Insight
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
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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 first quarter of 2022:
•ACRE upsized an existing$20.8 million senior mortgage loan on an industrial property located inColorado by$3.8 million . •ACRE originated a$4.7 million senior mortgage loan on an industrial property located inFlorida . •ACRE originated a$5.9 million senior mortgage loan on an industrial property located inFlorida . •ACRE originated a$55.7 million senior mortgage loan on a hotel property located inNew York . •ACRE originated a$60.8 million senior mortgage loan on a hotel property located inCalifornia . •ACRE originated a$91.1 million senior mortgage loan on a residential condominium property located inNew York . This senior mortgage loan refinanced the previously existing$71.8 million senior mortgage loan that was held by the Company. •ACRE originated an$18.2 million senior mortgage loan on a self storage property located inPhiladelphia . •ACRE originated an$8.5 million senior mortgage loan on a self storage property located inMassachusetts . •ACRE originated a$5.9 million senior mortgage loan on a self storage property located inNew Jersey . •ACRE originated a$5.4 million senior mortgage loan on a self storage property located inWisconsin . •ACRE originated a$2.9 million senior mortgage loan on a self storage property located inTexas . •ACRE amended the Citibank Facility 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 atACRE'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 toJanuary 13, 2027 . •ACRE closed the sale of the hotel property that was classified as real estate owned to a third party for$40.0 million . During the three months endedMarch 31, 2022 ,ACRE recognized a$2.2 million gain on the sale of the hotel property as the net carrying value of the hotel property as of the sale closing date was lower than the net sales proceeds received byACRE . •ACRE re-calibrated its net exposure to interest rate changes by terminating its interest rate cap derivative, which had a notional amount of$170.0 million on the termination date and a strike rate of 0.50%. For the three months endedMarch 31, 2022 ,ACRE recognized a$2.0 million realized gain within other comprehensive income in conjunction with the termination of the interest rate cap. In accordance with FASB ASC Topic 815, Derivatives and Hedging, the realized gain will be recognized within current earnings over the remaining original term of the interest rate cap derivative as it was designated as an effective hedge.
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.
Loans held for the investment portfolio
As ofMarch 31, 2022 , our portfolio included 77 loans held for investment, excluding 121 loans that were repaid, sold or converted to real estate owned since inception. As ofMarch 31, 2022 , the aggregate originated commitment under these loans at closing was approximately$2.8 billion and outstanding principal was$2.4 billion . During the three months endedMarch 31, 2022 , we funded approximately$222.9 million of outstanding principal and received repayments of$212.6 million of outstanding principal. As ofMarch 31, 2022 , 91.6% of our loans have LIBOR or SOFR floors, with a weighted average floor of 0.98%, calculated based on loans with LIBOR or SOFR floors. References to LIBOR or "L" are to 30-day LIBOR and references to SOFR or "S" are to 30-day SOFR (unless otherwise specifically stated). 35
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Except as disclosed in Note 3 to our consolidated financial statements included in this Quarterly Report on Form 10-Q, as of
Our loans held for investment purposes are recorded at amortized cost. The following table summarizes our loans held for investment
As of March 31, 2022
Weighted
Average
Carrying Amount Outstanding Weighted Average Unleveraged Effective Remaining Life
(1) Principal (1) Yield (Years)
Senior mortgage loans $ 2,405,013 $ 2,421,979 5.4 % (2) 5.5 % (3)
1.5
Subordinated debt and preferred equity investments 16,759 17,394 13.7 % (2) 13.7 % (3)
3.8
Total loans held for the investment portfolio
5.5 % (2) 5.6 % (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 ofMarch 31, 2022 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 ofMarch 31, 2022 as weighted by the total outstanding principal balance of each interest accruing loan (excludes loans on non-accrual status as ofMarch 31, 2022 ). 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. These 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 estimates as disclosed in Part II, "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" in our 2021 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
