We are a specialty finance company primarily engaged in originating and investing in CRE loans and related investments. We are externally managed by ACREM, a subsidiary of Ares Management, a publicly traded, leading global alternative asset manager, pursuant to the terms of 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 aMaryland corporation and completed our initial public offering inMay 2012 . We have elected and qualified to be taxed as a REIT forUnited States federal income tax purposes under the Internal Revenue Code of 1986, as amended, commencing with our taxable year endedDecember 31, 2012 . We generally will not be subject toUnited 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.
Below are significant developments during the year ended
presented by quarter:
Developments during the first quarter of 2021:
•ACRE originated a$45.0 million senior mortgage loan and a$13.9 million mezzanine loan on a mixed-use property located inCalifornia . •ACRE purchased a$105.5 million senior mortgage loan on an office property located inIllinois from the$200 million real estate debt warehouse investment vehicle maintained by an affiliate of the Company's Manager (the "Ares Warehouse Vehicle"). •ACRE purchased a$5.6 million senior mortgage loan on a self storage property located inIllinois from the Ares Warehouse Vehicle. •ACRE purchased a$6.4 million senior mortgage loan on a self storage property located inFlorida from the Ares Warehouse Vehicle. •ACRE purchased a$4.4 million senior mortgage loan on a self storage property located inFlorida from the Ares Warehouse Vehicle. •ACRE purchased a$7.0 million senior mortgage loan on a self storage property located inFlorida from the Ares Warehouse Vehicle. •ACRE purchased a$10.8 million senior mortgage loan on a self storage property located inFlorida from the Ares Warehouse Vehicle. •ACRE purchased a$6.5 million senior mortgage loan on a self storage property located inMissouri from the Ares Warehouse Vehicle. •ACRE Commercial Mortgage 2021-FL4 Ltd. (the "FL4 Issuer") and ACRE Commercial Mortgage 2021-FL4 LLC , both wholly owned indirect subsidiaries of ACRE, issued approximately$603.0 million principal balance secured floating rate notes and$64.3 million of preferred equity in the FL4 Issuer. ACRE retained (through one of its wholly owned subsidiaries) approximately$62.5 million of the FL4 CLO Securitization. •ACRE entered into an interest rate swap (the "Swap") withMorgan Stanley Capital Services, LLC ("Morgan Stanley Capital ") for the initial notional amount of$870.0 million , which amortizes according to an agreed upon notional schedule. The Swap requires ACRE to pay a fixed interest rate of 0.2075% and forMorgan Stanley Capital to pay a floating rate equal to one-month LIBOR, subject to a 0.00% floor. The Swap has a termination date ofDecember 15, 2023 . •ACRE entered into an interest rate cap (the "Cap") withMorgan Stanley Capital for the initial notional amount of$275.0 million , which amortizes according to an agreed upon notional schedule. The Cap is tied to one-month LIBOR with a strike rate of 0.50%. The Cap has a termination date ofDecember 15, 2023 . •ACRE entered into an underwriting agreement (the "March 2021 Underwriting Agreement") in which ACRE agreed to sell an aggregate of 7,000,000 shares of ACRE's common stock, par value$0.01 per share. The public offering generated net proceeds of approximately$100.7 million , after deducting transaction expenses.
Developments during the second quarter of 2021:
•ACRE originated a$19.5 million senior mortgage loan on a student housing property located inAlabama . •ACRE originated a$15.0 million mezzanine loan on a portfolio of self storage properties located inNew 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 theAres Warehouse Vehicle. 54 -------------------------------------------------------------------------------- Table of C ontents •ACRE purchased a$53.3 million senior mortgage loan on a residential condominium property located inNew York from a third party. At the purchase date, ACRE already owned the corresponding$18.6 million mezzanine loan. •ACRE purchased a$100.7 million senior mortgage loan on an industrial property located inIllinois from the Ares Warehouse Vehicle. •ACRE originated a$37.5 million senior mortgage loan on a multifamily property located inSouth Carolina . •ACRE purchased a$44.7 million senior mortgage loan on an industrial property located inNew Jersey from the Ares Warehouse Vehicle. •ACRE Commercial Mortgage 2017-FL3 Ltd. (the "FL3 Issuer") and ACRE Commercial Mortgage 2017-FL3 LLC (the "FL3 Co-Issuer") entered into a First Supplement to Amended and Restated Indenture (the "2021 Amended Indenture") withWells Fargo Bank, National Association , as advancing agent and note administrator, andWilmington 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 toMarch 31, 2024 , extend the date on and after which the FL3 Issuer may redeem the Notes held by third parties toMarch 17, 2025 (the "Redemption Date"), and eliminate the prepayment fee due on the Redemption Date. •ACRE entered into an underwriting agreement (the "June 2021 Underwriting Agreement") in which ACRE agreed to sell an aggregate of 6,500,000 shares of ACRE's common stock, par value$0.01 per share. The public offering generated net proceeds of approximately$101.6 million , after deducting transaction expenses.
