenses
Management fees - affiliate
9,944
28,838
29,594
Incentive fees - affiliate
1,558
General and administrative expenses
3,565
4,819
12,982
13,910
Stock-based compensation expense
4,369
3,426
12,130
4,030
Real estate owned:
Operating expenses
13,706
11,366
34,974
29,682
Interest expense
6,137
3,903
17,446
9,206
Depreciation and amortization
2,558
2,064
6,708
6,002
Total expenses
39,876
35,522
114,636
92,424
Gain on sale of loan
575
30,090
Proceeds from interest rate cap
1,691
Unrealized (loss) gain on interest rate cap
(1,659
2,776
(3,321
5,613
(Loss) income from equity method investment
(33
929
635
Gain on extinguishment of debt
2,217
Provision for current expected credit loss reserve
(110,198
(2,352
(148,435
(12,984
Net (loss) income
(68,947
42,248
(28,016
134,808
Net income attributable to non-controlling interests
177
91
Net (loss) income attributable to common stock
42,071
134,717
Net (loss) income per share of common stock:
Basic and diluted
(0.50
0.30
(0.22
0.95
Weighted-average shares of common stock outstanding:
138,899,168
139,430,153
138,563,355
139,592,500
Common Stock
AdditionalPaid-In
Accumulated
Shares
Par Value
Capital
Deficit
Total Equity
Balance at December 31, 2022
138,376,144
3,409
Dividends declared
(52,404
Net income
36,678
Balance at March 31, 2023
2,715,725
(272,971
2,444,154
9,760
4,443
(52,424
4,253
Balance at June 30, 2023
138,385,904
2,720,168
(321,142
2,400,426
342,786
4,417
Settlement of vested RSUs in cash
(3,897
(35,330
Net loss
Balance at September 30, 2023
138,728,690
Non-Controlling
Interests
Balance at December 31, 2021
139,840,088
2,726,190
(160,959
37,636
2,604,267
Repurchased Shares
(186,289
(3,179
Contributions from non-controlling interests
539
Offering costs
(30
(51,672
Net income (loss)
29,412
(41
29,371
Balance at March 31, 2022
139,653,799
2,722,981
(183,219
38,134
2,579,296
(33,721
(592
367
604
(52,458
63,234
(45
63,189
Balance at June 30, 2022
139,620,078
2,722,993
(172,443
38,456
2,590,406
(649,580
(10,092
3,475
(52,219
Deconsolidation of subsidiary
(38,633
Balance at September 30, 2022
138,970,498
2,716,376
(182,591
2,535,185
(unaudited, in thousands)
Cash flows from operating activities
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Accretion of origination fees on loans receivable
(17,943
(19,351
Accretion of origination fees on interests in loans receivable
(204
Amortization of deferred financing costs
17,564
14,651
Non-cash stock-based compensation expense
12,269
4,079
Depreciation and amortization on real estate owned and in-place lease values
Amortization of above and below market lease values, net
354
Unrealized loss (gain) on interest rate cap
3,321
(5,613
Income from equity method investment
(635
(929
Distribution from equity method investment
408
(2,217
(575
(30,090
Non-cash advances on loans receivable in lieu of interest
(52,862
(51,842
Non-cash advances on interests in loans receivable in lieu of interest
(2,427
Non-cash advances on secured financings in lieu of interest
2,279
155
Repayment of non-cash advances on loans receivable in lieu of interest
23,111
20,128
Repayment of non-cash advances on interests in loans receivable in lieu of interest
13,178
148,435
12,984
Changes in operating assets and liabilities:
(28,873
(12,981
1,241
8,038
(326
10
Net cash provided by operating activities
83,835
91,004
Cash flows from investing activities
(515
Loan originations, acquisitions and advances, net of fees
(611,985
(2,394,662
Advances of interests in loans receivable
(14,653
Repayments of loans receivable
523,267
1,458,389
Repayments of interests in loans receivable
165,468
Proceeds from sales of loans receivable
187,440
132,151
Extension and exit fees received from loans receivable
1,704
5,963
Extension and exit fees received from interests in loans receivable
502
Cash and restricted cash acquired from assignment-in-lieu of foreclosure of real estate owned
256
Payment of transaction costs from assignment-in-lieu of foreclosure of real estate owned
(7,024
Reserves and deposits held for loans receivable
300
(1,575
Capital expenditures on real estate owned
(1,487
(1,945
Net cash provided by (used in) investing activities
92,471
(650,877
Cash flows from financing activities
Repurchase of common stock
(13,863
906
(300
Dividends paid
(156,829
(155,871
Proceeds from secured financings
736,146
1,927,139
Payment of deferred financing costs
(12,281
(16,498
Repayments of secured financings
(732,024
(1,247,390
Repayments of secured term loan
(25,030
(5,720
Net cash (used in) provided by financing activities
(193,915
488,403
Net decrease in cash, cash equivalents and restricted cash
(17,609
(71,470
Cash, cash equivalents and restricted cash, beginning of period
348,159
334,136
Cash, cash equivalents and restricted cash, end of period
330,550
262,666
Cash and cash equivalents, end of period
225,556
Restricted cash, end of period
37,110
Supplemental disclosure of cash flow information:
Cash paid for interest
180,647
141,497
Supplemental disclosure of non-cash investing and financing activities:
Dividends accrued
52,219
7,651
Accrued deferred financing costs
3,750
Accrued loan sale transaction costs
757
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
Real estate acquired in assignment-in-lieu of foreclosure
124,332
Lease intangibles, net acquired in assignment-in-lieu of foreclosure
20,080
Working capital acquired in assignment-in-lieu of foreclosure
(2,392
Settlement of loans receivable in assignment-in-lieu of foreclosure
(208,797
7
(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 refers 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, upon the achievement of required performance hurdles, 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”).
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, 2022, 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, 2023 are not necessarily indicative of the results to be expected for the full year or any other future period.
We consolidate all entities that are controlled either through majority ownership or voting rights. We also identify entities for which control is achieved through means other than through voting rights (a variable interest entity or “VIE”) using the analysis as set forth in Accounting Standards Codification (“ASC”) 810, Consolidation of Variable Interest Entities, and determine when and which variable interest holder, if any, should consolidate the VIE. We do not have any consolidated variable interest entities as of September 30, 2023 and December 31, 2022. All significant intercompany transactions and balances have been eliminated in consolidation.
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 current expected credit loss reserve and impairment of certain assets.
Risks and Uncertainties
In the normal course of business, we primarily encounter two significant types of economic risk: credit and market. Credit risk is the risk of default on our loans receivable that results from a borrower's or counterparty's inability or unwillingness to make contractually required payments. Market risk reflects changes in the value of the loans receivable due to changes in interest rates, spreads or other market factors, including risks that impact the value of the collateral underlying our loans. We believe that the carrying values of our loans receivable are reasonable taking into consideration these risks along with estimated financings, collateral values and other information.
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. Changes to the CECL reserve are recognized through a provision for or reversal of current expected credit loss reserve on our consolidated statements of operations. ASU 2016-13 specifies the reserve should be based on relevant information about past events, including historical loss experience, current portfolio, market conditions and reasonable and supportable macroeconomic forecasts for the duration of each loan.
General CECL Reserve
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/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 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. Such analyses are completed and reviewed by asset management personnel and evaluated by senior management, utilizing 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.
We arrive at our general CECL reserve using the Weighted Average Remaining Maturity, or WARM method, which is considered 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 may impact the performance of the commercial real estate assets securing our loans and the borrower's ultimate ability to repay. These estimates include unemployment rates, price indices for commercial properties, and market liquidity, all of which may influence the likelihood and magnitude of potential credit losses for our loans during their anticipated term. Additionally, further adjustments may be made based upon loan positions senior to ours, the risk rating of a loan, whether a loan is a construction loan, or the economic conditions specific to the property type of a loan's underlying collateral.
To estimate an annual historical loss rate, we obtained historical loss rate data for loans most comparable to our loan portfolio from a commercial mortgage-backed securities database licensed by a third party, Trepp, LLC, which contains historical loss data from January 1, 1999 through September 30, 2023.
When evaluating the current and future macroeconomic environment, we consider the aforementioned macroeconomic factors. Historical data for each metric is compared to historical commercial real estate loan losses in order to determine the relationship between the two variables. We use projections of each macroeconomic factor, obtained from a third party, to approximate the impact the macroeconomic outlook may have on our loss rate. Selections of these economic forecasts require judgement about future events that, while based on the information available to us as of the balance sheet date, are ultimately unknowable with certainty, and the actual economic conditions could vary significantly from the estimates we made. Following a reasonable and supportable forecast period, we use a straight-line method of reverting to the historical loss rate. Additionally, we assess the obligation to extend credit through our unfunded loan commitments over each loan’s contractual period, adjusted for projected fundings from interest reserves, if applicable, which is considered in the estimate of the general CECL reserve. For both the funded and unfunded portions of our loans, we consider our internal risk rating of each loan as the primary credit quality indicator underlying our assessment.
9
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, property or collateral location, loan type and other more subjective variables that include 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 specific CECL reserve 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 Reserve
In certain circumstances we may determine that a loan is no longer suited for the WARM method due to its unique risk characteristics or where we have deemed the borrower/sponsor to be experiencing financial difficulty and the repayment of the loan’s principal is collateral-dependent. We may instead elect to employ different methods to estimate loan losses that also conform to ASU 2016-13 and related guidance. For such loan we would separately measure the specific reserve for each loan by using the fair value of the loan's collateral. If the fair value of the collateral is less than the carrying value of the loan, an asset-specific reserve is created as a component of our overall current expected credit loss reserve. Specific reserves are equal to the excess of a loan’s carrying value to the fair value of the collateral, less estimated costs to sell, if recovery of our investment is expected from the sale of the collateral.
If we have determined that a loan or a portion of a loan is uncollectible, we will write off such portion of the loan through an adjustment to our current expected credit loss reserve. Significant judgment is required in determining impairment and in estimating the resulting credit loss reserve, and actual losses, if any, could materially differ from those estimates.
For additional information on our General and Specific CECL Reserve please refer to Note 3—“Loans Portfolio—Current Expected Credit Losses”.
Real Estate Owned (and Related Debt)
We may assume legal title or physical possession of the underlying collateral property of a defaulted loan through foreclosure, a deed-in-lieu of foreclosure, or an assignment-in-lieu of 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 the 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 estimated useful lives ranging from 5 to 40 years and is recognized in depreciation and amortization expense on our consolidated statement of operations.
We account for acquisitions of real estate, including foreclosures, deed-in-lieu of foreclosures, or assignment-in-lieu of foreclosures, in accordance with ASC 805, Business Combinations, which first requires that we determine if the real estate investment is the acquisition of an asset or a business combination. Under this model, we identify and determine the fair value of any assets acquired and liabilities assumed. This generally results in the allocation of the purchase price to the assets acquired and liabilities assumed based on the relative fair values of each respective asset and liability. Debt related to real estate owned is non-recourse to us and is initially recorded at its estimated fair value at the time of foreclosure, deed-in-lieu of foreclosure, or assignment-in-lieu of foreclosure.
Assets acquired and liabilities assumed generally may include land, building, building improvements, tenant improvements, furniture, fixtures and equipment, mortgages payable, and identified intangible assets and liabilities, which generally consists of above or below market lease values, in-place lease values, and other lease-related values. In estimating fair values for allocating the purchase price of our real estate owned, we may utilize various methods, including a market approach, which considers recent sales of similar properties, adjusted for differences in location and state of the physical asset, or a replacement cost approach, which considers the composition of physical assets acquired, adjusted based on industry standard information and the remaining useful life of the acquired property. In estimating fair values of intangible assets acquired or liabilities assumed, we consider the estimated cost of leasing our real estate owned assuming the property was vacant, the value of the current lease agreements relative to market-rate leases, and the estimation of total lease-up time including lost rents. In-place, above market, and other lease values, net are included within other assets on our consolidated balance sheets. Below market lease values, net, are included within other liabilities on our consolidated balance sheets. Amortization of in-place and other lease values is recognized in depreciation and amortization expense on our consolidated statement of operations. Amortization of above and below market lease values is recognized in revenue from real estate owned on our consolidated statement of operations.