OnApril 15, 2022 , we originated an$82.2 million senior mortgage loan on an office property located inMassachusetts . At closing, the outstanding principal balance was approximately$19.3 million . The loan has a per annum interest rate of SOFR plus 3.75%. OnApril 21, 2022 , we purchased a fully funded$4.5 million senior mortgage loan on a self storage property located inFlorida from a third party. The loan has a per annum interest rate of LIBOR plus 2.90%. OnApril 21, 2022 , we purchased a fully funded$13.8 million senior mortgage loan on a self storage property located inPennsylvania from a third party. The loan has a per annum interest rate of LIBOR plus 3.05%. OnApril 21, 2022 , we purchased a$6.8 million senior mortgage loan on a self storage property located inMassachusetts from a third party. At closing, the outstanding principal balance was approximately$6.3 million . The loan has a per annum interest rate of LIBOR plus 2.90%. 36 -------------------------------------------------------------------------------- Table of Contents OnApril 21, 2022 , we purchased a fully funded$8.0 million senior mortgage loan on a self storage property located inTexas from a third party. The loan has a per annum interest rate of LIBOR plus 2.90%. OnApril 21, 2022 , we purchased a fully funded$7.7 million senior mortgage loan on a self storage property located inMassachusetts 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$0.02 per common share for the second quarter of 2022. The second quarter 2022 and supplemental cash dividends will be payable onJuly 15, 2022 to common stockholders of record as ofJune 30, 2022 . 37 -------------------------------------------------------------------------------- Table of Contents RESULTS OF OPERATIONS The following table sets forth a summary of our consolidated results of operations for the three months endedMarch 31, 2022 and 2021 ($ in thousands): For the three months ended March 31, 2022 2021 Total revenue $ 24,023$ 21,223 Total expenses 10,508 8,538 Provision for current expected credit losses (594) (3,240) Gain on sale of real estate owned 2,197 - Income before income taxes 16,306 15,925 Income tax expense, including excise tax 105 185 Net income attributable to common stockholders $
16,201
The following tables set forth select details of our consolidated results of operations for the three months endedMarch 31, 2022 and 2021 ($ in thousands): Net Interest Margin For the three months ended March 31, 2022 2021 Interest income $ 33,364$ 30,704 Interest expense (12,013) (12,139) Net interest margin $ 21,351$ 18,565 For the three months endedMarch 31, 2022 and 2021, net interest margin was approximately$21.4 million and$18.6 million , respectively. For the three months endedMarch 31, 2022 and 2021, interest income of$33.4 million and$30.7 million , respectively, was generated by weighted average earning assets of$2.4 billion and$1.9 billion , respectively, offset by$12.0 million and$12.1 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 was recognized as real estate owned in our consolidated balance sheets), the Secured Term Loan, Secured Borrowings and securitization debt (as defined below) were$1.8 billion for the three months endedMarch 31, 2022 and$1.5 billion for the three months endedMarch 31, 2021 . The increase in net interest margin for the three months endedMarch 31, 2022 compared to the three months endedMarch 31, 2021 primarily relates to an increase in our weighted average earning assets and weighted average borrowings for the three months endedMarch 31, 2022 .
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 hotel property as real estate owned. For both the three months endedMarch 31, 2022 and 2021, revenue from real estate owned was$2.7 million . Revenues consist of room sales, food and beverage sales and other hotel revenues. The increase in revenue from real estate owned for the three months endedMarch 31, 2022 compared to the three months endedMarch 31, 2021 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 three months endedMarch 31, 2022 . This was offset by the three months endedMarch 31, 2022 only including two months of operations as we closed the sale of the hotel property to a third party onMarch 1, 2022 . In connection with the sale of the hotel property, we provided a senior mortgage loan to the buyer of the hotel property. The initial advance funded under such loan was$30.7 million , with up to another$25.0 million of additional loan proceeds to be available for future advances to cover a portion of the anticipated property renovation plan costs, provided certain conditions are satisfied. At closing, the buyer contributed$12.9 million of equity into the purchase. Additionally, the buyer is required to fund an additional$8.7 million of equity associated with the anticipated property renovation plan costs. 38 --------------------------------------------------------------------------------
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Operating Expenses
For the three months ended March 31,
2022 2021
Management and incentive fees to affiliate $ 2,974 $ 2,567
Professional fees 778 785
General and administrative expenses 1,613 1,157
General and administrative expenses reimbursed to affiliate 834 752
Expenses from real estate owned 4,309 3,277
Total expenses $ 10,508 $ 8,538
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 March 31, 2022 compared to the three months ended March
31, 2021 .