Developments during the third quarter of 2021:
•ACRE purchased a$78.3 million pari-passu participation in a$227.1 million senior mortgage loan on a mixed use property located inNew York from an Ares Management managed investment vehicle. •ACRE originated a$75.0 million senior mortgage loan on a residential condominium property located inFlorida . •ACRE originated an$81.0 million senior mortgage loan on an office property located inNew York . •ACRE purchased a$3.2 million senior mortgage loan on a self storage property located inColorado from a third party. •ACRE purchased an$8.6 million senior mortgage loan on a self storage property located inArizona from a third party. •ACRE purchased a$7.4 million senior mortgage loan on a self storage property located inArizona from a third party. •ACRE originated a$20.8 million senior mortgage loan on an industrial property located inColorado . •ACRE purchased an$85.0 million pari-passu note in a senior mortgage loan on an office property located inNorth Carolina from an Ares Management managed investment vehicle. •ACRE originated a$1.3 million senior mortgage loan on an industrial property located inGeorgia . •ACRE originated a$3.0 million senior mortgage loan on an industrial property located inPennsylvania . •ACRE originated a$2.9 million senior mortgage loan on an industrial property located inColorado . •ACRE originated an$89.7 million pari-passu participation in a$115.7 million senior mortgage loan on an office property located inArizona . Subsequent to the origination of the$89.7 million participation, ACRE purchased the remaining$26.0 million pari-passu participation from the Ares Warehouse Vehicle. •ACRE originated a$2.7 million senior mortgage loan on an industrial property located inArizona .
Developments during the fourth quarter of 2021:
•ACRE originated a$23.1 million senior mortgage loan on a multifamily property located inTexas . •ACRE originated a$6.7 million senior mortgage loan on an industrial property located inTennessee . •ACRE originated a$7.0 million senior mortgage loan on an industrial property located inPennsylvania . •ACRE originated a$9.5 million senior mortgage loan on an industrial property located inFlorida . •ACRE purchased a$9.0 million senior mortgage loan on a self storage property located inMissouri from a third party. •ACRE purchased a$10.2 million senior mortgage loan on a self storage property located inWashington from a third party. •ACRE purchased a$12.2 million senior mortgage loan on a self storage property located inMaryland from a third party. •ACRE purchased a$12.5 million senior mortgage loan on a self storage property located inMaryland from a third party. •ACRE purchased a$12.8 million senior mortgage loan on a self storage property located inPennsylvania from a third party. •ACRE originated a$10.4 million senior mortgage loan on an industrial property located inTexas . •ACRE originated a$31.7 million senior mortgage loan on a multifamily property located inCalifornia . •ACRE originated a$68.8 million senior mortgage loan on a multifamily property located inTexas . •ACRE purchased a$67.0 million senior mortgage loan on a multifamily property and office property located inSouth Carolina from the Ares Warehouse Vehicle. •ACRE purchased a$23.1 million senior mortgage loan on a multifamily property located inWashington from the Ares Warehouse Vehicle. •ACRE purchased a$30.9 million senior mortgage loan on an industrial property located inTexas from the Ares Warehouse Vehicle. 55 -------------------------------------------------------------------------------- Table of C ontents •ACRE purchased a$25.5 million senior mortgage loan on an industrial property located inFlorida from the Ares Warehouse Vehicle. •ACRE upsized an existing senior mortgage loan by$5.1 million on an industrial property located inPennsylvania . •ACRE entered into a Purchase and Sale Agreement to sell the hotel property that is recognized as real estate owned in its consolidated balance sheets to a third party for$40.0 million and the sale is expected to close in the first quarter of 2022. •ACRE elected to increase the maximum commitment for the Wells Fargo Facility from$350.0 million to$450.0 million . •ACRE amended the CNB Facility to, among other things, (1) increase the commitment amount from$50.0 million to$75.0 million and (2) update the interest rate on advances under the CNB Facility to a per annum rate equal to the sum of, at the Company's option, either (a) Daily Simple SOFR (with a 0.35% floor) plus 2.65% or (b) a base rate (which is the highest of a prime rate, the federal funds rate plus 0.50%, or Daily Simple SOFR plus 1.00%) plus 1.00%; provided that in no event shall the interest rate be less than 2.65%. •ACRE amended the Secured Term Loan to, among other things, (1) increase the commitment amount from$60.0 million to$150.0 million , (2) extend the maturity date of the Secured Term Loan toNovember 12, 2026 and (3) update the interest rate on advances under the Secured Term Loan to the following fixed rates: (i) 4.50% per annum untilMay 12, 2025 , (ii) afterMay 12, 2025 throughNovember 12, 2025 , the interest rate increases 0.125% every three months and (iii) afterNovember 12, 2025 throughNovember 12, 2026 , the interest rate increases 0.250% every three months.
Factors Affecting Our Results of Operations
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.
Changes in the fair value of our assets. We issue CRE debt and related instruments generally intended to be held for investment purposes. Loans held for investment purposes are carried at cost, net of unamortized loan fees and origination fees (the “carrying amount”).