Real estate assets are evaluated for indicators of impairment on a quarterly basis. Factors that we may consider in our impairment analysis include, among others: (1) significant underperformance relative to historical or anticipated operating results; (2) significant negative industry or economic trends; (3) costs necessary to extend the life or improve the real estate asset; (4) significant increase in competition; and (5) ability to hold and dispose of the real estate asset in the ordinary course of business. A real estate asset is considered impaired when the sum of estimated future undiscounted cash flows expected to be generated by the real estate asset over the estimated remaining holding period is less than the carrying amount of such real estate asset. Cash flows include operating cash flows and anticipated capital proceeds generated by the real estate asset. If the sum of such estimated undiscounted cash flows is less than the carrying amount of the real estate asset, an impairment charge is recorded equal to the excess of the carrying value of the real estate asset over the fair value. When determining the fair value of a real estate asset, we make certain assumptions including, but not limited to, consideration of projected operating cash flows, comparable selling prices and projected cash flows from the eventual disposition of the real estate asset based upon our estimate of a capitalization rate and discount rate. There were no impairments of our real estate assets through September 30, 2023.
Equity Method Investment
We account for our investments in entities in which we have the ability to significantly 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 other than temporary impairment of our equity investments. There were no other than temporary impairments of our equity method investment through September 30, 2023.
Derivative Financial Instruments
In the normal course of business, we are exposed to the effect of interest rate changes and may undertake one or more strategies to limit these risks through the use of derivatives. We may use derivatives to reduce the impact that changes in interest rates will have on our floating rate assets and floating rate liabilities. Such derivatives may consist of interest rate swaps, interest rate caps, collars, and floors.
We recognize derivatives on our 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 any derivatives as hedges to qualify for hedge accounting for financial reporting purposes and fluctuations in the fair value of derivatives have been recognized as unrealized gain or loss on interest rate cap in our accompanying consolidated statements of operations. Payments received from our counterparties in connection with our derivative are recognized on our consolidated statements of operations as proceeds from interest rate cap.
Revenue Recognition
Interest income from loans receivable is recorded on the accrual basis based on the unpaid principal balance and the contractual terms of the loans. Fees, premiums, discounts and direct costs associated with these loans are initially deferred and recognized as an adjustment to unpaid principal balance until the loan is advanced and are 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/or principal is no longer probable. Once income accrual is suspended, any previously recognized interest income deemed uncollectible is reversed against interest income. 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 revenues associated with the operations of hotel and mixed-use 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. Hotel revenues consist of room sales, food and beverage sales and other hotel revenues and are recorded net of any discounts, sales and other taxes collected from customers.
11
Revenue from operations of our mixed-use property is derived from lease agreements with tenants, which generally provide for fixed rent payments which we recognize on a straight-line basis over the lease term. Variable lease payments, including reimbursement of certain operating expenses and miscellaneous fees, are recognized when earned. These reimbursements represent revenue attributable to non-lease components for which the timing and pattern of recognition is the same for lease components. We use the practical expedient, which allows us to account for lease and non-lease components as a single component for all classes of underlying assets. For the three months ended September 30, 2023, we recognized $1.6 million and $0.1 million of fixed and variable lease revenues, respectively, related to our mixed-use property. For the nine months ended September 30, 2023, we recognized $1.6 million and $0.1 million of fixed and variable lease revenues, respectively, related to our mixed-use property. During the comparable prior periods, we did not own our mixed-use property. We periodically evaluate the collectability of tenant receivables required under the lease agreements. If we determine that collectability is not probable, we reverse any difference between revenue recognized to date and payments that have been collected from the tenant to date as a current period adjustment to revenue from real estate owned.
Recent Accounting Guidance
The FASB issued ASU 2022-02, Financial Instruments – Credit Losses (Topic 326), Troubled Debt Restructurings and Vintage Disclosures, (“ASU 2022-02”). The standard eliminates the recognition and measurement guidance for troubled debt restructurings (“TDRs”) for creditors that have adopted ASU 2016-13. In addition to eliminating the TDR accounting guidance, ASU 2022-02 changes existing disclosure requirements and introduces new disclosures related to certain modifications of instruments with borrowers experiencing financial difficulty. The standard is effective for periods beginning after December 15, 2022, with early adoption permitted. During the second quarter of 2022, we adopted this standard effective January 1, 2022 and the adoption did not have a material impact on our consolidated financial statements.
Note 3. Loans Portfolio
Loans Receivable
Our loans receivable portfolio as of September 30, 2023 was comprised of the following loans ($ in thousands, except for number of loans):
Number ofLoans
Loan Commitment(1)
Unpaid Principal Balance
CarryingValue (2)
Weighted Average Spread(3)
Weighted Average Interest Rate(4)
Loans receivable held-for-investment:
Variable:
Senior loans(5)
64
8,356,413
7,013,978
6,912,095
+ 4.02%
8.96
%
Subordinate loans
1
30,200
30,294
+ 12.86%
18.18
65
8,386,613
7,044,178
6,942,389
+ 4.06%
9.00
Fixed:
15,884
16,096
N/A
8.80
125,886
124,802
8.44
141,770
140,898
8.48
Total/Weighted Average
69
8,528,383
7,185,948
7,083,287
8.99
General CECL reserve
(69,742
12
Our loans receivable portfolio as of December 31, 2022 was comprised of the following loans ($ in thousands, except for number of loans):
71
9,221,549
7,327,462
7,217,564
+ 3.92%
8.05
63,102
61,763
61,947
+ 11.55%
15.95
73
9,284,651
7,389,225
7,279,511
+ 3.98%
8.11
23,373
23,595
8.50
125,927
125,668
8.49
149,300
149,263
77
9,433,951
7,538,525
7,428,774
8.12
(68,347
Activity relating to the loans receivable portfolio for the nine months ended September 30, 2023 ($ in thousands):
Deferred Fees
Carrying Value (1)
(49,451
(60,300
Initial funding of new loan originations and acquisitions
101,059
Advances on existing loans
510,926
Non-cash advances in lieu of interest
51,412
1,450
52,862
Origination fees, extension fees and exit fees
(1,704
(523,956
Repayments of non-cash advances in lieu of interest
(23,111
Accretion of fees
17,943
Specific CECL Allowance
(151,537
Sales of loans receivable
(260,110
1,045
72,958
(186,107
Transfer to real estate owned, net
66,935
(141,862
(30,717
(71,944
Carrying Value
During the three months ended September 30, 2023, we sold a senior loan secured by a hospitality property in Austin, TX, with a carrying value of $121.9 million and an unpaid principal balance of $122.5 million, resulting in gross proceeds of $122.5 million and a realized gain of $0.6 million. Prior to the sale, the loan was ascribed a risk rating of 3. The financial asset was legally isolated, control of the financial asset has been transferred to the transferee, the transfer imposed no condition that would constrain the transferee from pledging the financial asset received, and we have no continuing involvement with the transferred financial asset. We have determined the transaction constituted a sale.
During the three months ended September 30, 2023, we sold a senior loan with a carrying value prior to any specific CECL reserves of $137.2 million and an unpaid principal balance of $137.6 million, resulting in gross proceeds of $65.0 million and a principal
13
charge-off of $73.0 million. The loan, which was comprised of a portfolio of uncrossed loans, was collateralized by a portfolio of multifamily properties located in San Francisco, CA. Prior to this sale, we had recorded a $37.1 million specific CECL reserve against this loan based upon the estimated fair value of the loan’s collateral portfolio. The $73.0 million principal charge-off follows the recognition of an incremental specific CECL reserve of $35.9 million. During 2023 and through the date of sale, this loan was ascribed a risk rating of 5, was on non-accrual status, and we received $1.1 million which was treated as a reduction of our carrying value. The financial asset was legally isolated, control of the financial asset has been transferred to the transferee and the transfer imposed no condition that would constrain the transferee from pledging the financial asset received. Concurrent with the sale, we entered into an agreement with the transferee which provides for a share of cash flows from the senior loan upon the transferee meeting certain financial metrics. As of September 30, 2023, we have not recognized any value to this interest on our consolidated financial statements. We have obtained a true-sale-at-law opinion and have determined the transaction constituted a sale.
Through CMTG/TT Mortgage REIT LLC (“CMTG/TT”), a previously consolidated joint venture, we held a 51% 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 $73.5 million senior position of the loan 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 hold $115.3 million of total loan commitments, of which $78.5 million has been funded and is included in loans receivable held-for-investment on our consolidated balance sheet as of September 30, 2023, as well as 51% of the $78.5 million subordinate loan 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.
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. During the nine months ended September 30, 2023, we further modified this loan to provide for a maturity extension to September 18, 2023. As of September 30, 2023, the loan had an amortized cost basis of $87.8 million, represents approximately 1.2% of total loans receivable held-for-investment, net, is current on interest payments, and is in maturity default. The loan is considered in determining our general CECL reserve.
14
Concentration of Risk
The following table presents our loans receivable portfolio by loan type, as well as property type and geographic location of the properties collateralizing these loans as of September 30, 2023 and December 31, 2022 ($ in thousands):
Loan Type
Percentage
Carrying Value (2)
Senior loans (3)
6,928,191
98
7,241,159
97
155,096
187,615
100
Property Type
Multifamily
2,883,177
41
3,044,892
Hospitality
1,341,912
19
1,551,946
20
Office
943,050
1,086,018
15
Land
527,975
426,645
Mixed-Use (4)
596,779
615,599
Other
406,358
269,464
For Sale Condo
384,036
434,210
Geographic Location
United States
West
2,463,577
36
2,450,710
Northeast
1,860,217
26
1,999,648
27
Southeast
953,134
1,008,590
Mid Atlantic
738,111
809,908
Southwest
590,307
694,887
Midwest
476,042
461,531
1,899
0
3,500
Interest Income and Accretion
The following table summarizes our interest and accretion income from loans receivable held-for-investment, interests in loans receivable held-for-investment, and interest on cash balances, for the three and nine months ended September 30, 2023 and 2022, respectively ($ in thousands):
Coupon interest
171,873
116,435
499,507
295,080
Interest on cash, cash equivalents, and other income
2,814
1,229
9,495
1,572
7,357
8,856
19,555
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 based on our internal risk ratings as of September 30, 2023 and December 31, 2022 ($ in thousands):
Risk Rating
Number of Loans
% of Total of Carrying Value
0%
158,170
157,127
2%
53
5,736,295
5,709,757
81%
954,107
951,650
13%
337,376
264,753
4%
100%
927
913
63
6,181,207
6,136,300
83%
1,005,345
1,001,235
351,046
290,326
As of September 30, 2023 and December 31, 2022, the average risk rating of our portfolio was 3.2 and 3.2, respectively, weighted by unpaid principal balance.
The following table presents the carrying value and significant characteristics of our loans receivable on non-accrual status as of September 30, 2023 ($ in thousands):
Location
Carrying Value Before Specific CECL Reserve
SpecificCECL Reserve
Net Carrying Value
Interest Recognition Method /as of Date
Land (1)
VA
150,657
(30,557
120,100
Cost Recovery/ 1/1/2023
Office (2)
CA
112,442
112,163
(20,595
91,568
Cash Basis/ 4/1/2023
98,214
97,827
Cost Recovery/ 9/1/2023
GA
71,492
71,094
(19,908
51,186
NY
67,000
Cash Basis/ 11/1/2021
Cost Recovery/ 7/1/2020
886
884
(884
Cost Recovery/ 6/30/2023
Total non-accrual (3)
502,590
501,524
429,580
16
The following table presents the carrying value and significant characteristics of our loans receivable on non-accrual status as of December 31, 2022 ($ in thousands):
Interest Recognition Method / as of Date
Mixed-Use (1)
208,797
(42,007
166,790
Cash Basis / 11/1/2022
Multifamily (2)
138,749
138,329
(18,293
120,036
Cost Recovery / 12/1/2022
Cash basis / 11/1/2021
Cost recovery / 7/1/2020
418,046
417,626
357,326
The current expected credit loss reserve required under GAAP reflects our current estimate of potential credit losses related to our loan commitments. See Note 2 for further discussion of our current expected credit loss reserve.
During the nine months ended September 30, 2023, we recorded a provision for current expected credit losses of $148.4 million, which included a $151.5 million increase in our specific CECL reserve prior to principal charge-offs, and a reversal of $3.1 million of general CECL reserves. The reversal of general CECL reserves was primarily attributable to the seasoning of and a reduction in our loan portfolio, offset by deteriorating macroeconomic conditions. As of September 30, 2023, our total provision for current expected credit losses was $154.9 million.
During the nine months ended September 30, 2022, we recorded a provision for current expected credit losses of $13.0 million, which included a $5.4 million increase in our specific CECL reserve prior to a principal charge-off, resulting in a total current expected credit loss reserve of $75.0 million as of September 30, 2022. The increase in the total current expected credit loss reserve was primarily attributable to an increase in the size of the portfolio and changes in macroeconomic conditions, partially offset by a principal charge-off. As of September 30, 2022, our total provision for current expected credit losses was $75.0 million.
