Maryland | 45-3148087 | |||||||
(State or other jurisdiction of | (I.R.S. Employer | |||||||
incorporation or organization) | Identification Number) |
Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||
Common stock, $0.01 par value per share | ACRE | New York Stock Exchange |
Large accelerated filer | ☐ | Accelerated filer | ☒ | |||||||||||
Non-accelerated filer | ☐ | Smaller reporting company | ☐ | |||||||||||
Emerging growth company | ☐ |
Class | Outstanding at July 29, 2021 | |||||||
Common stock, $0.01 par value | 47,001,821 |
Page | |||||||||
Part I. Financial Information | |||||||||
Item 1. Consolidated Financial Statements | |||||||||
As of | |||||||||||
June 30, 2021 | December 31, 2020 | ||||||||||
(unaudited) | |||||||||||
ASSETS | |||||||||||
Cash and cash equivalents | $ | 75,671 | $ | 74,776 | |||||||
Loans held for investment ($1,118,269 and $550,590 related to consolidated VIEs, respectively) | 2,032,408 | 1,815,219 | |||||||||
Current expected credit loss reserve | (16,893) | (23,604) | |||||||||
Loans held for investment, net of current expected credit loss reserve | 2,015,515 | 1,791,615 | |||||||||
Real estate owned, net | 36,860 | 37,283 | |||||||||
Other assets ($2,467 and $1,079 of interest receivable related to consolidated VIEs, respectively; $105,990 and $6,410 of other receivables related to consolidated VIEs, respectively) | 128,789 | 25,823 | |||||||||
Total assets | $ | 2,256,835 | $ | 1,929,497 | |||||||
LIABILITIES AND STOCKHOLDERS' EQUITY | |||||||||||
LIABILITIES | |||||||||||
Secured funding agreements | $ | 404,205 | $ | 755,552 | |||||||
Notes payable | 43,976 | 61,837 | |||||||||
Secured term loan | 60,000 | 110,000 | |||||||||
Collateralized loan obligation securitization debt (consolidated VIEs) | 979,777 | 443,871 | |||||||||
Secured borrowings | 59,902 | 59,790 | |||||||||
Due to affiliate | 3,731 | 3,150 | |||||||||
Dividends payable | 16,528 | 11,124 | |||||||||
Other liabilities ($599 and $391 of interest payable related to consolidated VIEs, respectively) | 9,679 | 11,158 | |||||||||
Total liabilities | 1,577,798 | 1,456,482 | |||||||||
Commitments and contingencies (Note 9) | 0 | 0 | |||||||||
STOCKHOLDERS' EQUITY | |||||||||||
Common stock, par value $0.01 per share, 450,000,000 shares authorized at June 30, 2021 and December 31, 2020 and 47,001,121 and 33,442,332 shares issued and outstanding at June 30, 2021 and December 31, 2020, respectively | 464 | 329 | |||||||||
Additional paid-in capital | 700,994 | 497,803 | |||||||||
Accumulated other comprehensive income | 117 | 0 | |||||||||
Accumulated earnings (deficit) | (22,538) | (25,117) | |||||||||
Total stockholders' equity | 679,037 | 473,015 | |||||||||
Total liabilities and stockholders' equity | $ | 2,256,835 | $ | 1,929,497 |
As of | |||||||
September 30, 2020 | December 31, 2019 | ||||||
(unaudited) | |||||||
ASSETS | |||||||
Cash and cash equivalents | $ | 81,295 | $ | 5,256 | |||
Restricted cash | 0 | 379 | |||||
Loans held for investment ($495,167 and $515,896 related to consolidated VIEs, respectively) | 1,778,199 | 1,682,498 | |||||
Current expected credit loss reserve | (25,454 | ) | 0 | ||||
Loans held for investment, net of current expected credit loss reserve | 1,752,745 | 1,682,498 | |||||
Real estate owned, net | 37,476 | 37,901 | |||||
Other assets ($896 and $1,309 of interest receivable related to consolidated VIEs, respectively; $61,833 and $41,104 of other receivables related to consolidated VIEs, respectively) | 77,542 | 58,100 | |||||
Total assets | $ | 1,949,058 | $ | 1,784,134 | |||
LIABILITIES AND STOCKHOLDERS' EQUITY | |||||||
LIABILITIES | |||||||
Secured funding agreements | $ | 791,136 | $ | 728,589 | |||
Notes payable | 57,848 | 54,708 | |||||
Secured term loan | 109,803 | 109,149 | |||||
Collateralized loan obligation securitization debt (consolidated VIE) | 443,860 | 443,177 | |||||
Secured borrowings | 54,617 | 0 | |||||
Due to affiliate | 2,670 | 2,761 | |||||
Dividends payable | 11,072 | 9,546 | |||||
Other liabilities ($368 and $718 of interest payable related to consolidated VIEs, respectively) | 8,703 | 9,865 | |||||
Total liabilities | 1,479,709 | 1,357,795 | |||||
Commitments and contingencies (Note 8) | |||||||
STOCKHOLDERS' EQUITY | |||||||
Common stock, par value $0.01 per share, 450,000,000 shares authorized at September 30, 2020 and December 31, 2019 and 33,441,937 and 28,865,610 shares issued and outstanding at September 30, 2020 and December 31, 2019, respectively | 329 | 283 | |||||
Additional paid-in capital | 497,421 | 423,619 | |||||
Accumulated earnings (deficit) | (28,401 | ) | 2,437 | ||||
Total stockholders' equity | 469,349 | 426,339 | |||||
Total liabilities and stockholders' equity | $ | 1,949,058 | $ | 1,784,134 |
For the three months ended June 30, | For the six months ended June 30, | ||||||||||||||||||||||||||||
2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||||||||
(unaudited) | (unaudited) | (unaudited) | (unaudited) | ||||||||||||||||||||||||||
Revenue: | |||||||||||||||||||||||||||||
Interest income | $ | 30,859 | $ | 29,835 | $ | 61,564 | $ | 61,283 | |||||||||||||||||||||
Interest expense | (11,092) | (13,042) | (23,231) | (28,576) | |||||||||||||||||||||||||
Net interest margin | 19,767 | 16,793 | 38,333 | 32,707 | |||||||||||||||||||||||||
Revenue from real estate owned | 3,764 | 1,189 | 6,421 | 6,409 | |||||||||||||||||||||||||
Total revenue | 23,531 | 17,982 | 44,754 | 39,116 | |||||||||||||||||||||||||
Expenses: | |||||||||||||||||||||||||||||
Management and incentive fees to affiliate | 2,951 | 2,152 | 5,518 | 3,924 | |||||||||||||||||||||||||
Professional fees | 615 | 660 | 1,400 | 1,563 | |||||||||||||||||||||||||
General and administrative expenses | 1,195 | 959 | 2,351 | 1,827 | |||||||||||||||||||||||||
General and administrative expenses reimbursed to affiliate | 788 | 1,038 | 1,540 | 2,089 | |||||||||||||||||||||||||
Expenses from real estate owned | 3,842 | 3,254 | 7,120 | 9,930 | |||||||||||||||||||||||||
Total expenses | 9,391 | 8,063 | 17,929 | 19,333 | |||||||||||||||||||||||||
Provision for current expected credit losses | (3,883) | (4,007) | (7,123) | 23,111 | |||||||||||||||||||||||||
Unrealized losses on loans held for sale | 0 | 3,998 | 0 | 3,998 | |||||||||||||||||||||||||
Income (loss) before income taxes | 18,023 | 9,928 | 33,948 | (7,326) | |||||||||||||||||||||||||
Income tax expense, including excise tax | 408 | 160 | 593 | 169 | |||||||||||||||||||||||||
Net income (loss) attributable to common stockholders | $ | 17,615 | $ | 9,768 | $ | 33,355 | $ | (7,495) | |||||||||||||||||||||
Earnings (loss) per common share: | |||||||||||||||||||||||||||||
Basic earnings (loss) per common share | $ | 0.43 | $ | 0.29 | $ | 0.88 | $ | (0.23) | |||||||||||||||||||||
Diluted earnings (loss) per common share | $ | 0.43 | $ | 0.29 | $ | 0.88 | $ | (0.23) | |||||||||||||||||||||
Weighted average number of common shares outstanding: | |||||||||||||||||||||||||||||
Basic weighted average shares of common stock outstanding | 41,009,175 | 33,316,933 | 37,731,317 | 32,607,442 | |||||||||||||||||||||||||
Diluted weighted average shares of common stock outstanding | 41,294,597 | 33,539,580 | 38,025,933 | 32,607,442 | |||||||||||||||||||||||||
Dividends declared per share of common stock | $ | 0.35 | $ | 0.33 | $ | 0.70 | $ | 0.66 |
For the three months ended September 30, | For the nine months ended September 30, | ||||||||||||||
2020 | 2019 | 2020 | 2019 | ||||||||||||
(unaudited) | (unaudited) | (unaudited) | (unaudited) | ||||||||||||
Revenue: | |||||||||||||||
Interest income | $ | 30,626 | $ | 28,269 | $ | 91,908 | $ | 86,248 | |||||||
Interest expense | (11,875 | ) | (15,124 | ) | (40,450 | ) | (47,539 | ) | |||||||
Net interest margin | 18,751 | 13,145 | 51,458 | 38,709 | |||||||||||
Revenue from real estate owned | 3,623 | 6,702 | 10,032 | 16,970 | |||||||||||
Total revenue | 22,374 | 19,847 | 61,490 | 55,679 | |||||||||||
Expenses: | |||||||||||||||
Management and incentive fees to affiliate | 1,847 | 1,578 | 5,771 | 5,405 | |||||||||||
Professional fees | 639 | 542 | 2,202 | 1,553 | |||||||||||
General and administrative expenses | 969 | 1,005 | 2,797 | 3,153 | |||||||||||
General and administrative expenses reimbursed to affiliate | 802 | 831 | 2,890 | 2,261 | |||||||||||
Expenses from real estate owned | 4,046 | 6,838 | 13,976 | 15,644 | |||||||||||
Total expenses | 8,303 | 10,794 | 27,636 | 28,016 | |||||||||||
Provision for current expected credit losses | (1,048 | ) | 0 | 22,063 | 0 | ||||||||||
Realized losses on loans sold | 4,008 | 0 | 4,008 | 0 | |||||||||||
Change in unrealized losses on loans held for sale | (3,998 | ) | 0 | 0 | 0 | ||||||||||
Income before income taxes | 15,109 | 9,053 | 7,783 | 27,663 | |||||||||||
Income tax expense, including excise tax | 181 | 19 | 350 | 332 | |||||||||||
Net income attributable to common stockholders | $ | 14,928 | $ | 9,034 | $ | 7,433 | $ | 27,331 | |||||||
Earnings per common share: | |||||||||||||||
Basic earnings per common share | $ | 0.45 | $ | 0.32 | $ | 0.23 | $ | 0.96 | |||||||
Diluted earnings per common share | $ | 0.44 | $ | 0.31 | $ | 0.22 | $ | 0.95 | |||||||
Weighted average number of common shares outstanding: | |||||||||||||||
Basic weighted average shares of common stock outstanding | 33,337,445 | 28,634,514 | 32,852,553 | 28,598,807 | |||||||||||
Diluted weighted average shares of common stock outstanding | 33,550,444 | 28,867,603 | 33,072,085 | 28,837,766 | |||||||||||
Dividends declared per share of common stock | $ | 0.33 | $ | 0.33 | $ | 0.99 | $ | 0.99 |
For the three months ended June 30, | For the six months ended June 30, | ||||||||||||||||||||||||||||
2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||||||||
(unaudited) | (unaudited) | (unaudited) | (unaudited) | ||||||||||||||||||||||||||
Net income (loss) attributable to common stockholders | $ | 17,615 | $ | 9,768 | $ | 33,355 | $ | (7,495) | |||||||||||||||||||||
Other comprehensive income: | |||||||||||||||||||||||||||||
Unrealized gains (losses) on derivative financial instruments | (146) | 0 | 117 | 0 | |||||||||||||||||||||||||
Comprehensive income (loss) | $ | 17,469 | $ | 9,768 | $ | 33,472 | $ | (7,495) |
Common Stock | Additional Paid-in Capital | Accumulated Other Comprehensive Income | Accumulated Earnings (Deficit) | Total Stockholders’ Equity | |||||||||||||||||||||||||||||||||||||||||||||||||
Common Stock | Additional Paid-in Capital | Accumulated Earnings (Deficit) | Total Stockholders’ Equity | Shares | Amount | ||||||||||||||||||||||||||||||||||||||||||||||||
Shares | Amount | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance at December 31, 2018 | 28,755,665 | $ | 283 | $ | 421,739 | $ | 3,565 | $ | 425,587 | ||||||||||||||||||||||||||||||||||||||||||||
Stock-based compensation | 93,405 | — | 492 | — | 492 | ||||||||||||||||||||||||||||||||||||||||||||||||
Net income | — | — | — | 8,543 | 8,543 | ||||||||||||||||||||||||||||||||||||||||||||||||
Dividends declared | — | — | — | (9,520 | ) | (9,520 | ) | ||||||||||||||||||||||||||||||||||||||||||||||
Balance at March 31, 2019 | 28,849,070 | $ | 283 | $ | 422,231 | $ | 2,588 | $ | 425,102 | ||||||||||||||||||||||||||||||||||||||||||||
Stock-based compensation | 19,665 | — | 427 | — | 427 | ||||||||||||||||||||||||||||||||||||||||||||||||
Net income | — | — | — | 9,755 | 9,755 | ||||||||||||||||||||||||||||||||||||||||||||||||
Dividends declared | — | — | — | (9,527 | ) | (9,527 | ) | ||||||||||||||||||||||||||||||||||||||||||||||
Balance at June 30, 2019 | 28,868,735 | $ | 283 | $ | 422,658 | $ | 2,816 | $ | 425,757 | ||||||||||||||||||||||||||||||||||||||||||||
Stock-based compensation | (3,125 | ) | — | 479 | — | 479 | |||||||||||||||||||||||||||||||||||||||||||||||
Net income | — | — | — | 9,034 | 9,034 | ||||||||||||||||||||||||||||||||||||||||||||||||
Dividends declared | — | — | — | (9,526 | ) | (9,526 | ) | ||||||||||||||||||||||||||||||||||||||||||||||
Balance at September 30, 2019 | 28,865,610 | $ | 283 | $ | 423,137 | $ | 2,324 | $ | 425,744 | ||||||||||||||||||||||||||||||||||||||||||||
Stock-based compensation | — | — | 482 | — | 482 | ||||||||||||||||||||||||||||||||||||||||||||||||
Net income | — | — | — | 9,660 | 9,660 | ||||||||||||||||||||||||||||||||||||||||||||||||
Dividends declared | — | — | — | (9,547 | ) | (9,547 | ) | ||||||||||||||||||||||||||||||||||||||||||||||
Balance at December 31, 2019 | 28,865,610 | $ | 283 | $ | 423,619 | $ | 2,437 | $ | 426,339 | Balance at December 31, 2019 | 28,865,610 | $ | 283 | $ | 423,619 | $ | 0 | $ | 2,437 | $ | 426,339 | ||||||||||||||||||||||||||||||||
Sale of common stock | 4,600,000 | 46 | 73,186 | — | 73,232 | Sale of common stock | 4,600,000 | 46 | 73,186 | — | — | 73,232 | |||||||||||||||||||||||||||||||||||||||||
Offering costs | — | — | (341 | ) | — | (341 | ) | Offering costs | — | — | (341) | — | — | (341) | |||||||||||||||||||||||||||||||||||||||
Stock-based compensation | (66,658 | ) | — | 225 | — | 225 | Stock-based compensation | (66,658) | — | 225 | — | — | 225 | ||||||||||||||||||||||||||||||||||||||||
Net loss | — | — | — | (17,263 | ) | (17,263 | ) | Net loss | — | — | — | — | (17,263) | (17,263) | |||||||||||||||||||||||||||||||||||||||
Dividends declared | — | — | — | (11,076 | ) | (11,076 | ) | Dividends declared | — | — | — | — | (11,076) | (11,076) | |||||||||||||||||||||||||||||||||||||||
Impact of adoption of CECL (Note 2) | — | — | — | (5,051 | ) | (5,051 | ) | Impact of adoption of CECL (Note 2) | — | — | — | — | (5,051) | (5,051) | |||||||||||||||||||||||||||||||||||||||
