Balance at June 30, 2021 (1) | $ | 1,221 | | | | (1)Balance at December 31, 2020 | As of September$ | 1,632 | | | | | Provision for current expected credit losses | (411) | | | Write-offs | 0 | | | Recoveries | 0 | | Balance at June 30, 2020, the CECL Reserve related to unfunded commitments on loans held for investment is recorded within other liabilities in the Company's consolidated balance sheets.2021 (1) | $ | 1,221 | |
__________________________
(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
coverage ratio, project sponsorship, and other factors deemed necessary. Based on a 5-point scale, the Company’s loans are rated "1"“1” through "5,"“5,” from less risk to greater risk, which ratings are defined as follows: | | | | | | | | | | Ratings | | Definition | | 1 | | Very Low Risk | | 2 | | Low Risk | | 3 | | Medium Risk | | 4 | | High Risk/Potential for Loss: Asset performance is trailing underwritten expectations. Loan at risk of impairment without material improvement to performance | | 5 | | Impaired/Loss Likely: A loan that has a significantly increased probability of default orand principal loss |
The risk ratings are primarily based on historical data as well as taking into account future economic conditions.
As of SeptemberJune 30, 2020,2021, the carrying value, excluding the CECL Reserve, of the Company’s loans held for investment within each risk rating by year of origination is as follows ($ in thousands): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2021 | | 2020 | | 2019 | | 2018 | | 2017 | | Prior | | Total | | Risk rating: | | | | | | | | | | | | | | | 1 | $ | 21,512 | | $ | 0 | | $ | 0 | | $ | 9,365 | | $ | 0 | | $ | 0 | | $ | 30,877 | | 2 | 99,631 | | 31,812 | | 104,771 | | 43,422 | | 107,393 | | 0 | | 387,029 | | 3 | 171,279 | | 521,691 | | 420,955 | | 248,909 | | 103,996 | | 16,439 | | 1,483,269 | | 4 | 33,852 | | 0 | | 2,649 | | 61,580 | | 0 | | 33,152 | | 131,233 | | 5 | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | Total | $ | 326,274 | | $ | 553,503 | | $ | 528,375 | | $ | 363,276 | | $ | 211,389 | | $ | 49,591 | | $ | 2,032,408 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2020 | | 2019 | | 2018 | | 2017 | | 2016 | | Prior | | Total | | Risk rating: | | | | | | | | | | | | | | | 1 | $ | 0 |
| | $ | 0 |
| | $ | 8,538 |
| | $ | 0 |
| | $ | 0 |
| | $ | 0 |
| | $ | 8,538 |
| | 2 | 0 |
| | 109,385 |
| | 22,753 |
| | 27,500 |
| | 0 |
| | 0 |
| | 159,638 |
| | 3 | 410,038 |
| | 482,374 |
| | 296,576 |
| | 247,540 |
| | 16,474 |
| | 0 |
| | 1,453,002 |
| | 4 | 0 |
| | 0 |
| | 99,929 |
| | 22,974 |
| | 0 |
| | 34,118 |
| | 157,021 |
| | 5 | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
| | Total | $ | 410,038 |
| | $ | 591,759 |
| | $ | 427,796 |
| | $ | 298,014 |
| | $ | 16,474 |
| | $ | 34,118 |
| | $ | 1,778,199 |
|
Accrued Interest Receivable
The Company elected not to measure a current expected credit loss reserveCECL Reserve on accrued interest receivable due to the Company’s policy of writing off uncollectible accrued interest receivable balances in a timely manner. As of SeptemberJune 30, 2020,2021, interest receivable of $9.2$14.2 million is included within other assets in the Company's consolidated balance sheets and is excluded from the carrying value of loans held for investment. If the Company were to have uncollectible accrued interest receivable, it generally would reverse accrued and unpaid interest against interest income and no longer accrue for these amounts.
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 $38.6 million carrying value of the senior mortgage loan. The assets and liabilities of the hotel property are included within other assets and other liabilities, respectively, in the Company’s consolidated balance sheets and include items such as cash, restricted cash, trade receivables and payables and advance deposits.
The following table summarizes the Company’s real estate owned as of SeptemberJune 30, 20202021 and December 31, 20192020 ($ in thousands):
| | | | As of | | As of | | | September 30, 2020 | | December 31, 2019 | | June 30, 2021 | | December 31, 2020 | | Land | $ | 10,200 |
| | $ | 10,200 |
| Land | $ | 10,200 | | | $ | 10,200 | | | Buildings and improvements | 24,281 |
| | 24,281 |
| Buildings and improvements | 24,281 | | | 24,281 | | | Furniture, fixtures and equipment | 4,331 |
| | 4,087 |
| Furniture, fixtures and equipment | 4,387 | | | 4,362 | | | | 38,812 |
| | 38,568 |
| | 38,868 | | | 38,843 | | | Less: Accumulated depreciation | (1,336 | ) | | (667 | ) | Less: Accumulated depreciation | (2,008) | | | (1,560) | | | Real estate owned, net | $ | 37,476 |
| | $ | 37,901 |
| Real estate owned, net | $ | 36,860 | | | $ | 37,283 | |
As of SeptemberJune 30, 2020,2021, 0 impairment charges have been recognized for real estate owned.
For the three and ninesix months ended SeptemberJune 30, 2021, the Company incurred depreciation expense of $225 thousand and $449 thousand, respectively. For the three and six months ended June 30, 2020, the Company incurred depreciation expense of $224 thousand and $668 thousand, respectively. For the three and nine months ended September 30, 2019, the Company incurred depreciation expense of $207 thousand and $448$445 thousand, respectively. Depreciation expense is included within expenses from real estate owned in the Company’s consolidated statements of operations.
6. DEBT
Financing Agreements
The Company borrows funds, as applicable in a given period, under the Wells Fargo Facility, the Citibank Facility, the BAML Facility, the CNB Facility, the MetLife Facility, the U.S. Bank Facility and the Morgan Stanley Facility (individually defined below and collectively, the “Secured Funding Agreements”), Notes Payable (as defined below) and the Secured Term Loan (as defined below). The Company refers to the Secured Funding Agreements, Notes Payable and the Secured Term Loan as the “Financing Agreements.” The outstanding balance of the Financing Agreements in the table below are presented gross of debt issuance costs. As of SeptemberJune 30, 20202021 and December 31, 2019,2020, the outstanding balances and total commitments under the Financing Agreements consisted of the following ($ in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | June 30, 2021 | | December 31, 2020 | | | Outstanding Balance | | Total
Commitment | | Outstanding Balance | | Total
Commitment | | | Secured Funding Agreements: | | | | | | | | | | Wells Fargo Facility | $ | 238,414 | | | $ | 350,000 | | (1) | $ | 336,001 | | | $ | 350,000 | | (1) | | Citibank Facility | 44,730 | | | 325,000 | | | 117,506 | | | 325,000 | | | | CNB Facility | 0 | | | 50,000 | | (2) | 50,000 | | | 50,000 | | (2) | | MetLife Facility | 20,648 | | | 180,000 | | | 104,124 | | | 180,000 | | | | Morgan Stanley Facility | 100,413 | | | 250,000 | | | 147,921 | | | 150,000 | | | | Subtotal | $ | 404,205 | | | $ | 1,155,000 | | | $ | 755,552 | | | $ | 1,055,000 | | | | | | | | | | | | | Notes Payable | $ | 44,936 | | | $ | 51,755 | | | $ | 63,122 | | | $ | 84,155 | | | | | | | | | | | | | Secured Term Loan | $ | 60,000 | | | $ | 60,000 | | | $ | 110,000 | | | $ | 110,000 | | | | | | | | | | | | | Total | $ | 509,141 | | | $ | 1,266,755 | | | $ | 928,674 | | | $ | 1,249,155 | | |
(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.
| | | | | | | | | | | | | | | | | | | | September 30, 2020 | | December 31, 2019 | | | | Outstanding Balance | | Total
Commitment | | Outstanding Balance | | Total
Commitment | | | Secured Funding Agreements: | | | | | | | | | | Wells Fargo Facility | $ | 375,301 |
| | $ | 500,000 |
| | $ | 360,354 |
| | $ | 500,000 |
| | | Citibank Facility | 120,506 |
| | 325,000 |
| | 126,603 |
| | 325,000 |
| | | BAML Facility | 0 |
| | 0 |
| (1) | 36,280 |
| | 36,280 |
| (1) | | CNB Facility | 50,000 |
| | 50,000 |
| (2) | 30,500 |
| | 50,000 |
| (2) | | MetLife Facility | 104,124 |
| | 180,000 |
| | 131,807 |
| | 180,000 |
| | | U.S. Bank Facility | 0 |
| | 0 |
| (3) | 43,045 |
| | 185,989 |
| | | Morgan Stanley Facility | 141,205 |
|
| 150,000 |
| | 0 |
| | 0 |
| | | Subtotal | $ | 791,136 |
| | $ | 1,205,000 |
| | $ | 728,589 |
| | $ | 1,277,269 |
| |
| | | | | | | | | | Notes Payable | $ | 59,155 |
| | $ | 84,155 |
| | $ | 56,155 |
| | $ | 84,155 |
| | | | | | | | | | | | | Secured Term Loan | $ | 110,000 |
| | $ | 110,000 |
| | $ | 110,000 |
| | $ | 110,000 |
| | | Total | $ | 960,291 |
| | $ | 1,399,155 |
| | $ | 894,744 |
| | $ | 1,471,424 |
| |
| | (1) | In May 2019, the Company’s borrowing period for new individual loans under the BAML Facility (as defined below) expired and its term was not extended. As such, the total commitment amount under the BAML Facility as of December 31, 2019 represented the outstanding balance under the facility at the time the borrowing period expired. In June 2020, the BAML Facility was repaid in full and its term was not extended. |
| | (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. |
| | (3) | In July 2020, the U.S. Bank Facility matured and its term was not extended. The U.S. Bank Facility had been repaid in full prior to its maturity. |
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 million.million at the Company’s option, subject to the satisfaction of certain conditions, including payment of an upsize fee. Under the Wells Fargo Facility, the Company is permitted to sell, and later repurchase, certain qualifying senior commercial mortgage loans, A-Notes, pari-passu participations in commercial mortgage loans and mezzanine loans under certain circumstances, subject to available collateral approved by Wells Fargo in its sole discretion. The funding period of the Wells Fargo Facility expires on December 14, 2022, subject to 1 12-month extension at the Company’s option, which, if exercised, would extend the funding period to December 14, 2023. The initial maturity date of the Wells Fargo Facility is December 14, 2020,2022, subject to 3 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 all three were exercised, would extend the maturity date of the Wells Fargo Facility to December 14, 2023.2025. Advances under the Wells Fargo Facility accrue interest at a per annum rate equal to the sum of one-month LIBOR plus a pricing margin range of 1.50% to 2.25%2.75%, subject to certain exceptions. TheIn December 2020, the Company incursamended the Wells Fargo Facility to, among other things, eliminate the non-utilization fee on the Wells Fargo Facility. Prior to the amendment, the Company incurred a non-utilization fee of 25 basis points per annum on the average daily available balance of the Wells Fargo Facility to the extent less than 75% of the Wells Fargo Facility iswas utilized. For the three months ended September 30, 2020, the Company did not incur a non-utilization fee. For the nine months ended September 30, 2020, the Company incurred a non-
utilization fee of $19 thousand. Forboth the three and ninesix months ended SeptemberJune 30, 2019,2020, the Company incurred a non-utilization fee of $177 thousand and $489 thousand, respectively.$19 thousand. The non-utilization fee is included within interest expense in the Company’s consolidated statements of operations.
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 ninesix months ended SeptemberJune 30, 2021, the Company incurred a non-utilization fee of $175 thousand and $334 thousand, respectively. For the three and six months ended June 30, 2020, the Company incurred a non-utilization fee of $129$127 thousand and $386 thousand, respectively. For the three and nine months ended September 30, 2019, the Company incurred a non-utilization fee of $99 thousand and $268$257 thousand, respectively. The non-utilization fee is included within interest expense in the Company’s consolidated statements of operations. BAML Facility
The Company was party to a $125.0 million Bridge Loan Warehousing Credit and Security Agreement with Bank of America, N.A. (“Bank of America”) (the “BAML Facility”). Under the BAML Facility, the Company was able to obtain advances secured by eligible commercial mortgage loans collateralized by multifamily properties. Bank of America approved the loans on which advances were made under the BAML Facility in its sole discretion. The Company was able to request individual loans under the facility up to May 23, 2019 and the term of the borrowing period was not extended. Individual advances under the BAML Facility had a two-year maturity, subject to 1 12-month extension at the Company’s option upon the satisfaction of certain conditions and applicable extension fees being paid. At the time the term of the borrowing period expired, the Company had 1 individual advance outstanding in the amount of $36.3 million that had a maturity date of September 5, 2019 per the original terms of the BAML Facility. In September 2019, the Company amended the BAML Facility to extend the maturity date for the one individual advance outstanding to December 4, 2019. In addition, in December 2019, the Company amended the BAML Facility to extend the maturity date for the one individual advance outstanding to March 3, 2020. In addition, effective February 2020, the Company amended the BAML Facility to extend the maturity date for the one individual advance outstanding to July 1, 2020. In June 2020, the BAML Facility was repaid in full and its term was not extended. Advances under the BAML Facility accrued interest at a per annum rate equal to the sum of one-month LIBOR plus a spread of 2.00%, subject to certain exceptions. The Company incurred a non-utilization fee of 12.5 basis points per annum up to May 23, 2019 on the average daily available balance of the BAML Facility to the extent less than 50% of the BAML Facility was utilized. For the three and nine months ended September 30, 2020 and for the three months ended September 30, 2019, the Company did not incur a non-utilization fee. For the nine months ended September 30, 2019, the Company incurred a non-utilization fee of $43 thousand. The non-utilization fee is included within interest expense in the Company’s consolidated statements of operations.