Specific CECL Reserves
During the three months ended September 30, 2023, we recorded a specific CECL reserve of $20.6 million in connection with a senior loan with a borrower that is experiencing financial difficulty. The loan is secured by an office building in San Francisco, CA and a pledge of equity interests therein with an unpaid principal balance and carrying value prior to any specific CECL reserve of $112.4 million and $112.2 million, respectively, and an initial maturity date of February 13, 2024. Effective September 1, 2023, this loan is on non-accrual status.
During the three months ended September 30, 2023, we recorded a specific CECL reserve of $19.8 million in connection with a senior loan with a borrower that is experiencing financial difficulty. The loan is secured by an office building in Atlanta, GA and a pledge of equity interests therein with an unpaid principal balance and carrying value prior to any specific CECL reserve of $71.5 million and $71.1 million, respectively, and an initial maturity date of August 27, 2024. Effective September 1, 2023, this loan is on non-accrual status.
During the three months ended September 30, 2023, we recorded a specific CECL reserve of $30.6 million in connection with a senior loan with a borrower that is experiencing financial difficulty and the loan is in maturity default. The loan is secured by land in
Arlington, VA with an unpaid principal balance and carrying value prior to any specific CECL reserve of $150.7 million. Effective January 1, 2023, this loan is on non-accrual status.
During the three months ended June 30, 2023, we recorded a specific CECL reserve of $0.9 million in connection with a subordinate loan with a borrower that is experiencing financial difficulty and the loan is in maturity default. The loan is secured by the equity interests in a retail condo in Brooklyn, NY with an unpaid principal balance and carrying value prior to any specific CECL reserve of $0.9 million. Effective June 30, 2023, the loan is on non-accrual status.
During the three months ended December 31, 2022, we recorded a specific CECL reserve of $42.0 million in connection with a senior loan with a borrower that was experiencing financial difficulty. The loan was secured by a mixed-use building in New York, NY and a pledge of equity interests therein with an unpaid principal balance and carrying value prior to any specific CECL reserve of $208.8 million and an initial maturity date of February 1, 2023. On June 30, 2023, we obtained legal title to the collateral through an assignment-in-lieu of foreclosure and during the three months ended June 30, 2023 recorded an additional specific CECL reserve of $24.9 million prior to a principal charge-off of $66.9 million. Prior to obtaining legal title to the collateral and while the loan was on non-accrual status during 2023, we recognized $8.3 million of interest income. See Note 5 - Real Estate Owned, Net for further detail. As of December 31, 2022 and through the date of the assignment-in-lieu of foreclosure, this loan was on non-accrual status.
During the three months ended December 31, 2022, we recorded a specific CECL reserve of $18.3 million in connection with a senior loan with a borrower that was experiencing financial difficulty. The loan had a then unpaid principal balance of $138.8 million, a carrying value prior to any specific CECL reserve of $138.3 million and an initial maturity date of August 8, 2024. The loan, which was comprised of a portfolio of uncrossed loans, was collateralized by a portfolio of multifamily properties located in San Francisco, CA. During the three months ended June 30, 2023, we recorded an additional specific CECL reserve of $18.8 million due to a revised valuation of the collateral properties. During the three months ended September 30, 2023, we sold the loan and recorded a principal charge-off of $73.0 million following the recognition of an incremental specific CECL reserve of $35.9 million due to a further decline in the value of the collateral properties. As of December 31, 2022 and through the date of the loan sale, the loan was on non-accrual status.
Fair market values used to determine specific CECL reserves are calculated using a discounted cash flow model, a sales comparison approach, or a market capitalization approach. Estimates of fair market values used to determine specific CECL reserves as of September 30, 2023 include assumptions of property specific cash flows over estimated holding periods, discount rates ranging from 7.5% to 9.5%, and market and terminal capitalization rates ranging from 6.0% to 8.3%. These assumptions are based upon the nature of the properties, recent sales and lease comparables, and anticipated real estate and capital market conditions.
The following table illustrates the quarterly changes in the current expected credit loss reserve for the nine months ended September 30, 2023 and 2022 ($ in thousands):
Loans Receivable Held-for-Investment
Interests in Loans Receivable Held-for-Investment
Accrued Interest Receivable
Unfunded Loan Commitments (1)
Total General CECL Reserve
Total CECL Reserve
Total reserve, December 31, 2021
6,333
60,677
218
6,286
67,195
73,528
Increase (reversal)
(133
(1,269
28
(218
3,694
2,235
2,102
Total reserve, March 31, 2022
6,200
59,408
42
9,980
69,430
75,630
5,405
(113
(42
3,280
3,125
8,530
Principal charge-off
(11,500
Total reserve, June 30, 2022
105
59,295
13,260
72,555
72,660
(67
(145
2,564
2,419
2,352
Total reserve, September 30, 2022
38
59,150
15,824
74,974
75,012
Total reserve, December 31, 2022
60,300
68,347
17,715
86,062
146,362
Reversal
(1,021
(2,218
(3,239
Total reserve, March 31, 2023
67,326
15,497
82,823
143,123
44,588
(1,628
(1,485
(3,113
41,475
(66,935
Total reserve, June 30, 2023
37,953
65,698
14,012
79,710
117,663
106,949
4,044
(793
3,251
110,200
(72,958
Total reserve, September 30, 2023
71,944
69,742
13,219
82,961
154,905
Reserve at September 30, 2023
1.0
1.2
2.2
18
Our primary credit quality indicator is our internal risk rating, which is further discussed above. The following table presents the carrying value of our loans receivable as of September 30, 2023 by year of origination and risk rating ($ in thousands):
Carrying Value by Origination Year as of September 30, 2023
2023
2022
2021
2020
2019
2018
100,782
2,080,851
1,593,719
87,750
1,294,537
552,118
379,565
164,489
226,420
181,176
2,460,416
1,809,394
179,318
1,679,983
853,394
Charge-offs (2)
The following table details overall statistics for our loans receivable:
Weighted average yield to maturity
9.5
8.6
Weighted average term to fully extended maturity
2.7 years
3.2 years
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 occurred simultaneously with the conversion of the aforementioned loan, and thus there was no change in the underlying value of our 51% equity interest in CMTG/TT. See Note 3 for further details. Effective April 1, 2023, the sole remaining loan held by CMTG/TT was placed on non-accrual status. As of September 30, 2023, the carrying value of our 51% equity interest in CMTG/TT approximated $42.5 million.
Note 5. Real Estate Owned, Net
On February 8, 2021, we acquired legal title to a portfolio of seven hotel properties located in New York, NY through a foreclosure and recognized real estate owned of $414.0 million. 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. As a result of the foreclosure, we assumed the securitized senior mortgage which is non-recourse to us.
On June 30, 2023, we acquired legal title to a mixed-use property located in New York, NY and the equity interests therein through an assignment-in-lieu of foreclosure. The mixed-use property contains both office and retail components. Prior to June 30, 2023, the mixed-use property and a pledge of equity interests therein represented the collateral for a senior loan with an unpaid principal balance of $208.8 million. During the fourth quarter of 2022, the borrower defaulted on the loan and in anticipation of the assignment-in-lieu of foreclosure, we recorded a specific CECL reserve of $42.0 million. Upon acquiring legal title of the collateral, we recorded an additional specific CECL reserve of $24.9 million a principal charge-off of $66.9 million, based upon the mixed-use property's $144.0 million estimated fair value as determined by a third-party appraisal and transaction costs of $0.4 million. The fair value was determined using discount rates ranging from 7.3% to 7.5% and market and terminal capitalization rates ranging from 5.0% to 5.5%. In accordance with ASC 805, we allocated the fair value of assets acquired and liabilities assumed as follows ($ in thousands):
108,667
Building
11,181
Capital improvements
70
Tenant improvements
4,414
In-place lease values and other lease values
6,403
Above market lease values
17,886
Below market lease values
(4,209
Total
144,412
The following table presents additional detail of the acquired assets and assumed liabilities of our mixed-use property upon assignment-in-lieu of foreclosure ($ in thousands):
Cash
Real estate owned
In-place, above market, and other lease values (1)
24,289
4,810
153,687
Liabilities
Below market lease values (2)
4,209
7,616
11,825
Assets acquired, net of liabilities assumed
141,862
The following table presents additional detail related to our real estate owned, net as of September 30, 2023 and December 31, 2022 ($ in thousands):
231,767
123,100
295,651
284,400
3,830
2,343
Furniture, fixtures and equipment
6,500
542,162
416,343
Less: accumulated depreciation
(21,662
(15,154
Depreciation expense for the three months ended September 30, 2023 and 2022 was $2.4 million and $2.1 million, respectively. Depreciation expense for the nine months ended September 30, 2023 and 2022 was $6.5 million and $6.0 million, respectively.
Leases
The Company has non-cancelable operating leases for space in our mixed-use property. These leases provide for fixed rent payments, which we recognize on a straight-line basis, and variable rent payments, including reimbursement of certain operating expenses and miscellaneous fees, which we recognize when earned. As of September 30, 2023, the future minimum fixed rents under our non-cancellable leases for each of the next five years and thereafter are as follows ($ in thousands):
Year
Amount (2)
2023 (1)
2,072
2024
8,312
2025
8,383
2026
8,415
2027
8,432
Thereafter
35,785
71,399
Lease Intangibles
Upon acquisition of our mixed-use property on June 30, 2023, $20.1 million of the purchase price was allocated to lease related intangible assets including $4.8 million to in-place leases, $17.9 million to above market leases, $4.2 million to below market leases, and $1.6 million to other lease related values.
As of September 30, 2023, our lease intangibles are comprised of the following:
Intangible
Amount
In-place, above market, and other lease values
Less: accumulated amortization
(648
In-place, above market, and other lease values, net
23,641
94
Below market lease values, net
(4,115
Amortization of in-place and other lease values for the three and nine months ended September 30, 2023 was $0.2 million and $0.2 million. Amortization of above market lease values for the three and nine months ended September 30, 2023 was $0.4 million and $0.4 million. Amortization of below market lease values for the three and nine months ended September 30, 2023 was $0.1 million and $0.1 million.
As of September 30, 2023, the estimated amortization of these intangibles for the next five years is approximately as follows:
In-place and OtherLease Values (1)
Above MarketLease Values (2)
Below MarketLease Values (2)
2023(3)
200
(448
802
(1,791
377
2,794
(9,827
2,513
6,202
(17,439
4,115
At acquisition, the weighted average amortization period for in-place and other lease values, above-market lease values, and below market lease values was approximately 8.9 years, 10.5 years, and 11.3 years, respectively.
Note 6. Debt Obligations
As of September 30, 2023 and December 31, 2022, we financed certain of our loans receivables using repurchase agreements, a term participation facility, the sale of loan participations, and notes payable. Further, we have a secured term loan and debt related to real estate owned. The financings bear interest at a rate equal to SOFR plus a credit spread or at a fixed rate.
21
The following table summarizes our financings as of September 30, 2023 and December 31, 2022 ($ in thousands):
Capacity
Borrowing Outstanding
WeightedAverageSpread (1)
WeightedAverageSpread(1)
Repurchase agreements and term participation facility (2)
6,105,465
4,159,752
+ 2.74%
5,700,000
4,012,818
+ 2.25%
Repurchase agreement - side car (2) (3)
271,171
211,572
+ 4.51%
Loan participations sold
254,252
+ 3.67%
264,252
+ 3.68%
Notes payable
419,867
235,669
+ 3.10%
495,934
154,629
+ 3.09%
Secured term loan
727,358
+ 4.50%
755,090
Debt related to real estate owned
290,000
+ 2.83%
+ 2.78%
Total / Weighted Average
7,796,942
5,667,031
+ 3.03%
7,776,447
5,688,361
+ 2.75%
Repurchase Agreements and Term Participation Facility
Repurchase Agreements
The following table summarizes our repurchase agreements by lender as of September 30, 2023 ($ in thousands):
Lender
Initial Maturity
FullyExtendedMaturity (1)
MaximumCapacity
BorrowingOutstanding and Carrying Value
UndrawnCapacity
Carrying Value of Collateral (2)
JP Morgan Chase Bank, N.A.
7/28/2026
7/28/2028
1,955,465
1,676,025
279,440
2,223,814
Morgan Stanley Bank, N.A.
1/26/2024
1/26/2025
1,000,000
716,179
283,821
1,014,071
Goldman Sachs Bank USA
5/31/2025
5/31/2027
500,000
194,756
305,244
282,925
Barclays Bank PLC
12/20/2024
12/20/2025
135,129
364,871
250,626
Deutsche Bank AG, New York Branch
6/26/2024
6/26/2026
400,000
359,646
40,354
596,503
Wells Fargo Bank, N.A.