Related Party Expenses
For the three months ended March 31, 2022 , related party expenses included $3.0
million in management and incentive fees due to our Manager pursuant to the
Management Agreement, which consisted of $2.6 million in management fees and
$0.4 million in incentive fees. For the three months ended March 31, 2022 ,
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 March
31, 2021 , related party expenses included $2.6 million in management and
incentive fees due to our Manager pursuant to the Management Agreement, which
consisted of $1.9 million in management fees and $0.7 million in incentive fees.
For the three months ended March 31, 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. The increase in management fees for the three months ended March 31,
2022 compared to the three months ended March 31, 2021 primarily relates to an
increase in our weighted average stockholders' equity for the three months ended
March 31, 2022 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
decrease in incentive fees for the three months ended March 31, 2022 compared to
the three months ended March 31, 2021 primarily relates to our Core Earnings for
the twelve months ended March 31, 2022 exceeding the 8% minimum return by a
lower margin than the twelve months ended March 31, 2021 . "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. On April 25, 2022 , ACRE and ACREM
entered into an amendment to the Management Agreement to (a) include a $2.4
million adjustment to reverse the impact of accumulated depreciation following
the sale of the real estate owned property for the three months ended March 31,
2022 and to (b) include a $2.0 million adjustment to include the realized gain
from the termination of the interest rate cap derivative for the three months
ended March 31, 2022 , in each case, with respect to Core Earnings for the three
months ended March 31, 2022 . Core Earnings is defined in the Management
Agreement and is used to calculate the incentive fees the Company pays to ACREM.
Allocable general and administrative expenses due to our Manager for the three
months ended March 31, 2022 were consistent with the three months ended March
31, 2021 .
Other Expenses
For both the three months ended March 31, 2022 and 2021, professional fees were
$0.8 million . For the three months ended March 31, 2022 and 2021, general and
administrative expenses were $1.6 million and $1.2 million , respectively. The
increase in general and administrative expenses for the three months ended March
31, 2022 compared to the three months ended March 31, 2021 primarily relates to
an increase in stock-based compensation expense due to restricted stock and
restricted stock unit awards granted after March 31, 2021 .
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Real estate expenses
For the three months ended
For the three months ended March 31,
2022 2021
Hotel operating expenses $ 3,631 $ 2,643
Interest expense on note payable 678 410
Depreciation expense - 224
Expenses from real estate owned $
4,309
For the three months endedMarch 31, 2022 and 2021, hotel operating expenses were$3.6 million and$2.6 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 three months endedMarch 31, 2022 compared to the three months endedMarch 31, 2021 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 endedMarch 31, 2022 . This was partially offset by the three months endedMarch 31, 2022 only including two months of operations as we closed the sale of the hotel property to a third party onMarch 1, 2022 . For the three months endedMarch 31, 2022 and 2021, interest expense on our note payable was$0.7 million and$0.4 million , respectively. The increase in interest expense on our note payable for the three months endedMarch 31, 2022 compared to the three months endedMarch 31, 2021 is primarily attributed to the accelerated recognition of deferred costs due to the repayment of our note payable in conjunction with the sale of the hotel property to a third party onMarch 1, 2022 . For the three months endedMarch 31, 2022 , no depreciation expense was incurred as the hotel property was classified as real estate owned held for sale effective inNovember 2021 . For the three months endedMarch 31, 2021 , depreciation expense was$0.2 million .
Provision for current expected credit losses
For the three months endedMarch 31, 2022 and 2021, the provision for current expected credit losses was$(0.6) million and$(3.2) million , respectively. The decrease in the provision for current expected credit losses for the three months endedMarch 31, 2022 compared to the three months endedMarch 31, 2021 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 three months endedMarch 31, 2022 . The current expected credit loss reserve ("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.
Gain on sale of real estate owned
For the three months endedMarch 31, 2022 , we recognized a$2.2 million gain on the sale of the hotel property that was recognized as real estate owned as the net carrying value of the hotel property as of theMarch 1, 2022 sale date was lower than the net sales proceeds received by the Company.