Loans are generally collateralized by real estate. The extent of any credit deterioration associated with the performance and/or value of the underlying collateral property and the financial and operating capability of the borrower could impact the expected amounts received. We monitor the performance of our loans held for investment portfolio under the following methodology: (1) borrower review, which analyzes the borrower's ability to execute on its original business plan, reviews its financial condition, assesses pending litigation and considers its general level of responsiveness and cooperation; (2) economic review, which considers underlying collateral (i.e. leasing performance, unit sales and cash flow of the collateral and its ability to cover debt service, as well as the residual loan balance at maturity); (3) property review, which considers current environmental risks, changes in insurance costs or coverage, current site visibility, capital expenditures and market perception; and (4) market review, which analyzes the collateral from a supply and demand perspective of similar property types, as well as from a capital markets perspective. Such analyses are completed and reviewed by asset management and finance personnel who utilize various data sources, including periodic financial data such as property occupancy, tenant profile, rental rates, operating expenses, and the borrower's exit plan, among other factors. Loans are generally placed on non-accrual status when principal or interest payments are past due 30 days or more or when there is reasonable doubt that principal or interest will be collected in full. Accrued and unpaid interest is generally reversed against interest income in the period the loan is placed on non-accrual status. Interest payments received on non-accrual loans may be recognized as income or applied to principal depending upon management's judgment regarding the borrower's ability to make pending principal and interest payments. Non-accrual loans are restored to accrual status when past due principal and interest are paid and, in management's judgment, are likely to remain current. We may make exceptions to placing a loan on non-accrual status if the loan has sufficient collateral value and is in the process of collection. Other than as set forth in Note 3 to our consolidated financial statements included in this annual report on Form 10-K, as ofDecember 31, 2021 , all loans held for investment were paying in accordance with their contractual terms. As ofDecember 31, 2020 , all loans were paying in accordance with their contractual terms. As ofDecember 31, 2021 , the Company had two loans held for investment on non-accrual status with a carrying value of$45.0 million . As ofDecember 31, 2020 , the Company had three loans held for investment on non-accrual status with a carrying value of$67.1 million . 56 -------------------------------------------------------------------------------- Table of C ontents Loan balances that are deemed to be uncollectible are written off as a realized loss and are deducted from the current expected credit loss reserve. The write-offs are recorded in the period in which the loan balance is deemed uncollectible based on management's judgment. There were no write-offs during the years endedDecember 31, 2021 , 2020 and 2019.
Changes in market interest rates. With respect to our business operations, increases in interest rates, in general, may, over time, result in:
•the interest expense associated with our borrowings to increase, subject to applicable ceilings;
•the value of our mortgages will decline;
•coupons on our variable rate mortgages to return to higher interest rates; and
•To the extent that we enter into interest rate swap contracts as part of our hedging strategy where we pay fixed interest rates and receive floating interest rates, the value of these contracts will increase.
Conversely, declines in interest rates, in general, can, over time, lead to:
• lower interest charges associated with our borrowings, subject to applicable floors;
•the value of our mortgage portfolio to increase, for those mortgages with applicable floors;
•coupons on our variable rate mortgages to lower them to lower interest rates, subject to any applicable floors; and
•To the extent that we enter into interest rate swap contracts as part of our hedging strategy where we pay fixed interest rates and receive floating interest rates, the value of these contracts will decrease.
Credit Risk. We are subject to varying degrees of credit risk in connection with our target investments. Our Manager seeks to mitigate this risk by seeking to originate or acquire investments of higher quality at appropriate prices with appropriate risk adjusted returns given anticipated and unanticipated losses, by employing a comprehensive review and selection process and by proactively monitoring originated or acquired investments (see the performance monitoring methodology above in Changes in Fair Value of Our Assets). Nevertheless, unanticipated credit losses could occur that could adversely impact our operating results and stockholders' equity. Performance of Commercial Real Estate Related Markets. Our business is dependent on the general demand for, and value of, commercial real estate and related services, which are sensitive to economic conditions. Demand for multifamily and other commercial real estate generally increases during periods of stronger economic conditions, resulting in increased property values, transaction volumes and loan origination volumes. During periods of weaker economic conditions, multifamily and other commercial real estate may experience higher property vacancies, lower demand and reduced values. These conditions can result in lower property transaction volumes and loan originations. Availability of Leverage and Equity. We expect to use leverage to make additional investments that may increase our potential returns. We may not be able to obtain the amount of leverage we desire and, consequently, the returns generated from our investments may be less than we currently expect. To grow our portfolio of investments, we also may determine to raise additional equity. Our access to additional equity will depend on many factors, and our ability to raise equity in the future cannot be predicted at this time. Size of Portfolio. The size of our portfolio of investments, as measured both by the aggregate principal balance and the number of our CRE loans and our other investments, will also be an important factor in determining our operating results. Generally, as the size of our portfolio grows, the amount of interest income we receive will increase and we may achieve certain economies of scale and diversify risk within our portfolio investments. A larger portfolio, however, may result in increased expenses; for example, we may incur additional interest expense or other costs to finance our investments. Also, if the aggregate principal balance of our portfolio grows but the number of our loans or the number of our borrowers does not grow, we could face increased risk by reason of the concentration of our investments. 57 -------------------------------------------------------------------------------- Table of C ontents Loans Held for Investment Portfolio As ofDecember 31, 2021 , our portfolio included 72 loans held for investment, excluding 116 loans that were repaid, sold or converted to real estate owned since inception. As ofDecember 31, 2021 , the aggregate originated commitment under these loans at closing was approximately$2.8 billion and outstanding principal was$2.4 billion . During the year endedDecember 31, 2021 , we funded approximately$1.3 billion of outstanding principal and received repayments of$657.2 million of outstanding principal. As ofDecember 31, 2021 , 93.1% of our loans have LIBOR floors, with a weighted average floor of 1.10%, calculated based on loans with LIBOR floors. References to LIBOR or "L" are to 30-day LIBOR (unless otherwise specifically stated).