9/29/2024
9/29/2026
750,000
731,877
18,123
947,944
5,105,465
1,291,853
5,315,883
The following table summarizes our repurchase agreements by lender as of December 31, 2022 ($ in thousands):
JP Morgan Chase Bank, N.A. - Main Pool
6/29/2025
6/29/2027
1,500,000
1,272,079
227,921
1,815,531
JP Morgan Chase Bank, N.A. - Side Car
5/27/2023
5/27/2024
59,599
460,481
Morgan Stanley Bank, N.A.(3)
859,624
140,376
1,340,573
Goldman Sachs Bank USA (4)
5/31/2024
356,014
143,986
551,091
176,384
323,616
269,973
6/26/2023
345,583
54,417
591,592
9/29/2023
800,000
745,603
54,397
952,845
4,971,171
1,004,312
5,982,086
22
Term Participation Facility
On November 4, 2022, we entered into a master participation and administration agreement to finance certain of our mortgage loans. The facility has a maximum committed amount of $1.0 billion. As of September 30, 2023, the facility had $535.1 million in commitments of which $346.1 million was outstanding. As of December 31, 2022, the facility had $481.4 million in commitments of which $257.5 million was outstanding. Per the terms of the agreement, we may continue to finance additional loans on this facility until the end of the facility’s availability period, which is November 4, 2023. The term participation facility will mature five years after the date that the last asset is financed under the facility. As of September 30, 2023, the maturity date of the facility is February 17, 2028.
Our term participation facility as of September 30, 2023 is summarized as follows ($ in thousands):
Contractual Maturity Date
Carrying Valueof Collateral
2/17/2028
520,803
Our term participation facility as of December 31, 2022 is summarized as follows ($ in thousands):
12/21/2027
375,769
Loan Participations Sold
Our loan participations sold as of September 30, 2023 are summarized as follows ($ in thousands):
ContractualMaturityDate
MaximumExtensionDate
CarryingValue
Carrying Valueof Collateral (1)
10/10/2023 (2)
128,322
271,450
10/18/2023
10/18/2024
105,930
105,902
192,576
12/31/2024
12/31/2025
20,000
157,128
621,154
Our loan participations sold as of December 31, 2022 are summarized as follows ($ in thousands):
8/1/2023
138,322
281,123
105,645
192,355
19,831
157,833
631,311
Notes Payable
Our notes payable as of September 30, 2023 are summarized as follows ($ in thousands):
110,715
110,014
2/2/2026
2/2/2027
47,599
46,691
58,194
9/2/2026
9/2/2027
29,221
27,996
39,943
11/22/2024
11/24/2026
36,782
36,444
47,577
10/13/2025
10/13/2026
11,352
10,730
45,964
348,806
23
Our notes payable as of December 31, 2022 are summarized as follows ($ in thousands):
103,592
102,467
28,288
27,292
34,199
6/30/2025
6/30/2026
4,777
4,354
16,290
(1,234
(1,763
16,055
25,403
1,917
1,145
5,749
237,711
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 $325.0 million, increase the interest rate, and to increase the quarterly amortization payment. On December 2, 2021, we entered into a modification of our secured term loan which reduced the interest rate to the greater of (i) SOFR plus a 0.10% credit spread adjustment, and (ii) 0.50%, plus a credit spread of 4.50%. Our secured term loan is collateralized by a pledge of equity in certain subsidiaries and their related assets.
The secured term loan as of September 30, 2023 is summarized as follows ($ in thousands):
Stated Rate (1)
Interest Rate
8/9/2026
S + 4.50%
9.92%
The secured term loan as of December 31, 2022 is summarized as follows ($ in thousands):
8.96%
The secured term loan is partially amortizing, with principal payments of $1.9 million due in quarterly installments. During the three months ended June 30, 2023, we purchased and retired $22.0 million of principal of our secured term loan for a price of $19.3 million, recognizing a $2.2 million gain on extinguishment of debt, inclusive of $485,000 of unamortized deferred financing costs.
Debt Related to Real Estate Owned, Net
On February 8, 2021 we assumed a $300.0 million securitized senior mortgage in connection with a foreclosure on a portfolio of hotels.
Our debt related to real estate owned as of September 30, 2023 is summarized as follows ($ in thousands):
Net Interest Rate (1)
2/9/2024
S + 2.83%
5.83%
Our debt related to real estate owned as of December 31, 2022 is summarized as follows ($ in thousands):
L + 2.78%
5.78%
24
Acquisition Facility
On June 29, 2022, we entered into a full recourse revolving credit facility with $150.0 million in capacity. 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 charges interest at a rate of 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, 2023 and December 31, 2022, the outstanding balance of the facility was $0.
Interest Expense and Amortization
The following table summarizes our interest and amortization expense on our secured financings, debt related to real estate owned and secured term loan for the three and nine months ended September 30, 2023 and 2022, respectively ($ in thousands):
Interest expense on secured financings
99,773
49,893
278,583
107,051
Interest expense on secured term loan
18,378
13,052
53,561
32,910
5,460
5,040
17,170
14,475
Interest and related expense
Interest expense on debt related to real estate owned (1)
Total interest and related expense
129,748
71,888
366,760
163,642
Financial Covenants
Our financing agreements generally contain certain financial covenants. For example, our ratio of earnings before interest, taxes, depreciation, and amortization, to interest charges, as defined in the agreements, shall be not less than either 1.4 to 1.0 or 1.5 to 1.0. Further, (i) our tangible net worth, as defined in the agreements, shall not be less than $2.06 billion as of each measurement date plus 75% of proceeds from future equity issuances; (ii) cash liquidity shall not be less than the greater of (x) $50 million or (y) 5% of our recourse indebtedness; and (iii) our indebtedness shall not exceed 77.8% of our total assets. As of September 30, 2023 and December 31, 2022, we are in compliance with all covenants under our financing agreements. The requirements set forth in (i) through (iii) above are based upon the most restrictive financial covenants in place as of the reporting date.
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, a strike rate of 3.00% 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 5.83%. Changes in the fair value of our interest rate cap are recorded as an unrealized gain or loss on interest rate cap on our consolidated statements of operations and the fair value is recorded in other assets on our consolidated balance sheets. Proceeds received from our counterparty related to the interest rate cap are recorded as proceeds from interest rate cap on our consolidated statements of operations. The fair value of the interest rate cap is $2.7 million and $6.0 million at September 30, 2023 and December 31, 2022, respectively. During the three months ended September 30, 2023 and 2022, we recognized $1.7 million and $0, respectively, of proceeds from interest rate cap. During the nine months ended September 30, 2023 and 2022, we recognized $4.4 million and $0, respectively, of proceeds from interest rate cap.
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).
25
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 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 $2.7 million at September 30, 2023 and $6.0 million at December 31, 2022.
Financial Instruments Not Reported at Fair Value
The carrying value and estimated fair value of financial instruments not recorded at fair value on a recurring basis but required to be disclosed at fair value were as follows ($ in thousands):
Carrying
Unpaid Principal
Fair Value Hierarchy Level
Value
Balance
Fair Value
Level 1
Level 2
Level 3
7,022,236
254,022
233,596
690,991
287,511
7,331,207
255,296
261,417
153,282
743,764
281,568
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 138,728,690 and 140,055,714 shares of common stock issued and 138,728,690 and 138,376,144 shares of common stock outstanding as of September 30, 2023 and December 31, 2022, respectively. In conjunction with our 10b5-1 Purchase Plan defined below, 1,679,570 shares of common stock were repurchased and subsequently retired and are not available to be reissued.
The following table provides a summary of the number of shares of common stock outstanding during the nine months ended September 30, 2023 and 2022, respectively:
Common Stock Outstanding
Beginning balance
(869,590
Conversion of fully vested RSUs to common stock
352,546
Ending balance
We entered into an agreement (the “10b5-1 Purchase Plan”) with Morgan Stanley & Co. LLC, pursuant to which Morgan Stanley & Co. LLC (”Morgan Stanley”), as our agent, would 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 required Morgan Stanley to purchase shares of our common stock on our behalf when the market price per share was below the book value per common stock, subject to certain daily limits prescribed by the 10b5-1 Purchase Plan. For the period from December 6, 2021 through October 24, 2022, our full $25.0 million commitment was used to repurchase 1,679,570 shares of common stock at an average price per share of $14.88. As of December 31, 2022, all of the capital committed to the 10b5-1 Purchase Plan was expended.
Dividends
The following tables detail our dividend activity for common stock ($ in thousands, except per share data):
For the Quarter Ended
March 31, 2023
June 30, 2023
Per Share
Dividends declared - common stock
51,199
0.37
51,203
34,682
0.25
Record Date - common stock
September 29, 2023
Payment Date - common stock
April 14, 2023
July 14, 2023
October 13, 2023
March 31, 2022
June 30, 2022
51,672
51,659
51,419
April 15, 2022
July 15, 2022
October 14, 2022
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, 2023 and 2022, 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 (loss) income attributable to common stockholders
Dividends on participating securities (1)
(799
(3,074
(1,598
Participating securities' share in earnings
Basic (loss) earnings
(69,595
41,272
(31,090
133,119
Weighted average shares of common stock outstanding, basic and diluted (2)
Net (loss) income per share of common stock, basic and diluted
For the three months ended September 30, 2023 and 2022, 2,569,993 and 2,159,280 of weighted average unvested RSUs, respectively, were excluded from the calculation of diluted EPS because the effect was antidilutive. For the nine months ended September 30, 2023 and 2022, 2,668,889 and 863,524 of weighted average RSUs, respectively, were excluded from the calculation of diluted EPS because the effect was anti-dilutive.
Note 11. Related Party Transactions
Our activities 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 our day-to-day operations. 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
Incentive fees
30,396
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, as defined in the Management Agreement. Management fees are reduced by our pro rata share of any management fees and incentive fees (if incentive fees are not incurred by us) incurred to the Manager by CMTG/TT. Management fees are paid quarterly, in arrears. Management fees of $9.5 million and $9.9 million were accrued and were included in management fee payable – affiliate, on the consolidated balance sheets at September 30, 2023 and December 31, 2022, respectively.
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. Incentive fees are reduced by our pro rata share of any incentive fees incurred 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, as defined in the Management Agreement.
There were no accrued incentive fees on our consolidated balance sheets as of September 30, 2023 and December 31, 2022.
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, 2023 and 2022, we incurred $1.1 million and $0.3 million, respectively, of reimbursable expenses incurred on our behalf by our Manager which are included in general and administrative expenses on our consolidated statements of operations. For the nine months ended September 30, 2023 and 2022, we incurred $3.0 million and $0.4 million, respectively, of reimbursable expenses incurred on our behalf by our Manager. As of September 30, 2023 and December 31, 2022, $1.0 million and $0.7 million, respectively, of reimbursable expenses incurred on our behalf and due to our Manager are included in other liabilities on our consolidated balance sheets.
Loan Receivable Held-for-Investment
As of December 31, 2022, we had a loan with an unpaid principal balance of $97.8 million and a loan commitment of $141.1 million, whereby the borrower is an affiliate of a shareholder of our common stock who, during the nine months ended September 30, 2023, owned approximately 10.9% of our common stock outstanding. During the three months ended September 30, 2023, the loan with a then unpaid principal balance of $113.0 million was repaid in full.
Note 12. Stock-Based Compensation
Incentive Award Plan
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. As of September 30, 2023, the maximum remaining number of shares that may be issued under the Plan is 4,975,513 shares.
On March 30, 2023, the Board granted an aggregate of 1,100,000 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 April 1, 2023, subject to the terms of the applicable award agreement. Each RSU was granted with the right to receive dividend equivalents. The fair value of the 1,100,000 RSUs was $11.30 per share based on the closing price of our common stock on the date of grant.
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 terms of the applicable award agreement. Each RSU was granted with the right to receive dividend equivalents. The fair value of the 2,130,000 RSUs was $18.72 per share based on the closing price of our common stock on the date of grant.
For the three and nine months ended September 30, 2023, we recognized $4.4 million and $12.1 million, respectively, of stock-based compensation expense related to the RSUs which is considered a non-cash expense. 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 which is considered a non-cash expense.
29
Deferred Compensation Plan
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 stock-based compensation or RSUs and director cash fees, if applicable, pursuant to the terms of the Deferred Compensation Plan.
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, during the nine months ended September 30, 2023 and 2022, we issued 11,097 and 2,894, respectively, of deferred RSUs in lieu of cash fees to such directors, and recognized a related expense of approximately $139,000 and $49,000, respectively, which is included in general and administrative expenses on our consolidated statements of operations.
