The following discussion should be read in conjunction with our unaudited consolidated financial statements and notes thereto appearing elsewhere in this quarterly report on Form 10-Q. References herein to "Claros Mortgage Trust ," "Company", "we", "us" or "our" refer toClaros Mortgage Trust, Inc. and its subsidiaries unless the context specifically require otherwise. We make forward-looking statements in this quarterly report that are subject to risks and uncertainties. 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, we intend to identify forward-looking statements. Statements regarding the following subjects, among others, may be forward-looking: • our business and investment strategy; • our projected operating results; • the timing of cash flows, if any, from our investments;
• the state of the
geographic regions; • the duration and the severity of the COVID-19 pandemic, actions that may
be taken by governmental authorities to contain the COVID-19 pandemic or
to treat its impact and the adverse impacts that the COVID-19 pandemic
has had, and will likely continue to have, on the global economy and on
our business, financial condition, liquidity, results of operations and
prospects and on our ability to service our debt and pay dividends to our
stockholders, including as a result of the COVID-19 pandemic's adverse
impact on the net worth, liquidity and other ability of borrowers or any
guarantors to honor their obligations to us; • defaults by borrowers in paying debt service on outstanding loans;
• governmental actions and initiatives and changes to government policies;
• the amount of commercial mortgage loans requiring refinancing;
• our ability to obtain financing arrangements on attractive terms, or at all;
• current and prospective financing costs and advance rates for our target
assets; • our expected leverage; • general volatility of the securities markets in which we may invest; • the impact of a protracted decline in the liquidity of credit markets on
our business; • the uncertainty surrounding the strength of the global economy;
• the return on or impact of current and future investments, including our
loan portfolio and real estate owned investment;
• allocation of investment opportunities to us by our Manager and our Sponsor;
• changes in interest rates and the market value of our investments; • effects of hedging instruments on our target assets;
• rates of default or decreased recovery rates on our target assets and
related impairment charges, including as it relates to our real estate owned investment;
• the degree to which our hedging strategies may or may not protect us from
interest rate volatility; • changes in governmental regulations, tax law and rates, and similar matters (including interpretation thereof); • our ability to maintain our qualification as a REIT;
• our ability to maintain our exclusion from registration under the 1940 Act;
• availability and attractiveness of investment opportunities we are able
to originate in our target assets; • the ability of our Manager to locate suitable investments for us, monitor, service and administer our investments and execute our investment strategy; 40
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• availability of qualified personnel from our Sponsor and its affiliates,
including our Manager;
• estimates relating to our ability to pay dividends to our stockholders in
the future; • our understanding of our competition; • impact of increased competition on projected returns; and
• market trends in our industry, interest rates, real estate values, the
debt markets generally, the CRE debt market or the general economy.
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. You should not place undue reliance on these forward-looking statements. These beliefs, assumptions and expectations can change as a result of many possible events or factors, not all of which are known to us. Factors that could cause or contribute to these differences include, but are not limited to, those identified below and those discussed in the section titled "Risk Factors" of this filing. If a change occurs, our business, financial condition, liquidity, results of operations and prospects may vary materially from those expressed in our forward-looking statements. Any forward-looking statement speaks only as of the date on which it is made. New risks and uncertainties arise over time, and it is not possible for us to predict those events or how they may affect us. Except as required by law, we are not obligated to, and do not intend to, update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Introduction We are a CRE finance company focused primarily on originating senior and subordinate loans on transitional CRE assets located in majorU.S. markets, including mortgage loans secured by a first priority or subordinate mortgage on transitional CRE assets, and subordinate loans including mezzanine loans secured by a pledge of equity ownership interests in the direct or indirect property owner rather than directly in the underlying commercial properties. These loans are subordinate to a mortgage loan but senior to the property owner's equity ownership interests. Transitional CRE assets are properties that require repositioning, renovation, rehabilitation, leasing, development or redevelopment or other value-added elements in order to maximize value. We believe our Sponsor's real estate development, ownership and operations experience and infrastructure differentiates us in lending on these transitional CRE assets. Our objective is to be a premier 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 majorU.S. markets with attractive fundamental characteristics supported by macroeconomic tailwinds. We were organized as aMaryland corporation onApril 29, 2015 and commenced operations onAugust 25, 2015 , and are traded on theNew York Stock Exchange , or NYSE, under the symbol "CMTG". We have elected and believe we have qualified to be taxed as a REIT forU.S. federal income tax purposes commencing with our taxable year endedDecember 31, 2015 . We are externally managed and advised by our Manager, an investment adviser registered with theSEC pursuant to the Advisers Act. We operate our business in a manner that permits us to maintain our exclusion from registration under the 1940 Act.
I. Key Financial Measures and Indicators
As a CRE finance company, we believe the key financial measures and indicators for our business are net income per share, dividends declared per share, Distributable Earnings per share, Net Distributable Earnings per share, book value per share, Net Debt-to-Equity Ratio and Total Leverage Ratio. During the three months endedSeptember 30, 2021 , we had net income per share of$0.40 , declared dividends of$0.37 per share, had Distributable Earnings per share of$0.34 , and had Net Distributable Earnings of$0.34 per share. As ofSeptember 30, 2021 , our book value per share was$18.78 , our Net-Debt-to-Equity Ratio was 1.8x, and our Total Leverage Ratio was 2.1x. We use Net Debt-to-Equity Ratio and Total Leverage Ratio, financial measures which are not prepared in accordance with GAAP, to evaluate our financial leverage, which in the case of our Total Leverage Ratio, makes certain adjustments that we believe provide a more conservative measure of our financial condition. 41
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Net Income Per Share and Dividends Declared Per Share
The following table sets forth the calculation of basic and diluted net income per share and dividends declared per share (in thousands, except share and per share data): Three Months Ended September 30, 2021 June 30, 2021 Net income attributable to common stock$ 52,877
133,433,487
133,433,487
Basic and diluted net income per share of common stock $ 0.40 $ 0.31 Dividends declared per share of common stock $ 0.37 $ 0.37
(1) Amounts for the three months ended
include 584,767 fully vested RSUs, which were delivered on
Excludes 1,097,293 shares of common stock underlying unvested RSUs that
vested in full in connection with the Company's initial public offering.
Distributable Earnings and Net Distributable Earnings
Distributable Earnings and Net Distributable Earnings are non-GAAP measures used to evaluate our performance excluding the effects of certain transactions, non-cash items and GAAP adjustments, as determined by our Manager, that we believe are not necessarily indicative of our current performance and operations. Distributable Earnings is a non-GAAP measure, which we define as net income as determined in accordance with GAAP, excluding (i) non-cash equity compensation expense (income), (ii) incentive fees, (iii) real estate depreciation and amortization, (iv) 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, (v) one-time events pursuant to changes in GAAP and (vi) certain non-cash items, which in the judgment of our Manager, should not be included in Distributable Earnings. Net Distributable Earnings is Distributable Earnings less incentive fees due to our Manager. Pursuant to the Management Agreement, we use Core Earnings, which is substantially the same as Distributable Earnings, to determine the incentive fees we pay our Manager. Distributable Earnings is substantially the same as Core Earnings, as defined in the Management Agreement, for the periods presented. We believe that Distributable Earnings and Net Distributable Earnings provide meaningful information to consider in addition to our net income and cash flows from operating activities determined in accordance with GAAP. We believe the Distributable Earnings and Net Distributable Earnings measures help us to evaluate our performance excluding the effects of certain transactions, non-cash items and GAAP adjustments, as determined by our Manager, that we believe are not necessarily indicative of our current performance and operations. Distributable Earnings and Net Distributable Earnings do not represent net income or cash flows from operating activities and should not be considered as an alternative to GAAP net income, an indication of our cash flows from operating activities, a measure of our liquidity or an indication of funds available for our cash needs. In addition, our methodology for calculating Distributable Earnings and Net Distributable Earnings may differ from the methodologies employed by other companies to calculate the same or similar supplemental performance measures and, accordingly, our reported Distributable Earnings and Net Distributable Earnings may not be comparable to the Distributable Earnings and Net Distributable Earnings 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. Net Distributable Earnings, and other similar measures, have historically been a useful indicator of mortgage REITs' ability to cover their dividends, and to mortgage REITs themselves in determining the amount of any dividends. Net Distributable Earnings is a key factor, among others, considered by the board of directors in setting the dividend and as such we believe Net Distributable Earnings is useful to investors. Accordingly, we believe providing Net Distributable Earnings on a supplemental basis to our net income as determined in accordance with GAAP is helpful to our stockholders in assessing the overall performance of our business. While Distributable Earnings and Net Distributable Earnings excludes the impact of our unrealized current provision for credit losses, loan losses are charged off and recognized through Distributable Earnings when deemed non-recoverable. Non-recoverability is determined (i) upon the resolution of a loan (i.e. when the loan is repaid, fully or partially, or in the case of foreclosure, when the underlying asset is sold), or (ii) with respect to any amount due under any loan, when such amount is determined to be non-collectible. During the nine months endedSeptember 30, 2021 , we recorded a net reversal of$17.4 million in the CECL reserve, which has been excluded from Distributable Earnings and Net Distributable Earnings. During the nine months endedSeptember 30, 2021 , no loan losses were charged off and recognized through Distributable Earnings. 42 --------------------------------------------------------------------------------
The following table provides a reconciliation of net income attributable to common stock to Distributable Earnings and Net Distributable Earnings (in thousands, except share and per share data):
Three Months Ended September 30, 2021 June 30, 2021 Net income attributable to common stock:$ 52,877 $ 42,021 Adjustments: Non-cash equity compensation expense (186 )
1,452
Current expected credit loss reserve (9,306 ) (7,922 ) Income tax benefit - (1,881 ) Depreciation expense 1,940 1,940 Distributable Earnings$ 45,325 $ 35,610 Less: incentive fee adjustments $ - $ - Net Distributable Earnings$ 45,325
133,433,487
133,433,487
Basic and diluted earnings per share $ 0.40 $ 0.31 Distributable Earnings per share, basic and diluted $ 0.34 $ 0.27 Net Distributable Earnings per share, basic and diluted $ 0.34 $ 0.27
(1) For the three months ended
584,767 shares of our common stock underlying fully vested RSUs, which were
settled on
underlying unvested RSUs that vested in full in connection with the Company's
initial public offering.