Except as disclosed in Note 3 to our consolidated financial statements included in this Annual Report on Form 10-K, as of
Our loans held for investment are accounted for at amortized cost. The following table summarizes our loans held for investment as ofDecember 31, 2021 ($ in thousands): As of December 31, 2021 Weighted Average Carrying Amount Outstanding Weighted Average Unleveraged Effective Remaining (1) Principal (1) Yield Life (Years) Senior mortgage loans$ 2,397,655 $ 2,411,718 5.3 % (2) 5.4 % (3)
1.5
Subordinated debt and preferred equity investments 16,728 17,394 13.7 % (2) 13.7 % (3)
4.0
Total loans held for the investment portfolio
5.4 % (2) 5.5 % (3)
1.6
_______________________________
(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 ofDecember 31, 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 ofDecember 31, 2021 as weighted by the total outstanding principal balance of each interest accruing loan (excludes loans on non-accrual status as ofDecember 31, 2021 ). Critical Accounting Estimates 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. We believe the following critical accounting policy represents an area where more significant judgments and estimates are used in the preparation of our consolidated financial statements. Current Expected Credit Loss Reserve. InJune 2016 , the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The standard replaced the incurred loss impairment methodology pursuant to GAAP with a methodology that reflects current expected credit losses ("CECL") on both the outstanding balances and unfunded commitments on loans held for investment and requires consideration of a broader range of historical experience adjusted for current conditions and reasonable and supportable forecast information to inform credit loss estimates (the "CECL Reserve"). ASU No. 2016-13 was effective for annual reporting periods beginning afterDecember 15, 2019 , including interim periods within that reporting period. We adopted ASU No. 2016-13 on a modified retrospective basis through a cumulative-effect adjustment to retained earnings as ofJanuary 1, 2020 . Subsequent period increases and decreases to expected credit losses impact earnings and are recorded within provision for current expected credit losses in our consolidated statements of operations. The CECL Reserve related to outstanding balances on loans held for investment required 58 -------------------------------------------------------------------------------- Table of C ontents under ASU No. 2016-13 is a valuation account that is deducted from the amortized cost basis of our loans held for investment in our consolidated balance sheets. The CECL Reserve related to unfunded commitments on loans held for investment is recorded within other liabilities in our consolidated balance sheets. We estimate our CECL Reserve primarily using a probability-weighted model that considers the likelihood of default and expected loss given default for each individual loan. Calculation of the CECL Reserve requires loan specific data, which includes capital senior to us when we are the subordinate lender, changes in net operating income, debt service coverage ratio, loan-to-value, occupancy, property type and geographic location. Estimating the CECL Reserve also requires significant judgment with respect to various factors, including (i) the appropriate historical loan loss reference data, (ii) the expected timing of loan repayments, (iii) calibration of the likelihood of default to reflect the risk characteristics of our floating-rate loan portfolio and (iv) our current and future view of the macroeconomic environment. We may consider loan-specific qualitative factors on certain loans to estimate our CECL Reserve. In order to estimate the future expected loan losses relevant to our portfolio, we utilize historical market loan loss data licensed from a third party data service. The third party's loan database includes historical loss data for commercial mortgage-backed securities, or CMBS, issued dating back to 1998, which we believe is a reasonably comparable and available data set to our type of loans.
See note 4 included in these consolidated financial statements for information relating to CECL.
Recent accounting pronouncements
See Note 2 to our consolidated financial statements included in this Annual Report on Form 10-K, which describes recent accounting pronouncements that we have adopted or are currently evaluating.
RECENT DEVELOPMENTS
OnJanuary 13, 2022 , we amended the Citibank Facility (as defined herein) to, among other things, extend the initial maturity date and funding availability period toJanuary 13, 2025 , subject to two 12-month extensions, each of which may be exercised at our 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 toJanuary 13, 2027 . The amendment also modified the interest rate provisions in the Citibank Facility such that advances under the Citibank Facility in connection with new loans pledged to the Citibank Facility will utilize term SOFR or a SOFR average, at the election of ACRE. OnFebruary 10, 2022 ,ACRC Lender C LLC ("ACRC Lender C"), a subsidiary of ACRE and ACRE, as guarantor, entered into a second amendment to the Second Amended and Restated Substitute Guaranty related to the Citibank Facility. The purpose of the amendment is to, among other things, (i) increase the guarantor's permitted ratio of indebtedness to tangible net worth to not more than 4.5:1 and (ii) remove the guarantor's financial covenant that limited recourse indebtedness. OnFebruary 10, 2022 ,ACRC Lender MS LLC ("ACRC Lender MS"), a subsidiary of ACRE and ACRE, as guarantor, entered into an amendment to the Guaranty and Indemnity related to the Morgan Stanley Facility (as defined herein). The purpose of the amendment is to, among other things, (i) increase the guarantor's permitted ratio of indebtedness to tangible net worth to not more than 4.5:1 and (ii) remove the guarantor's financial covenant that limited recourse indebtedness. OnFebruary 10, 2022 , ACRE, as guarantor, entered into a second amendment to the Guaranty related to the MetLife Facility (as defined herein). The purpose of the amendment is to, among other things, (i) increase the guarantor's permitted ratio of indebtedness to tangible net worth to not more than 4.5:1 and (ii) remove the guarantor's financial covenant that limited recourse indebtedness. OnFebruary 10, 2022 ,ACRC Lender W LLC and ACRC Lender W TRS (collectively, "ACRC Lender W"), each a subsidiary of ACRE, and ACRE, as guarantor, entered into (i) the Third Amended andRestated Master Repurchase and Securities Contract and (ii) the Second Amended and Restated Guarantee, each withWells Fargo Bank, National Association ("Wells Fargo"). The purpose of the amendments are to, among other things, (a) modify the interest rate provisions in the Wells Fargo Facility such that financings under the Wells Fargo Facility (as defined herein) in connection with new loans pledged to the Wells Fargo Facility will utilize term SOFR or a SOFR average, as agreed between ACRC Lender W and Wells Fargo, (b) increase the guarantor's permitted ratio of indebtedness to tangible net worth to not more than 4.5:1 and (c) remove the guarantor's financial covenant that limited recourse indebtedness.