Non-Employee Director Compensation Program
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 2023, the eligible non-executive members of the Board were granted an aggregate of 58,536 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 58,536 RSUs was determined to be $10.25 per share on the grant date based on the closing price of our common stock on such date.
In June 2022, the eligible non-executive members of the Board were 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 our common stock on such date. On June 1, 2023, 9,760 of the 29,280 vested RSUs were delivered as shares of our common stock to certain directors.
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, 2023, total unrecognized compensation expense was $33.4 million based on the grant date fair value of RSUs granted. This expense is expected to be recognized over a remaining period of 2.0 years from September 30, 2023.
We may allow participants of the Plan to settle their tax liabilities through a reduction of their vested RSU delivery. Such amount will result in a corresponding adjustment to additional paid-in capital and a cash payment to our Manager or its affiliates in order to remit the required statutory tax withholding to each respective taxing authority. Similarly, during the three months ended September 30, 2023, we amended the RSU grant agreements of certain participants with respect to whom neither we nor our Manager or its affiliates had a statutory basis to withhold required tax payments. Such amendments provided for partial cash settlement of fully vested RSUs as of the date of the amendments in order to facilitate the satisfaction by such participants of income tax obligations arising from vested RSUs. During the three months ended September 30, 2023, we delivered 342,786 shares of common stock for 703,318 vested RSUs and concurrently recorded a $3.9 million adjustment to additional paid-in capital on our consolidated statement of changes in equity. There were no deliveries of shares of common stock for vested RSUs in the comparable prior period.
The following table details the time-based RSU activity during the nine months ended September 30, 2023 and 2022:
Nine Months Ended September 30, 2023
Nine Months Ended September 30, 2022
Number of Restricted Share Units
Weighted-Average Grant Date Fair Value Per Share
Unvested, beginning of period
2,159,280
18.74
Granted
1,167,354
11.25
Vested
(732,598
18.79
Forfeited
(38,500
16.31
Unvested, end of period
2,555,536
15.34
30
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 income earned by 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 three and nine months ended September 30, 2023 and 2022, 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 hotel portfolio 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. For the three and nine months ended September 30, 2023 and 2022, we did not record a current or deferred tax benefit or expense related to our TRS.
As of September 30, 2023 and December 31, 2022, we did not have any deferred tax assets or deferred tax liabilities due to a full valuation allowance that was established against our deferred tax assets. The deferred tax asset and valuation allowance at September 30, 2023 were $21.7 million, respectively. The deferred tax asset and valuation allowance at December 31, 2022 were $16.6 million, respectively.
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, if applicable, are included as a component of the provision for income taxes in our consolidated statements of income. As of September 30, 2023 and December 31, 2022, we have not recorded any amounts for uncertain tax positions.
Our tax returns are subject to audit by taxing authorities. Tax years 2019 and onward remain open to examination by major taxing jurisdictions in 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, 2023 and December 31, 2022, we contributed $163.1 million and $163.1 million, respectively, to CMTG/TT and have received return of capital distributions of $123.3 million, of which $111.1 million were recallable. As of September 30, 2023 and December 31, 2022, CMTG’s remaining capital commitment to CMTG/TT was $72.9 million and $72.9 million, respectively.
As of September 30, 2023 and December 31, 2022, we had aggregate unfunded loan commitments of $1.3 billion and $1.9 billion respectively, which amounts will generally be funded to finance construction or leasing related expenditures by our borrowers, subject to them achieving certain conditions precedent to such funding. These future commitments will expire over the remaining term of the loans, none of which exceed five years.
Our contractual payments due under all financings were as follows as of September 30, 2023 ($ in thousands):
2023 (1) (2)
439,304
819,926
1,286,498
1,942,260
1,179,043
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.
31
Note 15. Subsequent Events
We have evaluated subsequent events through the filing of this Quarterly Report on Form 10-Q and determined that no additional disclosure is necessary.
32
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 requires otherwise. References to our “Manager” refer to Claros REIT Management LP and references to our "Sponsor" refer to Mack Real Estate Credit Strategies, L.P. (“MRECS”), the CRE lending and debt investment business affiliated with our Manager and Mack Real Estate Group, LLC (“MREG”). Although MRECS and MREG are distinct legal entities, for convenience, references to our “Sponsor” are deemed to include references to MRECS and MREG, individually or collectively, as appropriate for the context and unless otherwise indicated.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
We make forward-looking statements herein and will make forward-looking statements in future filings with 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 and secondary effects thereof on our financial condition, results of operations, liquidity and capital resources; market trends in our industry, interest rates, real estate values, the debt securities markets or the general economy; the demand for commercial real estate loans; our business and investment strategy; our operating results; actions and initiatives of 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; changes in geopolitical conditions; 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 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 (the “Advisers Act”). We operate our business in a manner that permits us to maintain our exclusion from registration under the Investment Company Act of 1940, as amended (the “1940 Act”).
I. Key Financial Measures and Indicators
As a CRE finance company, we believe the key financial measures and indicators for our business are net income (loss) per share, dividends declared per share, Distributable Earnings (Loss) per share, Distributable Earnings per share prior to realized gains and losses, which includes principal charge-offs, 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, 2023, we had net loss per share of $(0.50), dividends declared per share of $0.25, Distributable Loss per share of ($0.16), and Distributable Earnings per share prior to realized gains and principal charge-offs of $0.35. As of September 30, 2023, our book value per share was $16.25, our adjusted book value per share was $17.00, our Net-Debt-to-Equity Ratio was 2.3x, and our Total Leverage Ratio was 2.7x. We use Net Debt-to-Equity Ratio and Total Leverage Ratio, financial measures which are not prepared in accordance with GAAP, to evaluate our financial leverage, which in the case of our Total Leverage Ratio, makes certain adjustments that we believe provide a more conservative measure of our financial condition.
Net (Loss) Income Per Share and Dividends Declared Per Share
The following table sets forth the calculation of basic and diluted net (loss) income per share and dividends declared per share ($ in thousands, except share and per share data):
Weighted average shares of common stock outstanding, basic and diluted
138,399,446
Basic and diluted net (loss) income per share of common stock
0.02
Dividends declared per share of common stock
During the quarter ended September 30, 2023, the Company declared a dividend of $0.25 per share of common stock. One of the Company’s objectives in declaring the third quarter dividend was to establish a dividend level believed to be sustainable, assuming that the real estate capital market dislocation continues for the foreseeable future.
Distributable Earnings (Loss)
Distributable Earnings (Loss) is a non-GAAP measure used to evaluate our performance excluding the effects of certain transactions, non-cash items and GAAP adjustments, as determined by our Manager. Distributable Earnings (Loss) is a non-GAAP measure, which we define as net income in accordance with GAAP, excluding (i) non-cash stock-based compensation expense, (ii) real estate depreciation and amortization, (iii) any unrealized gains or losses from mark-to-market valuation changes (other than permanent impairments) that are included in net income for the applicable period, (iv) one-time events pursuant to changes in GAAP and (v) certain non-cash items, which in the judgment of our Manager, should not be included in Distributable Earnings (Loss). Furthermore, the Company presents Distributable Earnings prior to realized gains and losses, which includes principal charge-offs, as the Company believes this more easily allows our Board, Manager, and investors to compare our operating performance to our peers, to assess our ability to pay dividends, and to determine our compliance with certain financial covenants. Pursuant to the Management Agreement, we use Core Earnings, which is substantially the same as Distributable Earnings (Loss) excluding incentive fees, to determine the incentive fees we pay our Manager. Distributable Earnings (Loss) is substantially the same as Core Earnings, as defined in the Management Agreement, for the periods presented.
We believe that Distributable Earnings (Loss) and Distributable Earnings prior to realized gains and losses provide meaningful information to consider in addition to our net income and cash flows from operating activities in accordance with GAAP. Distributable Earnings (Loss) and Distributable Earnings prior to realized gains and losses do not represent net income or cash flows from operating activities in accordance with GAAP 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
34
for calculating these metrics may differ from the methodologies employed by other companies to calculate the same or similar supplemental performance measures and, accordingly, our reported Distributable Earnings (Loss) and Distributable Earnings prior to realized gains and losses may not be comparable to the Distributable Earnings (Loss) and Distributable Earnings prior to realized gains and losses reported by other companies.
In order to maintain our status as a REIT, we are required to distribute at least 90% of our REIT taxable income, determined without regard to the deduction for dividends paid and excluding net capital gain, as dividends. Distributable Earnings (Loss), Distributable Earnings prior to realized gains and losses, and other similar measures, have historically been a useful indicator over time of a mortgage REIT’s ability to cover its dividends, and to mortgage REITs themselves in determining the amount of any dividends to declare. Distributable Earnings (Loss) and Distributable Earnings prior to realized gains and losses are key factors, among others, considered by the Board in setting the dividend each quarter and as such we believe Distributable Earnings (Loss) and Distributable Earnings prior to realized gains and losses are useful to investors.
While Distributable Earnings (Loss) excludes the impact of our unrealized provision for or reversal of current expected credit loss reserves, loan losses are charged off and recognized through Distributable Earnings (Loss) 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 when we acquire title in the case of foreclosure, deed-in-lieu of foreclosure, or assignment-in-lieu of foreclosure), 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, 2023, we recorded a $110.2 million provision for CECL reserve, which has been excluded from Distributable Earnings (Loss). During the three months ended June 30, 2023, we recorded a $41.5 million provision for CECL reserve, which has been excluded from Distributable Earnings (Loss).
In determining Distributable Earnings (Loss) per share and Distributable Earnings per share prior to realized gains and losses, the dilutive effect of unvested RSUs is considered. The weighted-average diluted shares outstanding used for Distributable Earnings (Loss) has been adjusted from weighted-average diluted shares under GAAP to include unvested RSUs.