Book Value Per Share
The following table sets forth the calculation of our book value per share (in thousands, except share and per share data):
September 30, 2021 December 31, 2020 Total Stockholders' Equity(1)$ 2,543,311 $ 2,622,386 Non-controlling interest (37,143 ) (35,286 ) Preferred Stock (125 ) (125 ) Stockholders' Equity, Net of Preferred Stock and Non-controlling interest$ 2,506,043 $ 2,586,975 Number of Shares Common Stock Outstanding at Period End(1)(2) 133,433,487 133,726,218 Book Value per share(2)$ 18.78 $ 19.35
(1) Includes 7,306,984 shares of our common stock outstanding as of
2021, that are classified as redeemable common stock on our balance sheet.
The stockholder's contractual redemption right terminated upon completion of
our initial public offering in
previously subject to that right were reclassified as common stock on our
balance sheet.
(2) Calculated as (i) total stockholders' equity less non-controlling interest
and preferred stock divided by (ii) number of shares of common stock
outstanding at period end, which as of (x)
shares of common stock underlying RSUs that were vested in full but not yet
settled and (y)
stock underlying RSUs that were vested in full and settled, in each case as
of period end. Excludes 1,097,293 shares of common stock underlying unvested
RSUs that vested in full upon completion of our initial public offering inNovember 2021 . 43
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II. Our Portfolio
The below table summarizes our loan portfolio as ofSeptember 30, 2021 (dollars in thousands): Weighted Average(3) Term to Number Unpaid Term to Fully Number of of Principal All-In Initial Extended Investments (1) Loans(1) Loan
Commitment(2) Balance Yield(4) Maturity(5) Maturity(5) LTV(6) Senior loans(7) 52 89 $ 7,022,870$ 6,010,976 6.0 % 1.4 2.9 66.3 % Subordinate loans 6 8 459,571 435,577 11.3 % 0.2 2.2 63.5 % Total / Weighted Average 58 97 $ 7,482,441$ 6,446,553 6.4 % 1.3 2.9 66.1 %
(1) Certain investments include multiple loans for which we made commitments to
the same borrower or affiliated borrowers on the same date. The loan
portfolio table excludes our one real estate owned investment.
(2) Loan commitment represents initial loan commitments, as adjusted by
commitment reductions, less principal repayments and transfers which
qualified for sale accounting under GAAP.
(3) Weighted averages are based on unpaid principal balance.
(4) All-in yield represents the weighted average annualized yield to initial
maturity of each loan within our loan portfolio, inclusive of coupon,
origination fees, exit fees, and extension fees received, based on the
applicable floating benchmark rate (if applicable), including LIBOR floors
(if applicable), as of
(5) Term to initial and fully extended maturity are measured in years. Fully
extended maturity assumes all extension options are exercised by the borrower
upon satisfaction of the applicable conditions.
(6) LTV represents "loan-to-value" or "loan-to-cost", which is calculated as our
total loan commitment from time to time, as if fully funded, plus any
financings that are pari passu with or senior to our loan, divided by our
estimate of either (1) the value of the underlying real estate, determined in
accordance with our underwriting process (typically consistent with, if not
less than, the value set forth in a third-party appraisal) or (2) the
borrower's projected, fully funded cost basis in the asset, in each case as
we deem appropriate for the relevant loan and other loans with similar
characteristics. Underwritten values and projected costs should not be
assumed to reflect our judgment of current market values or project costs,
which may have changed materially since the date of origination including,
without limitation, as a result of the COVID-19 pandemic. LTV is updated only
in connection with a partial loan paydown and/or release of collateral,
material changes to expected project costs, the receipt of a new appraisal
(typically in connection with financing or refinancing activity) or a change
in our loan commitment.
(7) Includes contiguous subordinate loans (i.e., loans for which we also hold the
mortgage loan) representing loan commitments of
unpaid principal balance of
Portfolio Activity and Overview
The following table summarizes changes in unpaid principal balance within our portfolio, for both our loans and for our interests in loans (i.e., loans in which we have acquired an interest in a loan for which the transferor did not account for the transaction as a sale under GAAP) (dollars in thousands): Three Months Ended Nine Months Ended September 30, 2021 September 30, 2021 Interests Interests Loans in Loans in Loans Receivable Receivable
Total Loans Receivable Receivable Total Unpaid principal balance, beginning of period
$ 5,719,392 $ 410,225 $
6,129,617
745,034 - 745,034 842,154 - 842,154 Advances on loans 220,802 27,213 248,015 502,345 101,171 603,516 Loan repayments (675,463 ) (650 ) (676,113 ) (1,383,164 ) (3,340 ) (1,386,504 ) Transfer to real estate owned, net - - - (103,901 ) - (103,901 ) Total net fundings (repayments)$ 290,373 $ 26,563 $ 316,936 $ (142,566 )$ 97,831 $ (44,735 ) Unpaid principal balance, end of period$ 6,009,765 $ 436,788 $ 6,446,553 $ 6,009,765 $ 436,788 $ 6,446,553 44
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The following table details our loan investments individually based on unpaid
principal balances as of
Weighted Average(3) Fully Principal Carrying Initial Extended Loan Number(1) Loan type Origination Date Loan Commitment(2) Outstanding Value Maturity Maturity(7) LTV Property Type Construction Location Risk Rating Stated Rate(4) All-in Yield 1 Senior11/1/2019 390,000 390,000 388,19611/1/2024 11/1/2026 74.3% Multifamily - NY 3 L + 2.75% 4.35% 2 Senior10/18/2019 330,000 290,124 288,80410/18/2022 10/18/2024 73.3% Condo Y CA 3 L + 4.95% 7.69% 3 Senior7/12/2018 290,000 290,000 290,5038/1/2022 8/1/2023 52.9% Hospitality - NY 4 L + 5.35% 7.57% 4 Senior8/20/2018 370,228 286,365 284,8838/20/2022 8/20/2024 64.2% Mixed-use YVA 2 L + 4.80% 6.84% 5 Senior6/29/2018 306,800 248,311 248,4732/9/2022 8/9/2023 55.0% Mixed-use Y NY 2 L + 4.25% 5.64% 6(5) Subordinate8/22/2019 245,000 237,866 238,47911/9/2021 9/9/2024 68.0% Office - IL 2 L + 8.59% 11.09% 7 Senior12/27/2018 210,000 207,548 207,3252/1/2022 2/1/2025 75.0% Mixed-use - NY 4 L + 2.70% 3.02% 8 Senior8/14/2019 193,129 193,129 193,2918/15/2022 8/15/2022 67.8% Hospitality - NY 3 L + 3.95% 6.86% 9(5) Senior7/26/2018 205,049 188,477 188,4777/9/2021 7/9/2022 39.4% Mixed-use Y CA 2 L + 4.87% 5.46% 10 Senior7/26/2021 225,000 188,457 186,3307/26/2024 7/26/2026 59.1% Hospitality - GA 3 L + 4.80% 5.32% 11(9) Senior3/9/2018 186,500 170,877 170,43212/31/2022 12/31/2022 96.2% Condo Y NY 4 L + 7.91% 9.08% 12 Senior9/30/2019 167,500 155,208 154,8889/9/2022 9/9/2024 56.3% Office - NY 3 L + 3.48% 5.40% 13 Senior2/28/2019 150,000 150,000 150,0002/28/2022 2/28/2024 72.2% Office - CT 3 L + 3.50% 5.28% 14 Senior1/9/2018 148,500 148,500 148,3721/9/2022 1/9/2024 63.8% Hospitality -VA 3 L + 4.25% 5.52% 15(6) Senior9/7/2018 133,600 133,600 133,60010/7/2021 9/7/2023 78.3% Land - NY 3 L + 5.85% 8.10% 16 Senior8/8/2019 154,999 133,590 132,6458/8/2024 8/8/2026 55.8% Multifamily - CA 3 L + 2.95% 5.46% 17 Senior11/27/2019 131,000 131,000 130,46611/27/2022 11/27/2024 77.7% Multifamily - FL 1 L + 2.85% 5.18% 18 Senior9/27/2019 258,400 129,411 127,4469/26/2023 9/26/2026 68.0% Office - GA 3 L + 3.60% 5.85% 19 Senior9/20/2019 225,000 126,006 124,03612/31/2024 12/31/2025 63.1% Condo Y FL 3 L + 6.11% 8.15% 20 Senior12/18/2019 127,500 125,590 124,8846/18/2023 6/18/2025 76.7% Multifamily - FL 2 L + 3.40% 3.94% 21 Senior10/4/2019 263,000 124,240 123,64110/1/2023 10/1/2025 72.6% Mixed-use Y DC 3 L + 3.15% 4.96% 22 Senior9/24/2021 