At
59 -------------------------------------------------------------------------------- Table of C ontents OnFebruary 14, 2022 , we originated and fully funded a$4.7 million senior mortgage loan on an industrial property located inFlorida . The loan has a per annum interest rate of LIBOR plus 5.75%. 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 first quarter of 2022. The first quarter 2022 and supplemental cash dividends will be payable onApril 14, 2022 to common stockholders of record as ofMarch 31, 2022 .
RESULTS OF OPERATIONS
For the years ended
The following table presents a summary of our consolidated results of operations for the years ended
For the years ended
December 31,
2021 2020
Total revenue $ 102,069 $ 82,696
Total expenses 40,877 36,311
Provision for current expected credit losses 10 20,185
Realized losses on loans sold - 4,008
Income before income taxes 61,182 22,192
Income tax expense, including excise tax 722 352
Net income attributable to common stockholders
The following tables set forth certain details of our consolidated results of operations for the years ended
Net Interest Margin
For the years ended December 31,
2021 2020
Interest income $ 133,631 $ 121,052
Interest expense (50,080) (51,949)
Net interest margin $ 83,551 $ 69,103
For the years ended December 31, 2021 and 2020, net interest margin was
approximately $83.6 million and $69.1 million , respectively. For the years ended
December 31, 2021 and 2020, interest income of $133.6 million and $121.1
million , respectively, was generated by weighted average earning assets of $2.2
billion and $1.8 billion , respectively, offset by $50.1 million and $51.9
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 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 $1.6 billion for the year ended
December 31, 2021 and $1.5 billion for the year ended December 31, 2020 . The
increase in net interest margin for the year ended December 31, 2021 compared to
the year ended December 31, 2020 primarily relates to an increase in our
weighted average earning assets and weighted average borrowings for the year
ended December 31, 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.
Income from real estate owned
OnMarch 8, 2019 , we acquired legal title to a hotel property through a deed in lieu of foreclosure. Prior toMarch 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 theDecember 2018 maturity date. In conjunction with the deed in lieu of foreclosure, we derecognized the$38.6 million senior mortgage loan and recognized the 60 -------------------------------------------------------------------------------- Table of C ontents hotel property as real estate owned. For the years endedDecember 31, 2021 and 2020, revenue from real estate owned was$18.5 million and$13.6 million , respectively. Revenues consist of room sales, food and beverage sales and other hotel revenues. The increase in revenue from real estate owned for the year endedDecember 31, 2021 compared to the year endedDecember 31, 2020 is primarily due to the ongoing recovery from the impact of the COVID-19 pandemic as occupancy and overall revenue at the hotel property increased for the year endedDecember 31, 2021 . Operating Expenses For the years ended December 31, 2021 2020 Management and incentive fees to affiliate$ 12,136 $ 8,159 Professional fees 2,436 2,640 General and administrative expenses 4,741 3,732 General and administrative expenses reimbursed to affiliate 3,016 3,653 Expenses from real estate owned 18,548 18,127 Total expenses$ 40,877 $ 36,311 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 year endedDecember 31, 2021 compared to the year endedDecember 31, 2020 .