Balance at March 31, 2020 | 33,398,952 | $ | 329 | $ | 496,689 | $ | (30,953 | ) | $ | 466,065 | Balance at March 31, 2020 | 33,398,952 | $ | 329 | $ | 496,689 | $ | 0 | $ | (30,953) | $ | 466,065 | |||||||||||||||||||||||||||||||
Stock-based compensation | 42,985 | — | 365 | — | 365 | Stock-based compensation | 42,985 | — | 365 | — | — | 365 | |||||||||||||||||||||||||||||||||||||||||
Net income | — | — | — | 9,768 | 9,768 | Net income | — | — | — | — | 9,768 | 9,768 | |||||||||||||||||||||||||||||||||||||||||
Dividends declared | — | — | — | (11,072 | ) | (11,072 | ) | Dividends declared | — | — | — | — | (11,072) | (11,072) | |||||||||||||||||||||||||||||||||||||||
Balance at June 30, 2020 | 33,441,937 | $ | 329 | $ | 497,054 | $ | (32,257 | ) | $ | 465,126 | Balance at June 30, 2020 | 33,441,937 | $ | 329 | $ | 497,054 | $ | 0 | $ | (32,257) | $ | 465,126 | |||||||||||||||||||||||||||||||
Stock-based compensation | — | — | 367 | — | 367 | Stock-based compensation | — | — | 367 | — | — | 367 | |||||||||||||||||||||||||||||||||||||||||
Net income | — | — | — | 14,928 | 14,928 | Net income | — | — | — | — | 14,928 | 14,928 | |||||||||||||||||||||||||||||||||||||||||
Dividends declared | — | — | — | (11,072 | ) | (11,072 | ) | Dividends declared | — | — | — | — | (11,072) | (11,072) | |||||||||||||||||||||||||||||||||||||||
Balance at September 30, 2020 | 33,441,937 | $ | 329 | $ | 497,421 | $ | (28,401 | ) | $ | 469,349 | Balance at September 30, 2020 | 33,441,937 | $ | 329 | $ | 497,421 | $ | 0 | $ | (28,401) | $ | 469,349 | |||||||||||||||||||||||||||||||
Stock-based compensation | Stock-based compensation | 395 | — | 382 | — | — | 382 | ||||||||||||||||||||||||||||||||||||||||||||||
Net income | Net income | — | — | — | — | 14,407 | 14,407 | ||||||||||||||||||||||||||||||||||||||||||||||
Dividends declared | Dividends declared | — | — | — | — | (11,123) | (11,123) | ||||||||||||||||||||||||||||||||||||||||||||||
Balance at December 31, 2020 | Balance at December 31, 2020 | 33,442,332 | $ | 329 | $ | 497,803 | $ | 0 | $ | (25,117) | $ | 473,015 | |||||||||||||||||||||||||||||||||||||||||
Sale of common stock | Sale of common stock | 7,000,000 | 70 | 100,800 | — | — | 100,870 | ||||||||||||||||||||||||||||||||||||||||||||||
Offering costs | Offering costs | — | — | (188) | — | — | (188) | ||||||||||||||||||||||||||||||||||||||||||||||
Stock-based compensation | Stock-based compensation | 35,509 | — | 521 | — | — | 521 | ||||||||||||||||||||||||||||||||||||||||||||||
Other comprehensive income | Other comprehensive income | — | — | — | 263 | — | 263 | ||||||||||||||||||||||||||||||||||||||||||||||
Net income | Net income | — | — | — | — | 15,740 | 15,740 | ||||||||||||||||||||||||||||||||||||||||||||||
Dividends declared | Dividends declared | — | — | — | — | (14,248) | (14,248) | ||||||||||||||||||||||||||||||||||||||||||||||
Balance at March 31, 2021 | Balance at March 31, 2021 | 40,477,841 | $ | 399 | $ | 598,936 | $ | 263 | $ | (23,625) | $ | 575,973 | |||||||||||||||||||||||||||||||||||||||||
Sale of common stock | Sale of common stock | 6,500,000 | 65 | 101,725 | — | — | 101,790 | ||||||||||||||||||||||||||||||||||||||||||||||
Offering costs | Offering costs | — | — | (164) | — | — | (164) | ||||||||||||||||||||||||||||||||||||||||||||||
Stock-based compensation | Stock-based compensation | 23,280 | — | 497 | — | — | 497 | ||||||||||||||||||||||||||||||||||||||||||||||
Other comprehensive income | Other comprehensive income | — | — | — | (146) | — | (146) | ||||||||||||||||||||||||||||||||||||||||||||||
Net income | Net income | — | — | — | — | 17,615 | 17,615 | ||||||||||||||||||||||||||||||||||||||||||||||
Dividends declared | Dividends declared | — | — | — | — | (16,528) | (16,528) | ||||||||||||||||||||||||||||||||||||||||||||||
Balance at June 30, 2021 | Balance at June 30, 2021 | 47,001,121 | $ | 464 | $ | 700,994 | $ | 117 | $ | (22,538) | $ | 679,037 |
For the six months ended June 30, | |||||||||||||||||
2021 | 2020 | ||||||||||||||||
(unaudited) | (unaudited) | ||||||||||||||||
Operating activities: | |||||||||||||||||
Net income (loss) | $ | 33,355 | $ | (7,495) | |||||||||||||
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | |||||||||||||||||
Amortization of deferred financing costs | 4,491 | 3,257 | |||||||||||||||
Accretion of deferred loan origination fees and costs | (3,911) | (3,643) | |||||||||||||||
Stock-based compensation | 1,018 | 590 | |||||||||||||||
Depreciation of real estate owned | 449 | 445 | |||||||||||||||
Provision for current expected credit losses | (7,123) | 23,111 | |||||||||||||||
Unrealized losses on loans held for sale | 0 | 3,998 | |||||||||||||||
Changes in operating assets and liabilities: | |||||||||||||||||
Other assets | (9,346) | (4,689) | |||||||||||||||
Due to affiliate | 581 | 456 | |||||||||||||||
Other liabilities | 267 | (1,867) | |||||||||||||||
Net cash provided by (used in) operating activities | 19,781 | 14,163 | |||||||||||||||
Investing activities: | |||||||||||||||||
Issuance of and fundings on loans held for investment | (463,871) | (451,805) | |||||||||||||||
Principal repayment of loans held for investment | 155,302 | 255,119 | |||||||||||||||
Receipt of origination fees | 1,342 | 3,888 | |||||||||||||||
Purchases of capitalized additions to real estate owned | (26) | (237) | |||||||||||||||
Payments under derivative financial instruments | (700) | 0 | |||||||||||||||
Net cash provided by (used in) investing activities | (307,953) | (193,035) | |||||||||||||||
Financing activities: | |||||||||||||||||
Proceeds from secured funding agreements | 207,237 | 355,083 | |||||||||||||||
Repayments of secured funding agreements | (558,584) | (206,830) | |||||||||||||||
Proceeds from notes payable | 9,695 | 0 | |||||||||||||||
Repayments of notes payable | (27,880) | 0 | |||||||||||||||
Repayments of secured term loan | (50,000) | 0 | |||||||||||||||
Proceeds from secured borrowings | 0 | 48,055 | |||||||||||||||
Payment of secured funding costs | (9,133) | (2,393) | |||||||||||||||
Proceeds from issuance of debt of consolidated VIEs | 540,471 | 0 | |||||||||||||||
Dividends paid | (25,373) | (20,622) | |||||||||||||||
Proceeds from sale of common stock | 202,660 | 73,232 | |||||||||||||||
Payment of offering costs | (26) | (301) | |||||||||||||||
Net cash provided by (used in) financing activities | 289,067 | 246,224 | |||||||||||||||
Change in cash and cash equivalents | 895 | 67,352 | |||||||||||||||
Cash and cash equivalents, beginning of period | 74,776 | 5,635 | |||||||||||||||
Cash and cash equivalents, end of period | $ | 75,671 | $ | 72,987 | |||||||||||||
For the nine months ended September 30, | |||||||
2020 | 2019 | ||||||
(unaudited) | (unaudited) | ||||||
Operating activities: | |||||||
Net income | $ | 7,433 | $ | 27,331 | |||
Adjustments to reconcile net income to net cash provided by (used in) operating activities: | |||||||
Amortization of deferred financing costs | 4,906 | 4,954 | |||||
Accretion of deferred loan origination fees and costs | (5,732 | ) | (5,022 | ) | |||
Stock-based compensation | 956 | 1,398 | |||||
Depreciation of real estate owned | 668 | 448 | |||||
Provision for current expected credit losses | 22,063 | 0 | |||||
Realized losses on loans sold | 4,008 | 0 | |||||
Changes in operating assets and liabilities: | |||||||
Other assets | (9,302 | ) | (4,305 | ) | |||
Due to affiliate | (91 | ) | (536 | ) | |||
Other liabilities | (2,165 | ) | 608 | ||||
Net cash provided by (used in) operating activities | 22,744 | 24,876 | |||||
Investing activities: | |||||||
Issuance of and fundings on loans held for investment | (485,913 | ) | (415,156 | ) | |||
Principal repayment of loans held for investment | 280,318 | 343,948 | |||||
Proceeds from sale of loans held for sale | 96,597 | 0 | |||||
Receipt of origination fees | 3,978 | 4,982 | |||||
Purchases of capitalized additions to real estate owned | (243 | ) | (1,586 | ) | |||
Net cash provided by (used in) investing activities | (105,263 | ) | (67,812 | ) | |||
Financing activities: | |||||||
Proceeds from secured funding agreements | 466,778 | 415,433 | |||||
Repayments of secured funding agreements | (404,231 | ) | (573,377 | ) | |||
Proceeds from notes payable | 3,000 | 56,155 | |||||
Proceeds from secured borrowings | 55,095 | 0 | |||||
Payment of secured funding costs | (3,700 | ) | (5,124 | ) | |||
Proceeds from issuance of debt of consolidated VIEs | 0 | 172,673 | |||||
Dividends paid | (31,694 | ) | (27,961 | ) | |||
Proceeds from sale of common stock | 73,232 | 0 | |||||
Payment of offering costs | (301 | ) | 0 | ||||
Net cash provided by (used in) financing activities | 158,179 | 37,799 | |||||
Change in cash, cash equivalents and restricted cash | 75,660 | (5,137 | ) | ||||
Cash, cash equivalents and restricted cash, beginning of period | 5,635 | 11,468 | |||||
Cash, cash equivalents and restricted cash, end of period | $ | 81,295 | $ | 6,331 |
As of September 30, | |||||||
2020 | 2019 | ||||||
Cash and cash equivalents | $ | 81,295 | $ | 5,952 | |||
Restricted cash | 0 | 379 | |||||
Total cash, cash equivalents and restricted cash shown in the Company's consolidated statements of cash flows | $ | 81,295 | $ | 6,331 |
For the three months ended September 30, | For the nine months ended September 30, | ||||||||||||||
2020 | 2019 | 2020 | 2019 | ||||||||||||
Secured funding agreements | $ | 6,000 | $ | 7,438 | $ | 22,447 | $ | 24,868 | |||||||
Notes payable (1) | 337 | 356 | 952 | 536 | |||||||||||
Securitization debt | 2,518 | 5,088 | 9,879 | 15,361 | |||||||||||
Secured term loan | 1,668 | 2,242 | 5,469 | 6,774 | |||||||||||
Secured borrowings | 1,352 | 0 | 1,703 | 0 | |||||||||||
Interest expense | $ | 11,875 | $ | 15,124 | $ | 40,450 | $ | 47,539 |
For the three months ended June 30, | For the six months ended June 30, | ||||||||||||||||||||||||||||
2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||||||||
Secured funding agreements | $ | 3,196 | $ | 7,600 | $ | 7,019 | $ | 16,448 | |||||||||||||||||||||
Notes payable (1) | 279 | 304 | 1,473 | 616 | |||||||||||||||||||||||||
Securitization debt | 5,136 | 3,104 | 9,444 | 7,360 | |||||||||||||||||||||||||
Secured term loan | 797 | 1,737 | 2,138 | 3,802 | |||||||||||||||||||||||||
Secured borrowings | 1,450 | 297 | 2,881 | 350 | |||||||||||||||||||||||||
Other (2) | 234 | 0 | 276 | 0 | |||||||||||||||||||||||||
Interest expense | $ | 11,092 | $ | 13,042 | $ | 23,231 | $ | 28,576 |
As of September 30, 2020 | ||||||||||||||||
Carrying Amount (1) | Outstanding Principal (1) | Weighted Average Unleveraged Effective Yield | Weighted Average Remaining Life (Years) | |||||||||||||
Senior mortgage loans | $ | 1,680,529 | $ | 1,690,473 | 5.9 | % | (2) | 6.2 | % | (3) | 1.3 | |||||
Subordinated debt and preferred equity investments | 97,670 | 98,672 | 13.4 | % | (2) | 13.4 | % | (3) | 2.1 | |||||||
Total loans held for investment portfolio | $ | 1,778,199 | $ | 1,789,145 | 6.3 | % | (2) | 6.6 | % | (3) | 1.3 |
As of December 31, 2019 | |||||||||||
Carrying Amount (1) | Outstanding Principal (1) | Weighted Average Unleveraged Effective Yield (2) | Weighted Average Remaining Life (Years) | ||||||||
Senior mortgage loans | $ | 1,622,666 | $ | 1,632,164 | 6.5% | 1.5 | |||||
Subordinated debt and preferred equity investments | 59,832 | 60,730 | 15.1% | 2.6 | |||||||
Total loans held for investment portfolio | $ | 1,682,498 | $ | 1,692,894 | 6.8% | 1.6 |
As of June 30, 2021 | ||||||||||||||||||||||||||||||||
Carrying Amount (1) | Outstanding Principal (1) | Weighted Average Unleveraged Effective Yield | Weighted Average Remaining Life (Years) | |||||||||||||||||||||||||||||
Senior mortgage loans | $ | 2,001,488 | $ | 2,011,128 | 5.8 | % | (2) | 5.9 | % | (3) | 1.3 | |||||||||||||||||||||
Subordinated debt and preferred equity investments | 30,920 | 31,416 | 15.8 | % | (2) | 15.8 | % | (3) | 2.5 | |||||||||||||||||||||||
Total loans held for investment portfolio | $ | 2,032,408 | $ | 2,042,544 | 6.0 | % | (2) | 6.1 | % | (3) | 1.3 |
As of December 31, 2020 | ||||||||||||||||||||||||||||||||
Carrying Amount (1) | Outstanding Principal (1) | Weighted Average Unleveraged Effective Yield | Weighted Average Remaining Life (Years) | |||||||||||||||||||||||||||||
Senior mortgage loans | $ | 1,713,601 | $ | 1,723,638 | 5.9% | (2) | 6.2 | % | (3) | 1.2 | ||||||||||||||||||||||
Subordinated debt and preferred equity investments | 101,618 | 102,603 | 13.4% | (2) | 13.4 | % | (3) | 1.9 | ||||||||||||||||||||||||
Total loans held for investment portfolio | $ | 1,815,219 | $ | 1,826,241 | 6.3% | (2) | 6.6 | % | (3) | 1.2 |
Loan Type | Location | Outstanding Principal (1) | Carrying Amount (1) | Interest Rate | Unleveraged Effective Yield (2) | Maturity Date (3) | Payment Terms (4) | ||||||||||||||||||||||||||||||||||||||||
Senior Mortgage Loans: | |||||||||||||||||||||||||||||||||||||||||||||||
Office | IL | $150.5 | $149.7 | L+3.61% | 5.5% | Mar 2023 | I/O | ||||||||||||||||||||||||||||||||||||||||
Office | Diversified | 111.6 | 111.3 | L+3.65% | 5.7% | Jan 2023 | I/O | ||||||||||||||||||||||||||||||||||||||||
Multifamily | FL | 91.3 | 90.9 | L+5.00% | 6.7% | Jun 2022 | I/O | ||||||||||||||||||||||||||||||||||||||||
Mixed-use | FL | 84.0 | 84.0 | L+4.25% | 5.7% | Feb 2023 | (5) | I/O | |||||||||||||||||||||||||||||||||||||||
Multifamily | TX | 75.0 | 74.8 | L+3.25% | 3.5% | Oct 2024 | I/O | ||||||||||||||||||||||||||||||||||||||||
Hotel | OR/WA | 68.1 | 67.1 | L+3.45% | 7.4% | May 2022 | (6) | I/O | |||||||||||||||||||||||||||||||||||||||
Office | IL | 67.8 | 67.7 | L+3.75% | 5.3% | Dec 2021 | I/O | ||||||||||||||||||||||||||||||||||||||||
Industrial | NY | 64.3 | 64.3 | L+5.00% | 8.1% | Aug 2021 | I/O | ||||||||||||||||||||||||||||||||||||||||