127,535 121,172 120,0309/24/2025 9/24/2027 65.0% Hospitality - TX 3 L + 4.05% 4.37% 23 Senior4/29/2019 120,000 116,638 116,4564/29/2022 4/29/2024 61.5% Mixed-use - NY 3 L + 3.20% 4.98% 24(8) Senior9/21/2018 116,020 116,020 116,21110/1/2020 10/1/2021 40.9% Land - NY 4 L + 5.25% 8.02% 25 Senior7/20/2021 113,500 113,500 112,7097/19/2024 7/20/2026 76.2% Multifamily - IL 3 L + 3.60% 4.12% 26 Senior2/13/2020 124,810 110,517 109,8352/13/2024 2/13/2025 67.8% Office - CA 3 L + 2.75% 4.31% 27 Senior6/8/2018 104,250 104,250 105,3421/15/2022 1/15/2022 78.6% Land - NY 4 L + 7.63% 10.44% 28 Senior10/11/2017 97,500 97,500 97,35910/31/2022 10/31/2023 79.7% Hospitality - CA 3 L + 4.95% 6.00% 29(8) Senior5/5/2017 95,000 95,000 95,0005/31/2021 11/30/2022 76.6% Office - DC 5 L + 3.65% 4.60% 30 Senior8/2/2021 100,000 93,911 93,1598/2/2025 8/2/2026 68.5% Office - CA 3 L + 3.75% 4.14% 31 Senior9/2/2021 166,812 93,139 90,6639/2/2024 9/2/2026 67.8% Other Y GA 3 L + 4.10% 4.85% 32 Senior3/31/2020 87,750 87,750 87,7502/9/2023 2/9/2025 50.2% Office - TX 3 L + 2.75% 4.32% 33 Senior7/10/2018 81,380 81,380 77,53012/10/2023 7/10/2025 91.7% Hospitality - CA 4 L + 3.85% 5.88% 34(5) Senior7/12/2018 81,000 81,000 81,0438/1/2022 8/1/2023 49.1% Hospitality - DC 3 L + 5.35% 7.54% 35(6) Senior11/13/2018 77,500 77,500 77,50010/22/2021 10/22/2022 79.5% Office - NY 4 L + 3.25% 5.31% 36 Senior4/5/2019 75,500 75,500 75,4064/5/2022 4/5/2024 49.0% Mixed-use - NY 3 L + 4.65% 6.99% 37(8) Subordinate3/29/2018 74,562 74,562 75,0521/26/2021 1/26/2021 53.1% Land - NY 4 L + 9.78% 11.26% 45
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Weighted Average(3) Fully Principal Initial Extended All-in Loan Number(1) Loan type Origination Date Loan Commitment(2) Outstanding Carrying Value Maturity Maturity(7) LTV
Property Type Construction Location Risk Rating Stated Rate(4)
Yield 38 Senior12/14/2018 74,100 73,986 73,79112/14/2022 12/14/2023 68.5% Multifamily - DC 2 L + 3.00% 5.31% 39 Senior7/2/2021 87,500 72,574 71,8257/2/2023 7/2/2024 74.4% Land - FL 3 L + 7.31% 8.31% 40 Subordinate9/10/2019 85,682 70,239 70,0693/10/2022 3/10/2024 60.3% Condo - NY 3 L + 9.25% 11.48% 41 Senior12/19/2019 70,000 70,000 69,9196/19/2023 6/19/2024 74.4% Multifamily - PA 2 L + 3.00% 4.66% 42 Senior8/26/2021 84,810 67,710 66,8828/27/2024 8/27/2026 69.0% Office - GA 3 L + 3.50% 4.08% 43(8) Senior8/2/2019 67,000 67,000 67,00010/30/2021 1/30/2022 42.4% Land - NY 3 L + 7.75% 10.67% 44 Senior8/29/2018 60,000 60,000 60,0008/31/2023 8/31/2023 50.8% Hospitality - NY 3 L + 3.85% 4.05% 45 Senior6/3/2021 79,600 46,700 45,9526/3/2024 6/3/2026 68.3% Other - MI 3 L + 3.70% 4.28% 46 Senior6/13/2018 35,721 35,721 35,6876/13/2022 6/13/2023 49.6% Multifamily - PA 1 L + 3.00% 4.19% 47 Senior3/22/2021 110,135 35,013 34,0653/22/2025 3/22/2026 65.0% Other Y MA 3 L + 4.50% 5.56% 48 Subordinate12/21/2018 31,300 31,300 31,45612/21/2021 12/21/2021 50.6% Land - NY 3 L + 9.01% 11.98% 49 Senior4/18/2019 30,000 30,000 29,9135/1/2022 5/1/2023 71.4% Office - MA 3 L + 5.50% 8.21% 50 Senior4/1/2020 141,084 28,904 27,5504/1/2024 4/1/2026 65.0% Office Y TN 3 L + 4.35% 6.10% 51 Senior8/7/2017 28,500 28,500 28,6638/7/2022 8/7/2022 43.3% Condo - NY 2 L + 4.90% 6.33% 52(6) Senior1/15/2020 25,500 25,500 25,75511/9/2021 5/9/2022 64.3% Office - IL 3 L + 7.24% 9.84% 53(5) Senior10/20/2016 17,719 17,719 17,80710/20/2021 10/20/2021 61.3% Mixed-use - MA 1 L + 5.00% 5.86% 54 Senior4/29/2021 17,500 17,500 17,4404/29/2022 4/29/2023 75.8% Land - PA 3 L + 8.00% 10.54% Total/Weighted Average floating rate loans 7,400,475 6,366,004 6,339,990 66.0% L + 4.61% 6.30% 55 Senior8/2/2019 43,939 43,939 44,0732/2/2022 2/2/2024 79.6% Condo - NY 3 10.00% 10.49% 56 Subordinate1/24/2020 22,100 20,683 20,5197/24/2023 7/24/2025 80.0% Multifamily Y PA 3 11.75% 12.10% 57(8) Senior7/1/2019 15,000 15,000 15,00012/30/2020 12/30/2020 n/a Other - n/a 5 15.00% 15.00% 58 Subordinate8/2/2018 927 927 9278/2/2022 8/2/2023 75.8% Other - NY 1 7.15% 7.41% Total/Weighted Average fixed rate loans 81,966 80,549 80,519 79.7% 11.35% 11.71% CECL Allowance (59,442 ) Grand Total 7,482,441 6,446,553 6,361,067 66.1% 6.37%
(1) Certain investments include multiple loans for which we made commitments to
the same borrower or affiliated borrowers on the same date. The loan
portfolio table excludes our real estate owned investment.
(2) Loan commitment represents initial loan commitments, as adjusted by
commitment reductions, less loan repayments and transfers which qualified for
sale accounting under GAAP.
(3) Weighted averages are based on unpaid principal balance.
(4) As of
one-month LIBOR, which was 0.08%. All-in yield represents the weighted
average annualized yield to initial maturity of each loan within our
portfolio, inclusive of coupon, origination fees and exit fees, based on the
applicable floating benchmark rate (if applicable), including LIBOR floors
(if applicable), as of
(5) Subsequent to
(6) Subsequent to
(7) Fully extended maturity assumes all extension options are exercised by the
borrower upon satisfaction of the applicable conditions.
(8) The Company is actively pursuing resolutions to these loans.
(9) Includes a fixed-rate loan with an unpaid principal balance of
and a loan commitment of
floating rate loans with an outstanding principal balance of
and a loan commitment of$146.8 million atSeptember 30, 2021 . 46
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Real Estate Owned, Net OnFebruary 6, 2018 , we originated an$85.0 million mezzanine loan secured by a portfolio of seven limited service hotel properties located inNew York, New York , which was subordinate to a$300.0 million securitized senior mortgage. Following the onset of the COVID-19 pandemic, the hotels were forced to close, causing the borrower to experience financial difficulty which resulted in the borrower not paying debt service on our loan. Beginning inJune 2020 , we began funding debt service on the$300.0 million securitized senior mortgage as protective advances on our loan, which payments totaled$18.9 million throughFebruary 2021 . OnFebruary 8, 2021 , we foreclosed on the portfolio of hotel properties through a Uniform Commercial Code foreclosure. Prior toFebruary 8, 2021 , the hotel portfolio represented the collateral for the$103.9 million mezzanine loan that we held, which was in default as a result of the borrower failing to pay debt service. The hotel portfolio appears as real estate owned, net on our balance sheet and, as ofSeptember 30, 2021 , was encumbered by a$290.0 million securitized senior mortgage, which is included as a liability on our balance sheet. The following table presents additional detail related to the individual components of our real estate owned investment, net as ofSeptember 30, 2021 (dollars in thousands): September 30, 2021 Land $ 123,100 Building 284,400 Furniture, fixtures and equipment 6,500 Real estate assets 414,000 Less: accumulated depreciation (5,173 ) Real estate owned, net $ 408,827
The following table presents additional detail related to the operating
performance of our real estate owned investment for the three months ended
Period from February Three Months Ended 8, 2021 through September 30, 2021 September 30, 2021 Operating revenues $ 8,550 $ 15,620 Operating expenses (7,948 ) (16,739 ) Depreciation (1,940 ) (5,173 ) Net operating loss from real estate owned $ (1,338 ) $ (6,292 ) During the three months endedSeptember 30, 2021 and for the period fromFebruary 8, 2021 throughSeptember 30, 2021 , the Company recognized$2.6 million and$13.0 million of interest expense, excluding amortization of financing costs, related to its debt on real estate owned, net. See "Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations -Loan Portfolio Financing-Debt Related to Real Estate Owned" for further discussion.