CNB Facility
The Company is party to a $50.0 million secured revolving funding facility with City National Bank (the “CNB Facility”). The Company is permitted to borrow funds under the CNB Facility to finance investments and for other working capital and general corporate needs. In March 2020, the Company exercised a 12-month extension option on the CNB Facility to extend the initial maturity date to March 10, 2021. In June 2019, the Company amended the CNB Facility to, among other things, (1) add, which 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, (2) add two additionalyear. The Company is permitted to borrow funds under the CNB Facility to finance investments and for other working capital and general corporate needs. In March 2021, the Company exercised a 12-month extensions, each of which may be exercised atextension option on the Company’s option, subjectCNB Facility to the satisfaction of certain conditions, including payment of an extension fee, which, if both were exercised, would extend the maturity date ofto March 10, 2022. Advances under the CNB Facility to March 10, 2022 and (3) decrease theaccrue interest rate on advances toat a per annum rate equal to the sum of, at the Company’s option, either (a)LIBOR for a one, two, three, six or, if available to all lenders, 12-month interest period plus 2.65% or (b) a base rate (which is the highest of a prime rate, the federal funds rate plus 0.50%, or one-month LIBOR plus 1.00%) plus 1.00%; provided that in no event shall the interest rate be less than 2.65%. Previously the interest rate on advances was a per annum rate equal to the sum of, at the Company’s option, either (a) LIBOR for a one, two, three, six or, if available to all lenders, 12-month interest period plus 3.00% or (b) a base rate (which is the highest of a prime rate, the
federal funds rate plus 0.50%, or one-month LIBOR plus 1.00%) plus 1.25%. Unless at least 75% of the CNB Facility is used on average, unused commitments under the CNB Facility accrue non-utilization fees at the rate of 0.375% per annum. For the three and ninesix months ended SeptemberJune 30, 2021, the Company incurred a non-utilization fee of $41 thousand and $68
thousand, respectively. For both the three and six months ended June 30, 2020, the Company incurred a non-utilization fee of $6 thousand and $38 thousand, respectively. For the three and nine months ended September 30, 2019, the Company incurred a non-utilization fee of $40 thousand and $117 thousand, respectively.$32 thousand. The non-utilization fee is included within interest expense in the Company’s consolidated statements of operations.
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. In August 2020, the Company amended the MetLife Facility to, among other things, (1) extend theThe initial maturity date of the MetLife Facility tois August 13, 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 of the MetLife Facility to August 13, 2024, (2) increase the interest rate on new advances subsequent to the date of the amendment to a per annum rate equal to the sum of one-month LIBOR plus a spread of 2.50%. The interest rate on advances with respect to existing loans financed2024. Advances under the MetLife Facility prior to the amendment will continue to accrue interest at a per annum rate equal to the sum of one-month LIBOR plus a spread of 2.30%2.50%, subject to certain exceptions and (3) waiveexceptions. For a period of nine months subsequent to August 2020, the non-utilization fee of 25 basis points per annum on the average daily available balance of the MetLife Facility, which is owed if less than 65% of the MetLife Facility is utilized, for a period of nine months subsequent to the date of the amendment.was waived. For both the three and ninesix months ended SeptemberJune 30, 2021, the Company incurred a non-utilization fee of $39 thousand. For both the three and six months ended June 30, 2020, the Company incurred a non-utilization fee of $5 thousand and $7 thousand, respectively. For both the three and nine months ended September 30, 2019, the Company incurred a non-utilization fee of $5$3 thousand. The non-utilization fee is included within interest expense in the Company’s consolidated statements of operations.
U.S. BankMorgan Stanley Facility
The Company wasis party to a $186.0 million master repurchase and securities contract with U.S. Bank National Association (“U.S. Bank”) (the “U.S. Bank Facility”). Pursuant to the U.S. Bank Facility, the Company was permitted to sell, and later repurchase, eligible commercial mortgage loans collateralized by retail, office, mixed-use, multifamily, industrial, hospitality, student housing, manufactured housing or self storage properties. U.S. Bank approved the mortgage loans that were subject to the U.S. Bank Facility in its sole discretion. On July 31, 2020, the U.S. Bank Facility matured and its term was not extended. The U.S. Bank Facility had been repaid in full prior to its maturity. Advances under the U.S. Bank Facility generally accrued interest at a per annum rate equal to the sum of one-month LIBOR plus a spread of 2.25%, unless otherwise agreed between U.S. Bank and the Company, depending upon the mortgage loan sold to U.S. Bank in the applicable transaction. The Company incurred a non-utilization fee of 25 basis points per annum on the average daily available balance of the U.S. Bank Facility to the extent less than 50% of the U.S. Bank Facility was utilized. For the three and nine months ended September 30, 2020, the Company incurred a non-utilization fee of $34 thousand and $216 thousand, respectively. For the three and nine months ended September 30, 2019, the Company incurred a non-utilization fee of $89 thousand and $156 thousand, respectively. The non-utilization fee is included within interest expense in the Company’s consolidated statements of operations.
Morgan Stanley Facility
In January 2020, the Company entered into a $150.0$250.0 million master repurchase and securities contract with Morgan Stanley Bank, N.A. (“Morgan Stanley”) (the “Morgan Stanley Facility”). Under the Morgan Stanley Facility, the Company is permitted to sell, and later repurchase, certain qualifying commercial mortgage loans collateralized by retail, office, mixed-use, multifamily, industrial, hospitality, student housing or self-storage properties. Morgan Stanley may approve the mortgage loans that are subject to the Morgan Stanley Facility in its sole discretion. 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 the Company’s option, subject to the satisfaction of certain conditions, including payment of an upsized commitment fee. In June 2021, the Company exercised the option to increase the commitment amount from $150.0 million to $250.0 million. The initial maturity date of the Morgan Stanley Facility is January 16, 2023, 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 of the Morgan Stanley Facility to January 16, 2025. Advances under the Morgan Stanley Facility generally accrue interest at a per annum rate equal to the sum of one-month LIBOR plus a spread ranging from 1.75% to 2.25%, determined by Morgan Stanley, depending upon the mortgage loan sold to Morgan Stanley in the applicable transaction.
Notes Payable
Certain of the Company’s subsidiaries are party to three2 separate non-recourse note agreements (the “Notes Payable”) with the lenders referred to therein, consisting of (1) a $32.4 million note that was closed in May 2019, which is secured by a $40.5 million senior mortgage loan held by the Company on an industrial property located in North Carolina, (2) a $28.3 million note that was closed in June 2019, which is secured by a hotel property located in New York that is recognized as real estate owned in the Company’s consolidated balance sheets and (3)(2) a $23.5 million note that was closed in November 2019, which is secured by a $34.6 million senior mortgage loan held by the Company on a multifamily property located in South Carolina.
The initial maturity date of the $32.4 million note is March 5, 2024, subject to 1 12-month extension, which may be exercised at the Company’s option, subject to the satisfaction of certain conditions, including payment of an extension fee, which, if exercised, would extend the maturity date to March 5, 2025. Advances under the $32.4 million note accrue interest at a per annum rate equal to the sum of one-month LIBOR plus a spread of 2.50%. As of September 30, 2020, the total outstanding principal balance of the note was $27.9 million.
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 SeptemberJune 30, 2020,2021, the total outstanding principal balance of the note was $28.3 million.
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 SeptemberJune 30, 2020,2021, the total outstanding principal balance of the note was $3.0$16.7 million.
Secured Term Loan
The Company and certain of its subsidiaries are party to a $110.0$60.0 million Credit and Guaranty Agreement with the lenders referred to therein and Cortland Capital Market Services LLC, as administrative agent and collateral agent for the lenders (the “Secured Term Loan”). The initial maturity date ofIn December 2020, the Company exercised a 12-month extension option on the Secured Term Loan isto extend the maturity date to December 22, 2020, subject to 1 12-month extension, which may be exercised at the Company’s option, provided there are no existing events of default2021. Advances under the Secured Term Loan which, if exercised, would extendaccrue interest at a per annum rate equal to the maturity datesum of, at the Secured Term Loan to December 22, 2021.Company’s option, one, two, three or six-month LIBOR plus a spread of 5.00%. During the extension period, the spread on advances under the Secured Term Loan increases every three months by 0.125%, 0.375% and 0.750% per annum, respectively, beginning after the third-month of the extension period. Advances underIn March 2021, the Company voluntarily elected to repay $50.0 million of outstanding principal on the Secured Term Loan accrue interest at a per annum rate equalpar prior to the sumscheduled maturity as permitted by the contractual terms of at the Company’s option, one, two, three or six-month LIBOR plusSecured Term Loan. As of June 30, 2021, the Secured Term Loan has a spreadremaining outstanding principal balance of 5.00%. $60.0 million.
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 ninesix months ended SeptemberJune 30, 2020,2021, the estimated per annum effective interest rate of the Secured Term Loan, which is equal to LIBOR plus the spread plus the accretion of the original issue discount and associated costs, was 5.9%5.3% and 6.5%5.2%, respectively. For the three and ninesix months ended SeptemberJune 30, 2019,2020, the estimated per annum effective interest rate of the Secured Term Loan was 8.0%6.2% and 8.1%6.8%, respectively.
7. SECURED BORROWINGS
Certain of the Company’s subsidiaries are party to three3 separate secured borrowing arrangements related to transferred loans, consisting of (1) a secured borrowing that was closed in February 2020, which is secured by a $24.4 million senior mortgage loan on an office property located in North Carolina that was originated by the Company, (2) a secured borrowing that was closed in June 2020, which is secured by a $24.9 million subordinated loan on a multifamily property located in Florida that was originated by the Company and (3) a secured borrowing that was closed in June 2020, which is secured by a $12.6 million subordinated loan on a multifamily property located in Florida that was originated by the Company (collectively, the “Secured Borrowings”).
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 millionmillion0 senior mortgage loan to a third party and retained the $6.1 million mezzanine loan. The Company evaluated whether the transfer of the $24.4 million senior mortgage loan met the criteria in FASB ASC Topic 860, Transfers and Servicing, for treatment as a sale – legal isolation, ability of transferee to pledge or exchange the transferred assets without constraint and transfer of effective control – and 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 $24.4 million senior mortgage loan asset and recorded a secured borrowing liability in the consolidated balance sheets. The initial maturity date of the $24.4 million secured borrowing is May 5, 2023, subject to one 12-month extension, which may be exercised at the transferee’s option, which, if exercised, would extend the maturity date to May 5, 2024. Advances under the $24.4 million secured borrowing accrue interest at a per annum rate equal to the sum of one-month LIBOR plus a spread of 2.50%. As of SeptemberJune 30, 2020,2021, the total outstanding principal balance of the secured borrowing was $17.6$22.7 million. 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 one1 12-month extension, which may be exercised at the borrower’s option, which, if exercised, would extend the maturity date to June 5, 2023. As of SeptemberJune 30, 2020,2021, the total outstanding principal balance of the secured borrowing was $24.9 million.
In June 2020, the Company closed the purchase of a $46.7 million senior mortgage loan on a multifamily property located in Florida, (see Note 13), which the Company subsequently bifurcated between a $34.1 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 $12.6 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 $12.6 million subordinated participation to a third party and retained the $34.1 million senior participation. The Company evaluated whether the transfer of the $12.6 million subordinated participation met the criteria in FASB ASC Topic 860, Transfers and Servicing, for treatment as a sale. As the $34.1 million senior participation and the $12.6 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 $46.7 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 $12.6 million subordinated participation and recorded a secured borrowing liability in the consolidated balance sheets. The initial maturity date of the $12.6 million secured borrowing is June 5, 2022, subject to one1 12-month extension, which may be exercised at the borrower’s option, which, if exercised, would extend the maturity date to June 5, 2023. As of SeptemberJune 30, 2020,2021, the total outstanding principal balance of the secured borrowing was $12.6 million. 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):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Interest Rate Derivatives | | Number of Instruments | | Notional Amount | | Rate(1) | | Index | | Weighted Average Maturity (Years) | | Interest rate swaps | | 1 | | $ | 870,000 | | | 0.2075 | % | | LIBOR(2) | | 1.3 | | Interest rate caps | | 1 | | $ | 275,000 | | | 0.5000 | % | | LIBOR | | 1.3 |
_______________________________
(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):
| | | | | | | | | | | | | | | | | | | | | | | | | | Fair Value of Derivatives in an Asset Position(1) as of | | Fair Value of Derivatives in a Liability Position(2) as of | | June 30, 2021 | | December 31, 2020 | | June 30, 2021 | | December 31, 2020 | | Derivatives designated as hedging instruments: | | | | | | | | | Interest rate derivatives | $ | 266 | | | 0 | | | 0 | | | 0 | |
_____________________________
(1) Included in other assets in the Company’s consolidated balance sheets. (2) Included in other liabilities in the Company’s consolidated balance sheets.
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 SeptemberJune 30, 2020,2021, there were no contingencies recorded on the Company’s consolidated balance sheets as a result of the COVID-19 pandemic, however, if the global pandemic continues and market conditions worsen, it could adversely affect the Company’s business, financial condition and results of operations. As of SeptemberJune 30, 20202021 and December 31, 2019,2020, the Company had the following commitments to fund various senior mortgage loans, subordinated debt investments, as well as preferred equity investments accounted for as loans held for investment ($ in thousands):
| | | | | | | | | | | | | | As of | | June 30, 2021 | | December 31, 2020 | | Total commitments | $ | 2,236,212 | | | $ | 2,013,993 | | | Less: funded commitments | (2,042,544) | | | (1,826,241) | | | Total unfunded commitments | $ | 193,668 | | | $ | 187,752 | |
| | | | | | | | | | | As of | | | September 30, 2020 | | December 31, 2019 | | Total commitments | $ | 2,001,644 |
| | $ | 1,909,084 |
| | Less: funded commitments | (1,789,145 | ) | | (1,692,894 | ) | | Total unfunded commitments | $ | 212,499 |
| | $ | 216,190 |
|
The Company from time to time may be a party to litigation relating to claims arising in the normal course of business. As of SeptemberJune 30, 2020,2021, the Company is not aware of any legal claims that could materially impact its business, financial condition or results of operations.
9.10. STOCKHOLDERS’ EQUITY
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 ninesix months ended SeptemberJune 30, 2020,2021, the Company did not issue or sell any shares of common stock under the Equity Distribution Agreement.