Office | NC | 63.1 | 63.1 | L+4.25% | 6.7% | Mar 2022 | (7) | I/O | |||||||||||||||||||||||||||||||||||||||
Industrial | IL | 62.1 | 61.4 | L+4.55% | 5.3% | May 2024 | I/O | ||||||||||||||||||||||||||||||||||||||||
Hotel | Diversified | 60.8 | 60.8 | L+3.60% | 6.2% | Sep 2021 | I/O | ||||||||||||||||||||||||||||||||||||||||
Office | IL | 57.5 | 57.4 | L+3.95% | 6.2% | Jun 2022 | (8) | I/O | |||||||||||||||||||||||||||||||||||||||
Mixed-use | CA | 56.5 | 56.3 | (9) | 5.4% | Jan 2024 | I/O | ||||||||||||||||||||||||||||||||||||||||
Self Storage | NJ | 55.5 | 55.6 | L+3.80% | 4.1% | Feb 2024 | I/O | ||||||||||||||||||||||||||||||||||||||||
Residential Condominium | NY | 52.4 | 52.4 | (10) | 11.0% | May 2021 | (10) | I/O | |||||||||||||||||||||||||||||||||||||||
Multifamily | FL | 46.2 | 46.1 | L+5.00% | 6.6% | Jun 2022 | I/O | ||||||||||||||||||||||||||||||||||||||||
Office | GA | 45.7 | 45.4 | L+3.05% | 5.7% | Dec 2022 | I/O | ||||||||||||||||||||||||||||||||||||||||
Multifamily | FL | 43.5 | 43.4 | L+2.60% | 5.5% | Jan 2022 | I/O | ||||||||||||||||||||||||||||||||||||||||
Multifamily | NJ | 41.0 | 40.9 | L+3.05% | 4.9% | Mar 2022 | I/O | ||||||||||||||||||||||||||||||||||||||||
Hotel | CA | 40.0 | 39.9 | L+4.12% | 5.8% | Jan 2022 | I/O | ||||||||||||||||||||||||||||||||||||||||
Student Housing | TX | 39.7 | 39.7 | L+4.75% | 5.5% | Jan 2022 | (11) | P/I | (12) | ||||||||||||||||||||||||||||||||||||||
Multifamily | SC | 37.5 | 37.1 | L+2.75% | 3.4% | Jun 2023 | I/O | ||||||||||||||||||||||||||||||||||||||||
Student Housing | CA | 36.7 | 36.7 | L+3.95% | 4.3% | Jul 2022 | I/O | ||||||||||||||||||||||||||||||||||||||||
Mixed-use | TX | 35.7 | 35.5 | L+3.75% | (13) | 4.7% | Sep 2022 | I/O | |||||||||||||||||||||||||||||||||||||||
Hotel | MI | 33.2 | 33.1 | L+3.95% | 4.3% | Jul 2022 | I/O | ||||||||||||||||||||||||||||||||||||||||
Hotel | IL | 32.9 | 31.3 | L+4.40% | 0% | (14) | May 2022 | I/O | |||||||||||||||||||||||||||||||||||||||
Office | CA | 32.2 | 32.0 | L+3.35% | 6.0% | Nov 2022 | I/O | ||||||||||||||||||||||||||||||||||||||||
Mixed-use | CA | 32.1 | 31.8 | L+4.10% | 6.3% | Mar 2023 | I/O | ||||||||||||||||||||||||||||||||||||||||
Student Housing | NC | 30.0 | 30.0 | L+3.15% | 5.9% | Feb 2022 | I/O | ||||||||||||||||||||||||||||||||||||||||
Multifamily | PA | 29.4 | 29.3 | L+3.00% | 5.9% | Dec 2021 | I/O | ||||||||||||||||||||||||||||||||||||||||
Office | IL | 28.5 | 28.3 | L+3.80% | 6.2% | Jan 2023 | I/O | ||||||||||||||||||||||||||||||||||||||||
Office | NC | 28.5 | 28.0 | L+3.53% | 6.8% | May 2023 | I/O | ||||||||||||||||||||||||||||||||||||||||
Multifamily | SC | 26.9 | 26.7 | L+6.50% | 10.1% | Sep 2022 | I/O | ||||||||||||||||||||||||||||||||||||||||
Student Housing | TX | 24.6 | 24.4 | L+3.45% | 5.6% | Feb 2023 | I/O | ||||||||||||||||||||||||||||||||||||||||
Industrial | NJ | 23.2 | 22.9 | L+3.75% | 4.6% | May 2024 | I/O | ||||||||||||||||||||||||||||||||||||||||
Office | CA | 22.9 | 22.8 | L+3.40% | 6.2% | Nov 2021 | I/O | ||||||||||||||||||||||||||||||||||||||||
Industrial | CA | 22.8 | 22.8 | L+4.50% | 7.4% | Dec 2021 | I/O | ||||||||||||||||||||||||||||||||||||||||
Student Housing | FL | 22.0 | 21.9 | L+3.25% | 5.9% | Aug 2022 | I/O | ||||||||||||||||||||||||||||||||||||||||
Student Housing | AL | 19.5 | 19.3 | L+3.85% | 4.3% | May 2024 | I/O | ||||||||||||||||||||||||||||||||||||||||
Self Storage | FL | 19.5 | 19.5 | L+3.50% | 6.0% | Mar 2022 | I/O | ||||||||||||||||||||||||||||||||||||||||
Multifamily | WA | 18.7 | 18.6 | L+3.00% | 5.1% | Mar 2023 | I/O | ||||||||||||||||||||||||||||||||||||||||
Residential | CA | 14.3 | 14.3 | 13.00% | 13.0% | May 2021 | (15) | I/O | |||||||||||||||||||||||||||||||||||||||
Industrial | CA | 13.9 | 13.8 | L+3.75% | 6.3% | Mar 2023 | I/O | ||||||||||||||||||||||||||||||||||||||||
Self Storage | FL | 10.8 | 10.7 | L+2.90% | 4.4% | Dec 2023 | I/O | ||||||||||||||||||||||||||||||||||||||||
Office | NC | 9.4 | 9.4 | L+4.00% | 6.6% | Nov 2022 | I/O | ||||||||||||||||||||||||||||||||||||||||
Self Storage | FL | 7.0 | 6.9 | L+2.90% | 4.3% | Dec 2023 | I/O | ||||||||||||||||||||||||||||||||||||||||
Self Storage | FL | 6.4 | 6.4 | L+2.90% | 4.3% | Dec 2023 | I/O | ||||||||||||||||||||||||||||||||||||||||
Self Storage | MO | 6.0 | 6.0 | L+3.00% | 4.4% | Dec 2023 | I/O | ||||||||||||||||||||||||||||||||||||||||
Self Storage | IL | 5.5 | 5.4 | L+3.00% | 4.3% | Dec 2023 | I/O | ||||||||||||||||||||||||||||||||||||||||
Self Storage | FL | 4.4 | 4.4 | L+2.90% | 4.2% | Dec 2023 | I/O | ||||||||||||||||||||||||||||||||||||||||
Subordinated Debt and Preferred Equity Investments: | |||||||||||||||||||||||||||||||||||||||||||||||
Office | NJ | 16.9 | 16.4 | 12.00% | 12.8% | Jan 2026 | P/I | (12) | |||||||||||||||||||||||||||||||||||||||
Residential Condominium | HI | 11.5 | 11.5 | 14.00% | 21.7% | Aug 2021 | (16) | I/O | |||||||||||||||||||||||||||||||||||||||
Office | CA | 3.0 | 3.0 | L+8.25% | 9.7% | Nov 2021 | I/O | ||||||||||||||||||||||||||||||||||||||||
Total/Weighted Average | $2,042.5 | $2,032.4 | 6.0% |
Loan Type | Location | Outstanding Principal (1) | Carrying Amount (1) | Interest Rate | Unleveraged Effective Yield (2) | Maturity Date (3) | Payment Terms (4) | ||||||||
Senior Mortgage Loans: | |||||||||||||||
Office | Diversified | $108.6 | $108.2 | L+3.65% | 5.7% | Jan 2023 | I/O | ||||||||
Mixed-use | FL | 99.0 | 98.7 | L+4.25% | 7.8% | Feb 2021 | I/O | ||||||||
Multifamily | FL | 91.3 | 90.7 | L+5.00% | 6.7% | Jun 2022 | I/O | ||||||||
Multifamily | TX | 75.0 | 74.7 | L+2.85% | 5.0% | Oct 2022 | I/O | ||||||||
Office | IL | 69.6 | 69.6 | L+3.75% | 5.6% | Dec 2020 | I/O | ||||||||
Hotel | OR/WA | 68.1 | 67.6 | L+3.45% | 4.6% | (5) | May 2021 | I/O | |||||||
Office | NC | 61.0 | 60.8 | L+4.25% | 8.4% | Mar 2021 | I/O | ||||||||
Hotel | Diversified | 60.8 | 60.6 | L+3.60% | 6.2% | Sep 2021 | I/O | ||||||||
Office | IL | 57.3 | 57.2 | L+3.95% | 6.3% | Jun 2021 | I/O | ||||||||
Mixed-use | CA | 51.2 | 51.0 | L+4.00% | 6.2% | Apr 2022 | (6) | I/O | |||||||
Industrial | NY | 49.8 | 49.6 | L+5.00% | 8.3% | Feb 2021 | I/O | ||||||||
Multifamily | FL | 46.2 | 46.0 | L+5.00% | 6.6% | Jun 2022 | I/O | ||||||||
Multifamily | FL | 43.3 | 43.1 | L+2.60% | 5.5% | Jan 2022 | I/O | ||||||||
Student Housing | TX | 41.0 | 40.9 | L+4.75% | 5.4% | Jan 2021 | I/O | ||||||||
Multifamily | NJ | 41.0 | 40.8 | L+3.05% | 4.9% | Mar 2022 | I/O | ||||||||
Office | GA | 40.2 | 39.7 | L+3.05% | 5.7% | Dec 2022 | I/O | ||||||||
Hotel | CA | 40.0 | 40.0 | L+4.12% | 5.9% | Jan 2021 | I/O | ||||||||
Student Housing | CA | 39.7 | 39.7 | L+3.95% | 5.2% | Jul 2021 | (7) | I/O | |||||||
Multifamily | KS | 35.8 | 35.5 | L+3.25% | 5.5% | Nov 2022 | I/O | ||||||||
Mixed-use | TX | 35.2 | 34.9 | L+3.75% | 6.7% | Sep 2022 | I/O | ||||||||
Industrial | NC | 34.8 | 34.6 | L+4.05% | 5.9% | Mar 2024 | I/O | ||||||||
Hotel | MI | 34.2 | 34.1 | L+3.95% | 4.3% | Jul 2022 | (8) | I/O | |||||||
Hotel | IL | 32.9 | 32.4 | L+4.40% | 0% | (9) | May 2021 | I/O | |||||||
Office | CA | 31.1 | 30.8 | L+3.35% | 6.0% | Nov 2022 | I/O | ||||||||
Multifamily | NY | 30.1 | 30.1 | L+3.20% | 4.9% | Dec 2020 | I/O | ||||||||
Student Housing | NC | 30.0 | 29.9 | L+3.15% | 5.9% | Feb 2022 | I/O | ||||||||
Multifamily | PA | 29.4 | 29.2 | L+3.00% | 5.9% | Dec 2021 | I/O | ||||||||
Office | IL | 28.0 | 27.7 | L+3.80% | 6.2% | Jan 2023 | I/O | ||||||||
Multifamily | TX | 27.5 | 27.5 | L+3.20% | 4.9% | Oct 2021 | (10) | I/O | |||||||
Student Housing | TX | 24.6 | 24.3 | L+3.45% | 5.5% | Feb 2023 | I/O | ||||||||
Student Housing | AL | 24.1 | 23.0 | L+4.45% | 0% | (9) | Dec 2020 | (11) | I/O | ||||||
Office | CA | 22.8 | 22.8 | L+3.40% | 6.2% | Nov 2021 | I/O | ||||||||
Mixed-use | CA | 22.5 | 22.2 | L+4.10% | 6.5% | Mar 2023 | I/O | ||||||||
Office | NC | 22.1 | 21.5 | L+3.52% | 6.8% | May 2023 | I/O | ||||||||
Student Housing | FL | 22.0 | 21.9 | L+3.25% | 5.9% | Aug 2022 | I/O | ||||||||
Industrial | CA | 21.5 | 21.4 | L+4.50% | 7.3% | Dec 2021 | I/O | ||||||||
Self Storage | FL | 19.5 | 19.4 | L+3.50% | 6.0% | Mar 2022 | I/O | ||||||||
Multifamily | WA | 18.6 | 18.5 | L+3.00% | 5.1% | Mar 2023 | I/O | ||||||||
Office | TX | 15.8 | 15.6 | L+4.05% | 7.6% | Nov 2021 | I/O | ||||||||
Residential | CA | 13.7 | 13.7 | 13.00% | 13.0% | Feb 2021 | (12) | I/O | |||||||
Industrial | CA | 13.5 | 13.3 | L+3.75% | 6.3% | Mar 2023 | I/O | ||||||||
Multifamily | SC | 9.1 | 8.8 | L+6.50% | 10.1% | Sep 2022 | I/O | ||||||||
Office | NC | 8.6 | 8.5 | L+4.00% | 6.7% | Nov 2022 | I/O | ||||||||
Subordinated Debt and Preferred Equity Investments: | |||||||||||||||
Office | IL | 34.5 | 34.2 | L+8.00% | 10.0% | Mar 2023 | I/O | ||||||||
Office | NJ | 17.0 | 16.5 | 12.00% | 12.8% | Jan 2026 | I/O | (13) | |||||||
Residential Condominium | NY | 16.8 | 16.8 | L+14.00% | (14) | 18.0% | May 2021 | (14) | I/O | ||||||
Mixed-use | IL | 15.9 | 15.8 | L+12.25% | 14.5% | Nov 2021 | I/O | ||||||||
Residential Condominium | HI | 11.5 | 11.5 | 14.00% | 17.0% | Oct 2020 | (15) | I/O | |||||||
Office | CA | 2.9 | 2.9 | L+8.25% | 9.7% | Nov 2021 | I/O | ||||||||
Total/Weighted Average | $1,789.1 | $1,778.2 | 6.3% |
Balance at December 31, 2019 | $ | 1,682,498 | |
Initial funding | 422,062 | ||
Origination fees and discounts, net of costs | (4,915 | ) | |
Additional funding | 74,372 | ||
Amortizing payments | (1,819 | ) | |
Loan payoffs | (299,227 | ) | |
Loans sold to third parties (1) | (100,504 | ) | |
Origination fee accretion | 5,732 | ||
Balance at September 30, 2020 | $ | 1,778,199 |
Balance at December 31, 2020 | $ | 1,815,219 | |||
Initial funding | 431,235 | ||||
Origination fees and discounts, net of | (3,688) | ||||
Additional funding | 40,392 | ||||
Amortizing payments | (1,141) | ||||
Loan payoffs | (253,520) | ||||
Origination fee accretion | 3,911 | ||||
Balance at June 30, | $ | 2,032,408 |
Balance at June 30, 2020 | $ | 26,063 | |
Provision for current expected credit losses | (609 | ) | |
Write-offs | 0 | ||
Recoveries | 0 | ||
Balance at September 30, 2020 (1) | $ | 25,454 |
Balance at December 31, 2019 | $ | 0 | |
Impact of adoption of CECL | 4,440 | ||
Provision for current expected credit losses | 21,014 | ||
Write-offs | 0 | ||
Recoveries | 0 | ||
Balance at September 30, 2020 (1) | $ | 25,454 |
Balance at March 31, 2021 | $ | 20,895 | ||||
(4,003) | ||||||
Write-offs | 0 | |||||
Recoveries | 0 | |||||
Balance at June 30, 2021 (1) | $ | 16,892 | ||||
Balance at December 31, 2020 | $ | 23,604 | ||||
Provision for current expected credit losses | (6,712) | |||||
Write-offs | 0 | |||||
Recoveries | 0 | |||||
Balance at June 30, 2021 (1) | $ | 16,892 |
Balance at June 30, 2020 | $ | 2,099 | |
Provision for current expected credit losses | (439 | ) | |
Write-offs | 0 | ||
Recoveries | 0 | ||
Balance at September 30, 2020 (1) | $ | 1,660 |
Balance at December 31, 2019 | $ | 0 | |
Impact of adoption of CECL | 611 | ||
Provision for current expected credit losses | 1,049 | ||
Write-offs | 0 | ||
Recoveries | 0 | ||
Balance at September 30, 2020 (1) | $ | 1,660 |
Balance at March 31, 2021 | $ | 1,101 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Provision for current expected credit losses | 120 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Write-offs | 0 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Recoveries | 0 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance at June 30, 2021 (1)
(1) As of June 30, 2021, the CECL Reserve related to unfunded commitments on loans held for investment is recorded within other liabilities in the Company's consolidated balance sheets. The Company continuously evaluates the credit quality of each loan by assessing the risk factors of each loan and assigning a risk rating based on a variety of factors. Risk factors include property type, geographic and local market dynamics, physical condition, leasing and tenant profile, projected cash flow, loan structure and exit plan, loan-to-value ratio, debt service 20 coverage ratio, project sponsorship, and other factors deemed necessary. Based on a 5-point scale, the Company’s loans are rated
The risk ratings are primarily based on historical data as well as taking into account future economic conditions. As of
Accrued Interest Receivable The Company elected not to measure a 5. REAL ESTATE OWNED On March 8, 2019, the Company acquired legal title to a hotel property located in New York through a deed in lieu of foreclosure. Prior to March 8, 2019, the hotel property collateralized a $38.6 million senior mortgage loan held by the Company that was in maturity default due to the failure of the borrower to repay the outstanding principal balance of the loan by the December 2018 maturity date. In conjunction with the deed in lieu of foreclosure, the Company derecognized the $38.6 million senior mortgage loan and recognized the hotel property as real estate owned. As the Company does not expect to complete a sale of the hotel property within the next twelve months, the hotel property is considered held for use, and is carried at its estimated fair value at acquisition and is presented net of accumulated depreciation and impairment charges. The Company did not recognize any gain or loss on the derecognition of the senior mortgage loan as the fair value of the hotel property of $36.9 million and the net assets held at the hotel property of $1.7 million at acquisition approximated the $38.6 million carrying value of the senior mortgage loan. The assets and liabilities of the hotel property are included within other assets and other liabilities, respectively, in the Company’s consolidated balance sheets and include items such as cash, restricted cash, trade receivables and payables and advance deposits. The following table summarizes the Company’s real estate owned as of 21