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. Due to the impact of COVID-19, some of our borrowers have experienced delays in the execution of their business plans. As a result, we have worked with borrowers to execute loan modifications which typically include additional equity contributions from borrowers, repurposing of reserves, temporary deferrals of interest or principal, and partial deferral of coupon interest as payment-in-kind interest. While we have completed a number of loan modifications to date, we also may continue to make additional modifications depending on the duration of the COVID-19 pandemic and its impact on our borrowers' business plans and our borrowers' financial condition, liquidity and results of operations. 47 --------------------------------------------------------------------------------
Current Expected Credit Losses and Loan Risk Ratings
On
The following table illustrates the quarterly changes in allowance for loan
losses for nine months ended
Interests in loans Specific CECL Loans receivable receivable Accrued interest Unfunded loan Allowance (1) held-for-investment held-for-investment receivable commitments (2) Total Total allowance for loan losses, December 31, 2020$ 6,000 $ - $ - $ - $ -$ 6,000 Initial CECL allowance, January 1, 2021 - 64,274 406 357 13,214
78,251
Increase (reversal) in allowance - 1,547 (141 ) (14 ) (1,577 ) (185 ) Total allowance for loan losses, March 31, 2021$ 6,000 $ 65,821 $ 265 $ 343 $ 11,637$ 84,066 Increase (reversal) in allowance 500 (3,954 ) 270 (33 ) (4,705 ) (7,922 ) Total allowance for loan losses, June 30, 2021$ 6,500 $ 61,867 $ 535 $ 310 $ 6,932$ 76,144 Increase (reversal) in allowance 2,000 (11,154 ) (306 ) (64 ) 218 (9,306 ) Total allowance for loan losses, September 30, 2021$ 8,500 $ 50,713 $ 229 $ 246 $ 7,150$ 66,838 Percent of Unpaid Principal Balance at September 30, 2021 1.0 %
(1) As of
recorded on assets before the adoption of ASU 2016-13. After the adoption of
ASU 2016-13 on
(2) The CECL allowance for unfunded commitments is included in accounts payable
and accrued expenses on our consolidated balance sheets.
Prior to the adoption of ASU 2016-13, the Company had recorded a$6.0 million provision for loan losses against a loan to the personal estate of a former borrower, which had an outstanding principal balance and a carrying value of$15.0 million . The loan is on non-accrual status and is in maturity default. The amount of the loan loss provision is based on the difference between the net present value of the projected cash flows of the loan and its carrying value. AtSeptember 30, 2021 , we determined that the recovery of a senior loan with an outstanding principal balance of$95.0 million , and a maturity date ofMay 31, 2021 was collateral-dependent. Accordingly, this loan was assessed individually, and we have elected to apply a practical expedient in accordance with ASU 2016-13. We recorded an allowance for credit loss of$2.5 million on this loan based on our estimate of fair value of the loan's underlying collateral and a guaranty from the borrower. Our Manager reviews our entire loan portfolio at least quarterly, undertakes an assessment of the performance of each loan, and assigns it a risk rating between "1" and "5," from least risk to greatest risk, respectively. The following table provides a breakdown of our loan portfolio as ofSeptember 30, 2021 based on our internal risk ratings (dollars in thousands): September 30, 2021 Risk Rating Number of Loans Principal Balance Carrying Value 1 4 $ 185,367$ 184,887 2 11 1,259,095 1,257,569 3 66 3,769,954 3,748,158 4 14 1,122,137 1,119,895 5 2 110,000 110,000 97 $ 6,446,553$ 6,420,509 Allowance for loan losses (59,442 )$ 6,361,067 As ofSeptember 30, 2021 the average risk rating of our portfolio was 3.0 based on outstanding principal balance. AtSeptember 30, 2021 , loans with an aggregate outstanding principal balance of$1.1 billion , or 17.4% of the total portfolio, were rated as category 48
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"4". Of the loans rated as category "4", 33.1% relate to loans secured by hospitality assets. The Company had two loans, or 1.7% of the total portfolio, rated as category "5".
Portfolio Financing
Our portfolio financing arrangements include repurchase facilities, asset-specific financing structures, mortgages on real estate owned and Secured Term Loan borrowings.
The following table summarizes our loan portfolio financing (dollars in thousands): September 30, 2021 Unpaid Allocated Unallocated Weighted Principal Undrawn Undrawn Average Capacity Balance(1) Capacity(2) Capacity(3) Coupon(4)
Repurchase agreements$ 4,336,171 $ 3,094,832 $ 392,342 $ 848,997 L + 2.29 % Loan participations sold 592,370 525,447 66,923 - L + 4.50 % Notes payable 48,000 48,000 - - L + 4.00 % Secured Term Loan 762,717 762,717 - - L + 5.00 %
Debt related to real estate owned 290,000 290,000
- - L + 2.78 % Total / weighted average$ 6,029,258 $ 4,720,996 $ 459,265 $ 848,997 L + 3.02 %
(1) Excludes unamortized deferred financing costs relating to loan participations
sold of
financing costs relating to notes payable of
2021. Excludes unamortized deferred financing costs relating to our Secured
Term Loan of
deferred financing costs relating to our debt related to real estate owned of
(2) Allocated undrawn capacity represents undrawn amounts designated for future
identified assets. The drawing of such amounts typically remains subject to
the satisfaction of conditions set forth in the relevant financing
agreements.
(3) Unallocated undrawn capacity represents undrawn amounts that have not yet
been designated for identified assets. The drawing of such amounts typically
remains subject to lender approval of an identified asset in its sole
discretion.
(4) Weighted average coupon based on unpaid principal balance. One-month LIBOR as
of
over the relevant floating benchmark rates.
Repurchase Agreements
We finance certain of our loans using secured revolving repurchase facilities. As ofSeptember 30, 2021 , aggregate borrowings outstanding under our secured revolving repurchase facilities totaled$3.1 billion , with a weighted average coupon of one-month LIBOR plus 2.29% per annum. All weighted averages are based on unpaid principal balance. As ofSeptember 30, 2021 , outstanding borrowings under these facilities had a weighted average term to fully extended maturity (assuming we exercise all extension options and our counterparty agrees to such extension options) of 3.3 years. Each of the secured revolving repurchase facilities involves "margin maintenance" provisions, which are designed to allow the repurchase lender to maintain a certain margin of credit enhancement against the loan assets which serve as collateral. The lender's margin amount is typically based on a percentage of the market value of the loan asset and/or mortgaged property collateral. However, certain of our repurchase facilities permit valuation adjustments solely as a result of collateral-specific credit events, while other repurchase facilities contain provisions also allowing our lenders to make margin calls or require additional collateral upon the occurrence of adverse changes in the markets or interest rate or spread fluctuations, subject to minimum thresholds, among other factors. Since inception throughSeptember 30, 2021 , we have not received any margin calls under any of our repurchase facilities. 49 --------------------------------------------------------------------------------
The following table details our secured revolving repurchase facilities as of
Facility Collateral Unpaid Allocated Unallocated Unpaid Fully Weighted Principal Undrawn Undrawn Principal Initial Extended Average Lender Capacity(1) Balance Capacity(2) Capacity(3) Balance(4) Maturity Maturity(5) Coupon(6) JP Morgan Chase Bank, N.A.$ 1,250,000 $ 994,208 $ 74,648 $ 181,144 $ 1,598,897 6/29/2025 6/29/2027 L + 2.22 % Morgan Stanley Bank, N.A.(9) 1,000,000 859,695 89,004 51,301 1,469,857 1/26/2022 1/26/2024 L + 2.08 % Goldman Sachs Bank USA(7) 750,000 585,027 134,791 30,182 689,497 5/31/2022 5/31/2023 L + 2.23 % Barclays Bank PLC 500,000 201,384 26,679 271,937 283,591 12/20/2021 12/20/2022 L + 1.63 %Wells Fargo Bank , N.A. 300,000 50,783 12,825 236,392 67,710 9/29/2023 9/29/2026 L + 1.50 %JP Morgan Chase Bank, N.A. - Sidecar(8) 271,171 197,717 836 72,618 422,973 5/27/2023 5/27/2024 L + 4.50 % Deutsche Bank AG,New York Branch 265,000 206,018 53,559 5,423 317,868 6/26/2022 6/26/2023
L + 2.35 %
Total / weighted average
L + 2.29 %
(1) Capacity represents the largest amount of borrowings available under a given
facility once sufficient collateral assets have been approved by the lender
and pledged by us.
(2) Allocated undrawn capacity represents undrawn amounts designated for
identified assets. The drawing of such amounts typically remains subject to
the satisfaction of conditions set forth in the relevant financing agreement.