Equity Offerings
On January 22, 2020,March 15, 2021, the Company entered into an underwriting agreement (the “Underwriting“March 2021 Underwriting Agreement”), by and among the Company, ACREM, and Wells Fargo Securities, LLC, Citigroup Global Markets Inc. and Morgan Stanley & Co. LLC, Wells Fargo Securities, LLC, and BofA Securities, Inc., as representatives of the several underwriters listed therein (collectively, the “Underwriters”“March 2021 Underwriters”). Pursuant to the terms of the March 2021 Underwriting Agreement, the Company agreed to sell, and the March 2021 Underwriters agreed to purchase, subject to the terms and conditions set forth in the March 2021 Underwriting Agreement, an aggregate of 4,000,0007,000,000 shares of the Company’s common stock, par value $0.01 per share. In addition, the Company granted to the Underwriters a 30-day option to purchase up to an additional 600,000 shares. The public offering closed on January 27, 2020March 18, 2021 and generated net proceeds of approximately $63.3$100.7 million, after deducting transaction expenses.
On January 30, 2020,June 17, 2021, the Company soldentered into an additional 600,000 shares pursuantunderwriting agreement (the “June 2021 Underwriting Agreement”), by and among the Company, ACREM, and Morgan Stanley & Co. LLC, Wells Fargo Securities, LLC, and BofA Securities, Inc., as representatives of the several underwriters listed therein (collectively, the “June 2021 Underwriters”). Pursuant to the terms of the June 2021 Underwriting Agreement, the Company agreed to sell, and the June 2021 Underwriters optionagreed to purchase, additionalsubject to the terms and conditions set forth in the June 2021 Underwriting Agreement, an aggregate of 6,500,000 shares generating additionalof the Company’s common stock, par value $0.01 per share. The public offering closed on June 22, 2021 and generated net proceeds of approximately $9.6 million.$101.6 million, after deducting transaction expenses.
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
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 SeptemberJune 30, 2020:2021:
Schedule of Non-Vested Share and Share Equivalents | | | | | | | | | | | | | | | | | | | | | | | | | Restricted Stock Grants—Directors | | Restricted Stock Grants—Officers and Employees of the Manager | | RSUs—Officers and Employees of the Manager | | Total | | Balance at December 31, 2020 | 22,324 | | | 68,851 | | | 267,507 | | | 358,682 | | | Granted | 23,280 | | | 0 | | | 0 | | | 23,280 | | | Vested | (22,324) | | | (29,081) | | | (35,509) | | | (86,914) | | | Forfeited | 0 | | | 0 | | | (9,833) | | | (9,833) | | | Balance at June 30, 2021 | 23,280 | | | 39,770 | | | 222,165 | | | 285,215 | |
| | | | | | | | | | | | | | | Restricted Stock Grants—Directors | | Restricted Stock Grants—Officers and Employees of the Manager | | RSUs—Officers and Employees of the Manager | | Total | | Balance at December 31, 2019 | 12,332 |
| | 211,467 |
| | 61,594 |
| | 285,393 |
| | Granted | 42,985 |
| | 0 |
| | 59,457 |
| | 102,442 |
| | Vested | (21,831 | ) | | (64,081 | ) | | (9,944 | ) | | (95,856 | ) | | Forfeited | 0 |
| | (76,602 | ) | | (2,600 | ) | | (79,202 | ) | | Balance at September 30, 2020 | 33,486 |
| | 70,784 |
| | 108,507 |
| | 212,777 |
|
Future Anticipated Vesting Schedule | | | | | | | | | | | | | | | | | | | | | | | | | Restricted Stock Grants—Directors | | Restricted Stock Grants—Officers and Employees of the Manager | | RSUs—Officers and Employees of the Manager | | Total | | 2021 | 11,640 | | | 10,694 | | | 0 | | | 22,334 | | | 2022 | 11,640 | | | 29,076 | | | 85,260 | | | 125,976 | | | 2023 | 0 | | | 0 | | | 85,244 | | | 85,244 | | | 2024 | 0 | | | 0 | | | 51,661 | | | 51,661 | | | 2025 | 0 | | | 0 | | | 0 | | | 0 | | | Total | 23,280 | | | 39,770 | | | 222,165 | | | 285,215 | |
| | | | | | | | | | | | | | | Restricted Stock Grants—Directors | | Restricted Stock Grants—Officers and Employees of the Manager | | RSUs—Officers and Employees of the Manager | | Total | | 2020 | 11,162 |
| | 1,661 |
| | 0 |
| | 12,823 |
| | 2021 | 22,324 |
| | 40,047 |
| | 36,176 |
| | 98,547 |
| | 2022 | 0 |
| | 29,076 |
| | 36,171 |
| | 65,247 |
| | 2023 | 0 |
| | 0 |
| | 36,160 |
| | 36,160 |
| | 2024 | 0 |
| | 0 |
| | 0 |
| | 0 |
| | Total | 33,486 |
| | 70,784 |
| | 108,507 |
| | 212,777 |
|
11. EARNINGS PER SHARE
The following information sets forth the computations of basic and diluted earnings (loss) per common share for the three and ninesix months ended SeptemberJune 30, 20202021 and 20192020 ($ in thousands, except share and per share data):
| | | | | | | | | | | | | | | | | | | For the three months ended September 30, | | For the nine months ended September 30, | | | 2020 |
| 2019 | | 2020 | | 2019 | | Net income attributable to common stockholders | $ | 14,928 |
| | $ | 9,034 |
| | $ | 7,433 |
| | $ | 27,331 |
| | Divided by: | | | | | | | | | Basic weighted average shares of common stock outstanding: | 33,337,445 |
| | 28,634,514 |
| | 32,852,553 |
| | 28,598,807 |
| | Weighted average non-vested restricted stock and RSUs | 212,999 |
| | 233,089 |
| | 219,532 |
| | 238,959 |
| | Diluted weighted average shares of common stock outstanding: | 33,550,444 |
| | 28,867,603 |
| | 33,072,085 |
| | 28,837,766 |
| | 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 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | For the three months ended June 30, | | For the six months ended June 30, | | 2021 | | 2020 | | 2021 | | 2020 | | | | Net income (loss) attributable to common stockholders | $ | 17,615 | | | $ | 9,768 | | | $ | 33,355 | | | $ | (7,495) | | | | | Divided by: | | | | | | | | | | | Basic weighted average shares of common stock outstanding: | 41,009,175 | | | 33,316,933 | | | 37,731,317 | | | 32,607,442 | | | | | Weighted average non-vested restricted stock and RSUs (1) | 285,422 | | | 222,647 | | | 294,616 | | | 0 | | | | | Diluted weighted average shares of common stock outstanding: | 41,294,597 | | | 33,539,580 | | | 38,025,933 | | | 32,607,442 | | | | | 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) | | | |
(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. 11.
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 ninesix months ended SeptemberJune 30, 20202021 and 20192020 ($ in thousands): | | | | | | | | | | | | | | | | | | | | | | | | | | | For the three months ended June 30, | | For the six months ended June 30, | | | 2021 | | 2020 | | 2021 | | 2020 | | | | Current | $ | 408 | | | $ | 85 | | | $ | 472 | | | $ | 103 | | | | | Deferred | 0 | | | 0 | | | 0 | | | (99) | | | | | Excise tax | 0 | | | 75 | | | 121 | | | 165 | | | | | Total income tax expense, including excise tax | $ | 408 | | | $ | 160 | | | $ | 593 | | | $ | 169 | | | |
| | | | | | | | | | | | | | | | | | | For the three months ended September 30, | | For the nine months ended September 30, | | | 2020 |
| 2019 | | 2020 | | 2019 | | Current | $ | 76 |
| | $ | (76 | ) | | $ | 179 |
| | $ | 69 |
| | Deferred | 0 |
| | 30 |
| | (99 | ) | | 48 |
| | Excise tax | 105 |
| | 65 |
| | 270 |
| | 215 |
| | Total income tax expense, including excise tax | $ | 181 |
|
| $ | 19 |
|
| $ | 350 |
|
| $ | 332 |
|
For the three and nine months ended SeptemberJune 30, 2020,2021, the Company did 0t incur any U.S. federal excise tax expense. For the six months ended June 30, 2021 the Company incurred an expense of $105$121 thousand and $270 thousand, respectively, for U.S. federal excise tax. For the three and ninesix months ended SeptemberJune 30, 2019,2020, the Company incurred an expense of $65$75 thousand and $215$165 thousand,, respectively, for U.S. federal excise tax. Excise tax represents a 4% tax on the sum of a portion of the Company’s ordinary income and net capital gains not distributed during the calendar year (including any distribution declared in the fourth quarter and paid following January) plus any prior year shortfall. If it is determined that an excise tax liability exists for the current year, the Company will accrue excise tax on estimated excess taxable income as such taxable income is earned. The quarterly expense is calculated in accordance with applicable tax regulations.
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.
As of SeptemberJune 30, 2020,2021, tax years 20162017 through 20202021 remain subject to examination by taxing authorities. The Company does not have any unrecognized tax benefits and the Company does not expect that to change in the next 12 months.
12.13. FAIR VALUE
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 1-Quoted1—Quoted prices in active markets for identical assets or liabilities.
•Level 2-Prices2—Prices are determined using other significant observable inputs. Observable inputs are inputs that other market participants would use in pricing a security. These may include quoted prices for similar securities, interest rates, prepayment speeds, credit risk and others.
•Level 3-Prices3—Prices are determined using significant unobservable inputs. In situations where quoted prices or observable inputs are unavailable (for example, when there is little or no market activity for an investment at the end of the period), unobservable inputs may be used.
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.
26Recurring Fair Value Measurements
The following table summarizes the financial assets and liabilities measured at fair value on a recurring basis as of June 30, 2021: | | | | | | | | | | | | | | | | | | | | | | | | | Level 1 | | Level 2 | | Level 3 | | Total | | Financial assets: | | | | | | | | | Interest rate derivatives | $ | 0 | | | $ | 266 | | | $ | 0 | | | $ | 266 | | | | | | | | | | | Financial liabilities: | | | | | | | | | Interest rate derivatives | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | |
As of SeptemberJune 30, 2020 and2021, the Company did not have any nonfinancial assets or liabilities required to be recorded at fair value on a recurring basis. As of December 31, 2019,2020, the Company did not have any financial and nonfinancial assets or liabilities required to be recorded at fair value on a recurring basis.
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 SeptemberJune 30, 20202021 and December 31, 2019,2020, the Company did not have any financial assets or liabilities or nonfinancial liabilities required to be recorded at fair value on a nonrecurring basis.
Financial Assets and Liabilities Not Measured at Fair Value As of SeptemberJune 30, 20202021 and December 31, 2019,2020, the carrying values and fair values of the Company’s financial assets and liabilities recorded at cost are as follows ($ in thousands): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | As of | | | | June 30, 2021 | | December 31, 2020 | | Level in Fair Value Hierarchy | | Carrying Value | | Fair
Value | | Carrying Value | | Fair
Value | | Financial assets: | | | | | | | | | | | Loans held for investment | 3 | | $ | 2,032,408 | | | $ | 2,028,955 | | | $ | 1,815,219 | | | $ | 1,800,003 | | | Financial liabilities: | | | | | | | | | | | Secured funding agreements | 2 | | $ | 404,205 | | | $ | 404,205 | | | $ | 755,552 | | | $ | 755,552 | | | Notes payable | 3 | | 43,976 | | | 44,936 | | | 61,837 | | | 63,122 | | | Secured term loan | 3 | | 60,000 | | | 60,000 | | | 110,000 | | | 110,000 | | | Collateralized loan obligation securitization debt (consolidated VIEs) | 3 | | 979,777 | | | 985,007 | | | 443,871 | | | 443,467 | | | Secured borrowings | 3 | | 59,902 | | | 60,215 | | | 59,790 | | | 60,215 | |
| | | | | | | | | | | | | | | | | | | | | | | As of | | | | | September 30, 2020 | | December 31, 2019 | | | Level in Fair Value Hierarchy | | Carrying Value | | Fair
Value | | Carrying Value | | Fair
Value | | Financial assets: | | | | | | | | | | | Loans held for investment | 3 | | $ | 1,778,199 |
| | $ | 1,765,198 |
| | $ | 1,682,498 |
| | $ | 1,692,894 |
| | Financial liabilities: | | | | | | | | | | | Secured funding agreements | 2 | | $ | 791,136 |
| | $ | 791,136 |
| | $ | 728,589 |
| | $ | 728,589 |
| | Notes payable | 3 | | 57,848 |
| | 59,155 |
| | 54,708 |
| | 56,155 |
| | Secured term loan | 3 | | 109,803 |
| | 107,298 |
| | 109,149 |
| | 110,000 |
| | Collateralized loan obligation securitization debt (consolidated VIE) | 3 | | 443,860 |
| | 440,655 |
| | 443,177 |
| | 445,600 |
| | Secured borrowings | 3 | | 54,617 |
| | 55,095 |
| | 0 |
| | 0 |
|
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 methodology.methodology, taking into consideration various factors including discount rates, actions of other lenders and comparable market quotes and recent trades for similar products.
13.14. RELATED PARTY TRANSACTIONS
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 910 included in these consolidated financial statements) in the previous 12-month period, and (2) 8%; and (b) the sum of any incentive fees earned by ACREM with respect to the first three fiscal quarters of such previous 12-month period; provided, however, that 0 incentive fee is payable with respect to any fiscal quarter unless cumulative Core Earnings for the 12 most recently completed fiscal quarters is greater than 0. “Core Earnings” is a non-GAAP measure and is defined in the Management Agreement as GAAP net income (loss) computed in accordance with GAAP, excluding non-cash equity compensation expense, the incentive fee, depreciation and amortization (to the extent that any of the Company’s target investments are structured as debt and the Company forecloses on any properties underlying such debt), any unrealized gains, losses or other non-cash items recorded in net income (loss) for the period, regardless of whether such items are included in other comprehensive income or loss, or in net income (loss), and one-time events pursuant to changes in GAAP and certain non-cash charges after discussions between ACREM and the Company’s independent directors and after approval by a majority of the Company’s independent directors. For the three and six months ended June 30, 2021, the Company incurred incentive fees of $693 thousand and $1.4 million, respectively. For both the three and six months ended SeptemberJune 30, 2020, and 2019, 0 incentive fees were incurred. For the nine months ended September 30, 2020 and 2019, the Company incurred incentive fees of $303 thousand and $674 thousand, respectively.thousand.