As of For the three and 6. DEBT Financing Agreements The Company borrows funds, as applicable in a given period, under the Wells Fargo Facility, the Citibank Facility, the
(1) The maximum commitment for the Wells Fargo Facility (as defined below) may be increased to up to $500.0 million at the Company’s option, subject to the satisfaction of certain conditions, including payment of an upsize fee. (2) The CNB Facility (as defined below) has an accordion feature that provides for, subject to approval by City National Bank in its sole discretion, an increase in the commitment amount from $50.0 million to $75.0 million for up to a period of 120 days once per calendar year. 22
Some of the Company’s Financing Agreements are collateralized by (i) assignments of specific loans, preferred equity or a pool of loans held for investment or loans held for sale owned by the Company, (ii) interests in the subordinated portion of the Company’s securitization debt, or (iii) interests in wholly-owned entity subsidiaries that hold the Company’s loans held for investment. The Company is the borrower or guarantor under each of the Financing Agreements. Generally, the Company partially offsets interest rate risk by matching the interest index of loans held for investment with the Secured Funding Agreements used to fund them. The Company’s Financing Agreements contain various affirmative and negative covenants, including negative pledges, and provisions regarding events of default that are normal and customary for similar financing arrangements. Wells Fargo Facility The Company is party to a master repurchase funding facility with Wells Fargo Bank, National Association (“Wells Fargo”) (the “Wells Fargo Facility”), which allows the Company to borrow up to $350.0 million. The maximum commitment may be increased to up to $500.0 Citibank Facility The Company is party to a $325.0 million master repurchase facility with Citibank, N.A. (“Citibank”) (the “Citibank Facility”). Under the Citibank Facility, the Company is permitted to sell and later repurchase certain qualifying senior commercial mortgage loans and A-Notes approved by Citibank in its sole discretion. The initial maturity date of the Citibank Facility is December 13, 2021, subject to 2 12-month extensions, each of which may be exercised at the Company’s option assuming no existing defaults under the Citibank Facility and applicable extension fees being paid, which, if both were exercised, would extend the maturity date of the Citibank Facility to December 13, 2023. Advances under the Citibank Facility accrue interest at a per annum rate equal to the sum of one-month LIBOR plus an indicative pricing margin range of 1.50% to 2.25%, subject to certain exceptions. The Company incurs a non-utilization fee of 25 basis points per annum on the average daily available balance of the Citibank Facility to the extent less than 75% of the Citibank Facility is utilized. For the three and CNB Facility The Company is party to a $50.0 million secured revolving funding facility with City National Bank (the “CNB Facility”) 23 thousand, respectively. For both the three and six months ended June 30, 2020, the Company incurred a non-utilization fee of MetLife Facility The Company is party to a $180.0 million revolving master repurchase facility with Metropolitan Life Insurance Company (“MetLife”) (the “MetLife Facility”), pursuant to which the Company may sell, and later repurchase, commercial mortgage loans meeting defined eligibility criteria which are approved by MetLife in its sole discretion. The Company Notes Payable Certain of the Company’s subsidiaries are party to The maturity date of the $28.3 million note is June 10, 2024, subject to 1 6-month extension, which may be exercised at the Company’s option, subject to the satisfaction of certain conditions, which, if exercised, would extend the maturity date to December 10, 2024. The loan may be prepaid at any time subject to the payment of a prepayment fee, if applicable. Initial advances under the $28.3 million note accrue interest at a per annum rate equal to the sum of one-month LIBOR plus a spread of 3.00%. If the hotel property that collateralizes the $28.3 million note achieves certain financial performance hurdles, the interest rate on advances will decrease to a per annum rate equal to the sum of one-month LIBOR plus a spread of 2.50%. The $28.3 million loan amount may be increased to up to $30.0 million to fund certain construction costs of improvements at the hotel, subject to the satisfaction of certain conditions and the payment of a commitment fee. As of The initial maturity date of the $23.5 million note is September 5, 2022, subject to 2 12-month extensions, each of which may be exercised at the Company’s option, subject to the satisfaction of certain conditions, including payment of an extension fee, which, if both were exercised, would extend the maturity date to September 5, 2024. Advances under the $23.5 million note accrue interest at a per annum rate equal to the sum of one-month LIBOR plus a spread of 3.75%. As of 24 Secured Term Loan The Company and certain of its subsidiaries are party to a The total original issue discount on the Secured Term Loan draws was $2.6 million, which represents a discount to the debt cost to be amortized into interest expense using the effective interest method over the term of the Secured Term Loan. For the three and 7. SECURED BORROWINGS Certain of the Company’s subsidiaries are party to In April 2019, the Company originated a $30.5 million loan on an office property located in North Carolina, which was bifurcated between a $24.4 million senior mortgage loan and a $6.1 million mezzanine loan. In February 2020, the Company transferred its interest in the $24.4 In June 2020, the Company originated a $91.8 million senior mortgage loan on a multifamily property located in Florida, which the Company subsequently bifurcated between a $66.9 million senior participation, which accrues interest at a per annum rate equal to the sum of one-month LIBOR plus a spread of 2.94% and a $24.9 million subordinated participation, which accrues interest at a per annum rate equal to the sum of one-month LIBOR plus a spread of 10.50%. In June 2020, the Company transferred its interest in the $24.9 million subordinated participation to a third party and retained the $66.9 million senior participation. The Company evaluated whether the transfer of the $24.9 million subordinated participation met the criteria in FASB ASC Topic 860, Transfers and Servicing, for treatment as a sale. As the $66.9 million senior participation and the $24.9 million subordinated participation failed to meet the participating interest requirements in FASB ASC Topic 860, Transfers and Servicing, since the cash flows from the original $91.8 million senior mortgage loan are not allocated pro rata to the participation holders and there is a subordination of interest amongst the holders, it was determined that the transfer did not qualify as a sale and thus, is treated as a financing transaction. As such, the Company did not derecognize the $24.9 million subordinated participation and recorded a secured borrowing liability in the consolidated balance sheets. The initial maturity date of the $24.9 million secured borrowing is June 5, 2022, subject to 25 In June 2020, the Company closed the purchase of a $46.7 million senior mortgage loan on a multifamily property located in Florida, 8. DERIVATIVE FINANCIAL INSTRUMENTS The Company uses derivative financial instruments, which includes interest rate swaps and interest rate caps, on certain borrowing transactions to manage its net exposure to interest rate changes and to reduce its overall cost of borrowing. These derivatives may or may not qualify as cash flow hedges under the hedge accounting requirements of FASB ASC Topic 815, Derivatives and Hedging. Derivatives not designated as cash flow hedges are not speculative and are used to manage our exposure to interest rate movements. See Note 2 included in these consolidated financial statements for additional discussion of the accounting for designated and non-designated hedges. The use of derivative financial instruments involves certain risks, including the risk that the counterparties to these contractual arrangements do not perform as agreed. To mitigate this risk, the Company only enters into derivative financial instruments with counterparties that have appropriate credit ratings and are major financial institutions with which the Company and its affiliates may also have other financial relationships. The following tables detail our outstanding interest rate derivatives that were designated as cash flow hedges of interest rate risk as of June 30, 2021 (notional amount in thousands):
(1) Represents fixed rate for interest rate swaps and strike rate for interest rate caps. (2) Subject to a 0.00% floor. The following table summarizes the fair value of our derivative financial instruments ($ in thousands):
_____________________________ (1) Included in other assets in the Company’s consolidated balance sheets. (2) Included in other liabilities in the Company’s consolidated balance sheets. 26 9. COMMITMENTS AND CONTINGENCIES As further discussed in Note 2, the full extent of the impact of the COVID-19 pandemic on the global economy and the Company’s business is uncertain. As of As of
The Company from time to time may be a party to litigation relating to claims arising in the normal course of business. As of At the Market Stock Offering Program On November 22, 2019, the Company entered into an equity distribution agreement (the “Equity Distribution Agreement”), pursuant to which the Company may offer and sell, from time to time, shares of the Company’s common stock, par value $0.01 per share, having an aggregate offering price of up to $100.0 million. Subject to the terms and conditions of the Equity Distribution Agreement, sales of common stock, if any, may be made in transactions that are deemed to be an “at the market offering” as defined in Rule 415(a)(4) under the Securities Act of 1933, as amended. During the Equity Offerings On On Equity Incentive Plan On April 23, 2012, the Company adopted an equity incentive plan. In April 2018, the Company’s board of directors authorized, and in June 2018, the Company’s stockholders approved, an amended and restated equity incentive plan that increased the total amount of shares of common stock the Company may grant thereunder to 1,390,000 shares (the “Amended and Restated 2012 Equity Incentive Plan”). Pursuant to the Amended and Restated 2012 Equity Incentive Plan, the Company may grant awards consisting of restricted shares of the Company’s common stock, restricted stock units (“RSUs”) and/or other 27 equity-based awards to the Company’s outside directors, employees of the Manager, officers, ACREM and other eligible awardees under the plan. Any restricted shares of the Company’s common stock and RSUs will be accounted for under FASB ASC Topic 718, Compensation—Stock Compensation, resulting in stock-based compensation expense equal to the grant date fair value of the underlying restricted shares of common stock or RSUs. Restricted stock and RSU grants generally vest ratably over a one to four year period from the vesting start date. The grantee receives additional compensation for each outstanding restricted stock or RSU grant, classified as dividends paid, equal to the per-share dividends received by common stockholders. The following tables summarize the (i) non-vested shares of restricted stock and RSUs and (ii) vesting schedule of shares of restricted stock and RSUs for the Company’s directors and officers and employees of the Manager as of Schedule of Non-Vested Share and Share Equivalents
Future Anticipated Vesting Schedule
28 11. EARNINGS PER SHARE The following information sets forth the computations of basic and diluted earnings (loss) per common share for the three and
(1) For the six months ended June 30, 2020, the weighted average non-vested restricted stock and RSUs of 222,835 shares were excluded from the computation of diluted earnings (loss) per common share as the impact of including those shares would be anti-dilutive. 12. INCOME TAX The Company wholly owns ACRC Lender W TRS LLC, which is a taxable REIT subsidiary (“TRS”) formed to issue and hold certain loans intended for sale. The Company also wholly owns ACRC 2017-FL3 TRS LLC, which is a TRS formed to hold a portion of the FL3 CLO Securitization and FL4 CLO Securitization (as defined below), including the portion that generates excess inclusion income. Additionally, the Company wholly owns ACRC WM Tenant LLC, which is a TRS formed to lease from an affiliate the hotel property classified as real estate owned acquired on March 8, 2019. ACRC WM Tenant LLC engaged a third-party hotel management company to operate the hotel under a management contract. The income tax provision for the Company and the TRSs consisted of the following for the three and