The table below summarizes the reconciliation from weighted-average diluted shares under GAAP to the weighted-average diluted shares used for Distributable Earnings (Loss):
Weighted-Averages
Diluted Shares - GAAP
Unvested RSUs
2,569,993
3,249,255
Diluted Shares - Distributable Earnings (Loss)
141,469,161
141,648,701
The following table provides a reconciliation of net (loss) income attributable to common stock to Distributable Earnings (Loss) ($ in thousands, except share and per share data):
Net (loss) income attributable to common stock:
Adjustments:
4,395
110,198
41,476
Depreciation and amortization expense
2,092
Unrealized loss on interest rate cap
1,659
259
Distributable Earnings prior to realized gains and principal charge-offs
49,616
50,258
Principal charge-offs
(72,957
Distributable Loss
(22,766
(14,460
Weighted average diluted shares - Distributable Earnings (Loss)
Diluted Distributable Earnings per share prior to realized gains and principal charge-offs
0.35
Diluted Distributable Loss per share
(0.16
(0.10
35
Book Value Per Share
We believe that presenting book value per share adjusted for the general current expected credit loss reserve, accumulated depreciation, and accumulated amortization 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):
Number of shares of common stock outstanding and RSUs
141,321,693
140,542,274
Book Value per share(1)
16.25
17.48
Add back: accumulated depreciation on real estate owned and accumulated amortization on related lease intangibles
0.16
0.11
Add back: general CECL reserve
0.59
0.61
Adjusted Book Value per share
17.00
18.20
II. Our Portfolio
The below table summarizes our loan portfolio as of September 30, 2023 ($ in thousands):
Weighted Average(3)
CarryingValue(2)
Yield to Maturity(4)
Term to FullyExtendedMaturity(in years) (5)
LTV(6)
Senior and subordinate loans
68.8
Portfolio Activity and Overview
The following table summarizes changes in unpaid principal balance within our loan portfolio for the three and nine months ended September 30, 2023 ($ in thousands):
Three Months EndedSeptember 30, 2023
Nine Months EndedSeptember 30, 2023
Unpaid principal balance, beginning of period
7,559,500
Initial funding of loans
Advances on loans
173,811
562,338
Loan repayments
(287,253
(547,067
Total net fundings / (repayments)
(373,552
(352,577
Unpaid principal balance, end of period
The following table details our loan investments individually based on unpaid principal balances as of September 30, 2023 ($ in thousands):
Loan Number
OriginationDate
LoanCommitment(1)
UnpaidPrincipalBalance
Fully Extended Maturity(3)
PropertyType (4)
Construction(4, 5)
RiskRating
Senior
12/16/2021
405,000
401,159
399,213
6/16/2027
11/1/2019
390,000
389,361
11/1/2026
7/12/2018
270,000
10/10/2023
7/26/2021
225,000
224,554
7/26/2026
6/30/2022
227,000
215,896
214,397
6/30/2029
2/15/2022
262,500
214,859
213,256
2/15/2027
Y
8/17/2022
235,000
213,831
212,529
8/17/2027
10/18/2019
247,260
208,923
9/7/2018
192,600
192,575
10/4/2019
202,429
185,098
10/1/2025
Mixed-Use
DC
1/14/2022
170,000
169,275
1/14/2027
CO
4/14/2022
193,400
168,941
167,951
4/14/2027
MI
9/26/2019
319,900
159,420
3/31/2026
9/20/2019
160,000
FL
9/8/2022
155,000
153,978
9/8/2027
AZ
1/9/2018
1/9/2024
2/28/2019
150,000
149,844
2/28/2024
CT
12/30/2021
147,500
147,429
12/30/2025
PA
4/26/2022
151,698
133,630
132,652
4/26/2027
TX
12/10/2021
130,000
129,558
12/10/2026
Subordinate
12/9/2021
125,000
1/1/2027
IL
6/17/2022
127,250
123,346
122,337
6/17/2027
9/30/2019
122,500
122,459
2/9/2027
4/29/2019
120,000
119,510
119,336
4/29/2024
3/1/2022
122,000
119,084
118,457
2/28/2027
8/8/2022
115,000
114,621
8/8/2027
7/20/2021
113,500
113,549
7/20/2026
2/13/2020
124,810
2/13/2025
6/7/2018
104,250
105,343
1/15/2022
12/15/2021
103,000
102,630
12/15/2026
TN
3/21/2023
4/1/2028
8/2/2021
100,000
8/2/2026
1/27/2022
100,800
96,159
95,658
1/27/2027
NV
3/22/2021
148,303
90,931
90,301
3/22/2026
MA
3/31/2020
2/9/2025
12/21/2018
87,741
88,093
6/21/2022
37
5/13/2022
202,500
81,192
79,239
5/13/2027
8/1/2022
115,250
78,500
78,342
7/30/2026
39
7/10/2018
76,369
75,833
7/10/2025
40
11/2/2021
77,115
75,609
75,212
11/2/2026
7/27/2022
76,000
75,550
75,246
7/27/2027
UT
4/5/2019
75,500
75,406
4/5/2024
43
1/10/2022
130,461
74,061
72,898
1/9/2027
44
8/27/2021
84,810
8/27/2026
45
6/3/2021
79,600
70,069
69,740
6/3/2026
46
11/4/2022
140,000
67,790
66,597
11/9/2026
47
12/22/2021
76,350
67,040
66,662
12/22/2026
48
7/31/2019
10/31/2021
49
1/19/2022
73,677
59,112
58,682
1/19/2027
50
2/2/2022
90,000
59,017
WA
51
3/15/2022
53,300
50,164
49,913
3/15/2027
11/24/2021
60,255
48,028
47,578
10/13/2022
106,500
46,983
54
9/2/2022
176,257
41,696
2/4/2022
44,768
38,291
38,054
2/4/2027
141,791
36,354
35,070
12/30/2026
Mixed-use
7/2/2021
7/2/2024
4/18/2019
30,000
29,913
5/1/2024
59
2/17/2022
28,479
24,525
24,395
2/17/2027
60
1/4/2022
32,795
19,117
18,829
1/4/2027
61
8/2/2019
13,985
14,197
2/2/2024
62
2/25/2022
53,984
13,411
12,890
2/25/2027
2/18/2022
32,083
11,002
10,695
2/18/2027
4/19/2022
23,378
10,243
10,025
4/19/2027
24,245
6,754
6,520
66
3,939
3,789
67
7/1/2019
12/30/2020
68
8/2/2018
7/9/2023
12/21/2022
112,100
(1,121)
(69,742)
Grand Total / Weighted Average
20%
3.2
Real Estate Owned, Net
On February 8, 2021, we acquired legal title to a portfolio of seven hotel properties located in New York, NY through a foreclosure and recognized real estate owned of $414.0 million. Prior to February 8, 2021, the hotel portfolio represented the collateral for the $103.9 million mezzanine loan that we held, which was in default as a result of the borrower failing to pay debt service. The hotel portfolio appears as real estate owned, net on our consolidated balance sheets and, as of September 30, 2023, was encumbered by a $290.0 million non-recourse securitized senior mortgage assumed by us, which is included as a liability on our consolidated balance sheets.
On June 30, 2023, we acquired legal title to a mixed-use property located in New York, NY and the equity interests therein through an assignment-in-lieu of foreclosure. The mixed-use property contains both office and retail components. Prior to June 30, 2023, the mixed-use property and a pledge of equity interests therein represented the collateral for a senior loan with an unpaid principal balance of $208.8 million. During the fourth quarter of 2022, the borrower defaulted on the loan and in anticipation of the assignment-in-lieu of foreclosure, we recorded a specific CECL reserve of $42.0 million. Upon acquiring legal title of the collateral, we concurrently recorded an additional specific CECL reserve of $24.9 million immediately prior to recording a principal charge-off of $66.9 million, based upon the mixed-use property's $144.0 million estimated fair value as determined by a third-party appraisal and transaction costs of $0.4 million. The fair value was determined using discount rates ranging from 7.3% to 7.5% and market and terminal capitalization rates ranging from 5.0% to 5.5%.
Refer to Note 5 to our consolidated financial statements for additional details.
Asset Management
Our Manager proactively manages the loans in our portfolio from closing to final repayment and our Sponsor has dedicated asset management employees to perform asset management services. Following the closing of an investment, the asset management team rigorously monitors the loan, with an emphasis on ongoing financial, legal, market condition and quantitative analyses. Through the final repayment of a loan, the asset management team maintains regular contact with borrowers, servicers and local market experts monitoring performance of the collateral, anticipating borrower, property and market issues, and enforcing our rights and remedies when appropriate.
From time to time, some of our borrowers may experience delays in the execution of their business plans. As a transitional lender, we work with our borrowers to execute loan modifications which could include additional equity contributions from borrowers, repurposing of reserves, temporary deferrals of interest or principal, or partial deferral of coupon interest as payment-in-kind interest. We have completed a number of loan modifications to date, and we may continue to make additional modifications depending on the business plans, financial condition, liquidity and results of operations of our borrowers.
Our Manager reviews our loan portfolio at least quarterly, undertakes an assessment of the performance of each loan, and assigns it a risk rating between “1” and “5,” from least risk to greatest risk, respectively. The weighted average risk rating of our total loan portfolio based on unpaid principal balance was 3.2 at September 30, 2023.
During the three months ended September 30, 2023, we recorded a specific CECL reserve of $30.6 million in connection with a senior loan with a borrower that is experiencing financial difficulty and the loan is in maturity default. The loan is secured by land in Arlington, VA with an unpaid principal balance and carrying value prior to any specific CECL reserve of $150.7 million. Effective January 1, 2023, this loan is on non-accrual status.
During the three months ended December 31, 2022, we recorded a specific CECL reserve of $42.0 million in connection with a senior loan with a borrower that was experiencing financial difficulty. The loan was secured by a mixed-use building in New York, NY and a pledge of equity interests therein with an unpaid principal balance and carrying value prior to any specific CECL reserve of $208.8
million and an initial maturity date of February 1, 2023. On June 30, 2023, we obtained legal title to the collateral through an assignment-in-lieu of foreclosure and during the three months ended June 30, 2023 recorded an additional specific CECL reserve of $24.9 million prior to a principal charge-off of $66.9 million. Prior to obtaining legal title to the collateral and while the loan was on non-accrual status during 2023, we recognized $8.3 million of interest income. See Note 5 - Real Estate Owned, Net for further detail. As of December 31, 2022 and through the date of the assignment-in-lieu of foreclosure, this loan was on non-accrual status.
Portfolio Financing
Our financing arrangements include repurchase agreements, a term participation facility, asset-specific financings, mortgages on real estate owned, and secured term loan borrowings.
The following table summarizes our loan portfolio financing ($ in thousands):
Repurchase agreements and Term participation facility
Refer to Note 6 to our consolidated financial statements for additional details on our financings.
We finance certain of our loans using repurchase agreements and a term participation facility. As of September 30, 2023, aggregate borrowings outstanding under our repurchase agreements and the term participation facility totaled $4.2 billion, with a weighted average coupon of SOFR plus 2.74% per annum. All weighted averages are based on unpaid principal balance. As of September 30, 2023, outstanding borrowings under these facilities had a weighted average term to fully extended maturity (assuming conditions to extend are met) of 2.8 years.
Each repurchase agreement contains “margin maintenance” provisions, which are designed to allow the counterparty to require the delivery of cash or other assets to de-lever financings on assets that are determined to have experienced a diminution in value. Since inception through September 30, 2023, we have not received any margin calls under any of our repurchase agreements. As of September 30, 2023, five of our loans were financed under the term participation facility.
We finance certain of our loans via the sale of a participation in such loans, and we present the loan participations sold as liabilities on our consolidated balance sheet when such arrangements do not qualify as sales under GAAP. In instances where we have multiple
loan participations with the same lender, the financings are generally not cross-collateralized. Each of our loan participations sold is generally term-matched to its underlying loan. As of September 30, 2023, three of our loans were financed with loan participations sold.
We finance certain of our loans via secured financings that are generally non-recourse and are term matched to the related underlying loan. We refer to such financings as notes payable and they are secured by the related loans receivable. As of September 30, 2023, five of our loans were financed with notes payable.
Secured Term Loan
We have a secured term loan of $727.4 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. During the nine months ended September 30, 2023, we purchased and retired $22.0 million of principal of our secured term loan for a price of $19.3 million, recognizing a $2.2 million gain on extinguishment of debt, inclusive of $485,000 of unamortized deferred financing costs. As of September 30, 2023, our secured term loan has an unpaid principal balance of $727.4 million and a carrying value of $713.3 million.
Debt Related to Real Estate Owned
On February 8, 2021 we assumed a $300.0 million securitized senior mortgage in connection with a foreclosure on a portfolio of seven limited service hotels located in New York, New York. The securitized senior mortgage is non-recourse to us. Our debt related to real estate owned as of September 30, 2023 has an unpaid principal balance of $290.0 million, a carrying value of $289.8 million and a stated rate of LIBOR plus 2.83%, subject to a LIBOR floor of 0.75%. Effective July 1, 2023, interest on our debt related to real estate owned is indexed to SOFR. See Derivatives below for further detail of the interest rate cap related to this financing.
Derivatives
As part of the agreement to amend the terms of our debt related to real estate owned in June 2021, we acquired an interest rate cap with a notional amount of $290.0 million, a strike rate of 3.00%, and a maturity date of February 15, 2024 for $275,000. The fair value of the interest rate cap is $2.7 million as of September 30, 2023.
The interest rate cap effectively limits the maximum interest rate of our debt related to real estate owned to 5.83%. Changes in the fair value of our interest rate cap are recorded as an unrealized gain or loss on interest rate cap on our consolidated statements of operations and the fair value is recorded in other assets on our consolidated balance sheets. Proceeds received from our counterparty related to the interest rate cap are recorded as proceeds from interest rate cap on our consolidated statements of operations. During the three months ended September 30, 2023 and 2022, we recognized $1.7 million and $0 of proceeds from interest rate cap. During the nine months ended September 30, 2023 and 2022, we recognized $4.4 million and $0 of proceeds from interest rate cap.
On June 29, 2022, we entered into a full recourse revolving credit facility with $150.0 million in capacity. 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 charges interest at a rate of 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, 2023, the outstanding balance of the facility is $0.
Non-Consolidated Senior Interests Sold and Non-Consolidated Senior Interests Held by Third Parties
In certain instances, we use structural leverage through the non-recourse syndication of a match-term senior loan interest to a third party which qualifies for sale accounting under GAAP, or through the acquisition of a subordinate loan for which a non-recourse senior interest is retained by a third party. In such instances, the senior loan is not included on our consolidated balance sheet.
The following table summarizes our non-consolidated senior interests and related retained subordinate interests as of September 30, 2023 ($ in thousands):
LoanCount
LoanCommitment
Weighted Average Spread (2)
Term toFullyExtendedMaturity(in years) (3)
Floating rate non-consolidated senior loans (1)
57,300
+ 4.46%
0.8
Retained floating rate subordinate loans
Fixed rate non-consolidated senior loans
830,000
3.47%
3.3
Retained fixed rate subordinate loans
8.50%
Floating and Fixed Rate Portfolio
Our business model seeks to minimize our exposure to changing interest rates by originating floating rate loans and financing them with floating rate liabilities. Further, we seek to match the benchmark index in the floating rate loans we originate with the benchmark index used in the related floating rate financings. Generally, we use SOFR as the benchmark index in both our floating rate loans and floating rate financings. As of September 30, 2023, 98.0% of the unpaid principal balance of our loans were floating rate and indexed to SOFR. The majority of our floating rate loans were financed with floating rate liabilities indexed to SOFR, which resulted in approximately $1.4 billion of net floating rate exposure.