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, 2021,2022, with automatic one-year renewal terms thereafter. Except under limited circumstances, upon a termination of the Management Agreement, the Company will pay ACREM a termination fee equal to three3 times the average annual base management fee and incentive fee received by ACREM during the 24-month period immediately preceding the most recently completed fiscal quarter prior to the date of termination, each as described above.
The following table summarizes the related party costs incurred by the Company for the three and ninesix months ended SeptemberJune 30, 20202021 and 20192020 and amounts payable to the Company’s Manager as of SeptemberJune 30, 20202021 and December 31, 20192020 ($ in thousands): | | | | Incurred | | Payable | | Incurred | | | Payable | | | For the three months ended September 30, | | For the nine months ended September 30, | | As of | | For the three months ended June 30, | | For the six months ended June 30, | | | As of | | | 2020 | | 2019 | | 2020 | | 2019 | | September 30, 2020 | | December 31, 2019 | | 2021 | | 2020 | | 2021 | | 2020 | | | June 30, 2021 | | December 31, 2020 | | Affiliate Payments | | | | | | | | | | | | Affiliate Payments | | | | | | | | | | | | | | Management fees | $ | 1,847 |
| | $ | 1,578 |
| | $ | 5,468 |
| | $ | 4,730 |
| | $ | 1,847 |
| | $ | 1,581 |
| Management fees | $ | 2,258 | | | $ | 1,849 | | | $ | 4,167 | | | $ | 3,621 | | | | $ | 2,258 | | | $ | 1,854 | | | Incentive fees | 0 |
| | 0 |
| | 303 |
| | 674 |
| | 0 |
| | 378 |
| Incentive fees | 693 | | | 303 | | | 1,351 | | | 303 | | | | 693 | | | 533 | | | General and administrative expenses | 802 |
| | 831 |
| | 2,890 |
| | 2,261 |
| | 802 |
| | 789 |
| General and administrative expenses | 788 | | | 1,038 | | | 1,540 | | | 2,089 | | | | 788 | | | 762 | | | Direct costs (1) | 31 |
| | 19 |
| | 99 |
| | 148 |
| | 21 |
| | 13 |
| Direct costs (1) | (7) | | | 15 | | | (7) | | | 68 | | | | (8) | | | 1 | | | Total | $ | 2,680 |
| | $ | 2,428 |
| | $ | 8,760 |
|
| $ | 7,813 |
|
| $ | 2,670 |
|
| $ | 2,761 |
| Total | $ | 3,732 | | | $ | 3,205 | | | $ | 7,051 | | | $ | 6,081 | | | | $ | 3,731 | | | $ | 3,150 | |
| | (1) | For the three and nine months ended September 30, 2020 and 2019, direct costs incurred are included within general and administrative expenses in the Company’s consolidated statements of operations. |
(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
vehicles and the Company is not obligated to provide, nor has it provided, any financial support to the other Ares managed investment vehicles. As such, the Company’s risk is limited to the carrying value of its investment and the Company recognizes only the carrying value of its investment in its consolidated balance sheets. As of SeptemberJune 30, 20202021 and December 31, 2019,2020, the total outstanding principal balance for co-investments held by the Company was $44.3$30.1 million and $40.9$45.1 million, respectively.
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 2020,2021, the Company purchased a $105.5 million senior mortgage loan on an office property located in Illinois from the Ares Warehouse Vehicle with a commitment amount of $132.6 million on a portfolio of office properties located across multiple states.Vehicle. At the January 20202021 purchase date, the senior mortgage loan had a total outstanding principal balance of $107.1was $103.6 million, which is included within loans held for investment in the Company’s consolidated balance sheets.
In June 2020,January 2021, the Company purchased a $5.6 million senior mortgage loan on a self storage property located in Illinois from the Ares Warehouse Vehicle with a commitment amount of $46.7 million on a multifamily property located in Florida.Vehicle. At the June 2020January 2021 purchase date, the senior mortgage loan had a total outstanding principal balance of $46.2was $5.4 million, which is included within loans held for investment in the Company’s consolidated balance sheets. 14.In January 2021, the Company purchased a fully funded $6.4 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 $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 $23.2 million, which is included within loans held for investment in the Company’s consolidated balance sheets.
15. DIVIDENDS AND DISTRIBUTIONS
The following table summarizes the Company’s dividends declared during the ninesix months ended SeptemberJune 30, 20202021 and 20192020 ($ in thousands, except per share data):
| | | | | | | | | | | | | | | Date Declared | | Record Date | | Payment Date | | Per Share Amount | | Total Amount | | September 16, 2020 | | September 30, 2020 | | October 15, 2020 | | $ | 0.33 |
| | $ | 11,072 |
| | June 19, 2020 | | June 30, 2020 | | July 15, 2020 | | 0.33 |
| | 11,072 |
| | February 20, 2020 | | March 31, 2020 | | April 15, 2020 | | 0.33 |
| | 11,057 |
| | Total cash dividends declared for the nine months ended September 30, 2020 | | | | | | $ | 0.99 |
| | $ | 33,201 |
| | | | | | | | | | | | July 26, 2019 | | September 30, 2019 | | October 15, 2019 | | $ | 0.33 |
| | $ | 9,526 |
| | May 1, 2019 | | June 28, 2019 | | July 16, 2019 | | 0.33 |
| | 9,527 |
| | February 21, 2019 | | March 29, 2019 | | April 16, 2019 | | 0.33 |
| | 9,520 |
| | Total cash dividends declared for the nine months ended September 30, 2019 | | | | | | $ | 0.99 |
| | $ | 28,573 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | Date Declared | | Record Date | | Payment Date | | Per Share Amount | | Total Amount | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | May 4, 2021 | | June 30, 2021 | | July 15, 2021 | | $ | 0.35 | | (1) | $ | 16,528 | | | February 17, 2021 | | March 31, 2021 | | April 15, 2021 | | 0.35 | | (1) | 14,248 | | | Total cash dividends declared for the six months ended June 30, 2021 | | | | | | $ | 0.70 | | | $ | 30,776 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | June 19, 2020 | | June 30, 2020 | | July 15, 2020 | | $ | 0.33 | | | $ | 11,072 | | | February 20, 2020 | | March 31, 2020 | | April 15, 2020 | | 0.33 | | | 11,057 | | | Total cash dividends declared for the six months ended June 30, 2020 | | | | | | $ | 0.66 | | | $ | 22,129 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(1) Consists of a regular cash dividend of $0.33 and a supplemental cash dividend of $0.02. 15.
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 investmentinvestments in the CLO SecuritizationSecuritizations (as defined below), which isare considered to be a variable interestinterests in a VIE.VIEs.
CLO SecuritizationSecuritizations
On January 11, 2019, ACRE Commercial Mortgage 2017-FL3 Ltd. (the “Issuer”“FL3 Issuer”) and ACRE Commercial Mortgage 2017-FL3 LLC (the “Co-Issuer”“FL3 Co-Issuer”), both wholly-owned indirect subsidiaries of the Company, entered into an Amended and Restated Indenture (the “Amended“FL3 Amended Indenture”) with Wells Fargo Bank, National Association, as advancing agent and note administrator, and Wilmington Trust, National Association, as trustee, which governs the approximately $504.1 million principal balance of secured floating rate notes (the “Notes”“FL3 Notes”) issued by the FL3 Issuer and $52.9 million of preferred equity in the FL3 Issuer (the “CLO“FL3 CLO Securitization”). The FL3 Amended Indenture amends and restates, and replaces in its entirety, the indenture for the CLO securitization issued in March 2017, which governed the issuance of approximately $308.8 million principal balance of secured floating rate notes and $32.4 million of preferred equity in the FL3 Issuer.
As of SeptemberJune 30, 2020,2021, the FL3 Notes were collateralized by interests in a pool of 1412 mortgage assets having a total principal balance of $495.2$459.4 million (the “Mortgage“FL3 Mortgage Assets”) that were originatedclosed by a wholly-owned subsidiary of the Company and approximately $61.8$97.6 million of receivables related to repayments of outstanding principal on previous mortgage assets. As of December 31, 2019,2020, the FL3 Notes were collateralized by interests in a pool of 1615 mortgage assets having a total principal balance of approximately $515.9$550.6 million that were originatedclosed by a wholly-owned subsidiary of the Company and approximately $41.1$6.4 million of receivables related to repayments of outstanding principal on previous mortgage assets. On April 13, 2021, the FL3 Issuer and the FL3 Co-Issuer entered into a First Supplement to Amended and Restated Indenture (the “2021 Amended Indenture”) with Wells Fargo Bank, National Association, as advancing agent and note administrator, and Wilmington Trust, National Association, as trustee, which governs the FL3 CLO Securitization. The purpose of the 2021 Amended Indenture was to, among other things, extend the reinvestment period to March 31, 2024. During the reinvestment period, ending on March 31, 2021, the Company may direct the FL3 Issuer to acquire additional mortgage assets meeting applicable reinvestment criteria using the principal repayments from the FL3 Mortgage Assets, subject to the satisfaction of certain conditions, including receipt of a Rating Agency Confirmation and investor approval of the new mortgage assets. The contribution of the FL3 Mortgage Assets to the Issuer is governed by a Mortgage Asset Purchase Agreement between ACRC Lender LLC (the “Seller”), a wholly-owned subsidiary of the Company,Seller and the FL3 Issuer, and acknowledged by the Company solely for purposes of confirming its status as a REIT, in which the Seller made certain customary representations, warranties and covenants.
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 “Offered“FL3 Offered Notes”) to a third party. The Company retained (through one of its wholly-owned subsidiaries) approximately $58.5 million of the FL3 Notes and all of the $52.9 million of preferred equity in the FL3 Issuer, which totaled $111.4 million. The Company, as the holder of the subordinated FL3 Notes and all of the preferred equity in the FL3 Issuer, has the obligation to absorb losses of the CLO, since the Company has a first loss position in the capital structure of the CLO.
AfterOn January 16, 2023,28, 2021, ACRE Commercial Mortgage 2021-FL4 Ltd. (the “FL4 Issuer”) and ACRE Commercial Mortgage 2021-FL4 LLC (the “FL4 Co-Issuer”), both wholly owned indirect subsidiaries of the Company, entered into an Indenture (the “FL4 Indenture”) with ACRC Lender LLC, a wholly owned subsidiary of the Company (the “Seller”), as advancing agent, Wells Fargo Bank, National Association, as note administrator, and Wilmington Trust, National Association, as trustee, which governs the issuance of approximately $603.0 million principal balance secured floating rate notes (the “FL4 Notes”) and $64.3 million of preferred equity in the FL4 Issuer (the “FL4 CLO Securitization”). For U.S. federal income tax purposes, the FL4 Issuer and FL4 Co-Issuer are disregarded entities.
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 redeemuse certain principal proceeds from the Offered Notes subjectFL4 Mortgage Assets to paying a make whole prepayment fee of 1.0%acquire additional funded pari-passu participations related to the FL4 Mortgage Assets that meet certain acquisition criteria.
The sale of the then outstanding balanceFL4 Mortgage Assets to the FL4 Issuer is governed by a FL4 Mortgage Asset Purchase Agreement between the Seller and the FL4 Issuer, and acknowledged by the Company solely for purposes of confirming its status as a REIT, in which the Seller made certain customary representations, warranties and covenants.
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 Offered Notes. In addition, onceCompany retained approximately $62.5 million of the Class A Notes, Class A-S Notes, Class BFL4 Notes and Class Call of the $64.3 million of preferred equity in the FL4 Issuer, which totaled $126.8 million. The Company, as the holder of the subordinated FL4 Notes have been repaidand all of the preferred equity in full, the FL4 Issuer, has the rightobligation to redeemabsorb losses of the Class D Notes, subject to payingFL4 CLO Securitization, since the Company has a make whole prepayment feefirst loss position in the capital structure of 1.0% on the Class D Notes.FL4 CLO Securitization. The FL3 CLO Securitization and the FL4 CLO Securitization are collectively referred to as the “CLO Securitizations.” As the directing holder of the CLO Securitization,Securitizations, the Company has the ability to direct activities that could significantly impact the CLO Securitization’sSecuritizations’ economic performance. ACRES is designated as special servicer of the CLO SecuritizationSecuritizations and has the power to direct activities during the loan workout process on defaulted and delinquent loans, which is the activity that most significantly impacts the CLO Securitization’sSecuritizations’ economic performance. ACRES did not waive the special servicing fee, and the Company pays its overhead costs. If an unrelated third party had the right to unilaterally remove the special servicer, then the Company would not have the power to direct activities that most significantly impact the CLO Securitization’sSecuritizations’ economic performance. In addition, there were no substantive kick-out rights of any unrelated third party to remove the special servicer without cause. The Company’s subsidiaries, as directing holders, have the ability to remove the special servicer without cause. Based on these factors, the Company is determined to be the primary beneficiary of each of the CLO Securitization;Securitizations; thus, the CLO Securitization isSecuritizations are consolidated into the Company’s consolidated financial statements.
The CLO Securitization isSecuritizations are consolidated in accordance with FASB ASC Topic 810 and isare structured as a pass through entityentities that receivesreceive principal and interest on the underlying collateral and distributes those payments to the note holders, as applicable. The assets and other instruments held by the CLO SecuritizationSecuritizations are restricted and can only be used to fulfill the obligations of the respective CLO Securitization.Securitizations. Additionally, the obligations of the CLO SecuritizationSecuritizations do not have any recourse to the general credit of any other consolidated entities, nor to the Company as the primary beneficiary.
The inclusion of the assets and liabilities of the CLO SecuritizationSecuritizations of which the Company is deemed the primary beneficiary has no economic effect on the Company. The Company’s exposure to the obligations of the CLO Securitization isSecuritizations are generally limited to its investment in the entity. The Company is not obligated to provide, nor has it provided, any financial support for the consolidated structure.structures. As such, the risk associated with the Company’s involvement in the CLO Securitization isSecuritizations are limited to the carrying value of its investment in each of the entity.entities. As of SeptemberJune 30, 2020,2021, the Company’s maximum risk of loss was $111.4$238.2 million, which represents the carrying value of its investmentinvestments in the CLO Securitization.Securitizations.