Related party expenses
For the year endedDecember 31, 2021 , related party expenses included$12.1 million in management and incentive fees due to our Manager pursuant to the Management Agreement, which consisted of$9.4 million in management fees and$2.8 million in incentive fees. For the year endedDecember 31, 2021 , related party expenses also included$3.0 million for our share of allocable general and administrative expenses for which we were required to reimburse our Manager pursuant to the Management Agreement. For the year endedDecember 31, 2020 , related party expenses included$8.2 million in management and incentive fees due to our Manager pursuant to the Management Agreement, which consisted of$7.3 million in management fees and$0.8 million in incentive fees. For the year endedDecember 31, 2020 , related party expenses also included$3.7 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 year endedDecember 31, 2021 compared to the year endedDecember 31, 2020 primarily relates to an increase in our weighted average stockholders' equity for the year endedDecember 31, 2021 as a result of the public offering of 7,000,000 shares of our common stock inMarch 2021 , which generated net proceeds of approximately$100.7 million , and the public offering of 6,500,000 shares of our common stock inJune 2021 , which generated net proceeds of approximately$101.6 million . The increase in incentive fees for the year endedDecember 31, 2021 compared to the year endedDecember 31, 2020 primarily relates to our Core Earnings for the twelve months endedDecember 31, 2021 exceeding the 8% minimum return by a higher margin than the twelve months endedDecember 31, 2020 . "Core Earnings" 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 decrease in allocable general and administrative expenses due to our Manager for the year endedDecember 31, 2021 compared to the year endedDecember 31, 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 years endedDecember 31, 2021 and 2020, professional fees were$2.4 million and$2.6 million , respectively. The decrease in professional fees for the year endedDecember 31, 2021 compared to the year endedDecember 31, 2020 primarily relates to a decrease in our use of third-party professionals due to changes in transaction activity year over year. For the years endedDecember 31, 2021 and 2020, general and administrative expenses were$4.7 million and$3.7 million , respectively. The increase in general and administrative expenses for the year endedDecember 31, 2021 compared to the year endedDecember 31, 2020 primarily relates to an increase in stock-based compensation expense due to new restricted stock and restricted stock unit grants awarded afterDecember 31, 2020 . 61
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Contents
Real estate expenses
For the years ended
For the years ended December 31,
2021 2020
Hotel operating expenses $ 16,058 $ 15,567
Interest expense on note payable
1,665 1,668
Depreciation expense 825 892 Expenses from real estate owned
For the years endedDecember 31, 2021 and 2020, hotel operating expenses were$16.1 million and$15.6 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 increase in hotel operating expenses for the year endedDecember 31, 2021 compared to the year endedDecember 31, 2020 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 year endedDecember 31, 2021 . Hotel operating expenses for the year endedDecember 31, 2020 were 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 both the years endedDecember 31, 2021 and 2020, interest expense on our note payable was$1.7 million . For the years endedDecember 31, 2021 and 2020, depreciation expense was$0.8 million and$0.9 million , respectively.
Provision for current expected credit losses
For the years endedDecember 31, 2021 and 2020, the provision for current expected credit losses was$10 thousand and$20.2 million , respectively. The decrease in the provision for current expected credit losses for the year endedDecember 31, 2021 compared to the year endedDecember 31, 2020 is primarily due to forecasted improvement in macroeconomic factors, shorter average remaining loan term and loan payoffs, partially offset by growth in the loan portfolio and other changes to the loan portfolio during the year endedDecember 31, 2021 . The CECL Reserve takes into consideration our estimates relating to 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
InJuly 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 inMinnesota , to a third party. In addition, inAugust 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 inIllinois andTexas , respectively. For the year endedDecember 31, 2020 , we recognized an aggregate net realized loss of$4.0 million in our consolidated statements of operations upon the sale of the three senior mortgage loans as the carrying value exceeded the sale prices of the loans.
For the years ended
The comparison of the fiscal years endedDecember 31, 2020 and 2019 can be found in our annual report on Form 10-K for the fiscal year endedDecember 31, 2020 located within Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations, which is incorporated by reference herein. 62 -------------------------------------------------------------------------------- Table of C ontents 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 equity 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. We expect our primary sources of cash to continue to be sufficient to fund our operating activities and cash commitments for investing and financing activities for at least the next 12 months and thereafter for the foreseeable future. Due to the impact of the COVID-19 pandemic, in 2020 and to a lesser extent in 2021, we experienced borrowers unable to pay interest and principal payments timely, including at the maturity date of the borrower's loan. 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 proactively engaged in discussions with certain of our lenders in 2020 and to a lesser extent in 2021 to modify the terms of our borrowings on certain assets within these facilities, in order to, among other things, reduce the amounts we are borrowing against such assets and/or increase the borrowing spreads. As a result of the ongoing risks of COVID-19, there is no guarantee that borrowers will be able to pay interest and principal payments timely. 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. Subject to maintaining our qualification as a REIT and our exemption from registration under 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. OnJuly 19, 2019 , we filed a registration statement on Form S-3 with theSEC , which became effective onAugust 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 also have and may continue to access liquidity through our "At the Market Stock Offering Program" which was established inNovember 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 FL3 CLO Securitization, which allows us to replace mortgage assets in our FL3 CLO Securitization which have repaid and (ii) future funding acquisition provisions in 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, which may include receipt of a Rating Agency Confirmation and investor approval. There can be no assurance that the conditions for reinvestment or acquisition will be satisfied and whether our CLO Securitizations will acquire any additional mortgage assets or funded pari-passu participations. 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. Ares Management or one of its investment vehicles, including theAres Warehouse Vehicle, may originate mortgage loans. We have had and may continue to have the opportunity to purchase such loans that are determined by our Manager in 63 -------------------------------------------------------------------------------- Table of C ontents good faith to be appropriate for us, depending on our available liquidity. Ares Management or one of its investment vehicles may also acquire mortgage loans from us.