The following table details our net floating rate exposure as of September 30, 2023 ($ in thousands):
Net FloatingRate Exposure(1)
Floating rate assets
Floating rate liabilities
(5,647,031
Net floating rate exposure
1,397,147
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 LIBOR. As of September 30, 2023, all of our floating rate loans and financing arrangements were indexed to SOFR.
On our debt related to real estate owned, we have an interest rate cap with a notional amount of $290.0 million, a strike rate of 3.00%, and a maturity date of February 15, 2024. The interest rate cap effectively limits the maximum interest rate of our debt related to real estate owned to 5.83%. We have not employed other interest rate derivatives (interest rate swaps, caps, collars or floors) to hedge our asset or liability portfolio, but we may do so in the future.
Results of Operations – Three Months Ended September 30, 2023 and June 30, 2023
As previously disclosed, beginning with our Quarterly Report on Form 10-Q for the quarter ended September 30, 2021, and for all subsequent reporting periods, we have elected to present results of operations by comparing to the immediately preceding period, as well as the same year to date period in the prior year. Given the dynamic nature of our business and the sensitivity to the real estate and capital markets, we believe providing analysis of results of operations by comparing to the immediately preceding period is more meaningful to our stockholders in assessing the overall performance of our current business.
Operating Results
The following table sets forth information regarding our consolidated results of operations for the three months ended September 30, 2023, and June 30, 2023 ($ in thousands, except per share data):
$ Change
180,735
1,309
119,676
3,935
61,059
(2,626
19,866
2,254
80,925
(372
9,641
(100
4,492
(927
(26
11,269
2,437
5,865
272
466
37,754
2,122
1,495
196
(259
(1,400
Loss from equity method investment
(895
862
(41,476
(68,722
(73,200
(0.52
Comparison of the three months ended September 30, 2023 and June 30, 2023
Revenue decreased $0.4 million during the three months ended September 30, 2023, compared to the three months ended June 30, 2023. The decrease is primarily due to an increase in interest expense of $3.9 million, as a result of increases in SOFR over the three months ended September 30, 2023 and higher average financing balances compared to the prior quarter. The decrease was partially offset by an increase in revenue from real estate owned of $2.3 million primarily due to $1.3 million of revenue generated from the mixed-use property we acquired legal title to on June 30, 2023, and a $1.0 million increase in revenue recognized at the hotel portfolio due to higher occupancy, ADR, and RevPAR levels over the comparative period, as well as an increase in interest income of $1.3 million primarily as a result of SOFR increases over the three months ended September 30, 2023, and accelerated fee revenue recognized upon repayments of loans, partially offset by lower average outstanding loan balances compared to the prior quarter.
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 and amortization on real estate owned and related in-place and other lease values. Expenses increased by $2.1 million during the three months ended September 30, 2023, as compared to the three months ended June 30, 2023, primarily due to:
During the three months ended September 30, 2023, we realized a gain on sale of loan totaling $0.6 million. There were no loans sold during the three months ended June 30, 2023.
Proceeds from interest rate cap increased $0.2 million during the three months ended September 30, 2023, as compared to the three months ended June 30, 2023, due to increased SOFR rates, which continued to be in excess of our interest rate cap's 3% strike rate.
During the three months ended September 30, 2023, we recognized a $1.7 million unrealized loss on interest rate cap, compared to a $0.3 million unrealized loss on interest rate cap during the three months ended June 30, 2023 driven by the decline in remaining term. The fair value of the interest rate cap increases as interest rates increase, decreases as the interest rate cap approaches maturity, and further fluctuates following shifts in the forward curve.
During the three months ended September 30, 2023, we recognized a loss from our equity method investment of $0.1 million as a result of the net loss recognized by our investee over the three months ended September 30, 2023. During the three months ended June 30, 2023, we recognized a loss from our equity method investment of $0.9 as a result of the loan held by the equity method investee being placed on non-accrual status effective April 1, 2023.
During the three months ended June 30, 2023, we recognized a gain on extinguishment of debt of $2.2 million, inclusive of $485,000 of unamortized deferred financing costs, as a result of the retirement of $22.0 million of principal of our secured term loan for a price of $19.3 million.
During the three months ended September 30, 2023, we recorded a provision for current expected credit losses of $110.2 million, primarily attributable to a $71.1 million increase in our specific CECL reserves and a $3.2 million increase in general CECL reserves which was primarily attributable to deteriorating macroeconomic conditions, offset by seasoning of and a reduction in the size of our loan portfolio. During the three months ended June 30, 2023, we recorded provision for of current expected credit losses of $41.5 million, primarily attributable a $19.7 million increase in our specific CECL reserves, and a $3.1 million reversal of general CECL reserves which was primarily attributable to seasoning of and a reduction in the size of our loan portfolio.
Results of Operations – Nine Months Ended September 30, 2023 and September 30, 2022
The following table sets forth information regarding our consolidated results of operations for nine months ended September 30, 2023 and 2022 ($ in thousands, except per share data):
210,738
194,878
15,860
11,136
26,996
(756
(928
8,100
5,292
8,240
706
22,212
(29,515
(8,934
(294
(135,451
(162,824
(91
(162,733
(1.17
Comparison of the nine months ended September 30, 2023 and September 30, 2022
Revenue increased $27.0 million during the nine months ended September 30, 2023, compared to the nine months ended September 30, 2022. The increase is primarily due to an increase in net interest income of $15.9 million for the comparative period, which was driven by an increase in interest income of $210.7 million, primarily as a result of an increased loans receivable balance and reference rate increases, partially offset by an increase in interest expense of $194.9 million as a result of increased borrowing levels and reference rate increases. Further, revenue from real estate owned increased $11.1 million compared to the prior period due to higher occupancy, ADR, and RevPAR levels at the hotel portfolio compared to the nine months ended September 30, 2022 and revenue generated from the mixed-use property we acquired legal title to on June 30, 2023.
Expenses are primarily comprised of base management fees payable to our Manager, incentive fees payable to our Manager, general and administrative expenses, stock-based compensation expense, operating expenses from real estate owned, interest expense from debt related to real estate owned, and depreciation and amortization on real estate owned and related in-place and other lease values. Expenses increased by $22.2 million, during the nine months ended September 30, 2023, as compared to the nine months ended September 30, 2022, primarily due to:
During the nine months ended September 30, 2022, we realized a gain on sale of loan of $30.1 million compared to a gain on sale of loan of $0.6 million realized during the nine months ended September 30, 2023.
Proceeds from interest rate cap were $4.4 million higher during the comparative period due to SOFR exceeding our interest rate cap's 3% strike rate during 2023.
During the nine months ended September 30, 2023, we recognized a $3.3 million unrealized loss on interest rate cap, compared to a $5.6 million unrealized gain on interest rate cap during the nine months ended September 30, 2022. The fair value of the interest rate cap increases as interest rates increase, decreases as the interest rate cap approaches maturity, and further fluctuates following shifts in the forward curve.
During the nine months ended September 30, 2023, we recognized income from equity method investment of $0.6 million compared to $0.9 million recognized during the nine months ended September 30, 2022 as a result of income earned by our investee.
During the nine months ended September 30, 2023, we recognized a gain on extinguishment of debt of $2.2 million, inclusive of $485,000 of unamortized deferred financing costs, as a result of the retirement of $22.0 million of principal of our secured term loan for a price of $19.3 million.
During the nine months ended September 30, 2023, we recorded a provision for current expected credit losses of $148.4 million, primarily attributable to a $90.7 million increase in our specific CECL reserves, partially offset by a $3.1 million reversal of general CECL reserves which was primarily attributable to seasoning of and a reduction in the size of our loan portfolio. During the nine months ended September 30, 2022, we recorded a provision for current expected credit losses of $13.0 million, primarily attributable to a principal charge off of $11.5 million and an increase in the size of our loan portfolio.
Liquidity and Capital Resources
Capitalization
We have capitalized our business to date primarily through the issuance of shares of our common stock and borrowings under our secured financings and our secured term loan. As of September 30, 2023, we had 138,728,690 shares of our common stock outstanding, representing $2.3 billion of equity and we also had $5.7 billion of outstanding borrowings under our secured financings, our secured term loan, and our debt related to real estate owned. As of September 30, 2023, our secured financings consisted of six repurchase agreements with capacity of $5.1 billion and an outstanding balance of $3.8 billion, a term participation facility with a capacity of $1.0 billion and an outstanding balance of $346.1 million, eight asset-specific financings with capacity of $674.1 million and an outstanding balance of $489.9 million, and an acquisition facility with a capacity of $150.0 million and no outstanding balance. As of September 30, 2023, our secured term loan had an outstanding balance of $727.4 million and our debt related to real estate owned had an outstanding balance of $290.0 million.
Net Debt-to-Equity Ratio and Total Leverage Ratio
Net Debt-to-Equity Ratio and Total Leverage Ratio are non-GAAP measures that we use to evaluate our financial leverage, which in the case of our Total Leverage Ratio, makes certain adjustments that we believe provide a more conservative measure of our financial condition.
Net Debt-to-Equity Ratio is calculated as the ratio of asset specific debt (repurchase agreements, term participation facility, loan participations sold, net, notes payable, net, and debt related to real estate owned, net) and secured term loan, less cash and cash equivalents to total equity.
Total Leverage Ratio is similar to Net Debt-to-Equity Ratio; however, it includes non-consolidated senior interests sold and non-consolidated senior interests held by third parties. Non-consolidated senior interests sold and non-consolidated senior interests held by third parties, as applicable, are secured by the same collateral as our loan and are structurally senior in repayment priority relative to our loan. We believe the inclusion of non-consolidated senior interests sold and non-consolidated senior interests held by third parties provides a meaningful measure of our financial leverage.
The following table presents our Net Debt-to-Equity and Total Leverage Ratios as of September 30, 2023 and December 31, 2022 ($ in thousands):
Asset specific debt
4,935,633
4,927,098
Total debt
5,648,909
5,663,951
Less: cash and cash equivalents
(307,367
(306,456
Net Debt
5,341,542
5,357,495
Net Debt-to-Equity Ratio
2.3x
2.2x
Non-consolidated senior loans
887,300
968,302
Total Leverage
6,228,842
6,325,797
Total Leverage Ratio
2.7x
2.6x
Sources of Liquidity
Our primary sources of liquidity include cash and cash equivalents, interest income from our loans, loan repayments, available borrowings under our repurchase agreements, identified borrowing capacity related to our notes payable and loan participations sold, proceeds from the issuance of incremental secured term loan or other corporate debt issuances, and proceeds from the issuance of our common stock. As circumstances warrant, we and our subsidiaries may also issue common equity, preferred equity and/or debt or incur other debt, including term loans, from time to time on an opportunistic basis, dependent upon market conditions and available pricing. The following table sets forth, as of September 30, 2023 and December 31, 2022, our sources of available liquidity ($ in thousands):
Loan principal payments held by servicer(1)
Approved and undrawn credit capacity
124,457
213,113
Total sources of liquidity
432,513
519,569
We have $438.0 million unpaid principal balance of unencumbered loans and we have unencumbered real estate owned and net lease intangible assets with a carrying value of $143.6 million at September 30, 2023. Our ability to finance certain of these unencumbered loans, or our real estate owned asset is subject to one or more counterparties' willingness to finance such loans.
Liquidity Needs
In addition to our 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, certain financial covenants in our financing agreements require us to maintain minimum levels of liquidity. We currently maintain, and seek to maintain, cash and liquidity to comply with minimum liquidity requirements under our financings, and we also maintain and seek to maintain excess cash and liquidity to, if necessary, de-lever certain of our secured financings, including our repurchase agreements.
As of September 30, 2023, we had aggregate unfunded loan commitments of $1.3 billion which is comprised of funding for capital expenditures and construction, leasing costs, and interest and carry costs. The timing of these fundings will vary depending on the progress of capital projects, leasing, and cash flows at the properties securing our loans. Therefore, the exact timing and amounts of such future loan fundings are uncertain and will depend on the current and future performance of the underlying collateral assets. We expect to fund our loan commitments over the remaining maximum term of the related loans, which have a weighted-average future funding period of 3.2 years.
We may from time to time use capital to retire, redeem, or repurchase our equity or debt securities, term loans or other debt instruments through open market purchases, privately negotiated transactions or otherwise. The execution of such repurchases, redemptions or retirements, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and/or other factors.