16.17. SUBSEQUENT EVENTS
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 ninesix months ended June 30, 2021, except as disclosed below.
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, 2020.2021.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations Some of the statements contained in this quarterly report constitute forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995 and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and we intend such statements to be covered by the safe harbor provisions contained therein. The information contained in this section should be read in conjunction with our consolidated financial statements and notes thereto appearing elsewhere in this quarterly report on Form 10-Q. This description contains forward-looking statements that involve risks and uncertainties. Actual results could differ significantly from the results discussed in the forward-looking statements due to the factors set forth in “Risk Factors” and elsewhere in this quarterly report on Form 10-Q and in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019. In addition, some of the statements in this quarterly report (including in the following discussion) constitute forward-looking statements, which relate to future events or the future performance or financial condition of Ares Commercial Real Estate Corporation (“ACRE” and, together with its consolidated subsidiaries, the “Company,” “we,” “us” and “our”). The forward-looking statements contained in this report involve a number of risks and uncertainties, including statements concerning:
our business and investment strategy;
our projected operating results;
the return or impact of current and future investments;
the severity and duration of the novel coronavirus (“COVID-19”) pandemic;
the impact of the COVID-19 pandemic, on our business and the United States and global economies;
the impact of the COVID-19 pandemic on the real estate industry and our borrowers, the performance of the properties securing our loans that may cause deterioration in the performance of our investments and, potentially, principal losses to us;
whether, or how much, we or our borrowers have benefited or may benefit from government stimulus programs in response to the COVID-19 pandemic;
management’s current estimate of expected credit losses and current expected credit loss reserve;
the collectability and timing of cash flows, if any, from our investments;
estimates relating to our ability to make distributions to our stockholders in the future;
defaults by borrowers in paying amounts due on outstanding indebtedness and our ability to collect all amounts due according to the contractual terms of our investments;
our ability to obtain and maintain financing arrangements, including securitizations;
market conditions and our ability to access alternative debt markets and additional debt and equity capital;
the amount of commercial mortgage loans requiring refinancing;
the demand for commercial real estate loans;
our expected investment capacity and available capital;
financing and advance rates for our target investments;
our expected leverage;
changes in interest rates, credit spreads and the market value of our investments;
the impact of the elimination of the London Interbank Offered Rate (“LIBOR”) on our operating results;
effects of hedging instruments on our target investments;
rates of default or decreased recovery rates on our target investments;
rates of prepayments on our mortgage loans and the effect on our business of such prepayments;
the degree to which our hedging strategies may or may not protect us from interest rate volatility;
availability of investment opportunities in mortgage-related and real estate-related investments and securities;
the ability of Ares Commercial Real Estate Management LLC (“ACREM” or our “Manager”) to locate suitable investments for us, monitor, service and administer our investments and execute our investment strategy;
allocation of investment opportunities to us by our Manager;
our ability to successfully identify, complete and integrate any acquisitions;
our ability to maintain our qualification as a real estate investment trust (“REIT”) for United States federal income tax purposes;
our ability to maintain our exemption from registration under the Investment Company Act of 1940 (the “1940 Act”);
our understanding of our competition;
general volatility of the securities markets in which we may invest;
adverse changes in the real estate, real estate capital and credit markets and the impact of a protracted decline in the liquidity of credit markets on our business;
changes in governmental regulations, tax law and rates, and similar matters (including interpretation thereof);
authoritative or policy changes from standard-setting bodies such as the Financial Accounting Standards Board, the Securities and Exchange Commission, the Internal Revenue Service, the stock exchange where we list our common stock, and other authorities that we are subject to, as well as their counterparts in any foreign jurisdictions where we might do business;
actions and initiatives of the United States Government or governments outside of the United States, and changes to United States Government policies;
the state of the United States, European Union and Asian economies generally or in specific geographic regions;
global economic trends and economic conditions; and
market trends in our industry, interest rates, real estate values, the debt securities markets or the general economy.
We use words such as “anticipates,” “believes,” “expects,” “intends,” “will,” “should,” “may” and similar expressions to identify forward-looking statements, although not all forward-looking statements include these words. Our actual results and financial condition could differ materially from those implied or expressed in the forward-looking statements for any reason, including the factors set forth in “Risk Factors” and the other information included in our Annual Report on Form 10-K and elsewhere in this quarterly report on Form 10-Q.
We have based the forward-looking statements included in this quarterly report on information available to us on the date of this quarterly report, and we assume no obligation to update any such forward-looking statements. Although we undertake no obligation to revise or update any forward-looking statements, whether as a result of new information, future events or otherwise, you are advised to consult any additional disclosures that we may make directly to you or through reports that we have filed or in the future may file with the Securities and Exchange Commission (“SEC”), including annual reports on Form 10-K, registration statements on Form S-3, quarterly reports on Form 10-Q and current reports on Form 8-K.
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 ThirdSecond Quarter of 2020:2021:
•ACRE closed the sale oforiginated a $19.5 million senior mortgage loan with outstanding principal of $31.5 million, which was collateralized byon a hotelstudent housing property located in Minnesota,Alabama. •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. In addition,At the purchase date, ACRE closedalready owned the sale of twocorresponding $18.6 million mezzanine loan. •ACRE purchased a $100.7 million senior mortgage loans to a third party with outstanding principal of $39.9 million and $29.6 million, respectively, which were collateralized by multifamily propertiesloan on an industrial property located in Illinois from the Ares Warehouse Vehicle. •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 Texas, respectively. ACRE recognized an aggregate net realized loss of $4.0 million uponCommercial Mortgage 2017-FL3 LLC (the “FL3 Co-Issuer”) entered into a First Supplement to Amended and Restated Indenture (the “2021 Amended Indenture”) with Wells Fargo Bank, National Association, as advancing agent and note administrator, and Wilmington Trust, National Association, as trustee, which governs the closingFL3 collateralized loan obligation securitization debt (“FL3 CLO Securitization”). The purpose of the sale of the three loans as the carrying value exceeded the sale prices of the loans. The U.S. Bank Facility (as defined below) matured and its term2021 Amended Indenture was not extended. The U.S. Bank Facility had been repaid in full prior to the maturity date.
ACRE amended the MetLife Facility (as defined below) to, among other things, (1) extend the initial maturity date of the MetLife Facilityreinvestment period to August 13, 2022, subject to two 12-month extensions, each of which may be exercised at ACRE’s option, subject to the satisfaction of certain conditions, including payment of an extension fee, which, if both were exercised, wouldMarch 31, 2024, extend the maturity date ofon and after which the MetLife FacilityFL3 Issuer may redeem the Notes held by third parties to August 13, 2024, (2) increaseMarch 17, 2025 (the “Redemption Date”), and eliminate the interest rate on new advances subsequent to the date of the amendment to a per annum rate equal to the sum of one-month LIBOR plus a spread of 2.50%. The interest rate on advances with respect to existing loans financed under the MetLife Facility prior to the amendment will continue to accrue interest at a per annum rate equal to the sum of one-month LIBOR plus a spread of 2.30%, subject to certain exceptions and (3) waive the non-utilizationprepayment fee of 25 basis points per annumdue on the average daily available balanceRedemption Date.
•ACRE entered into an underwriting agreement (the “Underwriting Agreement”) in which ACRE agreed to sell an aggregate of the MetLife Facility, which is owed if less than 65%6,500,000 shares of the MetLife Facility is utilized, for a periodACRE’s common stock, par value $0.01 per share. The public offering generated net proceeds of nine months subsequent to the date of the amendment.approximately $101.6 million, after deducting transaction expenses.
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 SeptemberJune 30, 2020,2021, our portfolio included 4953 loans held for investment, excluding 98106 loans that were repaid, sold or converted to real estate owned since inception. As of SeptemberJune 30, 2020,2021, the aggregate originated commitment under these loans at closing was approximately $2.0$2.3 billion and outstanding principal was $1.8$2.0 billion. During the ninesix months ended SeptemberJune 30, 2020, 2021,
we funded approximately $496.4 million of outstanding principal, received repayments of $299.2$471.6 million of outstanding principal and sold three loans withreceived repayments of $255.3 million of outstanding principal of $101.0 million to third parties.principal. As of SeptemberJune 30, 2020, 95.2%2021, 97.2% of our loans have LIBOR floors, with a weighted average floor of 1.74%1.36%, calculated based on loans with LIBOR floors. References to LIBOR or “L” are to 30-day LIBOR (unless otherwise specifically stated).
AsOther than as set forth in Note 3 to our consolidated financial statements included in this quarterly report on Form 10-Q, as of SeptemberJune 30, 2020,2021, all loans held for investment were paying in accordance with their contractual terms.
Our loans held for investment are accounted for at amortized cost. The following table summarizes our loans held for investment as of SeptemberJune 30, 20202021 ($ in thousands):
| | | | As of September 30, 2020 | | As of June 30, 2021 |
| Carrying Amount (1) | | Outstanding Principal (1) | | Weighted Average Unleveraged Effective Yield | | Weighted Average Remaining Life (Years) | | 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 | Senior mortgage loans | $ | 2,001,488 | | | $ | 2,011,128 | | | 5.8 | % | (2) | 5.9 | % | (3) | | 1.3 | | Subordinated debt and preferred equity investments | 97,670 |
| | 98,672 |
| | 13.4 | % | (2) | 13.4 | % | (3) | | 2.1 | Subordinated debt and preferred equity investments | 30,920 | | | 31,416 | | | 15.8 | % | (2) | 15.8 | % | (3) | | 2.5 | | Total loans held for investment portfolio | $ | 1,778,199 |
| | $ | 1,789,145 |
| | 6.3 | % | (2) | 6.6 | % | (3) | | 1.3 | Total loans held for investment portfolio | $ | 2,032,408 | | | $ | 2,042,544 | | | 6.0 | % | (2) | 6.1 | % | (3) | | 1.3 |
| | (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 September 30, 2020 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 September 30, 2020 as weighted by the total outstanding principal balance of each interest accruing loan (excludes loans on non-accrual status as of September 30, 2020). |
(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%.
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 $0.02 per common share for the third quarter of 2021. The third quarter 2021 and supplemental cash dividends will be payable on October 15, 2021 to common stockholders of record as of September 30, 2021.
RESULTS OF OPERATIONS
The following table sets forth a summary of our consolidated results of operations for the three and ninesix months ended SeptemberJune 30, 20202021 and 20192020 ($ in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | For the three months ended June 30, | | For the six months ended June 30, | | 2021 | | 2020 | | 2021 | | 2020 | | Total revenue | $ | 23,531 | | | $ | 17,982 | | | $ | 44,754 | | | $ | 39,116 | | | 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 | — | | | 3,998 | | | — | | | 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) | |
| | | | | | | | | | | | | | | | | | | For the three months ended September 30, | | For the nine months ended September 30, | | | 2020 | | 2019 | | 2020 | | 2019 | | Total revenue | $ | 22,374 |
| | $ | 19,847 |
| | $ | 61,490 |
| | $ | 55,679 |
| | Total expenses | 8,303 |
| | 10,794 |
| | 27,636 |
| | 28,016 |
| | Provision for current expected credit losses | (1,048 | ) | | — |
| | 22,063 |
| | — |
| | Realized losses on loans sold | 4,008 |
| | — |
| | 4,008 |
| | — |
| | Change in unrealized losses on loans held for sale | (3,998 | ) | | — |
| | — |
| | — |
| | 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 |
|
The following tables set forth select details of our consolidated results of operations for the three and ninesix months ended SeptemberJune 30, 20202021 and 20192020 ($ in thousands):
Net Interest Margin | | | | | | | | | | | | | | | | | | | | | | | | | For the three months ended June 30, | | For the six months ended June 30, | | 2021 | | 2020 | | 2021 | | 2020 | | 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 | |
| | | | | | | | | | | | | | | | | | | For the three months ended September 30, | | For the nine months ended September 30, | | | 2020 | | 2019 | | 2020 | | 2019 | | 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 |
|
For the three months ended SeptemberJune 30, 20202021 and 2019,2020, net interest margin was approximately $18.8$19.8 million and $13.1$16.8 million, respectively. For the three months ended SeptemberJune 30, 20202021 and 2019,2020, interest income of $30.6$30.9 million and $28.3$29.8 million, respectively, was generated by weighted average earning assets of $1.8$2.0 billion and $1.5$1.9 billion, respectively, offset by $11.9$11.1 million and $15.1$13.0 million, respectively, of interest expense, unused fees and amortization of deferred loan costs. The weighted average borrowings under the Wells Fargo Facility, the Citibank Facility, the CNB Facility, the MetLife Facility, the U.S. Bank Facility and the Morgan Stanley Facility (individually defined below and collectively, the “Secured Funding Agreements”), Notes Payable (as defined below and excluding the Note Payable on the hotel property that is recognized as real estate owned in our consolidated balance sheets), the Secured Term Loan, Secured Borrowings and securitization debt (as defined below) were $1.5 billion for the three months ended SeptemberJune 30, 20202021 and $1.1$1.6 billion for the three months ended SeptemberJune 30, 20192020 (which included one facilitytwo facilities which waswere subsequently paid in full). The increase in net interest margin for the three months ended SeptemberJune 30, 20202021 compared to the three months ended SeptemberJune 30, 20192020 primarily relates to an increase in our weighted average earning assets and weighted average borrowings for the three months ended September 30, 2020 as well as the benefit received from the impact of LIBOR floors on our loans held for investment due to a decrease in 30-day LIBOR for the three months ended SeptemberJune 30, 2020.2021. As of SeptemberJune 30, 2020, 95.2%2021, 97.2% of our loans held for investment as measured by outstanding principal balance have LIBOR floors, with a weighted average floor of 1.74%1.36%, calculated based on loans with LIBOR floors, while 18.1%13.0% of our borrowings have LIBOR floors, with a
weighted average floor of 0.95%1.22%.