For the three The TRSs recognize interest and penalties related to unrecognized tax benefits within income tax expense in the Company’s consolidated statements of operations. Accrued interest and penalties, if any, are included within other liabilities in the Company’s consolidated balance sheets. 29 As of The Company follows FASB ASC Topic 820-10, Fair Value Measurement (“ASC 820-10”), which expands the application of fair value accounting. ASC 820-10 defines fair value, establishes a framework for measuring fair value in accordance with GAAP and expands disclosure requirements for fair value measurements. ASC 820-10 determines fair value to be the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date. ASC 820-10 specifies a hierarchy of valuation techniques based on the inputs used in measuring fair value. In accordance with ASC 820-10, the inputs used to measure fair value are summarized in the three broad levels listed below: •Level •Level •Level GAAP requires disclosure of fair value information about financial and nonfinancial assets and liabilities, whether or not recognized in the financial statements, for which it is practical to estimate the value. In cases where quoted market prices are not available, fair values are based upon the application of discount rates to estimated future cash flows using market yields, or other valuation methodologies. Any changes to the valuation methodology will be reviewed by the Company’s management to ensure the changes are appropriate. The methods used may produce a fair value calculation that is not indicative of net realizable value or reflective of future fair values. Furthermore, while the Company anticipates that the valuation methods are appropriate and consistent with other market participants, the use of different methodologies, or assumptions, to determine the fair value of certain financial and nonfinancial assets and liabilities could result in a different estimate of fair value at the reporting date. The Company uses inputs that are current as of the measurement date, which may fall within periods of market dislocation, during which price transparency may be reduced. The following table summarizes the financial assets and liabilities measured at fair value on a recurring basis as of June 30, 2021:
As of 30 Nonrecurring Fair Value Measurements The Company is required to record real estate owned, a nonfinancial asset, at fair value on a nonrecurring basis in accordance with GAAP. Real estate owned consists of a hotel property that was acquired by the Company on March 8, 2019 through a deed in lieu of foreclosure. See Note 5 included in these consolidated financial statements for more information on real estate owned. Real estate owned is recorded at fair value at acquisition using Level 3 inputs and is evaluated for indicators of impairment on a quarterly basis. Real estate owned is considered impaired when the sum of estimated future undiscounted cash flows expected to be generated by the real estate owned over the estimated remaining holding period is less than the carrying amount of such real estate owned. Cash flows include operating cash flows and anticipated capital proceeds generated by the real estate owned. An impairment charge is recorded equal to the excess of the carrying value of the real estate owned over the fair value. The fair value of the hotel property at acquisition was estimated using a third-party appraisal, which utilized standard industry valuation techniques such as the income and market approach. When determining the fair value of a hotel, certain assumptions are made including, but not limited to: (1) projected operating cash flows, including factors such as booking pace, growth rates, occupancy, daily room rates, hotel specific operating costs and future capital expenditures; and (2) projected cash flows from the eventual disposition of the hotel based upon the Company’s estimation of a hotel specific capitalization rate, hotel specific discount rates and comparable selling prices in the market. As of Financial Assets and Liabilities Not Measured at Fair Value As of
The carrying values of cash and cash equivalents, restricted cash, interest receivable, due to affiliate liability and accrued expenses, which are all categorized as Level 2 within the fair value hierarchy, approximate their fair values due to their short-term nature. Loans held for investment are recorded at cost, net of unamortized loan fees and origination costs. To determine the fair value of the collateral, the Company may employ different approaches depending on the type of collateral. The Company determined the fair value of loans held for investment based on a discounted cash flow methodology, taking into consideration various factors including capitalization rates, discount rates, leasing, occupancy rates, availability and cost of financing, exit plan, sponsorship, actions of other lenders, and comparable selling prices in the market. The Secured Funding Agreements are recorded at outstanding principal, which is the Company’s best estimate of the fair value. The Company determined the fair value of the Notes Payable, Secured Term Loan, collateralized loan obligation (“CLO”) securitization debt and Secured Borrowings based on a discounted cash flow 31 Management Agreement The Company is party to a Management Agreement under which ACREM, subject to the supervision and oversight of the Company’s board of directors, is responsible for, among other duties, (a) performing all of the Company’s day-to-day functions, (b) determining the Company’s investment strategy and guidelines in conjunction with the Company’s board of directors, (c) sourcing, analyzing and executing investments, asset sales and financing, and (d) performing portfolio management duties. In addition, ACREM has an Investment Committee that oversees compliance with the Company’s investment strategy and guidelines, loans held for investment portfolio holdings and financing strategy. In exchange for its services, ACREM is entitled to receive a base management fee, an incentive fee and expense reimbursements. In addition, ACREM and its personnel may receive grants of equity-based awards pursuant to the Company’s Amended and Restated 2012 Equity Incentive Plan and a termination fee, if applicable. The base management fee is equal to 1.5% of the Company’s stockholders’ equity per annum, which is calculated and payable quarterly in arrears in cash. For purposes of calculating the base management fee, stockholders’ equity means: (a) the sum of (i) the net proceeds from all issuances of the Company’s equity securities since inception (allocated on a pro-rata daily basis for such issuances during the fiscal quarter of any such issuance), plus (ii) the Company’s retained earnings at the end of the most recently completed fiscal quarter determined in accordance with GAAP (without taking into account any non-cash equity compensation expense incurred in current or prior periods); less (b) (x) any amount that the Company has paid to repurchase the Company’s common stock since inception, (y) any unrealized gains and losses and other non-cash items that have impacted stockholders’ equity as reported in the Company’s consolidated financial statements prepared in accordance with GAAP, and (z) one-time events pursuant to changes in GAAP, and certain non-cash items not otherwise described above, in each case after discussions between ACREM and the Company’s independent directors and approval by a majority of the Company’s independent directors. As a result, the Company’s stockholders’ equity, for purposes of calculating the management fee, could be greater or less than the amount of stockholders’ equity shown in the Company’s consolidated financial statements. The incentive fee is an amount, not less than 0, equal to the difference between: (a) the product of (i) 20% and (ii) the difference between (A) the Company’s Core Earnings (as defined below) for the previous 12-month period, and (B) the product of (1) the weighted average of the issue price per share of the Company’s common stock of all of the Company’s public offerings of common stock multiplied by the weighted average number of all shares of common stock outstanding including any restricted shares of the Company’s common stock, RSUs, or any shares of the Company’s common stock not yet issued, but underlying other awards granted under the Company’s Amended and Restated 2012 Equity Incentive Plan (see Note The Company reimburses ACREM at cost for operating expenses that ACREM incurs on the Company’s behalf, including expenses relating to legal, financial, accounting, servicing, due diligence and other services, expenses in connection with the origination and financing of the Company’s investments, communications with the Company’s stockholders, information technology systems, software and data services used for the Company, travel, complying with legal and regulatory requirements, taxes, insurance maintained for the benefit of the Company as well as all other expenses actually incurred by ACREM that are reasonably necessary for the performance by ACREM of its duties and functions under the Management Agreement. Ares Management, from time to time, incurs fees, costs and expenses on behalf of more than one investment vehicle. To the extent such fees, costs and expenses are incurred for the account or benefit of more than one fund, each such investment vehicle, including the Company, will typically bear an allocable portion of any such fees, costs and expenses in proportion to the size of its investment in the activity or entity to which such expense relates (subject to the terms of each fund’s governing documents) or in such other manner as Ares Management considers fair and equitable under the circumstances, such as the relative fund size or capital available to be invested by such investment vehicles. Where an investment vehicle’s governing documents do not permit the payment of a particular expense, Ares Management will generally pay such investment vehicle’s allocable portion of such expense. In addition, the Company is responsible for its proportionate share of certain fees and expenses, including due diligence costs, as determined by ACREM and Ares Management, including legal, accounting and financial advisor fees and related costs, incurred in connection with evaluating and consummating investment opportunities, regardless of whether such transactions are ultimately consummated by the parties thereto. The Company will not reimburse ACREM for the salaries and other compensation of its personnel, except for the allocable share of the salaries and other compensation of the Company’s (a) Chief Financial Officer, based on the percentage of his time spent on the Company’s affairs and (b) other corporate finance, tax, accounting, internal audit, legal, risk management, operations, compliance and other non-investment professional personnel of ACREM or its affiliates who spend all or a portion of their time managing the Company’s affairs based on the percentage of their time spent on the Company’s affairs. The Company is also required to pay its pro-rata portion of rent, telephone, utilities, office furniture, equipment, machinery and other office, internal and overhead expenses of ACREM and its affiliates that are required for the Company’s operations. Certain of the Company’s subsidiaries, along with the Company’s lenders under certain of the Company’s Secured Funding Agreements, as well as under the CLO transaction have entered into various servicing agreements with ACREM’s subsidiary servicer, Ares Commercial Real Estate Servicer LLC (“ACRES”). The Company’s Manager will specially service, as needed, certain of the Company’s investments. Effective May 1, 2012, ACRES agreed that no servicing fees pursuant to these servicing agreements would be charged to the Company or its subsidiaries by ACRES or the Manager for so long as the Management Agreement remains in effect, but that ACRES will continue to receive reimbursement for overhead related to servicing and operational activities pursuant to the terms of the Management Agreement. The term of the Management Agreement ends on May 1, The following table summarizes the related party costs incurred by the Company for the three and