(3) Unallocated undrawn capacity represents undrawn amounts that have not yet
been designated for identified assets. The drawing of such amounts typically
remains subject to lender approval of an identified asset in its sole
discretion.
(4) Represents the unpaid principal balance of the collateral assets approved by
the lender and pledged by us.
(5) Our ability to extend our secured revolving repurchase facilities to the
dates shown above is subject to satisfaction of certain conditions.
(6) One-month LIBOR as of
(7) This financing has a LIBOR floor of 0.35% with respect to transactions where
the initial financing was before
(8) This financing has a LIBOR floor of 0.25%.
(9) One asset on this financing has a LIBOR floor of 1.00% and one asset on this
financing has LIBOR floor of 0.25%. Subsequent to
initial maturity of this financing was extended untilJanuary 26, 2023 . See "Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations -Loan Portfolio Financing-Repurchase Agreements" in our prospectus comprising a part of our Registration Statement on Form S-11 (File No. 333-260140) (the "Prospectus"), which is accessible on theSEC's website at www.sec.gov, for further discussion on our repurchase agreements.
Loan Participations Sold
We finance certain investments via the sale of a participation in the loans we own, however we present the loan participation sold as a liability on our consolidated balance sheet because such arrangement does not qualify as a sale under GAAP. In instances where we have multiple loan participations with the same lender, the financings are generally not cross-collateralized. Each of our loan participations sold is generally term-matched to its corresponding loan collateral. As ofSeptember 30, 2021 , we had five loans financed with separate participations sold to three counterparties.
The following table outlines our loan participations sold as of
Contractual Maximum Carrying Maturity Extension Stated Financing Interest Carrying Value of Date Date Rate (1) Costs
Rate Par Value Value Collateral
Variable:
(2 ) 8/1/2022 8/1/2023 L + 3.10%$ 3,531 4.95 %$ 189,750 $ 189,345 $ 371,546 (3 ) 8/20/2022 8/20/2024 L + 3.50% 1,634 5.25 % 218,609 218,275 284,883 (4 ) 11/9/2021 9/9/2024 L + 5.60% 418 7.60 % 49,535 49,662 121,673 (4 ) 11/9/2021 9/9/2024 L + 11.70% 401 13.70 % 47,553 47,676 116,806 L + 4.33% 5,984 6.16 % 505,447 504,958 894,908
Fixed:
12/31/2024 12/31/2025 9.00% 475
9.00 % 20,000 19,560 124,036
Total/Weighted Average$ 6,459 6.27 %$ 525,447 $ 524,518 $ 1,018,944 50
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(1) All of these floating rate loans and related liabilities are indexed to
one-month LIBOR. One-month LIBOR as of
(2) This financing has a LIBOR floor of 1.85%.
(3) This financing has a LIBOR floor of 1.75%.
(4) This financing has a LIBOR floor of 2.00%. This financing was repaid in full
onDecember 9, 2021 . Notes Payable We finance certain investments on a match-term, non-recourse basis with such financings collateralized by our loans, which we refer to as notes payable. Each of our notes payable is generally term-matched to its corresponding loan collateral. As ofSeptember 30, 2021 , one of our loans was financed with notes payable. AtSeptember 30, 2021 , we have one note payable with a par value of$48.0 million and a carrying value of$47.9 million collateralized by an investment with a carrying value of$117.3 million , inclusive of a cash reserve of$1.1 million . The note accrues interest at LIBOR plus 4.00%, subject to a LIBOR floor of 2.43%, and matures onJanuary 4, 2022 . We have incurred$1.0 million in financing costs related to this note.
Secured Term Loan
OnAugust 9, 2019 , we entered into our Secured Term Loan. Our Secured Term Loan is collateralized by a pledge of equity in certain subsidiaries and their related assets, as well as a first priority security interest in selected assets. OnDecember 1, 2020 , our Secured Term Loan was modified to increase the aggregate principal amount by$325.0 million , increase the interest rate, and increase the quarterly amortization payment. Our Secured Term Loan is presented net of any original issue discount and transaction expenses which are deferred and recognized as a component of interest expense over the life of the loan using the effective interest method. As ofSeptember 30, 2021 , our Secured Term Loan has a par value of$762.7 million and a carrying value of$742.8 million . The Secured Term Loan accrues interest at LIBOR plus 5.00%, subject to a LIBOR floor of 1.00%, and matures onAugust 9, 2026 . We have incurred$25.8 million in financing costs related to the Secured Term Loan. Subsequent toSeptember 30, 2021 , we entered into a refinancing of our Secured Term Loan which reduced the interest rate to the greater of (i) 1-month SOFR plus a 0.10% credit spread adjustment and (ii) 0.50%, plus a credit spread of 4.50%. Our Secured Term Loan includes various customary affirmative and negative covenants, including, but not limited to, reporting requirements and certain operational restrictions, including restrictions on dividends, distributions or other payments from our subsidiaries. As ofSeptember 30, 2021 , we were in compliance with our Secured Term Loan financial covenants. See "Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations -Loan Portfolio Financing-Secured Term Loan" in our Prospectus, which is accessible on theSEC's website at www.sec.gov, for further discussion.
Debt Related to Real Estate Owned
OnFebruary 8, 2021 we assumed a$300.0 million securitized senior mortgage in connection with a Uniform Commercial Code foreclosure on a portfolio of seven limited service hotels located inNew York, New York . InJune 2021 , the Company modified the securitized senior mortgage, which resulted in an extension of the contractual maturity date toFebruary 9, 2024 , a principal repayment of$10.0 million , and the payment of$7.6 million of fees and modification costs, among other items. The securitized senior mortgage is non-recourse to us. Our debt related to real estate owned as ofSeptember 30, 2021 has an outstanding principal balance of$290.0 million , a carrying value of$289.8 million and a stated rate of L+2.78%, subject to a LIBOR floor of 0.75%. We have incurred$0.2 million in financing costs related to this debt. For the period fromFebruary 8, 2021 throughSeptember 30, 2021 , the Company recognized$13.0 million of interest expense related to its debt on real estate owned, net,$6.3 million of which was in connection with the modification of the securitized senior mortgage.
Non-Consolidated Senior Interests Sold and Non-Consolidated Senior Interests Held by Third Parties
In certain instances, we use structural leverage through the non-recourse syndication of a match-term senior loan interest to a third party which qualifies for sale accounting under GAAP, or through the acquisition of a subordinate loan for which a non-recourse senior interest is retained by a third party. In such instances, the senior loan is not included on our balance sheet.
51 -------------------------------------------------------------------------------- The following table summarizes our non-consolidated senior interests and related retained subordinate interests as ofSeptember 30, 2021 (dollars in thousands): Term to Term to Fully Unpaid Initial Extended Non-Consolidated Senior Loan Loan Principal Carrying Maturity Maturity Interests Count Commitment Balance
Value Coupon(1) (in years)(2) (in years)(2)(3) Floating rate non-consolidated senior loans
5$ 906,739 $ 888,949 N/A L + 3.88 % 0.2 2.4 Retained floating rate subordinate loans 7 484,495 429,967 431,216 L + 8.95 % 0.2 2.1 Fixed rate non-consolidated senior loans 2$ 91,960 $ 70,815 N/A 3.06 % 1.4 3.0 Retained fixed rate subordinate loans 2 23,027 21,610 21,446 11.55 % 1.8 3.7
(1) Non-consolidated senior interests are indexed to one-month LIBOR, which was
0.08% at
balance.
(2) Weighted average is based on unpaid principal balance.
(3) Term to fully extended maturity is determined based on the maximum maturity
of each of the corresponding loans, assuming all extension options are
exercised by the borrower; provided, however, that our loans may be repaid
prior to such date.