For the ninesix months ended SeptemberJune 30, 20202021 and 2019,2020, net interest margin was approximately $51.5$38.3 million and $38.7$32.7 million, respectively. For the ninesix months ended SeptemberJune 30, 20202021 and 2019,2020, interest income of $91.9$61.6 million and $86.2$61.3 million, respectively, was generated by weighted average earning assets of $1.9 billion and $1.6$1.9 billion, respectively, offset by $40.5$23.2 million and $47.5$28.6 million, respectively, of interest expense, unused fees and amortization of deferred loan costs. The weighted average borrowings under the Secured Funding Agreements, Notes Payable (excluding the Note Payable on the hotel property that is recognized as real estate owned in our consolidated balance sheets), the Secured Term Loan, Secured Borrowings and securitization debt were $1.5 billion for the ninesix months ended SeptemberJune 30, 20202021 and $1.2$1.5 billion for the ninesix months ended SeptemberJune 30, 2019.2020. The increase in net interest margin for the ninesix months ended SeptemberJune 30, 20202021 compared to the ninesix months ended SeptemberJune 30, 20192020 primarily relates to an increase in our weighted average earning assets and weighted average borrowings for the nine months ended September 30, 2020 as well as the benefit received from the impact of LIBOR floors on our loans held for investment due to a decrease in 30-day LIBOR for the ninesix months ended SeptemberJune 30, 2020.2021. In addition, in January 2021, we issued $540.5 million of securitization debt, a portion of the proceeds of which were used to pay down debt with a higher cost of funds than the issued securitization debt.
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 SeptemberJune 30, 20202021 and 2019,2020, revenue from real estate owned was $3.6$3.8 million and $6.7 $1.2 million,, respectively. Revenues consist of room sales, food and beverage sales and other hotel revenues. The decreaseincrease in revenue from real estate owned for the three months ended SeptemberJune 30, 20202021 compared to the three months ended SeptemberJune 30, 20192020 is primarily due to the ongoing recovery from the impact of the COVID-19 pandemic which significantly reducedas occupancy and overall revenue at the hotel property increased for the three months ended SeptemberJune 30, 2020.2021. For both the ninesix months ended SeptemberJune 30, 20202021 and 2019,2020, revenue from real estate owned was $10.0 million and $17.0$6.4 million, respectively. The decrease in revenue from real estate owned for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019 is primarily due to the impact of the COVID-19 pandemic, which significantly reduced occupancy and overall revenue at the hotel property for the nine months ended September 30, 2020. This was partially offset due to the inclusion of a full nine months of operations for the nine months ended September 30, 2020, whereas the nine months ended September 30, 2019 only included approximately seven months of operations as the hotel property was acquired on March 8, 2019.
Operating Expenses | | | | | | | | | | | | | | | | | | | | | | | | | For the three months ended June 30, | | For the six months ended June 30, | | 2021 | | 2020 | | 2021 | | 2020 | | 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 | |
| | | | | | | | | | | | | | | | | | | For the three months ended September 30, | | For the nine months ended September 30, | | | 2020 | | 2019 | | 2020 | | 2019 | | 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 |
|
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 three and ninesix months ended SeptemberJune 30, 20202021 compared to the three and ninesix months ended SeptemberJune 30, 2019.2020. Related Party Expenses
For the three months ended SeptemberJune 30, 2020,2021, related party expenses included $1.8$3.0 million in management and incentive fees due to our Manager pursuant to the Management Agreement. NoAgreement, which consisted of $2.3 million in management fees and $0.7 million in incentive fees were incurred for the three months ended September 30, 2020.fees. For the three months ended SeptemberJune 30, 2020,2021, related party expenses also included $0.8 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 three months ended SeptemberJune 30, 2019,2020, related party expenses included $1.6$2.2 million in management and incentive fees due to our Manager pursuant to the Management Agreement. NoAgreement, which consisted of $1.8 million in management fees and $0.3 million in incentive fees were incurred for the three months ended September 30, 2019.fees. For the three months ended SeptemberJune 30, 2019,2020, related party expenses also included $0.8$1.0 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 three months ended SeptemberJune 30, 20202021 compared to the three months ended SeptemberJune 30, 20192020 primarily relates to an increase in our weighted average stockholders’
equity for the three months ended SeptemberJune 30, 20202021 as a result of the public offering of 4,600,0007,000,000 shares of our common stock in January 2020,March 2021, which generated net proceeds of approximately $72.9 million. The allocable general$100.7 million, and administrative expenses due to our Manager were relatively consistent for both periods.
For the nine months ended September 30, 2020, related party expenses included $5.8 million in management and incentive fees due to our Manager pursuant to the Management Agreement, which consisted of $5.5 million in management fees and $0.3 million in incentive fees. For the nine months ended September 30, 2020, related party expenses also included $2.9 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 nine months ended September 30, 2019, related party expenses included $5.4 million in management and incentive fees due to our Manager pursuant to the Management Agreement, which
consisted of $4.7 million in management fees and $0.7 million in incentive fees. For the nine months ended September 30, 2019, related party expenses also included $2.3 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 nine months ended September 30, 2020 compared to the nine months ended September 30, 2019 primarily relates to an increase in our stockholders’ equity for the nine months ended September 30, 2020 as a result of the public offering of 4,600,0006,500,000 shares of our common stock in January 2020,June 2021, which generated net proceeds of approximately $72.9$101.6 million. The decreaseincrease in incentive fees for the ninethree months ended SeptemberJune 30, 20202021 compared to the ninethree months ended SeptemberJune 30, 20192020, primarily relates to our Core Earnings (as defined below) for the twelve months ended SeptemberJune 30, 20202021 exceeding the 8% minimum return by a lowerhigher margin than the twelve months ended SeptemberJune 30, 2019.2020. “Core Earnings” is a non-GAAP measure and is defined in the Management Agreement as GAAP net income (loss) computed in accordance with GAAP, excluding non-cash equity compensation expense, the incentive fee, depreciation and amortization (to the extent that any of our target investments are structured as debt and we foreclose on any properties underlying such debt), any unrealized gains, losses or other non-cash items recorded in net income (loss) for the period, regardless of whether such items are included in other comprehensive income or loss, or in net income (loss), and one-time events pursuant to changes in GAAP and certain non-cash charges after discussions between our Manager and our independent directors and after approval by a majority of our independent directors. The increasedecrease in allocable general and administrative expenses due to our Manager for the ninethree months ended SeptemberJune 30, 20202021 compared to the ninethree months ended SeptemberJune 30, 20192020, primarily relates to an increasea decrease in the percentage of time allocated to us by employees of our Manager due to changes in transaction activity year over year.
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 SeptemberJune 30, 20202021 and 2019,2020, professional fees were $0.6 million and $0.5$0.7 million, respectively. The increasedecrease in professional fees for the three months ended SeptemberJune 30, 20202021 compared to the three months ended SeptemberJune 30, 20192020 primarily relates to an increase in our use of third party professionals due to changes in transaction activity year over year. For both the three months ended September 30, 2020 and 2019, general and administrative expenses were $1.0 million.
For the nine months ended September 30, 2020 and 2019, professional fees were $2.2 million and $1.6 million, respectively. The increase in professional fees for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019 primarily relates to an increasea decrease in our use of third-party professionals due to changes in transaction activity year over year. For the ninethree months ended SeptemberJune 30, 20202021 and 2019,2020, general and administrative expenses were $2.8$1.2 million and $3.2$1.0 million, respectively. The decreaseincrease in general and administrative expenses for the ninethree months ended SeptemberJune 30, 20202021 compared to the ninethree months ended SeptemberJune 30, 20192020 primarily relates to an increase in stock-based compensation expense due to new restricted stock and restricted stock unit grants awarded after June 30, 2020.
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 $1.8 million, respectively. The increase in general and administrative expenses for the six months ended June 30, 2021 compared to the six months ended June 30, 2020 primarily relates to an increase in stock-based compensation expense due to the reversal of previously recognized expense related tonew restricted stock forfeitures for the nine months ended Septemberand restricted stock unit grants awarded after June 30, 2020.
Expenses From Real Estate Owned
For the three and ninesix months ended SeptemberJune 30, 20202021 and 2019,2020, expenses from real estate owned was comprised of the following ($ in thousands): | | | | | | | | | | | | | | | | | | | | | | | | | For the three months ended June 30, | | For the six months ended June 30, | | 2021 | | 2020 | | 2021 | | 2020 | | Hotel operating expenses | $ | 3,202 | | | $ | 2,611 | | | $ | 5,846 | | | $ | 8,654 | | | Interest expense on note payable | 415 | | | 419 | | | 825 | | | 831 | | | Depreciation expense | 225 | | | 224 | | | 449 | | | 445 | | | Expenses from real estate owned | $ | 3,842 | | | $ | 3,254 | | | $ | 7,120 | | | $ | 9,930 | |
| | | | | | | | | | | | | | | | | | | For the three months ended September 30, | | For the nine months ended September 30, | | | 2020 | | 2019 | | 2020 | | 2019 | | Hotel operating expenses | $ | 3,404 |
| | $ | 6,212 |
| | $ | 12,059 |
| | $ | 14,680 |
| | Interest expense on note payable | 418 |
| | 419 |
| | 1,249 |
| | 516 |
| | Depreciation expense | 224 |
| | 207 |
| | 668 |
| | 448 |
| | Expenses from real estate owned | $ | 4,046 |
| | $ | 6,838 |
| | $ | 13,976 |
| | $ | 15,644 |
|
For the three months ended SeptemberJune 30, 20202021 and 2019,2020, hotel operating expenses were $3.4$3.2 millionand and $6.22.6 million, respectively.Hotel operating expenses consist primarily of expenses incurred in the day-to-day operation of our hotel property, including room expense, food and beverage expense and other operating expenses. Room expense includes housekeeping and front office wages and payroll taxes, reservation systems, room supplies, laundry services and other costs. Food and beverage expense primarily includes the cost of food, the cost of beverages and associated labor costs. Other operating expenses include labor and other costs associated with administrative departments, sales and marketing, repairs and maintenance, real estate taxes, insurance, utility costs and management and incentive fees paid to the hotel property manager. The decreaseincrease in hotel operating expenses for the three months ended SeptemberJune 30, 20202021 compared to the three months ended SeptemberJune 30, 20192020 is primarily due to the ongoing recovery from the impact of the COVID-19 pandemic as occupancy and overall expenses at the hotel property increased for the three months ended June 30, 2021. For both the three months ended June 30, 2021 and 2020, interest expense on our note payable was $0.4 million. For both the three months ended June 30, 2021 and 2020, depreciation expense was $0.2 million.
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 property for the three months ended September
30, 2020.property. For both the threesix months ended SeptemberJune 30, 20202021 and 2019,2020, interest expense on our note payable was $0.4$0.8 million. For both the threesix months ended SeptemberJune 30, 20202021 and 2019, the weighted average borrowings under the Note Payable on the hotel property was $28.3 million. For both the three months ended September 30, 2020, and 2019, depreciation expense was $0.2$0.4 million.
For the nine months ended September 30, 2020 and 2019, hotel operating expenses were $12.1 million
and$14.7 million, respectively. The decrease in hotel operating expenses for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019 is primarily due to the impact of the COVID-19 pandemic, which significantly reduced occupancy and forced us to implement plans to reduce overall operating expenses at the hotel property for the nine months ended September 30, 2020. This was partially offset due to the inclusion of a full nine months of operations for the nine months ended September 30, 2020, whereas the nine months ended September 30, 2019 only included approximately seven months of operations as the hotel property was acquired on March 8, 2019. For the nine months ended September 30, 2020 and 2019, interest expense on our note payable was $1.2 million and $0.5 million, respectively. For the nine months ended September 30, 2020 and 2019, the weighted average borrowings under the Note Payable on the hotel property was $28.3 million and $11.7 million, respectively. For the nine months ended September 30, 2020 and 2019, depreciation expense was $0.7 million and $0.4 million, respectively. The increase in depreciation expense for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019 is primarily due to the inclusion of a full nine months of depreciation expense for the nine months ended September 30, 2020, whereas the nine months ended September 30, 2019 only included approximately seven months of depreciation expense as the hotel property was acquired on March 8, 2019.
Provision for Current Expected Credit Losses
We adopted Accounting Standards Update No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, on January 1, 2020. For the three and nine months ended SeptemberJune 30, 2021 and 2020, the provision for current expected credit losses was $(1.0)$(3.9) million and $22.1$(4.0) million, respectively. Management’sThe decrease in the provision for current estimate of expected credit losses decreased fromfor the three months ended June 30, 2021 compared to the three months ended June 30, 2020 to September 30, 2020is primarily due to forecasted improvement in macroeconomic factors, shorter average remaining loan term and changes in the portfolio, including contractual reductionpayoffs, during the three months ended June 30, 2021.
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 loan commitments, loan paydowns andthe provision for current expected credit losses for the six months ended June 30, 2021 compared to the six months ended June 30, 2020 is primarily due to forecasted improvement in macroeconomic factors, shorter average remaining loan term.term and changes in the portfolio, including payoffs, during the six months ended June 30, 2021.
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.
Realized Losses on Loans Sold and Change in Unrealized Losses on Loans Held for Sale
In July 2020, we closed the sale of a senior mortgage loan with outstanding principal of $31.5 million, which was collateralized by a hotel property located in Minnesota, to a third party. In addition, in August 2020, we closed the sale of two senior mortgage loans to a third party with outstanding principal of $39.9 million and $29.6 million, respectively, which were collateralized by multifamily properties located in Illinois and Texas, respectively. As of June 30, 2020, it was our intent to sell these three senior mortgage loans and thus, the three loans were reclassified from held for investment to held for sale and were carried at fair value in our consolidated balance sheets. For the three months ended June 30, 2020, we recognized an aggregate net unrealized loss of $4.0 million in our consolidated statements of operations upon reclassifying the three loans from held for investment to held for sale as the carrying value exceeded fair value as determined by the sale prices of the loans. This aggregate net unrealized loss was realized during the three months ended September 30, 2020. For the three months ended September 30, 2020, the $4.0 million net realized loss recognized upon the sale of the loans is included within realized losses on loans sold in our consolidated statements of operations while the reversal of the net unrealized loss is included within change in unrealized losses on loans held for sale in our consolidated statements of operations.