(1) For the three and six months ended June 30, 2021 and 2020, direct costs incurred are included within general and administrative expenses in the Company’s consolidated statements of operations. Investments in Loans From time to time, the Company may co-invest with other investment vehicles managed by Ares Management or its affiliates, including the Manager, and their portfolio companies, including by means of splitting investments, participating in investments or other means of syndication of investments. For such co-investments, the Company expects to act as the administrative agent for the holders of such investments provided that the Company maintains a majority of the aggregate investment. No fees will be received by the Company for performing such service. The Company will be responsible for its pro-rata share of costs and expenses for such co-investments, including due diligence costs for transactions which fail to close. The Company’s investment in such co-investments are made on a pari-passu basis with the other Ares managed investment 33 Loan Purchases From Affiliate An affiliate of the Company’s Manager maintains a $200 million real estate debt warehouse investment vehicle (the “Ares Warehouse Vehicle”) that holds Ares Management originated commercial real estate loans, which are made available to purchase by other investment vehicles, including the Company and other Ares Management managed investment vehicles. From time to time, the Company may purchase loans from the Ares Warehouse Vehicle. The Company’s Manager will approve the purchase of such loans only on terms, including the consideration to be paid, that are determined by the Company’s Manager in good faith to be appropriate for the Company once the Company has sufficient liquidity. The Company is not obligated to purchase any loans originated by the Ares Warehouse Vehicle. Loans purchased by the Company from the Ares Warehouse Vehicle are purchased at fair value as determined by an independent third-party valuation expert and are subject to approval by a majority of the Company’s independent directors. In January In In January 2021, the Company purchased a fully funded $4.4 million senior mortgage loan on a self storage property located in Florida from the Ares Warehouse Vehicle, which is included within loans held for investment in the Company’s consolidated balance sheets. In January 2021, the Company purchased a fully funded $7.0 million senior mortgage loan on a self storage property located in Florida from the Ares Warehouse Vehicle, which is included within loans held for investment in the Company’s consolidated balance sheets. In January 2021, the Company purchased a fully funded $10.8 million senior mortgage loan on a self storage property located in Florida from the Ares Warehouse Vehicle, which is included within loans held for investment in the Company’s consolidated balance sheets. In January 2021, the Company purchased a $6.5 million senior mortgage loan on a self storage property located in Missouri from the Ares Warehouse Vehicle. At the January 2021 purchase date, the outstanding principal balance was $5.9 million, which is included within loans held for investment in the Company’s consolidated balance sheets. In May 2021, the Company purchased a $100.7 million senior mortgage loan on an industrial property located in Illinois from the Ares Warehouse Vehicle. At the May 2021 purchase date, the outstanding principal balance was $62.1 million, which is included within loans held for investment in the Company’s consolidated balance sheets. In June 2021, the Company purchased a fully funded $40.5 million senior mortgage loan on a portfolio of self storage properties located in New Jersey from the Ares Warehouse Vehicle, which is included within loans held for investment in the Company’s consolidated balance sheets. In June 2021, the Company purchased a $44.7 million senior mortgage loan on an industrial property located in New Jersey from the Ares Warehouse Vehicle. At the June 2021 purchase date, the outstanding principal balance was $23.2 million, which is included within loans held for investment in the Company’s consolidated balance sheets. 34 15. DIVIDENDS AND DISTRIBUTIONS The following table summarizes the Company’s dividends declared during the
16. VARIABLE INTEREST ENTITIES Consolidated VIEs As discussed in Note 2, the Company evaluates all of its investments and other interests in entities for consolidation, including its CLO On January 11, 2019, ACRE Commercial Mortgage 2017-FL3 Ltd. (the As of The contribution of the FL3 Mortgage Assets to the Issuer is governed by a Mortgage Asset Purchase Agreement between 35 In connection with the securitization, the FL3 Issuer and FL3 Co-Issuer offered and issued the following classes of Notes: Class A, Class A-S, Class B, Class C and Class D Notes (collectively, the As of June 30, 2021, the FL4 Notes were collateralized by interests in a pool of 22 mortgage assets having a total principal balance of approximately $658.9 million (the “FL4 Mortgage Assets”) that were closed by a subsidiary of the Company and approximately $8.4 million of receivables related to repayments of outstanding principal on current mortgage assets. During the period ending in April 2024 (the “Companion Participation Acquisition Period”), the FL4 Issuer may The sale of the In connection with the FL4 CLO Securitization, the FL4 Issuer and FL4 Co-Issuer offered and issued the following classes of FL4 Notes to third party investors: Class A, Class A-S, Class B, Class C, Class D and Class E Notes (collectively, the “FL4 Offered Notes”). A wholly owned subsidiary of the The FL3 CLO Securitization and the FL4 CLO Securitization are collectively referred to as the “CLO Securitizations.” As the directing holder of the CLO The CLO The inclusion of the assets and liabilities of the CLO 36 The Company’s management has evaluated subsequent events through the date of issuance of the consolidated financial statements included herein. There have been no subsequent events that occurred during such period that would require disclosure in this Form 10-Q or would be required to be recognized in the consolidated financial statements as of and for the On July 1, 2021, the Company purchased a $78.3 million pari-passu participation in a $227.1 million senior mortgage loan on a mixed use property located in New York from an Ares Management managed investment vehicle. At the purchase date, the outstanding principal balance was $75.0 million. The loan has a per annum interest rate of LIBOR plus 3.65%. On July 9, 2021, the Company originated a $75.0 million senior mortgage loan on a residential condominium property located in Florida. At closing, the outstanding principal balance was approximately $65.0 million. The loan has a per annum interest rate of LIBOR plus 5.25%. On July 9, 2021, the Company originated an $81.0 million senior mortgage loan on an office property located in New York. At closing, the outstanding principal balance was approximately $59.9 million. The loan has a per annum interest rate of LIBOR plus 3.85%. On July 16, 2021, the Company purchased a fully funded $3.2 million senior mortgage loan on a self storage property located in Colorado from a third party. The loan has a per annum interest rate of LIBOR plus 2.90%. On July 16, 2021, the Company purchased an $8.6 million senior mortgage loan on a self storage property located in Arizona from a third party. At the purchase date, the outstanding principal balance was approximately $8.3 million. The loan has a per annum interest rate of LIBOR plus 2.90%. On July 16, 2021, the Company purchased a fully funded $7.4 million senior mortgage loan on a self storage property located in Arizona from a third party. The loan has a per annum interest rate of LIBOR plus 2.90%. The Company’s Board of Directors declared a regular cash dividend of $0.33 per common share and a supplemental cash dividend of $0.02 per common share for the third quarter of 2021. The third quarter 2021 and supplemental cash dividends will be payable on October 15, 2021 to common stockholders of record as of September 30, 37 Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations Overview We are a specialty finance company primarily engaged in originating and investing in commercial real estate (“CRE”) loans and related investments. We are externally managed by ACREM, a subsidiary of Ares Management Corporation (NYSE: ARES) (“Ares Management”), a publicly traded, leading global alternative asset manager, pursuant to the terms of the management agreement dated April 25, 2012, as amended, between us and our Manager (the “Management Agreement”). From the commencement of our operations in late 2011, we have been primarily focused on directly originating and managing a diversified portfolio of CRE debt-related investments for our own account. We were formed and commenced operations in late 2011. We are a Maryland corporation and completed our initial public offering in May 2012. We have elected and qualified to be taxed as a REIT for United States federal income tax purposes under the Internal Revenue Code of 1986, as amended, commencing with our taxable year ended December 31, 2012. We generally will not be subject to United States federal income taxes on our REIT taxable income as long as we annually distribute to stockholders an amount at least equal to our REIT taxable income prior to the deduction for dividends paid and comply with various other requirements as a REIT. We also operate our business in a manner that is intended to permit us to maintain our exemption from registration under the 1940 Act. Developments During the •ACRE •ACRE originated a $15.0 million mezzanine loan on a portfolio of self storage properties located in New Jersey. Subsequent to the origination of the $15.0 million mezzanine loan, ACRE purchased a $40.5 million senior mortgage loan on the same portfolio of self storage properties from the Ares Warehouse Vehicle. •ACRE purchased a $53.3 million senior mortgage loan on a residential condominium property located in New York from a third party. •ACRE purchased a $100.7 million senior mortgage •ACRE originated a $37.5 million senior mortgage loan on a multifamily property located in South Carolina. •ACRE purchased a $44.7 million senior mortgage loan on an industrial property located in New Jersey from the Ares Warehouse Vehicle. •ACRE Commercial Mortgage 2017-FL3 Ltd. (the “FL3 Issuer”) and •ACRE entered into an underwriting agreement (the “Underwriting Agreement”) in which ACRE agreed to sell an aggregate of Factors Impacting Our Operating Results The results of our operations are affected by a number of factors and primarily depend on, among other things, the level of our net interest income, the market value of our assets and the supply of, and demand for, commercial mortgage loans, CRE debt and other financial assets in the marketplace. Our net interest income, which reflects the amortization of origination fees and direct costs, is recognized based on the contractual rate and the outstanding principal balance of the loans we originate. Interest rates will vary according to the type of investment, conditions in the financial markets, creditworthiness of our borrowers, competition and other factors, none of which can be predicted with any certainty. Our operating results may also be impacted by credit losses in excess of initial anticipations or unanticipated credit events experienced by borrowers. Loans Held for Investment Portfolio As of 38 we funded approximately Our loans held for investment are accounted for at amortized cost. The following table summarizes our loans held for investment as of
(1)The difference between the Carrying Amount and the Outstanding Principal amount of the loans held for investment consists of unamortized purchase discount, deferred loan fees and loan origination costs. (2)Unleveraged Effective Yield is the compounded effective rate of return that would be earned over the life of the investment based on the contractual interest rate (adjusted for any deferred loan fees, costs, premiums or discounts) and assumes no dispositions, early prepayments or defaults. The total Weighted Average Unleveraged Effective Yield is calculated based on the average of Unleveraged Effective Yield of all loans held by us as of June 30, 2021 as weighted by the outstanding principal balance of each loan. (3)Unleveraged Effective Yield is the compounded effective rate of return that would be earned over the life of the investment based on the contractual interest rate (adjusted for any deferred loan fees, costs, premiums or discounts) and assumes no dispositions, early prepayments or defaults. The total Weighted Average Unleveraged Effective Yield is calculated based on the average of Unleveraged Effective Yield of all interest accruing loans held by us as of June 30, 2021 as weighted by the total outstanding principal balance of each interest accruing loan (excludes loans on non-accrual status as of June 30, 2021). Critical Accounting Policies Our consolidated financial statements have been prepared in accordance with generally accepted accounting principles (“GAAP”), which require management to make estimates and assumptions that affect reported amounts. The estimates and assumptions are based on historical experience and other factors management believes to be reasonable. Actual results may differ from those estimates and assumptions. There have been no significant changes to our critical accounting policies as disclosed in our Annual Report on Form 10-K. See Note 2 to our consolidated financial statements included in this quarterly report on Form 10-Q, which describes factors which may impact management’s estimates and assumptions and the recently issued accounting pronouncements that were adopted or not yet required to be adopted by us. RECENT DEVELOPMENTS On July 1, 2021, we purchased a $78.3 million pari-passu participation in a $227.1 million senior mortgage loan on a mixed use property located in New York from an Ares Management managed investment vehicle. At the purchase date, the outstanding principal balance was $75.0 million. The loan has a per annum interest rate of LIBOR plus 3.65%. On July 9, 2021, we originated a $75.0 million senior mortgage loan on a residential condominium property located in Florida. At closing, the outstanding principal balance was approximately $65.0 million. The loan has a per annum interest rate of LIBOR plus 5.25%. On July 9, 2021, we originated an $81.0 million senior mortgage loan on an office property located in New York. At closing, the outstanding principal balance was approximately $59.9 million. The loan has a per annum interest rate of LIBOR plus 3.85%. 39 On July 16, 2021, we purchased a fully funded $3.2 million senior mortgage loan on a self storage property located in Colorado from a third party. The loan has a per annum interest rate of LIBOR plus 2.90%. On July 16, 2021, we purchased an $8.6 million senior mortgage loan on a self storage property located in Arizona from a third party. At the purchase date, the outstanding principal balance was approximately $8.3 million. The loan has a per annum interest rate of LIBOR plus 2.90%. On July 16, 2021, we purchased a fully funded $7.4 million senior mortgage loan on a self storage property located in Arizona from a third party. The loan has a per annum interest rate of LIBOR plus 2.90%. Our Board of Directors declared a regular cash dividend of $0.33 per common share and a supplemental cash dividend of $0.02 per common share for the third quarter of 2021. The third quarter 2021 and supplemental cash dividends will be payable on October 15, 2021 to common stockholders of record as of September 30, 2021. RESULTS OF OPERATIONS The following table sets forth a summary of our consolidated results of operations for the three and