As of
Floating and Fixed Rate Portfolio
Our business model seeks to minimize our exposure to changing interest rates by originating floating rate loans and as much as possible, match-funding the duration of our financing of such loans and using the same benchmark indices, typically one-month LIBOR. As ofSeptember 30, 2021 , 98.3% of our loans based on unpaid principal balance were floating rate, and 95.8% of our floating rate loans based on unpaid principal balance had interest rate floors tied to LIBOR, providing protection against certain decreases in prevailing interest rates, and our floating rate loans were all financed with liabilities that require interest payments based on floating rates also determined by reference to one-month LIBOR plus a spread, which resulted in approximately$1.6 billion of net floating rate exposure. The following table details our net floating rate exposure as ofSeptember 30, 2021 (dollars in thousands): Net Floating Rate Exposure Floating rate assets(1)$ 6,338,830 Floating rate liabilities(1) (4,700,996 ) Net floating rate exposure$ 1,637,834
(1) Our floating rate loans and related liabilities are all indexed to one-month
LIBOR. One-month LIBOR as of
In addition, certain of our loans and financings have floors associated with the benchmark indices that determine the applicable rate on such loans and financings. As ofSeptember 30, 2021 , 95.8% of our floating rate loans were subject to a one-month LIBOR floor, while 53.1% of our floating rate financings were subject to one-month LIBOR floors. As ofSeptember 30, 2021 , all of the loans held in our portfolio which are subject to a one-month LIBOR floor had one-month LIBOR floors greater than one-month LIBOR. The weighted average one-month LIBOR floor of our floating rate loans based onSeptember 30, 2021 unpaid principal balance was 1.4%. The weighted average one-month LIBOR floor of our financings based onSeptember 30, 2021 unpaid principal balance was 0.5%. The LIBOR floor on all of our financings which are subject to a one-month LIBOR floor had a one-month LIBOR floor greater than one-month LIBOR of 0.08% as ofSeptember 30, 2021 . Refer to "Quantitative and Qualitative Disclosures About Market Risk-LIBOR as our Reference Rate" below for additional considerations. 52 -------------------------------------------------------------------------------- As ofSeptember 30, 2021 , one-month LIBOR was 0.08% and our loan portfolio by one-month LIBOR floor level, including fixed rate loans for which LIBOR is not applicable, was as follows (dollars in thousands): Total Loan Portfolio by LIBOR Floor Levels Unpaid Cumulative% Principal % of Total Loan One-month LIBOR Floor Range Balance Total Portfolio 2.25% - 2.50% 788,093 12 % 12 % 2.00% - 2.24% 902,583 14 % 26 % 1.75% - 1.99% 1,314,438 20 % 46 % 1.50% - 1.74% 442,392 7 % 53 % 1.25% - 1.49% 818,828 13 % 66 % 1.00% - 1.24% 356,424 6 % 72 % <1.00% 1,448,524 22 % 94 % No floor 267,548 4 % 98 % Total Floating Rate Loans $ 6,338,830 Total Fixed Rate Loans 107,723 2 % 100 % Total Loans $ 6,446,553 As ofSeptember 30, 2021 , we held six fixed rate loans with unpaid principal balances totaling$107.7 million and a weighted average coupon of 12.9% (based on unpaid principal balance). We do not employ interest rate derivatives (interest rate swaps, caps, collars or swaptions) to hedge our loan portfolio's cash flow or fair value exposure to increases in interest rates, but we may do so in the future.
Results of Operations - Three Months Ended
We have elected to present results of operations by comparing to the immediately preceding period. 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. 53 --------------------------------------------------------------------------------
Operating Results
The following table sets forth information regarding our consolidated results of
operations for the three months ended
Three Months Ended September 30, 2021 June 30. 2021 $ Change % Change Revenue Interest and related income$ 103,876 $ 104,647 $ (771 ) -0.7 % Less: interest and related expense 48,070 55,356 (7,286 ) -13.2 % Net interest income 55,806 49,291 6,515 13.2 % Revenue from real estate owned 8,550 6,019 2,531 42.1 % Total revenue 64,356 55,310 9,046 16.4 % Expenses Management fees - affiliate 9,789 9,737 52 0.5 % Incentive fees - affiliate - - - 0.0 % Equity compensation (186 ) 1,452 (1,638 ) -112.8 % General and administrative expenses 1,330 2,746 (1,416 ) -51.6 % Expenses from real estate owned 9,888 9,159 729 8.0 % Total expenses 20,821 23,094
(2,273 ) -9.8 %
Realized loss on sale of investments - - - 0.0 % Gain on foreclosure of real estate owned - - - 0.0 % Other income - - - 0.0 % Reversal of current expected credit loss reserve 9,306 7,922 1,384 17.5 % Income before income taxes 52,841 40,138 12,703 31.6 % Income tax benefit - 1,846 (1,846 ) -100.0 % Net income$ 52,841 $ 41,984 $ 10,857 25.9 % Net (loss) income attributable to non-controlling interests $ (40 ) $ (41 )$ 1 -2.4 % Net income attributable to preferred stock $ 4 $ 4 $ - 0.0 % Net income attributable to common stock and redeemable common stock$ 52,877 $ 42,021
Net income per share of common stock and redeemable common stock Basic $ 0.40 $ 0.31$ 0.09 29.0 % Diluted $ 0.40 $ 0.31$ 0.09 29.0 % Dividend declared per share $ 0.37 $ 0.37
Comparison of the three months ended
Revenue
Revenue increased$9.0 million during the three months endedSeptember 30, 2021 compared to the three months endedJune 30, 2021 . The increase is primarily due to an increase in net interest income of$6.5 million during the three months endedSeptember 30, 2021 compared to the three months endedJune 30, 2021 , which was driven by a decrease in interest expense of$7.3 million during the three months endedSeptember 30, 2021 compared to the three months endedJune 30, 2021 as$6.3 million of interest expense was incurred in connection with the modification of our debt related to real estate owned onJune 2, 2021 . Additionally, the increase in revenue was also driven by an increase in revenue from real estate owned of$2.5 million during the three months endedSeptember 30, 2021 compared to the three months endedJune 30, 2021 due to improved operating performance of our real estate owned driven by higher occupancy levels and average daily room rates at the hotel portfolio. 54 --------------------------------------------------------------------------------
Expenses
Expenses are primarily comprised of base management fees payable to our Manager, equity compensation expense, general and administrative expenses, and expenses from real estate owned. Expenses decreased by$2.3 million , net, during the three months endedSeptember 30, 2021 , as compared to the three months endedJune 30, 2021 primarily due to: (i) a decrease in equity compensation expense of$1.6 million during the three months endedSeptember 30, 2021 , as compared to the three months endedJune 30, 2021 , due to a reversal of previously recognized compensation expense incurred in connection with a change in estimated vesting percentages on performance-based RSU awards during the three months endedSeptember 30, 2021 , as compared to the three months endedJune 30, 2021 ; (ii) a decrease in general and administrative expenses of$1.4 million during the three months endedSeptember 30, 2021 , as compared to the three months endedJune 30, 2021 , due primarily to general and administrative expenses incurred relating to the modification of our debt related to real estate owned of$1.1 million during the three months endedJune 30, 2021 , as compared to the three months endedSeptember 30, 2021 ; and (iii) offset by an increase in expenses from real estate owned of$0.7 million during the three months endedSeptember 30, 2021 , as compared to the three months endedJune 30, 2021 , which relates to increased operating expenses incurred in connection with increased occupancy at the hotel portfolio during the three months endedSeptember 30, 2021 , as compared to the three months endedJune 30, 2021 .
Reversal of current expected credit loss reserve
During the three months ended
Income tax benefit
Income tax benefit decreased$1.8 million during the three months endedSeptember 30, 2021 , as compared to the three months endedJune 30, 2021 . The change in the comparative periods is primarily due to an increase in net operating losses generated by the TRS, offset by a partial valuation allowance for NOLs that are not expected to be utilized in future periods. This resulted in no income tax benefit during the three months endedSeptember 30, 2021 . 55 --------------------------------------------------------------------------------
Results of Operations - Nine Months Ended
Nine Months Ended September 30, 2021 September 30, 2020 $ Change % Change Revenue Interest and related income $ 314,326 $ 340,786$ (26,460 ) -7.8 % Less: interest and related expense 151,188 129,081 22,107 17.1 % Net interest income 163,138 211,705 (48,567 ) -22.9 % Revenue from real estate owned 15,620 - 15,620 100.0 % Total revenue 178,758 211,705 (32,947 ) -15.6 % Expenses Management fees - affiliate 29,152 29,111 41 0.1 % Incentive fees - affiliate - 7,579 (7,579 ) -100.0 % Equity compensation (376 ) 7,354 (7,730 ) -105.1 % General and administrative expenses 5,393 4,162 1,231 29.6 % Expenses from real estate owned 21,912 - 21,912 100.0 % Total expenses 56,081 48,206 7,875 16.3 % Realized loss on sale of investments - (202 ) 202 -100.0 % Gain on foreclosure of real estate owned 1,430 - 1,430 100.0 % Other income 5,855 - 5,855 100.0 % Reversal of current expected credit loss reserve 17,413 - 17,413 100.0 % Income before income taxes 147,375 163,297 (15,922 ) -9.8 % Income tax benefit 6,025 - 6,025 100.0 % Net income $ 153,400 $ 163,297$ (9,897 ) -6.1 % Net (loss) income attributable to non-controlling interests $ (118 ) $ 4,113$ (4,231 ) -102.9 % Net income attributable to preferred stock $ 12 $ 24$ (12 ) -50.0 % Net income attributable to common stock and redeemable common stock $ 153,506 $
159,160
Net income per share of common stock and redeemable common stock Basic $ 1.15 $ 1.20$ (0.05 ) -4.2 % Diluted $ 1.15 $ 1.20$ (0.05 ) -4.2 % Dividend declared per share $ 1.11
1.24
Comparison of the nine months ended
Revenue
Revenue decreased$32.9 million during the nine months endedSeptember 30, 2021 , as compared to the nine months endedSeptember 30, 2020 . The decrease is primarily due to a decrease in net interest income of$48.6 million , offset by an increase in revenue from real estate owned during the nine months endedSeptember 30, 2021 , as compared to the nine months endedSeptember 30, 2020 . The decrease in net interest income was driven by (i) a decrease in interest and related income of$26.5 million due primarily to the impact of non-accrual loans, offset in part, by interest and related income earned on newly originated loans and (ii) an increase in interest and related expense of$22.1 million during the nine months endedSeptember 30, 2021 , as compared to the nine months endedSeptember 30, 2020 , arising from a net increase in our secured financings, partially offset by (iii) an increase of$15.6 million of revenue from real estate owned earned in connection with our real estate owned which we acquired legal title to onFebruary 8, 2021 . 56 --------------------------------------------------------------------------------
Expenses
Expenses are primarily comprised of base management fees payable to our Manager, incentive fees payable to our Manager, equity compensation expense, general and administrative expenses, and expenses from real estate owned. Expenses increased by$7.9 million , net, during the nine months endedSeptember 30, 2021 , as compared to the nine months endedSeptember 30, 2020 primarily due to increases in: (i) Expenses from real estate owned of$21.9 million incurred during the nine months endedSeptember 30, 2021 , relating to operating expenses incurred by the portfolio of hotels on which we acquired legal title to onFebruary 8, 2021 . These expenses include depreciation expense of$5.2 million . Similar expenses were not incurred during the nine months endedSeptember 30, 2020 as we did not own any real estate assets during such period; (ii) General and administrative expenses increased$1.2 million during the nine months endedSeptember 30, 2021 , as compared to the nine months endedSeptember 30, 2020 , due to one-time general and administrative costs of$1.1 million incurred relating to the modification of our debt related to real estate owned;
Such increases were offset in part by:
(i) a decrease in Incentive fees-affiliate of
(ii) a decrease in equity compensation expense of$1.2 million during the nine months endedSeptember 30, 2021 compared to the nine months endedSeptember 30, 2020 , due to the impact of 525,206 performance-based RSU awards being forfeited prior to vesting. Equity compensation expense incurred during the nine months endedSeptember 30, 2020 is related to the estimated fair value of performance-based RSU awards granted in 2019 based on estimated vesting percentage over the three year vesting period endingDecember 31, 2021 .