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
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 have proactively engaged in discussions with certain of our lenders to modify the terms of our borrowings on certain assets within these facilities, in order to, potentially, among other things, reduce the amounts we are borrowing against such assets and/or increase the borrowing spreads. We may not receive financing from our Secured Funding Agreements with respect to our commitments to fund our loans held for investment in the future. See “Summary of Financing Agreements” below for a description of our Financing Agreements.
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 collateralized loan obligation securitization debt (“FL3 CLO Securitization”),Securitization, which allows us to replace mortgage assets in our FL3 CLO Securitization which have repaid and (ii) future funding acquisition provisions in our FL4 collateralized loan obligation securitization debt (“FL4 CLO Securitization”, together with our FL3 CLO Securitization, our “CLO Securitizations”), which allows us to use mortgage asset repayment funds to acquire additional funded pari-passu participations related to the mortgage assets then-remaining in our FL4 CLO Securitization; each subject to the satisfaction of certain reinvestment or acquisition conditions, includingwhich may include receipt of a Rating Agency Confirmation and investor approval of the new mortgage assets.approval. There can be no assurance that the conditions for reinvestment or acquisition will be satisfied and whether our CLO SecuritizationSecuritizations will acquire any additional mortgage assets.assets or funded pari-passu participations. In addition, our CLO Securitizations contains 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.
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.
As of October 28, 2020,July 29, 2021, we had approximately $91$57 million in liquidity including $2 million of unrestricted cash.cash and $55 million of availability under secured funding agreements.
Equity Offerings
On January 22, 2020,March 15, 2021, we entered into an underwriting agreement (the “Underwriting“March 2021 Underwriting Agreement”), by and among us, ACREM, and Wells Fargo Securities, LLC, Citigroup Global MarketsBofA Securities, Inc. and Morgan Stanley & Co. LLC, as representatives of the several underwriters listed therein (collectively, the “Underwriters”“March 2021 Underwriters”). Pursuant to the terms of the March 2021 Underwriting Agreement, we agreed to sell, and the March 2021 Underwriters agreed to purchase, subject to the terms and conditions set forth in the March 2021 Underwriting Agreement, an aggregate of 4,000,0007,000,000 shares of our common stock, par value $0.01 per share. In addition, we granted to the Underwriters a 30-day option to purchase up to an additional 600,000 shares. The public offering closed on January 27, 2020March 18, 2021 and generated net proceeds of approximately $63.3$100.7 million, after deducting transaction expenses. We used the net proceeds from the public offering to repay indebtedness and to invest in mortgage loans and other target assets and investments consistent with our investment strategies and investment guidelines.
On January 30, 2020,June 17, 2021, we soldentered into an additional 600,000 shares pursuantunderwriting agreement (the “June 2021 Underwriting Agreement”), by and among us, ACREM, and Wells Fargo Securities, LLC, BofA Securities, Inc. and Morgan Stanley & Co. LLC, as representatives of the several underwriters listed therein (collectively, the “June 2021 Underwriters”). Pursuant to the terms of the June 2021 Underwriting Agreement, we agreed to sell, and the June 2021 Underwriters optionagreed to purchase, additionalsubject to the terms and conditions set forth in the June 2021 Underwriting Agreement, an aggregate of 6,500,000 shares generating additionalof the Company’s common stock, par value $0.01 per share. The public offering closed on June 22, 2021 and generated net proceeds of approximately $9.6 million.$101.6 million, after deducting transaction expenses. We used the net proceeds from the public offering to repay indebtedness and to invest in mortgage loans and other target assets and investments consistent with our investment strategies and investment guidelines.
Cash Flows
The following table sets forth changes in cash and cash equivalents and restricted cash for the ninesix months ended SeptemberJune 30, 20202021 and 20192020 ($ in thousands): | | | | | | | | | | | | | | | For the six months ended June 30, | | | 2021 | | 2020 | | | Net income (loss) | $ | 33,355 | | | $ | (7,495) | | | | Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | (13,574) | | | 21,658 | | | | Net cash provided by (used in) operating activities | 19,781 | | | 14,163 | | | | Net cash provided by (used in) investing activities | (307,953) | | | (193,035) | | | | Net cash provided by (used in) financing activities | 289,067 | | | 246,224 | | | | Change in cash and cash equivalents | $ | 895 | | | $ | 67,352 | | |
| | | | | | | | | | | For the nine months ended September 30, | | | 2020 | | 2019 | | Net income | $ | 7,433 |
| | $ | 27,331 |
| | Adjustments to reconcile net income to net cash provided by (used in) operating activities: | 15,311 |
| | (2,455 | ) | | Net cash provided by (used in) operating activities | 22,744 |
| | 24,876 |
| | Net cash provided by (used in) investing activities | (105,263 | ) | | (67,812 | ) | | Net cash provided by (used in) financing activities | 158,179 |
| | 37,799 |
| | Change in cash, cash equivalents and restricted cash | $ | 75,660 |
| | $ | (5,137 | ) |
During the ninesix months ended SeptemberJune 30, 2021 and 2020, cash and 2019, cash, cash equivalents and restricted cash increased (decreased) by $75.7$0.9 million and $(5.1)$67.4 million, respectively.
Operating Activities
For the ninesix months ended SeptemberJune 30, 20202021 and 2019,2020, net cash provided by operating activities totaled $22.7$19.8 million and $24.9$14.2 million, respectively. For the ninesix months ended SeptemberJune 30, 2020,2021, adjustments to net income related to operating activities primarily included the provision for current expected credit losses of $22.1$7.1 million, accretion of deferred loan origination fees and costs of $5.7$3.9 million, amortization of deferred financing costs of $4.9$4.5 million and change in other assets of $9.3 million. For the ninesix months ended SeptemberJune 30, 2019,2020, adjustments to net incomeloss related to operating activities primarily included the provision for current expected credit losses of $23.1 million, accretion of deferred loan origination fees and costs of $5.0$3.6 million, amortization of deferred financing costs of $5.0$3.3 million and change in other assets of $4.3$4.7 million. Investing Activities
For the ninesix months ended SeptemberJune 30, 20202021 and 2019,2020, net cash used in investing activities totaled $105.3$308.0 million and $67.8$193.0 million, respectively. This change in net cash used in investing activities was primarily as a result of the cash used for
the origination and funding of loans held for investment exceeding the cash received from principal repayment of loans held for investment and the sale of loans held for sale for the ninesix months ended SeptemberJune 30, 2020.2021. Financing Activities
For the ninesix months ended SeptemberJune 30, 2020,2021, net cash provided by financing activities totaled $158.2$289.1 million and primarily related to proceeds from our Secured Funding Agreements of $466.8$207.2 million, proceeds from the issuance of debt of consolidated VIEs of $540.5 million and proceeds from the sale of our common stock of $202.7 million, partially offset by repayments of our Secured Funding Agreements of $558.6 million, repayments of our Notes Payable of $27.9 million, repayments of our Secured Term Loan of $50.0 million and dividends paid of $25.4 million. For the six months ended June 30, 2020, net cash provided by financing activities totaled $246.2 million and primarily related to proceeds from our Secured Funding Agreements of $355.1 million, proceeds from Secured Borrowings of $55.1$48.1 million, and proceeds from the sale of our common stock of $73.2 million, partially offset by repayments of our Secured Funding Agreements of $404.2$206.8 million and dividends paid of $31.7 million. For the nine months ended September 30, 2019, net cash provided by financing activities totaled $37.8 million and primarily related to proceeds from our Secured Funding Agreements of $415.4 million, proceeds from Notes Payable of $56.2 million and proceeds from the issuance of debt of consolidated VIEs of $172.7 million, partially offset by repayments of our Secured Funding Agreements of $573.4 million and dividends paid of $28.0$20.6 million.
Summary of Financing Agreements The sources of financing, as applicable in a given period, under our Secured Funding Agreements, Notes Payable and the Secured Term Loan (collectively, the “Financing Agreements”) are described in the following table ($ in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | As of | | | June 30, 2021 | | December 31, 2020 | | | | Total
Commitment | | Outstanding Balance | | Interest Rate | | Maturity Date | | Total
Commitment | | Outstanding Balance | | Interest Rate | | Maturity Date | | | Secured Funding Agreements: | | | | | | | | | | | | | | | | | Wells Fargo Facility | | $ | 350,000 | | | $ | 238,414 | | | LIBOR+1.50 to 2.75% | | December 14, 2022 | (1) | $ | 350,000 | | | $ | 336,001 | | | LIBOR+1.45 to 2.75% | | December 14, 2022 | (1) | | Citibank Facility | | 325,000 | | | 44,730 | | | LIBOR+1.50 to 2.25% | | December 13, 2021 | (2) | 325,000 | | | 117,506 | | | LIBOR+1.50 to 2.25% | | December 13, 2021 | (2) | | CNB Facility | | 50,000 | | | — | | | LIBOR+2.65% | | March 10, 2022 | (3) | 50,000 | | | 50,000 | | | LIBOR+2.65% | | March 10, 2021 | (3) | | MetLife Facility | | 180,000 | | | 20,648 | | | LIBOR+2.10 to 2.50% | | August 13, 2022 | (4) | 180,000 | | | 104,124 | | | LIBOR+2.10 to 2.50% | | August 13, 2022 | (4) | | Morgan Stanley Facility | | 250,000 | | | 100,413 | | | LIBOR+1.75 to 2.85% | | January 16, 2023 | (5) | 150,000 | | | 147,921 | | | LIBOR+1.75 to 2.85% | | January 16, 2023 | (5) | | Subtotal | | $ | 1,155,000 | | | $ | 404,205 | | | | | | | $ | 1,055,000 | | | $ | 755,552 | | | | | | | | | | | | | | | | | | | | | | | | | | Notes Payable | | $ | 51,755 | | | $ | 44,936 | | | LIBOR+3.00 to 3.75% | | (6) | | $ | 84,155 | | | $ | 63,122 | | | LIBOR+2.50 to 3.75% | | (6) | | | | | | | | | | | | | | | | | | | | | Secured Term Loan | | $ | 60,000 | | | $ | 60,000 | | | LIBOR+5.38% | | December 22, 2021 | (7) | $ | 110,000 | | | $ | 110,000 | | | LIBOR+5.00% | | December 22, 2021 | (7) | | Total | | $ | 1,266,755 | | | $ | 509,141 | | | | | | | $ | 1,249,155 | | | $ | 928,674 | | | | | | |
_____________________________
(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
(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. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | As of | | | | September 30, 2020 | | December 31, 2019 | | | | | Total
Commitment | | Outstanding Balance | | Interest Rate | | Maturity Date | | Total
Commitment | | Outstanding Balance | | Interest Rate | | Maturity Date | | | Secured Funding Agreements: | | | | | | | | | | | | | | | | | Wells Fargo Facility | | $ | 500,000 |
|
| $ | 375,301 |
| | LIBOR+1.45 to 2.25% |
| December 14, 2020 | (1) | $ | 500,000 |
| | $ | 360,354 |
| | LIBOR+1.45 to 2.25% | | December 14, 2020 | (1) | | Citibank Facility | | 325,000 |
|
| 120,506 |
| | LIBOR+1.50 to 2.25% |
| December 13, 2021 | (2) | 325,000 |
| | 126,603 |
| | LIBOR+1.50 to 2.50% | | December 13, 2021 | (2) | | BAML Facility | | — |
|
| — |
| | — |
| — | (3) | 36,280 |
| | 36,280 |
| | LIBOR+2.00% | | March 3, 2020 | (3) | | CNB Facility | | 50,000 |
|
| 50,000 |
| | LIBOR+2.65% |
| March 10, 2021 | (4) | 50,000 |
| | 30,500 |
| | LIBOR+2.65% | | March 11, 2020 | (4) | | MetLife Facility | | 180,000 |
|
| 104,124 |
| | LIBOR+2.10 to 2.50% |
| August 13, 2022 | (5) | 180,000 |
| | 131,807 |
| | LIBOR+2.30% | | August 12, 2020 | (5) | | U.S. Bank Facility | | — |
|
| — |
| | — |
| — | (6) | 185,989 |
| | 43,045 |
| | LIBOR+1.65 to 2.25% | | July 31, 2020 | (6) | | Morgan Stanley Facility | | 150,000 |
| | 141,205 |
| | LIBOR+1.75 to 2.85% | | January 16, 2023 | (7) | — |
| | — |
| | — | | — | | | Subtotal | | $ | 1,205,000 |
| | $ | 791,136 |
| | | | | | $ | 1,277,269 |
| | $ | 728,589 |
| | | | | | | | | | | | | | | | | | | | | | | | | | Notes Payable | | $ | 84,155 |
| | $ | 59,155 |
| | LIBOR+2.50 to 3.75% | | (8) | | $ | 84,155 |
| | $ | 56,155 |
| | LIBOR+2.50 to 3.75% | | (8) | | | | | | | | | | | | | | | | | | | | | | Secured Term Loan | | $ | 110,000 |
|
| $ | 110,000 |
| | LIBOR+5.00% | | December 22, 2020 | (9) | $ | 110,000 |
| | $ | 110,000 |
| | LIBOR+5.00% | | December 22, 2020 | (9) | | Total | | $ | 1,399,155 |
| | $ | 960,291 |
| | | | | | $ | 1,471,424 |
| | $ | 894,744 |
| | | | | |
_____________________________
| | (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. |
| | (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) | Individual advances on loans under the Bridge Loan Warehousing Credit and Security Agreement with Bank of America, N.A. (the “BAML Facility”) generally had a two-year maturity, subject to a 12-month extension at our option provided that certain conditions were met and applicable extension fees were paid. In May 2019, our borrowing period for new individual loans under the BAML Facility expired and its term was not extended. As such, the total commitment amount under the BAML Facility as of December 31, 2019 represented the outstanding balance under the facility at the time the borrowing period expired. In June 2020, the BAML Facility was repaid in full and its term was not extended. |
| | (4) | In March 2020, we exercised a 12-month extension option on the secured revolving funding facility with City National Bank (the “CNB Facility”). The CNB Facility is subject to one additional 12-month extension at our option provided that certain conditions are met and applicable extension fees are paid. In June 2019, we amended the CNB Facility to, among other things, (1) add 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 and (2) decrease the interest rate on advances to a per annum rate equal to the sum of, at our option, either (a) LIBOR for a one, two, three, six or, if available to all lenders, 12-month interest period plus 2.65% or (b) a base rate (which is the highest of a prime rate, the federal funds rate plus 0.50%, or one-month LIBOR plus 1.00%) plus 1.00%; provided that in no event shall the interest rate be less than 2.65%. |
| | (5) | 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. In August 2020, we amended the MetLife Facility to, among other things, (1) extend the initial maturity date of the MetLife Facility to August 13, 2022 and (2) increase the interest rate on new advances subsequent to the date of the amendment to a per annum rate equal to the sum of one-month LIBOR plus a spread 2.50%. The interest rate on advances with respect to existing loans financed under the MetLife Facility prior to the amendment continues to accrue interest at a per annum rate equal to the sum of one-month LIBOR plus a spread of 2.30%, subject to certain exceptions. |
| | (6) | The maturity date of the master repurchase and securities contract with U.S. Bank National Association (the “U.S. Bank Facility”) was subject to two 12-month extensions at our option provided that certain conditions were met and applicable extension fees were paid. In July 2020, the U.S. Bank Facility matured and its term was not extended. The U.S. Bank Facility had been repaid in full prior to its maturity. |
| | (7) | 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. |
| | (8) | Certain of our consolidated subsidiaries are party to three separate note agreements (the “Notes Payable”) with the lenders referred to therein, consisting of (1) a $32.4 million note that has an initial maturity date of March 5, 2024, subject to one 12-month extension at our option provided that certain conditions are met and applicable extension fees are paid, (2) a $28.3 million note that has a maturity date of June 10, 2024 and (3) 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. |
| | (9) | The maturity date of the Credit and Guaranty Agreement with the lenders referred to therein and Cortland Capital Market Services LLC, as administrative agent and collateral agent for the lenders (the “Secured Term Loan”), is subject to one 12-month extension at our option provided that certain conditions are met. |
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 SeptemberJune 30, 2020,2021, we were in compliance with all financial covenants of each respective Financing Agreement. We may be required to fund commitments on our loans held for investment in the future and we may not receive funding from our Secured Funding Agreements with respect to these commitments. See Note 6 to our consolidated financial statements included in this quarterly report on Form 10-Q for more information on our Financing Agreements.