The following tables set forth select details of our consolidated results of operations for the three and Net Interest Margin
For the three months ended 40 weighted average floor of For the Revenue From Real Estate Owned On March 8, 2019, we acquired legal title to a hotel property through a deed in lieu of foreclosure. Prior to March 8, 2019, the hotel property collateralized a $38.6 million senior mortgage loan that we held that was in maturity default due to the failure of the borrower to repay the outstanding principal balance of the loan by the December 2018 maturity date. In conjunction with the deed in lieu of foreclosure, we derecognized the $38.6 million senior mortgage loan and recognized the hotel property as real estate owned. For the three months ended Operating Expenses
See the Related Party Expenses, Other Expenses and Expenses from Real Estate Owned discussions below for the cause of the increase in operating expenses for the three months ended June 30, 2021 compared to the three months ended June 30, 2020 and the cause of the decrease in operating expenses for the Related Party Expenses For the three months ended 41 equity for the three months ended For the six months ended June 30, 2021, related party expenses included $5.5 million in management and incentive fees due to our Manager pursuant to the Management Agreement, which consisted of $4.2 million in management fees and $1.4 million in incentive fees. For the six months ended June 30, 2021, related party expenses also included $1.5 million for our share of allocable general and administrative expenses for which we were required to reimburse our Manager pursuant to the Management Agreement. For the six months ended June 30, 2020, related party expenses included $3.9 million in management and incentive fees due to our Manager pursuant to the Management Agreement, which consisted of $3.6 million in management fees and $0.3 million in incentive fees. For the six months ended June 30, 2020, related party expenses also included $2.1 million for our share of allocable general and administrative expenses for which we were required to reimburse our Manager pursuant to the Management Agreement. The increase in management fees for the six months ended June 30, 2021 compared to the six months ended June 30, 2020 primarily relates to an increase in our weighted average stockholders’ equity for the six months ended June 30, 2021 as a result of the public offering of 7,000,000 shares of our common stock in March 2021, which generated net proceeds of approximately $100.7 million, and the public offering of 6,500,000 shares of our common stock in June 2021, which generated net proceeds of approximately $101.6 million. The increase in incentive fees for the six months ended June 30, 2021 compared to the six months ended June 30, 2020 primarily relates to our Core Earnings for the twelve months ended June 30, 2021 exceeding the 8% minimum return by a higher margin than the twelve months ended June 30, 2020. The decrease in allocable general and administrative expenses due to our Manager for the six months ended June 30, 2021 compared to the six months ended June 30, 2020 primarily relates to a decrease in the percentage of time allocated to us by employees of our Manager due to changes in transaction activity year over year. Other Expenses For the three months ended For the six months ended June 30, 2021 and 2020, professional fees were $1.4 million and $1.6 million, respectively. The decrease in professional fees for the six months ended June 30, 2021 compared to the six months ended June 30, 2020 primarily relates to a decrease in our use of third-party professionals due to changes in transaction activity year over year. For the six months ended June 30, 2021 and 2020, general and administrative expenses were $2.4 million and $1.8 million, respectively. The increase in general and administrative expenses for the six months ended June 30, 2021 compared to the six months ended June 30, 2020 primarily relates to an increase in stock-based compensation expense due to 42 Expenses From Real Estate Owned For the three and
For the three months ended For the six months ended June 30, 2021 and 2020, hotel operating expenses were $5.8 million and $8.7 million, respectively. The decrease in hotel operating expenses for the six months ended June 30, 2021 compared to the six months ended June 30, 2020 is primarily due to the six months ended June 30, 2020 including two months of hotel operations that were not significantly impacted by the COVID-19 pandemic, which significantly reduced occupancy and forced us to implement plans to reduce overall operating expenses at the hotel Provision for Current Expected Credit Losses For the six months ended June 30, 2021 and 2020, the provision for current expected credit losses was $(7.1) million and $23.1 million, respectively. The decrease in The current expected credit loss reserve (the “CECL Reserve”) takes into consideration the macroeconomic impact of the COVID-19 pandemic on CRE properties and is not specific to any loan losses or impairments on our loans held for investment. Additionally, the CECL Reserve is not an indicator of what we expect our CECL Reserve would have been absent the current and potential future impacts of the COVID-19 pandemic. LIQUIDITY AND CAPITAL RESOURCES Liquidity is a measure of our ability to meet potential cash requirements, including ongoing commitments to repay borrowings, fund and maintain our assets and operations, make distributions to our stockholders and other general business 43 needs. We use significant cash to purchase our target investments, make principal and interest payments on our borrowings, make distributions to our stockholders and fund our operations. Our primary sources of cash generally consist of unused borrowing capacity under our Secured Funding Agreements, the net proceeds of future offerings, payments of principal and interest we receive on our portfolio of assets and cash generated from our operating activities. Principal repayments from mortgage loans in securitizations where we retain the subordinate securities are applied sequentially, first used to pay down the senior notes, and accordingly, we will not receive any proceeds from repayment of loans in the securitizations until all senior notes are repaid in full. Due to the impact of the COVID-19 pandemic, we may experience borrowers who are unable to pay interest and principal payments timely, including at the maturity date of the borrower’s loan, if at all, and expected prepayments by our borrowers may not occur, which could impact our liquidity. Our Secured Funding Agreements contains margin call provisions following the occurrence of certain mortgage loan credit events. If we are unable to make the required payment or if we fail to meet or satisfy any of the covenants in our Financing Agreements, we would be in default under these agreements, and our lenders could elect to declare outstanding amounts due and payable, terminate their commitments, require the posting of additional collateral, including cash to satisfy margin calls, and enforce their interests against existing collateral. We are also subject to cross-default and acceleration rights with respect to our Financing Agreements. Given the impact of the COVID-19 pandemic on the real estate industry and the potential impact on our borrowers, to mitigate the risk of future margin calls, we We are focused on preserving our liquidity in order to satisfy our cash requirements, including future commitments to fund on our loans, make interest, principal and other payments pursuant to our financing obligations and to potentially originate new loans and make opportunistic new investments. Subject to maintaining our qualification as a REIT and our exemption from the 1940 Act, we expect that our primary sources of enhancing our liquidity will be financing, to the extent available to us, through credit, secured funding and other lending facilities, other sources of private financing, including warehouse and repurchase facilities, and public or private offerings of our equity or debt securities. On July 19, 2019, we filed a registration statement on Form S-3 with the SEC, which became effective on August 2, 2019, in order to permit us to offer, from time to time, in one or more offerings or series of offerings up to $1.25 billion of our common stock, preferred stock, debt securities, subscription rights to purchase shares of our common stock, warrants representing rights to purchase shares of our common stock, preferred stock or debt securities, or units. The specifics of any future offerings, along with the use of proceeds of any securities offered, will be described in detail in a prospectus supplement, or other offering materials, at the time of any offering. We may also access liquidity through our “At the Market Stock Offering Program” which was established in November 2019 pursuant to which we may sell, from time to time, up to $100.0 million of shares of our common stock. Furthermore, we have sold, and may continue to sell certain of our mortgage loans, or interests therein, in order to manage liquidity needs. Subject to maintaining our qualification as a REIT, we may also change our dividend practice, including by reducing the amount of, or temporarily suspending, our future dividends or making dividends that are payable in cash and shares of our common stock for some period of time. We are also able to access additional liquidity through the (i) reinvestment provisions in our Ares Management or one of its investment vehicles, including the Ares Warehouse Vehicle, may originate mortgage loans and we may have the opportunity to purchase such loans that are determined by our Manager in good faith to be appropriate for us, once we have sufficient available liquidity. Ares Management or one of its investment vehicles may also acquire mortgage loans from us. 44 As of Equity Offerings On On Cash Flows The following table sets forth changes in cash and cash equivalents
During the Operating Activities For the Investing Activities For the 45 the origination and funding of loans held for investment exceeding the cash received from principal repayment of loans held for investment Financing Activities For the Summary of Financing Agreements The sources of financing, as applicable in a given period, under our Secured Funding Agreements, Notes Payable and the Secured Term Loan (collectively, the “Financing Agreements”) are described in the following table ($ in thousands):
_____________________________ (1)The maturity date of the master repurchase funding facility with Wells Fargo Bank, National Association (the “Wells Fargo Facility”) is subject to three 12-month extensions at our option provided that certain conditions are met and applicable extension fees are paid. The maximum commitment may be increased to up to $500.0 million at our option, subject to the satisfaction of certain conditions, including payment of an upsize fee. (2)The maturity date of the master repurchase facility with Citibank, N.A. (the “Citibank Facility”) is subject to two 12-month extensions at our option provided that certain conditions are met and applicable extension fees are paid. (3)In March 2021, we exercised a 12-month extension option on the secured revolving funding facility with City National Bank (the “CNB Facility”). The CNB Facility has an accordion feature that provides for, subject to approval by City National Bank in its sole discretion, an increase in the commitment amount from $50.0 million to $75.0 million for up to a period of 120 days once per calendar year. (4)The maturity date of the revolving master repurchase facility with Metropolitan Life Insurance Company (the “MetLife Facility”) is subject to two 12-month extensions at our option provided that certain conditions are met and applicable extension fees are paid. (5)The maturity date of the master repurchase and securities contract with Morgan Stanley (the “Morgan Stanley Facility”) is subject to two 12-month extensions at our option provided that certain conditions are met and applicable extension fees are paid. The Morgan Stanley Facility has an accordion feature that provides for a $100.0 million permanent increase in the commitment amount from $150.0 million to $250.0 million, which may be exercised at our 46 (6)Certain of our consolidated subsidiaries are party to two separate note agreements (the “Notes Payable”) with the lenders referred to therein, consisting of (1) a $28.3 million note that has a maturity date of June 10, 2024 and (2) a $23.5 million note that has an initial maturity date of September 5, 2022, subject to two 12-month extensions at our option provided that certain conditions are met and applicable extension fees are paid. In March 2021, the $32.4 million note, which was secured by a $40.5 million senior mortgage loan held by us on an industrial property located in North Carolina, was repaid in full and not extended. The outstanding principal on the note at the time of repayment was $27.9 million.