From
In the Market Share Offering Program
OnNovember 22, 2019 , we entered into an equity distribution agreement (the "Equity Distribution Agreement"), pursuant to which we may offer and sell, from time to time, shares of our 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 year endedDecember 31, 2021 , we sold an aggregate of 137,237 shares of our common stock under the Equity Distribution Agreement at an average price of$15.68 per share. The sales generated net proceeds of approximately$2.1 million .
Equity offerings
OnMarch 15, 2021 , we entered into theMarch 2021 Underwriting Agreement, by and among us, ACREM, andWells Fargo Securities, LLC ,BofA Securities, Inc. andMorgan Stanley & Co. LLC , as representatives of the several underwriters listed therein (collectively, the "March 2021 Underwriters"). Pursuant to the terms of theMarch 2021 Underwriting Agreement, we agreed to sell, and theMarch 2021 Underwriters agreed to purchase, subject to the terms and conditions set forth in theMarch 2021 Underwriting Agreement, an aggregate of 7,000,000 shares of our common stock, par value$0.01 per share. The public offering closed onMarch 18, 2021 and generated net proceeds of approximately$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. OnJune 17, 2021 , we entered into theJune 2021 Underwriting Agreement, by and among us, ACREM, andWells Fargo Securities, LLC ,BofA Securities, Inc. andMorgan Stanley & Co. LLC , as representatives of the several underwriters listed therein (collectively, the "June 2021 Underwriters"). Pursuant to the terms of theJune 2021 Underwriting Agreement, we agreed to sell, and theJune 2021 Underwriters agreed to purchase, subject to the terms and conditions set forth in theJune 2021 Underwriting Agreement, an aggregate of 6,500,000 shares of the Company's common stock, par value$0.01 per share. The public offering closed onJune 22, 2021 and generated net proceeds of approximately$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 shows the changes in cash and cash equivalents for the years ended
For fiscal years ending in December
31,
2021 2020
Net income $
60 460
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
(12,110) 9,922 Net cash provided by (used in) operating activities 48,350 31,762 Net cash provided by (used in) investing activities (699,685) (81,867) Net cash provided by (used in) financing activities 627,174 119,246 Change in cash and cash equivalents $
(24,161)
Over the years ended
Operational activities
For the years endedDecember 31, 2021 and 2020, net cash provided by operating activities totaled$48.4 million and$31.8 million , respectively. For the year endedDecember 31, 2021 , adjustments to net income related to operating activities 64 -------------------------------------------------------------------------------- Table of C ontents primarily included the provision for current expected credit losses of$10 thousand , accretion of deferred loan origination fees and costs of$8.4 million , amortization of deferred financing costs of$9.9 million and change in other assets of$18.5 million . For the year endedDecember 31, 2020 , adjustments to net income related to operating activities primarily included the provision for current expected credit losses of$20.2 million , accretion of deferred loan origination fees and costs of$7.4 million , amortization of deferred financing costs of$6.4 million and change in other assets of$15.3 million .
Investing activities
For the years endedDecember 31, 2021 and 2020, net cash used in investing activities totaled$699.7 million and$81.9 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 for the year endedDecember 31, 2021 . Financing Activities For the year endedDecember 31, 2021 , net cash provided by financing activities totaled$627.2 million and primarily related to proceeds from our Secured Funding Agreements of$970.0 million , proceeds from our Secured Term Loan of$90.0 million , proceeds from the issuance of debt of consolidated VIEs of$540.5 million and proceeds from the sale of our common stock of$204.8 million , partially offset by repayments of our Secured Funding Agreements of$885.5 million , repayments of our Notes Payable of$27.9 million , repayments of our Secured Term Loan of$50.0 million , repayments of our Secured Borrowings of$37.5 million , repayments of debt of consolidated VIEs of$121.2 million and dividends paid of$58.4 million . For the year endedDecember 31, 2020 , net cash provided by financing activities totaled$119.2 million and primarily related to proceeds from our Secured Funding Agreements of$473.5 million , proceeds from Secured Borrowings of$60.2 million and proceeds from the sale of our common stock of$73.2 million , partially offset by repayments of our Secured Funding Agreements of$446.5 million and dividends paid of$42.8 million .
For the years ended
The comparison of the fiscal years endedDecember 31, 2020 and 2019 can be found in our annual report on Form 10-K for the fiscal year endedDecember 31, 2020 located within Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations, which is incorporated by reference herein.
Summary of funding agreements
The sources of financing, as applicable in a given period, under our Secured
Funding Agreements, Notes Payable and the Secured Term Loan (collectively, the
"Financing Agreements") are described in the following table ($ in thousands):
As of
December 31, 2021 December 31, 2020
Total Outstanding Total Outstanding
Commitment Balance Interest Rate Maturity Date Commitment Balance Interest Rate Maturity Date
Secured Funding Agreements:
Wells Fargo Facility $ 450,000 $ 399,528 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 325,000 192,970 LIBOR+1.50 to 2.25% January 13, 2022 (2) 325,000 117,506 LIBOR+1.50 to 2.25% December 13, 2021 (2)
CNB Facility 75,000 - SOFR+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 250,000 226,901 LIBOR+1.50 to 3.00% January 16, 2023 (5) 150,000 147,921 LIBOR+1.75 to 2.85% January 16, 2023 (5)
Subtotal $ 1,280,000 $ 840,047 $ 1,055,000 $ 755,552
Notes Payable $ 51,755 $ 51,110 LIBOR+3.00 to 3.75% (6) $ 84,155 $ 63,122 LIBOR+2.50 to 3.75% (6)
Secured Term Loan $ 150,000 $ 150,000 4.50% November 12, 2026 (7) $ 110,000 $ 110,000 LIBOR+5.00% December 22, 2021 (7)
Total $ 1,481,755 $ 1,041,157 $ 1,249,155 $ 928,674
_____________________________
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(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. In December 2021 , we elected to
increase the maximum commitment for the Wells Fargo Facility from $350.0 million
to $450.0 million .