Subsequent to
Realized loss on sale of investments
During the nine months endedSeptember 30, 2020 , we recognized a loss of$0.2 million in connection with a sale of a loan with an unpaid principal balance of$20.0 million . There were no loans sold during the nine months endedSeptember 30, 2021 .
Gain on foreclosure of real estate owned
During the nine months endedSeptember 30, 2021 , we recognized a gain of$1.4 million on the foreclosure of a portfolio of seven limited service hotel properties located inNew York, New York . This gain is based upon the estimated fair value of the hotel properties of$414.0 million as determined by a third-party appraisal relative to our basis in the investment at the time of foreclosure. The fair value was determined using discount rates ranging from 8.50% to 8.75% and a terminal capitalization rate of 6.00% on projected net operating profits on the hotels.
Other income
During the nine months endedSeptember 30, 2021 , 292,731 fully-vested time-based RSU awards were forfeited prior to their delivery pursuant to the terms of the RSU award documents, resulting in us reversing previously recognized compensation expense associated with these RSU awards.
Reversal of current expected credit loss reserve
During the nine months ended
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Income tax benefit
Income tax benefit increased by$6.0 million for the nine months endedSeptember 30, 2021 as compared to the nine months endedSeptember 30, 2020 . The change in the comparative period is primarily related to the recognition of a deferred tax asset for (i) the difference in the tax basis of our real estate owned investment, which is held in our TRS, compared to the GAAP basis, and (ii) net operating losses generated by the TRS offset by a partial valuation allowance for NOLs that we don't expect to be able to utilize in future periods.
Non-controlling interest
We own a 51% interest in the JV, which we control. As a result, we consolidate the activities of the JV and account for the 49% owned by a third party as income attributable to non-controlling interests. Net income attributable to non-controlling interests decreased by$4.2 million during the nine months endedSeptember 30, 2021 as compared to the nine months endedSeptember 30, 2020 as a result of one investment being repaid in full during the nine months endedSeptember 30, 2020 and the remaining investment held in the JV being on non-accrual.
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 ofSeptember 30, 2021 , we had 133,433,487 shares of our common stock outstanding, including redeemable common stock, representing$2.5 billion of stockholders' equity and we also had$4.7 billion of outstanding borrowings under our secured financings, our Secured Term Loan, and our debt related to real estate owned. As ofSeptember 30, 2021 , our secured financings consisted of six secured revolving repurchase facilities for loan investments with capacity of$4.3 billion and an outstanding balance of$3.1 billion , and six asset-specific financings for loan investments with an outstanding balance of$573.4 million . As ofSeptember 30, 2021 , our Secured Term Loan had an outstanding balance of$762.7 million and our debt related to real estate owned had an outstanding balance of$290.0 million .
On
Series A Cumulative Non-Voting Preferred Stock
InJanuary 2016 , in order to satisfy the minimum 100 stockholder threshold required for us to qualify as a REIT, we issued 125 shares of 12.5% Series A Redeemable Cumulative Preferred Stock, which are non-voting, with a liquidation preference of$1,000 per share.
Debt to Equity Ratio and Total Leverage Ratio
Net Debt-to-Equity Ratio and Total Leverage Ratio are non-GAAP measures that we use to evaluate our financial leverage, which in the case of our Total Leverage Ratio, makes certain adjustments that we believe provide a more conservative measure of our financial condition. Net Debt-to-Equity Ratio is calculated as the ratio of (i) the sum of (a) repurchase agreements, (b) loan participations sold, net, (c) notes payable, net, (d) Secured Term Loan, net, and (e) debt related to real estate owned, less cash and cash equivalents to (ii) total equity. 58 --------------------------------------------------------------------------------
The following table presents our Net Debt-to-Equity Ratios and reconciles net
debt to total liabilities, the most directly comparable GAAP measure as of
September 30, December 31, 2021 2020 Total liabilities$ 4,808,962 $ 4,330,157 Less: accounts payable and accrued expenses (32,740 ) (2,481 ) Less: interest payable (8,673 ) (10,180 ) Less: other liabilities (2,626 ) (1,967 ) Less: dividends payable-common stock, redeemable common stock and vested restricted stock units (50,000 ) (50,000 ) Less: dividends payable-unvested restricted stock units (3,192 ) (3,480 ) Less: dividends payable-preferred stock (4 ) - Less: deposits held (2,105 ) (716 ) Less: management fee payable-affiliate (9,789 ) (9,849 ) Less: incentive fee payable-affiliate - (187 ) Less: cash and cash equivalents (235,596 ) (427,512 ) Net Debt$ 4,464,237 $ 3,823,785 Total Stockholders' Equity$ 2,543,311 $ 2,622,386 Net Debt-to-Equity Ratio 1.8x 1.5x 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. Total Leverage Ratio is calculated as the ratio of (i) the sum of (a) repurchase agreements, (b) loan participations sold, net, (c) notes payable, net, (d) Secured Term Loan, net, (e) non-consolidated senior interests sold, (f) non-consolidated senior interests held by third parties, and (g) debt related to real estate owned, less cash and cash equivalents to (ii) total equity. The following table presents our Total Leverage Ratios and reconciles net total leverage to total liabilities, the most directly comparable GAAP measure as ofSeptember 30, 2021 andDecember 31, 2020 (dollars in thousands): September 30, December 31, 2021 2020 Total liabilities$ 4,808,962 $ 4,330,157 Less: accounts payable and accrued expenses (32,740 ) (2,481 ) Less: interest payable (8,673 ) (10,180 ) Less: other liabilities (2,626 ) (1,967 ) Less: dividends payable-common stock, redeemable common stock and vested restricted stock units (50,000 ) (50,000 ) Less: dividends payable-unvested restricted stock units (3,192 ) (3,480 ) Less: dividends payable-preferred stock (4 ) - Less: deposits held (2,105 ) (716 ) Less: management fee payable-affiliate (9,789 ) (9,849 ) Less: incentive fee payable-affiliate - (187 ) Less: cash and cash equivalents (235,596 ) (427,512 ) Non-consolidated senior loans 959,764 1,594,159 Net Total Leverage$ 5,424,001 $ 5,417,944 Total Stockholders' Equity$ 2,543,311 $ 2,622,386 Total Leverage Ratio 2.1x 2.1x 59
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Sources of Liquidity Our primary sources of liquidity include cash and cash equivalents, interest income from our loans, loan repayments, available borrowings under our secured revolving repurchase facilities and identified borrowing capacity related to our notes payable and loan participations sold, borrowings under our Secured Term Loan, and proceeds from the issuance of our common stock. The following table sets forth, as ofSeptember 30, 2021 andDecember 31, 2020 , our sources of available liquidity (dollars in thousands): September 30, 2021 December 31, 2020 Cash and cash equivalents$ 235,596 $ 427,512 Secured financing arrangements (allocated undrawn capacity)(1) 459,265
592,438
Loan principal payments held by servicer(2) 145,876 9,169 Total identified sources of liquidity$ 840,737 $
1,029,119
Secured financing arrangements (unallocated undrawn capacity)(3) 848,997 971,821 Total sources of liquidity$ 1,689,734 $ 2,000,940 (1) Allocated undrawn capacity represents undrawn amounts designated for
identified assets. The drawing of such amounts typically remains subject to
the satisfaction of conditions set forth in the relevant financing agreement.
(2) Represents loan principal payments held in lockboxes or by our third-party
loan servicer as of the balance sheet date which were remitted to us during
the subsequent remittance cycle, net of the related secured debt balance.