Securitizations
As of SeptemberJune 30, 2020,2021, the carrying amount and outstanding principal of our CLO SecuritizationSecuritizations was $443.9$979.8 million and $445.6$986.1 million, respectively. See Note 1516 to our consolidated financial statements included in this quarterly report on Form 10-Q for additional terms and details of our CLO Securitization.Securitizations.
Secured Borrowings
As of SeptemberJune 30, 2020,2021, the carrying amount and outstanding principal of our secured borrowings was $54.6$59.9 million and $55.1$60.2 million, respectively. See Note 7 to our consolidated financial statements included in this quarterly report on Form 10-Q for additional terms and details of our secured borrowings.
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.
DividendsDIVIDENDS
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)
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.
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 SeptemberJune 30, 2020 and2021, (2) no change in the outstanding principal balance of our loans held for investment portfolio and borrowings as of SeptemberJune 30, 20202021 and (3) no changes in the notional amount of the interest rate swap and interest rate cap agreements entered into as of June 30, 2021 ($ in millions): | | | | | | | | | | Change in 30-Day LIBOR | | Increase/(Decrease)
in Net Income
| | Up 100 basis points | | $(11.9)0.7 | | Up 50 basis points | | $(6.0)(0.7) | | LIBOR at 0 basis points | | $1.70.5 |
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
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 SecuritizationSecuritizations are applied sequentially, first used to pay down the senior notes in the CLO Securitization notes.Securitizations. We will not receive any proceeds from the repayment of loans in the CLO SecuritizationSecuritizations until all senior notes are repaid in full.
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
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 SeptemberJune 30, 2020.2021. Based upon that evaluation and subject to the foregoing, our principal executive officer and principal financial officer concluded that, as of SeptemberJune 30, 2020,2021, the design and operation of our disclosure controls and procedures were effective to accomplish their objectives at the reasonable assurance level.
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 SeptemberJune 30, 20202021 that have materially affected, or that are reasonably likely to materially affect, our internal control over financial reporting.
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 SeptemberJune 30, 2020,2021, we were not subject to any material pending legal proceedings. If the globalCOVID-19 pandemic continues and market conditions worsen, litigation may increase to the extent we find it necessary to foreclose or otherwise enforce remedies with respect to loans that are in default, which borrowers may seek to resist by asserting counterclaims and defenses against us.
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 fiscal year ended December 31, 2019,2020, which could materially affect our business, financial condition and/or operating results. The risks described below and in our Annual Report on Form 10-K for the fiscal year ended December 31, 20192020 are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially and adversely affect our business, financial condition and/or operating results. The rapid development and fluidity of the ongoing COVID-19 pandemic precludes any prediction as to the ultimate adverse impact of COVID-19 on economic and market conditions. In addition to the foregoing, COVID-19 may exacerbate the potential adverse effects on our business, financial performance, operating results, cash flows and financial condition described in the risk factors in our Annual Report on Form 10-K for the fiscal year ended December 31, 20192020 filed with the Securities and Exchange Commission.
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 operationsoperations. .
As of the filing date of this Quarterly Report, there is ana continued outbreak of a novel and highly contagious form of coronavirus (“COVID-19”),the COVID-19 pandemic, which the World Health Organization has declared a global pandemic, the United States has declared a national emergency and every state in the United States is under a federal disaster declaration. The COVID-19 pandemic has resulted in numerous deaths, adversely impacted global commercial activity and contributed to significant volatility in equity and debt markets. Many states, including those in which we and our borrowers operate, have issued orders requiring the closure of, or certain restrictions on the operation of, non-essential businesses and/or requiring residents to stay at home. The COVID-19 pandemic and preventative measures taken to contain or mitigate its spread have caused, and are continuing to cause, business shutdowns, the re-introduction of business shutdowns, cancellations of events and restrictions on travel, significant reductions in demand for certain goods and services, reductions in business activity and financial transactions, supply chain interruptions and overall economic and financial market instability both globally and in the United States. Such effects will likely continue for the duration of the pandemic, which is uncertain, and for some period thereafter. While several countries, as well as certain states in the United States, have relaxed the early public health restrictions with a view to partially or fully reopen their economies, recurring COVID-19 outbreaks have led to the re-introduction of such restrictions in certain states in the United States and globally and could continue to lead to the re-introduction of such restrictions elsewhere. Additionally, in December 2020, the absence or delayU.S. Food and Drug Administration authorized certain vaccines for emergency use, which are currently being distributed nationwide and globally. However, it remains unclear how quickly “herd immunity” will be achieved and the restrictions that were imposed to slow the spread of viable treatment options or a vaccinethe virus will be lifted entirely. These uncertainties could lead peoplethe public to continue
to self-isolate and not participaterefrain from participating in the economy at pre-pandemic levels for a prolonged period of time. Even after the COVID-19 pandemic subsides, the U.S. economy and most other major global economies may continue to experience a recession, and we anticipate our business and operations could be materially adversely affectedthe lingering effects of the economic shock caused by COVID-19 containment measures including a prolonged recessionrecessionary environment in the United States.
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. TheThe inability of our borrowers’ tenants to pay rent on their leases, or our borrowers’ inability to re-lease space that becomes vacant, may adversely impact thethe ability of the borrowers to which we lend to continue to meet loan covenants or to make payments on their loans on a timely basis or at all. We may seek to restructure our loan investments and amend the terms, including the payment terms, which could cause us to incur losses. Potential declines in value and net operating income at properties that serve as collateral for our portfolio of loan investments significantly increase the likelihood that we will incur losses on our loans in the event of default because the value of our collateral may be insufficient to cover our cost on the loan. Although on March 27, 2020, the U.S. government enacted the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), on March 27, 2020, which contains provisions intended to mitigate the adverse economic effects of the COVID-19 pandemic, and a second and third stimulus package on December 27, 2020 and March 11, 2021, respectively, which provided $900 billion and $1.9 trillion, respectively, in resources to small businesses and individuals as well as certain industries and state and local governments that have been adversely affected by the COVID-19 pandemic, it is uncertain whether, or how much, we or certain of our borrowers have benefited or may benefit from the CARES Actsuch legislation or any other subsequent legislation intended to provide financial relief or assistance.
The impact of the COVID-19 pandemic on our borrowers will likelymay reduce the availability of our liquidity sources, but our requirements for liquidity, future commitments to fund on our loans, make interest, principal and other payments pursuant to our financing obligations, including potential margin calls, likely will not be reduced. If we diddo not have funds available to meet our obligations, we wouldwill have to raise capital from alternative sources, which may be aton unfavorable terms or may not be available to us due to the impacts of the COVID-19 pandemic. We expect that the adverse impact of the COVID-19 pandemic will likelymay adversely affect our liquidity position and the execution of our business strategy. We are focused on preserving our liquidity in order to satisfy our cash requirements and we expect that our primary sources of enhancing our liquidity will be financing, to the extent available to us, public or private offerings of our equity or debt securities, asset sales and changes in 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.
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 Factors - Factors—The Financing Agreements and any bank credit facilities and repurchase agreements that we may use in the future to finance our assets may require us to provide additional collateral or pay down debt” included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019.
Market conditions may also make it difficult for us to extend the maturity of or refinance our existing indebtedness or to access or obtain new indebtedness with similar terms and any failure to do so could have a material adverse effect on our business. The debt capital that will be available to us in the future, if at all, may be offered at a higher cost and on less favorable terms and conditions than what we currently receive, including in potentially rising interest rate environments. If we are unable to raise or refinance debt, then our equity investors may not benefit from the potential for increased returns on equity resulting from leverage and we may be limited in our ability to make new loan commitments or to fund existing commitments on our portfolio of loan investments. See “Risk Factors-Risks Relating to Sources of Financing and Hedging-Our access to sources of financing may be limited and thus our ability to grow our business and to maximize our returns may be adversely affected” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019.
Despite actions of the United States federal government and foreign governments, the uncertainty surrounding the COVID-19 pandemic and other factors have contributed to significant volatility and declines in the global public equity markets and global debt capital markets, including the market price of shares of our common stock. The volatility and disruption to the global economy from the COVID-19 pandemic has had, and may continue to have, a negative effect on the potential for liquidity events involving our loan investments. The illiquidity of our loan investments may make it difficult for us to sell such loan investments to access capital if required, and as a result, we could realize significantly less than the value at which we have recorded our loan investments if we were required to sell them for liquidity purposes. An inability to raise or
access capital, and any required sale of all or a portion of our loan investments as a result, may affect the pace of our investment activity and the size of our portfolio, which may have an adverse impact on our financial condition or results of operations, including our total interest income.
The effects on our portfolio of loan investments described above may require us to increase the current expected credit loss (“CECL”) reserveCECL Reserve in our consolidated balance sheets (“CECL Reserve”) related to certain of our investments, and may in the future require us to undertake similar actions with respect to other of our investments. As a result of the impact of the COVID-19 pandemic and other factors, from January 1, 2020 to March 31, 2020 we increased, and may continue to increase, our assessment of CECL on our loans held for investment. Our loans held for investment are carried at cost, net of unamortized loan fees and origination costs, however, under the CECL methodology we adopted pursuant to Accounting Standards Update No. 2016-13, we are required to estimate expected credit losses on such loans using a range of historical experience adjusted for current and future conditions. Based on certain factors, our current estimate of expected credit losses has decreased slightly from December 31, 2020 to June 30, 2020 to September 30, 2020,2021 and may continue to fluctuate as the impact of the COVID-19 pandemic develops and we receive additional collateral financial data.
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. In addition, COVID-19 presents a significant threat to our Manager’s and/or its affiliate’s employees’ well-being and morale, and we may experience potential loss of productivity.
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
None.Disclosure Pursuant to Section 219 of the Iran Threat Reduction and Syria Human Rights Act
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.
Item 6. Exhibits
EXHIBIT INDEX
| | | | | | | | | | | | | Exhibit Number | | Exhibit Description | | | Articles of Amendment and Restatement of Ares Commercial Real Estate Corporation. (1) | | | Amended and Restated Bylaws of Ares Commercial Real Estate Corporation. (1)(2) | | | Second AmendmentFirst Supplement to Master Repurchase Agreement,Amended and Restated Indenture dated August 4, 2020,as of April 13, 2021, by and between ACRC Lender MLamong ACRE Commercial Mortgage 2017-FL3 Ltd., as issuer, ACRE Commercial Mortgage 2017-FL3 LLC, as seller,co-issuer, Wells Fargo Bank, National Association, as advancing agent and Metropolitan Life Insurance Company,note administrator, and Wilmington Trust, National Association, as buyer.trustee. (3) | | | Reaffirmation of Guarantor dated August 4, 2020, by Ares Commercial Real Estate Corporation in favor of Metropolitan Life Insurance Company. | | | Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | | | Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | | | Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | | 101.INS | | XBRL Instance Document | | 101.SCH | | XBRL Taxonomy Extension Schema Document | | 101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document | | 101.LAB | | XBRL Taxonomy Extension Label Linkbase Document | | 101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document | | 101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document | | 104 | | Cover Page Interactive Data File (formatted in Inline XBRL and contained in Exhibit 101) |
| | | | | | | * | Previously filed | | (1) | Incorporated by reference to Exhibit 3.1 to the Company’s Form 10-K (File No. 001-35517), filed on March 1, 2016. | | (2) | Incorporated by reference to Exhibit 3.2 to the Company’s Form S-8 (File No. 333-181077), filed on May 1, 2012. | | (3) | Incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K (File No. 001-35517), filed on April 19, 2021. |
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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. | | | | | | | | | | | | | | ARES COMMERCIAL REAL ESTATE CORPORATION | | | | | | | | | | Date: | October 29, 2020July 30, 2021 | By: | /s/ Bryan Donohoe | | | | Bryan Donohoe | | | | Chief Executive Officer
(Principal Executive Officer)
| | | | | | Date: | October 29, 2020July 30, 2021 | By: | /s/ Tae-Sik Yoon | | | | Tae-Sik Yoon | | | | Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer)
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