Contractual Obligations and Commitments
Our contractual obligations and commitments as of September 30, 2023 were as follows ($ in thousands):
Payment Timing
TotalObligations
Less than1 year
1 to3 years
3 to5 years
More than5 years
Unfunded loan commitments(1)
1,342,435
903,131
312,101
127,203
Secured financings, term loan agreement, and debt re- lated to real estate owned - principal and interest(2)(3)
6,734,606
1,570,429
3,699,470
1,464,707
8,077,041
2,473,560
4,011,571
1,591,910
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.
Loans Receivable Maturities
The following table summarizes the future scheduled repayments of principal based on fully extended maturity dates for our loans receivable portfolio as of September 30, 2023 ($ in thousands):
UnpaidPrincipalBalance(1)
971,375
1,010,202
771,268
802,797
1,871,930
2,411,374
2,722,644
3,444,175
316,955
328,059
6,924,172
8,266,607
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, 2023 and 2022, respectively ($ in thousands):
Net cash flows provided by operating activities
Net cash flows provided by (used in) investing activities
Net cash flows (used in) provided by financing activities
Net decrease in cash, cash equivalents, and restricted cash
We experienced a net decrease in cash and cash equivalents and restricted cash of $17.6 million during the nine months ended September 30, 2023, compared to a net decrease of $71.5 million during the nine months ended September 30, 2022.
During the nine months ended September 30, 2023, we made initial fundings of $101.1 million of new loans and $510.9 million of advances on existing loans and made repayments on financings arrangements of $757.1 million. We received $723.9 million of net proceeds from borrowings under our financing arrangements and received $523.3 million from loan repayments.
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 hotel portfolio 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, 2023, we were in compliance with all REIT requirements.
Refer to Note 13 to our consolidated financial statements for additional information about our income taxes.
Off-Balance Sheet Arrangements
As of September 30, 2023, we had no off-balance sheet arrangements aside from those discussed in Note 3 - Loans Portfolio, Note 4 - Equity Method Investment, and Note 14 - Commitments and Contingencies.
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.
The CECL reserve required under ASU 2016-13 “Financial Instruments – Credit Losses – Measurement of Credit Losses on Financial Instruments (Topic 326)” (“ASU 2016-13”), reflects our current estimate of potential credit losses related to our loan portfolio.
Changes to the CECL reserve are recognized through a provision for or reversal of current expected credit loss reserve on our consolidated statements of operations. ASU 2016-13 specifies the reserve should be based on relevant information about past events, including historical loss experience, current portfolio, market conditions and reasonable and supportable macroeconomic forecasts for the duration of each loan.
For our loan portfolio, we perform a quantitative assessment of the impact of CECL using the Weighted Average Remaining Maturity, or WARM, method. The application of the WARM method to estimate a general CECL reserve requires judgment, including the appropriate historical loan loss reference data, the expected timing and amount of future loan fundings and repayments, the current credit quality of our portfolio, and our expectations of performance and market conditions over the relevant time period.
In certain circumstances we may determine that a loan is no longer suited for the WARM method due to its unique risk characteristics or where we have deemed the borrower/sponsor to be experiencing financial difficulty and the repayment of the loan’s principal is collateral-dependent. We may instead elect to employ different methods to estimate loan losses that also conform to ASU 2016-13 and related guidance.
For such loan we would separately measure the specific reserve for each loan by using the fair value of the loan's collateral. If the fair value of the loan's collateral is less than the carrying value of the loan, an asset-specific reserve is created as a component of our overall current expected credit loss reserve. Specific reserves are equal to the excess of a loan’s carrying value to the fair value of the collateral, less estimated costs to sell, if recovery of our investment is expected from the sale of the collateral.
If we have determined that a loan or a portion of a loan is uncollectible, we will write-off such portion of the loan through an adjustment to our current expected credit loss reserve. Significant judgment is required in determining impairment and in estimating the resulting credit loss reserve, and actual losses, if any, could materially differ from those estimates.
We account for acquisitions of real estate, including foreclosures, deed-in-lieu of foreclosures, or assignment-in-lieu of foreclosures, in accordance with ASC 805, Business Combinations, which first requires that we determine if the real estate investment is the acquisition of an asset or a business combination. Under this model, we identify and determine the fair value of any assets acquired
and liabilities assumed. This generally results in the allocation of the purchase price to the assets acquired and liabilities assumed based on the relative fair values of each respective asset and liability. Debt related to real estate owned is non-recourse to us and is initially recorded at its estimated fair value at the time of foreclosure, deed-in-lieu of foreclosure, or assignment-in-lieu of foreclosure.
Real estate assets are evaluated for indicators of impairment on a quarterly basis. Factors that we may consider in our impairment analysis include, among others: (1) significant underperformance relative to historical or anticipated operating results; (2) significant negative industry or economic trends; (3) costs necessary to extend the life or improve the real estate asset; (4) significant increase in competition; and (5) ability to hold and dispose of the real estate asset in the ordinary course of business. A real estate asset is considered impaired when the sum of estimated future undiscounted cash flows expected to be generated by the real estate asset over the estimated remaining holding period is less than the carrying amount of such real estate asset. Cash flows include operating cash flows and anticipated capital proceeds generated by the real estate asset. If the sum of such estimated undiscounted cash flows is less than the carrying amount of the real estate asset, an impairment charge is recorded equal to the excess of the carrying value of the real estate asset over the fair value.
When determining the fair value of a real estate asset, we make certain assumptions including, but not limited to, consideration of projected operating cash flows, comparable selling prices and projected cash flows from the eventual disposition of the real estate asset based upon our estimate of a capitalization rate and discount rate.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Interest Rate Risk
In early 2022, the Federal Reserve began a campaign to combat inflation by increasing interest rates. By the end of 2022, the Federal Reserve had raised interest rates by a total of 4.25%. During the nine months ended September 30, 2023, the Federal Reserve raised rates another 1.00% and signaled the potential for further increases in coming quarters to the extent necessary to tame inflation. Higher interest rates imposed by the Federal Reserve may continue to increase our interest expense, negatively impact the ability of our borrowers to service their debt, and reduce the value of the CRE collateral underlying our loans.
Rising interest rates will generally increase our net interest income, while declining interest rates will generally decrease our net interest income.
The following table illustrates as of September 30, 2023 the impact on our interest income and interest expense for the twelve-month period following September 30, 2023 assuming a decrease in SOFR of 50 and 100 basis points and an increase in SOFR of 50 and 100 basis points in the applicable interest rate benchmark (based on SOFR of 5.32% as of September 30, 2023) ($ in thousands):
Net Floating
Decrease
Increase
Rate Exposure
Change in
100 Basis Points
50 Basis Points
(11,873
(5,937
5,937
11,873
Net interest income per share
(0.08
(0.04
0.04
0.08
Risks related to fluctuations in cash flows and asset values associated with movements in interest rates may also contribute to the risk of nonperformance on floating rate assets. In the case of a significant increase in interest rates, the cash flows of the collateral real estate assets to our loans may be insufficient to pay debt service due, which may contribute to nonperformance of, or in severe cases default on, our loans. We seek to manage this risk by, among other things, generally requiring our borrowers to acquire interest rate caps from an unaffiliated third-party.
Credit Risk
Our loans and other investments are also subject to credit risk, including the risk of default. In particular, changes in general economic conditions, including interest rates, will affect the creditworthiness of borrowers and/or the value of underlying real estate collateral relating to our investments. By its very nature, our investment strategy emphasizes prudent risk management and capital preservation by primarily originating senior loans utilizing underwriting techniques requiring 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 by performing extensive due diligence on our collateral, borrower and guarantors, as applicable, evaluating, 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 origination, we also manage credit risk by proactively monitoring our investments 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 (including interest rates) 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.
Capital Markets Risks
We are exposed to risks related to the equity and debt capital markets which impact our related ability to raise capital through the issuance of our common stock or other debt or equity-related 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 constantly monitoring the debt and equity capital markets, the maturity profile of our in-place loan portfolio and financings, and future funding requirements on our loan portfolio to inform our decisions on the amount, timing, and terms of any capital we may raise.
Each of our repurchase agreements contain “margin maintenance” provisions, which allow the lender to require the delivery of cash or other assets to reduce the financing amount against loans that have been deemed to have experienced a diminution in value. A substantial deterioration in the commercial real estate capital markets may negatively impact the value of assets financed with lenders that have margin maintenance provisions in their facilities. Certain of our repurchase agreements permit valuation adjustments solely as a result of collateral-specific credit events, while other repurchase agreements contain provisions also allowing our lenders to make margin calls upon the occurrence of adverse changes in the capital markets or as a result of interest rate or spread fluctuations, subject to minimum thresholds, among other factors. As of September 30, 2023, we have not received any margin calls under any of our repurchase agreements.
During 2023, there was significant volatility in the banking sector resulting from several bank failures. While we neither maintained nor maintain any accounts at these failed banks, substantially all of our cash and cash equivalents currently on deposit with major financial institutions exceed insured limits. Such deposits are redeemable upon demand and are maintained with financial institutions with strong credit profiles and we therefore believe bear minimal risk. Further, we do not and have not had any financing relationships with any of the banks that have recently failed, and thus none of our future fundings are subject to the risk that one of the failed banks will not fund.
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 is contractually obligated to 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.
Repayment / 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. 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 or request additional extension options. The granting of these extensions may cause a loan’s term to extend beyond the term of its related secured financing. Higher interest rates may also increase the number of our borrowers who may default because, among other things, they may not be able to find replacement financing for our loan. 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.
Counterparty Risk
The nature of our business requires us to hold cash and cash equivalents with various financial institutions, as well as obtain financing from various financial institutions. This exposes us to the risk that these financial institutions may not fulfill their obligations to us under various contractual arrangements. We mitigate this exposure by depositing our cash and cash equivalents and entering into financing agreements with high credit-quality institutions.
Our relationships with our lenders subject us to counterparty risks including the risk that a counterparty is unable to fund undrawn credit capacity, particularly if such counterparty enters bankruptcy. We seek to manage this risk by diversifying our financing sources across counterparties and financing types and generally obtaining financing from high credit quality institutions.
The nature of our loans and other investments also exposes us to the risk that our borrowers 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 fraudulent behavior and other bad acts by borrowers, as well as require borrowers to adhere to their stated business plans while the loan is outstanding. Such protections may 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.
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. 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 interest rate environment; persistent inflation; increases in remote work trends; COVID-19 pandemic; national, regional, local and foreign economic conditions (which may be adversely affected by industry slowdowns and other factors); changes in social conditions; regional or local real estate conditions; geopolitical volatility, changes or continued weakness in specific industry segments; construction quality, age and design; demographic factors; changes to building or similar codes and regulatory requirements (such as rent control); and changes in real property tax rates. 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 and participation 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 COVID-19 pandemic, geopolitical volatility, and recent rapid increase in interest rates and the resulting market disruptions therefrom 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.
Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed in our reports filed or submitted 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, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
As of September 30, 2023, 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, 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, 2023.
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, 2023, we were not involved in any material legal proceedings. Refer to Note 14 to our consolidated financial statements for information on our commitments and contingencies.
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.
Item 6. Exhibits.
Exhibit
Number
Description
3.1
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)
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*
Second Amendment to Amended and Restated Guarantee Agreement, dated as of August 24, 2023, by and between the Company and Goldman Sachs Bank USA.
10.2*
Extension Option Acknowledgement Letter, dated as of September 29, 2023, regarding that certain Master Repurchase and Securities Contract, dated as of September 29, 2021, by and between CMTG WF Finance LLC and Wells Fargo Bank, National Association, as amended, and that certain Guarantee Agreement made by the Company in favor of Wells Fargo Bank, National Association, dated as of September 29, 2021, by and among the Company, CMTG WF Finance LLC, and Wells Fargo Bank, National Association.
10.3*
Second Amendment to Guaranty, dated as of October 5, 2023, by and between the Company and Morgan Stanley Bank, N.A.
10.4
Amendment No. 4 to Amended and Restated Master Repurchase Agreement and Amendment No. 2 to Guarantee Agreement, dated as of July 28, 2023, by and among the Company, CMTG JP Finance LLC and JPMorgan Chase Bank, National Association (incorporated by reference to Exhibit 10.3 to the Quarterly Report on Form 10-Q, dated August 1, 2023, filed by the Company, Commission File No. 001-40993).
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 Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: October 31, 2023
By:
/s/ Richard J. Mack
Richard J. Mack
Chief Executive Officer and Chairman
(Principal Executive Officer)
/s/ Jai Agarwal
Jai Agarwal
Chief Financial Officer
(Principal Financial and Accounting Officer)