(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.
In November 2021 , we amended the Citibank Facility to extend the initial
maturity date to January 13, 2022 . See Note 17 to our consolidated financial
statements included in this annual report on Form 10-K for a subsequent event
related to the Citibank Facility.
(3)In March 2021 , we exercised a 12-month extension option on the secured
revolving funding facility with City National Bank (the "CNB Facility"). In
November 2021 , we amended the CNB Facility to, among other things, (1) increase
the commitment amount from $50.0 million to $75.0 million and (2) update the
interest rate on advances under the CNB Facility to a per annum rate equal to
the sum of, at the Company's option, either (a) Daily Simple SOFR (with a 0.35%
floor) plus 2.65% or (b) a base rate (which is the highest of a prime rate, the
federal funds rate plus 0.50%, or Daily Simple SOFR plus 1.00%) plus 1.00%;
provided that in no event shall the interest rate be less than 2.65%.
(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 option,
subject to the satisfaction of certain conditions, including payment of an
upsized commitment fee. In June 2021 , we exercised the option to increase the
commitment amount from $150.0 million to $250.0 million .
(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 .
(7)In December 2020 , we exercised the 12-month extension option on 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"). During the extension period, the spread on
advances under the Secured Term Loan increased every three months by 0.125%,
0.375% and 0.750% per annum, respectively, beginning after the third-month of
the extension period. In March 2021 , we voluntarily elected to repay
$50.0 million of outstanding principal at par on the Secured Term Loan prior to
the scheduled maturity as permitted by the contractual terms of the Secured Term
Loan. In November 2021 , we amended the Secured Term Loan to, among other things,
(1) increase the commitment amount to $150.0 million , (2) extend the maturity
date of the Secured Term Loan to November 12, 2026 and (3) update the interest
rate on advances under the Secured Term Loan to the following fixed rates: (i)
4.50% per annum until May 12, 2025 , (ii) after May 12, 2025 through November 12,
2025 , the interest rate increases 0.125% every three months and (iii) after
November 12, 2025 through November 12, 2026 , the interest rate increases 0.250%
every three months.
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 December 31, 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 annual report on Form 10-K for more
information on our Financing Agreements.
Securitizations
As ofDecember 31, 2021 , the carrying amount and outstanding principal of our CLO Securitizations was$861.2 million and$864.8 million , respectively. See Note 16 to our consolidated financial statements included in this annual report on Form 10-K for additional terms and details of our CLO Securitizations. 66 -------------------------------------------------------------------------------- Table of C ontents Secured Borrowings As ofDecember 31, 2021 , the carrying amount and outstanding principal of our secured borrowings was$22.6 million and$22.7 million , respectively. See Note 7 to our consolidated financial statements included in this annual report on Form 10-K 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 4.5-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 onthe 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.
OBLIGATIONS AND CONTRACTUAL COMMITMENTS
Our contractual obligations from
Less than More than
Total 1 year 1 to 3 years 3 to 5 years 5 years
Wells Fargo Facility $ 399,528 $ 399,528 $ - $ - $ -
Citibank Facility 192,970 192,970 - - -
CNB Facility - - - - -
MetLife Facility 20,648 20,648 - - -
Morgan Stanley Facility 226,901 - 226,901 - -
Notes Payable 51,110 22,835 28,275 - -
Secured Term Loan 150,000 - - 150,000 -
Future Loan Funding
Commitments 233,741 48,798 165,517 19,426 -
Total $ 1,274,898 $ 684,779 $ 420,693 $ 169,426 $ -
The table above does not include the related interest expense under the Secured
Funding Agreements, Notes Payable and the Secured Term Loan, as all our interest
is variable. Additionally, the table above does not include extension options,
as applicable, under the Secured Funding Agreements, Notes Payable and the
Secured Term Loan.
We may enter into certain contracts that may contain a variety of
indemnification obligations, principally with underwriters and counterparties to
repurchase agreements. The maximum potential future payment amount we could be
required to pay under these indemnification obligations may be unlimited.
Other than as set forth in this annual report on Form 10-K, 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.
Management contract
We are also required to pay our Manager a base management fee of 1.5% of our
stockholders' equity per year, an incentive fee and expense reimbursements
pursuant to our Management Agreement. The table above does not include the
amounts payable to our Manager under our Management Agreement as they are not
fixed and determinable. See Note 14 to our
67
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Table of C ontents
consolidated financial statements included in this annual report on Form 10-K
for additional terms and details of the fees payable under our Management
Agreement.
DIVIDENDS
We elected to be taxed as a REIT forUnited 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 forUnited 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.
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