(3) Unallocated undrawn capacity represents undrawn amounts that have not yet
been designated for identified assets. The drawing of such amounts
typically remains subject to lender approval of an identified asset in its
sole discretion. Liquidity Needs In addition to our ongoing loan origination and acquisition activity, our primary liquidity needs include future fundings to our borrowers on our unfunded loan commitments, interest and principal payments on outstanding borrowings under our financings, operating expenses and dividend payments to our stockholders necessary to satisfy REIT dividend requirements. Additionally, our financing, repurchase and term loan agreements require us to maintain minimum levels of liquidity in order to satisfy certain financial covenants. We currently maintain, and seek to maintain, excess cash and liquidity to comply with minimum liquidity requirements under our financings, and if necessary, to reduce borrowings under our secured financings, including our repurchase agreements. As ofSeptember 30, 2021 , we had aggregate unfunded loan commitments of$1.0 billion across 52 loans receivable, and$459.3 million of committed or identified financings for those commitments. The unfunded loan commitments comprise funding for capital expenditures and construction, leasing costs, and interest and carry costs, and their funding will vary depending on the progress of capital projects, leasing, and cash flows at the properties securing our loans. Therefore, the exact timing and amounts of such future loan fundings are uncertain and will depend on the current and future performance of the underlying collateral assets. We expect to fund our loan commitments over the remaining maximum term of the related loans, which have a weighted-average future funding period of 3.0 years.
Contractual Obligations and Commitments
Our contractual obligations and commitments as of
Payment Timing Total Less than 1 to 3 to More than Obligations 1 year 3 years 5 years 5 years Unfunded loan commitments(1)$ 1,035,888 $ 199,607 $ 649,713 $ 186,568 $ - Secured financings, term loan agreement, and debt related to real estate owned- principal(2) 4,720,996 1,862,681 1,654,458 1,203,857 - Secured financings, term loan agreement, and debt related to real estate owned-interest(3) 385,852 133,551 163,817 88,484 - Total$ 6,142,736 $ 2,195,839 $ 2,467,988 $ 1,478,909 $ -
(1) The allocation of our unfunded loan commitments is based on the earlier of
the commitment expiration date and the initial loan maturity date, however we
may be obligated to fund these commitments earlier than such date.
(2) The allocation of our secured financings and term loan agreement is based on
the current maturity date of each individual borrowing under the respective
agreement, and excludes the impact of any extension options.
(3) Amounts include the related future interest payment obligations, which are
estimated by assuming the amounts outstanding under our secured financing
agreements and one-month LIBOR in effect as of
constant into the 60
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future. This is only an estimate, as actual amounts borrowed and rates will
vary over time. Our floating rate loans and related liabilities are indexed to
one-month LIBOR. Totals exclude non-consolidated senior interests.
InJanuary 2020 , we entered into an arrangement with a borrower whereby we may advance additional funds on an existing loan in excess of the primary mezzanine loan commitment amount, at an interest rate which exceeds the rate stated in the underlying mezzanine loan. As ofSeptember 30, 2021 , we had commitments of$5.0 million resulting from such arrangement that had a contractual maturity date ofJuly 24, 2023 . No amounts were drawn under this arrangement as ofSeptember 30, 2021 . During 2018, we entered into an arrangement with a borrower whereby we may advance additional funds on existing loans in excess of the primary mortgage and mezzanine loan commitment amounts, at interest rates which exceed the rate stated in the underlying mortgage or mezzanine loan. As ofSeptember 30, 2021 , we had commitments of$50.0 million resulting from such arrangement that has a contractual maturity date ofAugust 20, 2022 . No amounts have been drawn as ofSeptember 30, 2021 . We are required to pay our Manager, in cash, a base management fee and incentive fees (to the extent earned) on a quarterly basis in arrears. The tables above do not include the amounts payable to our Manager under the Management Agreement as they are not fixed and determinable. As a REIT, we generally must distribute substantially all of our taxable income to stockholders in the form of dividends to comply with certain of the provisions of the Code. Our REIT taxable income does not necessarily equal our net income as calculated in accordance with GAAP or our Net Distributable Earnings as described previously.
Loan Maturities
The following table summarizes the future scheduled repayments of principal
based on initial maturity dates for the loan portfolio as of
Unpaid Principal Loan Year Balance Commitment 2021$ 1,079,544 $ 1,103,250 2022 3,046,762 3,278,276 2023 771,628 1,057,630 2024 1,298,523 1,705,615 2025 250,096 337,670 Total$ 6,446,553 $ 7,482,441 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 endedSeptember 30, 2021 and 2020 (dollars in thousands): Nine Months Nine Months Ended Ended September 30, 2021 September 30, 2020 Net cash flows provided by operating activities $ 144,538 $ 95,839 Net cash flows used in investing activities (302,488 ) (226,939 ) Net cash flows (used in) provided by financing activities (13,192 ) 101,333
Net decrease in cash and cash equivalents
and restricted cash $ (171,142 ) $ (29,767 ) We experienced a net decrease in cash and cash equivalents and restricted cash of$171.1 million during the nine months endedSeptember 30, 2021 , compared to a net decrease of$29.8 million during the nine months endedSeptember 30, 2020 . During the nine months endedSeptember 30, 2021 , we made initial fundings of$842.2 million of new loans and$603.5 million of advances on existing loans and made repayments on financings arrangements of$887.3 million . We received$1.0 billion of borrowings under our financing arrangements, and$1.1 billion from repayment of loan principal. 61
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Income Taxes
We have elected and believe we have qualified to be taxed as a REIT forU.S. federal income tax purposes, commencing with our initial taxable year endedDecember 31, 2015 . We generally must distribute annually at least 90% of our REIT taxable income, determined without regard to the deduction for dividends paid and excluding net capital gain, to maintain our REIT status. To the extent that we satisfy this distribution requirement, but distribute less than 100% of our REIT taxable income, we will be subject toU.S. federal income tax on our undistributed REIT taxable income. In addition, we will be subject to a 4% nondeductible excise tax if the actual amount that we pay out to our stockholders in a calendar year is less than a minimum amount specified underU.S. federal tax laws. The Company's real estate owned is held in a TRS. The Company's TRS is not consolidated forU.S. federal income tax purposes and is taxed separately as a corporation. For financial reporting purposes, a provision or benefit for current and deferred taxes is established for the portion of earnings or expense recognized by the Company with respect to its TRS. Our qualification as a REIT also depends on our ability to meet various other requirements imposed by the Code, which relate to organizational structure, diversity of stock ownership and certain restrictions with regard to the nature of our assets and the sources of our income. Even if we qualify as a REIT, we may be subject to certainU.S. federal income and excise taxes and state and local taxes on our income and assets. If we fail to maintain our qualification as a REIT for any taxable year, we may be subject to material penalties as well as federal, state and local income tax on our REIT taxable income at regular corporate rates and we would not be able to qualify as a REIT for the subsequent four full taxable years. As ofSeptember 30, 2021 we were in compliance with all REIT requirements.
Refer to Note 12 to our consolidated financial statements for additional information about our income taxes.
Off-Balance Sheet Arrangements
As of
Critical Accounting Policies
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, judgements 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. On an ongoing basis, we evaluate our estimates and assumptions. Our actual results could differ from these estimates. For a discussion of our potential risks and uncertainties, see the information under the heading "Critical Accounting Policies" in our Prospectus. There have been no material changes to our Critical Accounting Policies disclosed in the Prospectus, which is accessible on theSEC's website at www.sec.gov.
Refer to Note 2 to our consolidated financial statements for a description of our significant accounting policies.
Recent Accounting Pronouncements
Recently Adopted Accounting Pronouncements
InJune 2016 , the FASB issued ASU 2016-13. This standard replaces the existing measurement of the allowance for credit losses that is based on our Manager's best estimate of probable incurred credit losses inherent in our lending activities with our Manager's best estimate of lifetime expected credit losses inherent in our relevant financial assets.
We adopted the standard on
Assets
Loans receivable held-for-investment$ 64,274 Interests in loans receivable held-for-investment 406 Accrued interest receivable 357
Liabilities
Unfunded loan commitments 13,214
Total impact of ASU 2016-13 adoption on retained earnings
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Recently Issued Accounting Pronouncements Not Yet Adopted
The FASB issued ASU 2019-12, Income Taxes (Topic 815), or ASU 2019-12. ASU 2019-12 simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. ASU 2019-12 also improves the consistent application of, and simplifies, GAAP for other areas of Topic 740 by clarifying and amending existing guidance. The standard is effective for financial statements issued for fiscal years beginning afterDecember 15, 2021 , with early adoption permitted. The Company is evaluating the impact ASU 2019-12 will have on its consolidated financial statements. InAugust 2020 , the FASB issued ASU 2020-06 "Debt-Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging-Contracts in Entity's Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity's Own Equity," or ASU 2020-06. ASU 2020-06 simplifies the accounting for convertible debt by eliminating the beneficial conversion and cash conversion accounting models. ASU 2020-06 also updates the earnings per share calculation and requires entities to assume share settlement when the convertible debt can be settled in cash or shares. ASU 2020-06 is effective for fiscal years beginning afterDecember 15, 2023 , with early adoption permitted. We are currently evaluating the impact ASU 2020-06 will have on our consolidated financial statements. InMarch 2020 , the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, ("ASU 2020-04"). ASU 2020-04 provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. ASU 2020-04 is effective upon issuance of ASU 2020-04 for contract modifications and hedging relationships on a prospective basis. We have not adopted any of the optional expedients or exceptions, but will continue to evaluate the possible adoption of any such expedients or exceptions during the effective period as circumstances evolve. 63
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