Our Financing Agreements contain various affirmative and negative covenants, including negative pledges, and provisions related to events of default that are normal and customary for similar financing agreements. As of Securitizations As of Secured Borrowings As of Leverage Policies We intend to use prudent amounts of leverage to increase potential returns to our stockholders. To that end, subject to maintaining our qualification as a REIT and our exemption from registration under the 1940 Act, we intend to continue to use borrowings to fund the origination or acquisition of our target investments. Given current market conditions and our focus on first or senior mortgages, we currently expect that such leverage would not exceed, on a debt-to-equity basis, a 4-to-1 ratio. Our charter and bylaws do not restrict the amount of leverage that we may use. The amount of leverage we will deploy for particular investments in our target investments will depend upon our Manager’s assessment of a variety of factors, which may include, among others, our liquidity position, the anticipated liquidity and price volatility of the assets in our loans held for investment portfolio, the potential for losses and extension risk in our portfolio, the gap between the duration of our assets and liabilities, including hedges, the availability and cost of financing the assets, our opinion of the creditworthiness of our financing counterparties, the impact of the COVID-19 pandemic on the United States economy generally or in specific geographic regions and commercial mortgage markets, our outlook for the level and volatility of interest rates, the slope of the yield curve, the credit quality of our assets, the collateral underlying our assets, and our outlook for asset spreads relative to the LIBOR curve. We elected to be taxed as a REIT for United States federal income tax purposes and, as such, anticipate annually distributing to our stockholders at least 90% of our REIT taxable income, prior to the deduction for dividends paid. If we distribute less than 100% of our REIT taxable income in any tax year (taking into account any distributions made in a subsequent tax year under Sections 857(b)(9) or 858 of the Code), we will pay tax at regular corporate rates on that undistributed portion. Furthermore, if we distribute less than the sum of 1) 85% of our ordinary income for the calendar year, 2) 47 95% of our capital gain net income for the calendar year and 3) any undistributed shortfall from our prior calendar year (the “Required Distribution”) to our stockholders during any calendar year (including any distributions declared by the last day of the calendar year but paid in the subsequent year), then we are required to pay non-deductible excise tax equal to 4% of any shortfall between the Required Distribution and the amount that was actually distributed. Any of these taxes would decrease cash available for distribution to our stockholders. The 90% distribution requirement does not require the distribution of net capital gains. However, if we elect to retain any of our net capital gain for any tax year, we must notify our stockholders and pay tax at regular corporate rates on the retained net capital gain. The stockholders must include their proportionate share of the retained net capital gain in their taxable income for the tax year, and they are deemed to have paid the REIT’s tax on their proportionate share of the retained capital gain. Furthermore, such retained capital gain may be subject to the nondeductible 4% excise tax. If we determine that our estimated current year taxable income (including net capital gain) will be in excess of estimated dividend distributions (including capital gains dividends) for the current year from such income, we accrue excise tax on a portion of the estimated excess taxable income as such taxable income is earned. Before we make any distributions, whether for United States federal income tax purposes or otherwise, we must first meet both our operating requirements and debt service on our Financing Agreements and other debt payable. If our cash available for distribution is less than our REIT taxable income, we could be required to sell assets or borrow funds to make cash distributions or we may make a portion of the Required Distribution in the form of a taxable stock distribution or distribution of debt securities. OFF-BALANCE SHEET ARRANGEMENTS We have commitments to fund various senior mortgage loans, as well as subordinated debt and preferred equity investments in our portfolio. As a result of the COVID-19 pandemic, the progress of capital expenditures, construction and leasing is anticipated to be slower than otherwise expected, and the pace of the funding of our unfunded commitments may be slower. Other than as set forth in this quarterly report on Form 10-Q, we do not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured investment vehicles, special purpose entities or variable interest entities, established to facilitate off-balance sheet arrangements or other contractually narrow or limited purposes. Further, we have not guaranteed any obligations of unconsolidated entities or entered into any commitment or intend to provide additional funding to any such entities. Item 3. Quantitative and Qualitative Disclosures About Market Risk As part of our risk management strategy, our Manager closely monitors our portfolio and actively manages the credit, interest rate, market, prepayment, real estate inflation and financing risks associated with holding a portfolio of our target investments. We manage our portfolio through an interactive process with our Manager and Ares Management. Our Manager has an Investment Committee that oversees compliance with our investment strategy and guidelines, loans held for investment portfolio holdings and financing strategy. Credit Risk We are subject to varying degrees of credit risk in connection with holding our target investments. We have exposure to credit risk on our CRE loans and other target investments in our business. Our Manager seeks to manage credit risk by performing our due diligence process prior to origination or acquisition and through the use of non-recourse financing, when and where available and appropriate. Credit risk is also addressed through our Manager’s ongoing review of our loans held for investment portfolio. In addition, with respect to any particular target investment, our Manager’s investment team evaluates, among other things, relative valuation, comparable analysis, supply and demand trends, shape of yield curves, delinquency and default rates, recovery of various sectors and vintage of collateral. In this current environment, prepayments may slow down, borrowers may not be able to repay principal upon the loan maturity or qualify for loan extensions. Additionally, if tenants are not able to pay rent to their landlords, property owners may not be able to make payments to their lenders. We have been in regular dialogue with our borrowers and our financing providers to assess this credit risk. See Note 3 to our consolidated financial statements included in this quarterly report on Form 10-Q for a more detailed description of the potential impacts of the COVID-19 pandemic on our loan investments. 48 Interest Rate Risk Interest rates are highly sensitive to many factors, including fiscal and monetary policies and domestic and international economic and political considerations, as well as other factors beyond our control. We are subject to interest rate risk in connection with our assets and our related financing obligations, including our borrowings under the Financing Agreements. We primarily originate or acquire floating rate mortgage assets and finance those assets with index-matched floating rate liabilities. As a result, we significantly reduce our exposure to changes in portfolio value and cash flow variability related to changes in interest rates. However, we regularly measure our exposure to interest rate risk and assess interest rate risk and manage our interest rate exposure on an ongoing basis by comparing our interest rate sensitive assets to our interest rate sensitive liabilities. Based on that review, we determine whether or not we should enter into hedging transactions and derivative financial instruments, such as forward sale commitments and interest rate floors in order to mitigate our exposure to changes in interest rates. While hedging activities may mitigate our exposure to adverse fluctuations in interest rates, certain hedging transactions that we have entered into or may enter into in the future, such as interest rate swap agreements, may also limit our ability to participate in the benefits of lower interest rates with respect to our investments. In addition, there can be no assurance that we will be able to effectively hedge our interest rate risk. In addition to the risks related to fluctuations in asset values and cash flows associated with movements in interest rates, there is also the risk of non-performance on floating rate assets. In the case of a significant increase in interest rates, the additional debt service payments due from our borrowers may strain the operating cash flows of the real estate assets underlying our mortgages and, potentially, contribute to non-performance or, in severe cases, default. Interest Rate Effect on Net Income Our operating results depend in large part on differences between the income earned on our assets and our cost of borrowing. The cost of our borrowings generally is based on prevailing market interest rates. During a period of rising interest rates, our borrowing costs generally increase while the yields earned on our leveraged fixed-rate mortgage assets remain static, which could result in a decline in our net interest spread and net interest margin. During a period of declining interest rates, our borrowing costs generally decrease while the yields earned on our leveraged fixed-rate mortgage assets remain static, which could result in an increase in our net interest spread and net interest margin. The impact of rising or declining interest rates may be mitigated by certain hedging transactions that we have entered into or may enter into in the future. The following table estimates the hypothetical increases/(decreases) in net income for a twelve month period, assuming (1) an immediate increase or decrease in 30-day LIBOR as of
The severity of any such impact depends on our asset/liability composition at the time as well as the magnitude and duration of the interest rate increase and any applicable floors and caps. Further, an increase in short-term interest rates could also have a negative impact on the market value of our target investments. If any of these events happen, we could experience a decrease in net income or incur a net loss during these periods, which could adversely affect our liquidity and results of operations. Interest Rate Cap and Floor Risk We primarily originate or acquire floating rate mortgage assets. These are assets in which the mortgages may be subject to periodic and lifetime interest rate caps and floors, which limit the amount by which the asset’s interest yield changes during any given period. However, our borrowing costs pursuant to our Financing Agreements sometimes are not subject to similar restrictions or have different floors and caps. As a result, in a period of increasing interest rates, interest rate costs on our borrowings could increase without limitation by caps, while the interest rate yields on our floating rate mortgage assets could be limited if we do not implement effective caps. In addition, floating rate mortgage assets may be subject to periodic payment caps that result in some portion of the interest being deferred and added to the principal outstanding. This could result in our 49 receipt of less cash income on such assets than we would need to pay the interest cost on our related borrowings. In addition, in a period of decreasing interest rates, the interest rate yields on our floating rate mortgage assets could decrease, while the interest rate costs on certain of our borrowings could be fixed at a higher floor. These factors could lower our net interest income or cause a net loss during periods of decreasing interest rates, which would harm our financial condition, cash flows and results of operations. The impact of rising or declining interest rates may be mitigated by certain hedging transactions that we have entered into or may enter into in the future. Market Risk The estimated fair values of our investments fluctuate primarily due to changes in interest rates, changes in credit and other factors. Generally, in a rising interest rate environment, the estimated fair value of the fixed-rate securities would be expected to decrease; conversely, in a decreasing interest rate environment, the estimated fair value of the fixed-rate securities would be expected to increase. As market volatility increases or liquidity decreases, the fair value of our investments may be adversely impacted. Prepayment and Securitizations Repayment Risk Our net income and earnings may be affected by prepayment rates on our existing CRE loans. When we originate our CRE loans, we anticipate that we will generate an expected yield. When borrowers prepay their CRE loans faster than we expect, we may be unable to replace these CRE loans with new CRE loans that will generate yields which are as high as the prepaid CRE loans. If prepayment rates decrease in a rising interest rate environment, borrowers exercise extension options on CRE loans or we extend the term of CRE loans, the life of the loans could extend beyond the term of the Financing Agreements that we borrow on to fund our CRE loans. This could have a negative impact on our results of operations. In some situations, we may be forced to fund additional cash collateral in connection with the Financing Agreements or sell assets to maintain adequate liquidity, which could cause us to incur losses. Additionally, principal repayment proceeds from mortgage loans in the CLO Financing Risk We borrow funds under our Financing Agreements to finance our target assets. The COVID-19 pandemic has resulted in extreme volatility in a variety of global markets, including the real estate-related debt markets. In reaction to market conditions, banks and other lenders have generally restricted lending activity and, in some cases, have requested margin posting or repayments where applicable for secured loans collateralized by assets with depressed valuations. Our Secured Funding Agreements contain margin call provisions following the occurrence of certain mortgage loan credit events. If we are unable to make the required payment or if we fail to meet or satisfy any of the covenants in our Financing Agreements, we would be in default under these agreements, and our lenders could elect to declare outstanding amounts due and payable, terminate their commitments, require the posting of additional collateral, including cash to satisfy margin calls, and enforce their interests against existing collateral. We are also subject to cross-default and acceleration rights with respect to our Financing Agreements. Given the impact of the COVID-19 pandemic on the real estate industry and the potential impact on our borrowers, to mitigate the risk of future margin calls, we have proactively engaged in discussions with certain of our lenders to modify the terms of our borrowings on certain assets within these facilities, including reducing the amounts we are borrowing against such assets and/or increasing the borrowing spreads. In addition, our CLO Securitizations contain certain senior note overcollateralization ratio tests. To the extent we fail to meet these tests, amounts that would otherwise be used to make payments on the subordinate securities that we hold will be used to repay principal on the more senior securities to the extent necessary to satisfy any senior note overcollateralization ratio and we may incur significant losses. Our sources of liquidity may be impacted to the extent we do not receive cash payments that we would otherwise expect to receive from the CLO Securitizations if these tests were met. Weakness or volatility in the financial markets, the commercial real estate and mortgage markets and the economy generally could adversely affect one or more of our potential lenders and could cause one or more of our potential lenders to be unwilling or unable to provide us with financing or to increase the costs of that financing. Real Estate Risk Our real estate investments are subject to volatility and may be affected adversely by a number of factors, including, but not limited to, national, regional and local economic conditions (which may be adversely affected by industry slowdowns and other factors); local real estate conditions; changes or continued weakness in specific industry segments; local markets with a significant exposure to the energy sector; construction quality, age and design; demographic factors; and retroactive changes to building or similar codes. The COVID-19 pandemic is having a particularly adverse impact on industries whose properties serve as collateral for some of our portfolio of loan investments. Decreases in property values reduce the value of the collateral 50 and the potential proceeds available to a borrower to repay the underlying loan or loans, as the case may be, which could also cause us to suffer losses. We seek to manage these risks through our underwriting and asset management processes. Inflation Risk Virtually all of our assets and liabilities are sensitive to interest rates. As a result, interest rates and other factors influence our performance far more so than does inflation. Changes in interest rates do not necessarily correlate with inflation rates or changes in inflation rates. In each case, in general, our activities and balance sheet are measured with reference to historical cost and/or fair market value without considering inflation. Item 4. Controls and Procedures Evaluation of Disclosure Controls and Procedures We maintain disclosure controls and procedures (as that term is defined in Rules 13a‑15(e) and 15d‑15(e) under the Exchange Act) that are designed to ensure that information required to be disclosed in our reports under the Exchange Act 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 principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosures. Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. Our management, with the participation of our principal executive officer and principal financial officer, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of Changes in Internal Control over Financial Reporting There have been no changes in our internal control over financial reporting (as defined in Rules 13a‑15(f) and 15d‑15(f) under the Exchange Act) during the quarter ended PART II — OTHER INFORMATION Item 1. Legal Proceedings In the normal course of business, we may be subject to various legal proceedings from time to time. Furthermore, third parties may try to seek to impose liability on us in connection with our loans. As of Item 1A. Risk Factors In addition to the other information set forth in this report, you should carefully consider the risk factors described below and in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the The COVID-19 pandemic has caused severe disruptions in the global economy, which has had, and may continue to have, a negative impact on our business and 51 As of the filing date of this Quarterly Report, there is to The COVID-19 pandemic is having a particularly adverse impact on industries whose properties serve as collateral for some of our portfolio of loan investments. Certain of our investments in loans collateralized by properties within other industries have also been significantly impacted by the COVID-19 pandemic. The impact of the COVID-19 pandemic on our borrowers Provisions in our financing agreements require us to pay margin call provisions following the occurrence of certain mortgage loan credit events. We may not have the funds available to satisfy such margin calls or repay our debt at that time, which would likely result in defaults unless we are able to raise the funds from alternative sources, which we may not be able to achieve on favorable terms or at all. Posting additional collateral would reduce our liquidity. If we are unable to make the required payment or if we fail to meet or satisfy any of the covenants in our financing agreements, we would be in default under these agreements, and our lenders could elect to declare outstanding amounts due and payable, terminate their commitments and enforce their interests against existing collateral. We are also subject to cross-default and acceleration rights, which could materially and adversely affect our financial condition and ability to implement our investment strategy. See “Risk 52 The effects on our portfolio of loan investments described above may require us to increase the In response to the COVID-19 pandemic, Ares Management Corporation instituted a work from home policy until it is deemed safe to return to the office. Such policy of an extended period of remote working by our Manager’s and/or its affiliate’s employees could strain our technology resources and introduce operational risks, including heightened cybersecurity risk. Remote working environments may be less secure and more susceptible to hacking attacks, including phishing and social engineering attempts that seek to exploit the COVID-19 pandemic. Item 2. Unregistered Sales of Equity Securities and Use of Proceeds None. Item 3. Defaults Upon Senior Securities None. Item 4. Mine Safety Disclosures Not applicable. Item 5. Other Information Section 219 of the Iran Threat Reduction and Syria Human Rights Act of 2012 and Section 13(r) of the Exchange Act, require an issuer to disclose in its annual and quarterly reports whether it or any of its affiliates have knowingly engaged in specified activities or transactions relating to Iran. We are required to include certain disclosures in our periodic reports if we or any of our “affiliates” (as defined in Rule 12b-2 under the Exchange Act) knowingly engaged in certain specified activities, transactions or dealings relating to Iran or with certain individuals or entities targeted by United States' economic sanctions during the period covered by the report. Disclosure is generally required even where the activities, transactions or dealings were conducted in compliance with applicable law. Neither we nor any of our controlled affiliates or subsidiaries knowingly engaged in any of the specified activities relating to Iran or otherwise engaged in any activities associated with Iran during the reporting period. However, because the SEC defines the term “affiliate” broadly, it includes any person or entity that is under common control with us as well as any entity that controls us or is controlled by us. The description that follows has been provided to us by Ares Management. On January 31, 2019, funds and accounts managed by Ares Management’s European direct lending strategy (together, the “Ares funds”) collectively acquired a 32% equity stake in Daisy Group Limited (“Daisy”). Daisy is a provider of communication services to businesses based in the United Kingdom. The Ares funds do not hold a majority equity interest in Daisy and do not have the right to appoint a majority of directors to Daisy’s board of directors. Subsequent to completion of the Ares funds’ investment in Daisy, in connection with Ares Management’s routine quarterly survey of its investment funds’ portfolio companies, Daisy informed the Ares funds that it has customer contracts with Melli Bank Plc and Persia International Bank Plc. Both Melli Bank Plc and Persia International Bank Plc have been designated by the Office of Foreign Assets Control within the U.S. Department of Treasury pursuant to Executive Order 13324. Daisy generated a total of £74,774 in annual revenues (less than 0.02% of Daisy’s annual revenues) from its dealings with Melli Bank Plc and Persia International Bank Plc and de minimis net profits. Daisy entered into the customer contracts with Melli Bank Plc and Persia International Bank Plc prior to the Ares funds’ investment in Daisy. Daisy has given notice of termination of the contracts to Melli Bank Plc and Persia International Bank Plc. Following termination of the contracts, Daisy does not intend to engage in any further dealings or transactions with Melli Bank Plc or Persia International Bank Plc. 53 Item 6. Exhibits EXHIBIT INDEX
54 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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