CASH 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.
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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 for the
periods following, 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 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 proactively engaged in discussions
with certain of our lenders in 2020 and to a lesser extent in periods following
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. 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 also have and may continue to 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 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 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, 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 the Ares 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 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.
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We have commitments to fund various senior mortgage loans, as well as
subordinated debt and preferred equity investments in our portfolio. 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.
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 three months endedMarch 31, 2022 , the Company sold 190,369 shares of common stock under the Equity Distribution Agreement.
Cash flow
The following table presents the changes in cash and cash equivalents for the three months ended
For the three months endedMarch 31, 2022 2021 Net income $
16,201
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
14 (5,816) Net cash provided by (used in) operating activities 16,215 9,924 Net cash provided by (used in) investing activities 89,680 (131,354) Net cash provided by (used in) financing activities (142,751) 144,598 Change in cash and cash equivalents $
(36,856)
In the three months ended
Operational activities
For the three months endedMarch 31, 2022 and 2021, net cash provided by operating activities totaled$16.2 million and$9.9 million , respectively. For the three months endedMarch 31, 2022 , adjustments to net income related to operating activities primarily included the provision for current expected credit losses of$0.6 million , accretion of deferred loan origination fees and costs of$2.3 million , amortization of deferred financing costs of$2.2 million , change in other assets of$4.0 million and gain on sale of real estate owned of$2.2 million . For the three months endedMarch 31, 2021 , adjustments to net income related to operating activities primarily included the provision for current expected credit losses of$3.2 million , accretion of deferred loan origination fees and costs of$2.0 million , amortization of deferred financing costs of$2.2 million and change in other assets of$2.7 million .
Investing activities
For the three months endedMarch 31, 2022 and 2021, net cash provided by (used in) investing activities totaled$89.7 million and$(131.4) million , respectively. This change in net cash provided by investing activities was primarily as a result of the cash received from principal repayment of loans held for investment exceeding the cash used for the origination and funding of loans held for investment and proceeds from the sale of real estate owned for the three months endedMarch 31, 2022 . 42 -------------------------------------------------------------------------------- Table of Contents Financing Activities For the three months endedMarch 31, 2022 , net cash used in financing activities totaled$142.8 million and primarily related to repayments of our Secured Funding Agreements of$137.9 million , repayments of our Notes Payable of$28.3 million and dividends paid of$16.7 million , partially offset by proceeds from our Secured Funding Agreements of$37.9 million and proceeds from the sale of our common stock of$2.9 million . For the three months endedMarch 31, 2021 , net cash provided by financing activities totaled$144.6 million and primarily related to proceeds from our Secured Funding Agreements of$77.3 million , proceeds from the issuance of debt of consolidated VIEs of$540.5 million and proceeds from the sale of our common stock of$100.9 million , partially offset by repayments of our Secured Funding Agreements of$483.2 million , repayments of our Notes Payable of$27.9 million , repayments of our Secured Term Loan of$50.0 million and dividends paid of$11.1 million .
Summary of funding agreements
The sources of financing, as applicable in a given period, under our Secured
Funding Agreements, Notes Payable and the Secured Term Loan (collectively, the
"Financing Agreements") are described in the following table ($ in thousands):
As of
March 31, 2022 December 31, 2021
Total Outstanding Total Outstanding
Commitment Balance Interest Rate Maturity Date Commitment Balance Interest Rate Maturity Date
Secured Funding Agreements:
Wells Fargo Facility $ 450,000 $ 345,928
Base rate(1)+1.50 to 2.75%
$ 399,528 LIBOR+1.50 to 2.75% December 14, 2022
(2)
Citibank Facility 325,000 200,970
Base rate(1)+1.50 to 2.10%
192,970 LIBOR+1.50 to 2.25% January 13, 2022 (3) CNB Facility 75,000 - SOFR+2.65%March 10, 2023 (4) 75,000 - SOFR+2.65%March 10, 2022 (4) MetLife Facility 180,000 20,648 Base Rate(1)+2.10 to 2.50%August 13, 2022 (5) 180,000 20,648 LIBOR+2.10 to 2.50%August 13, 2022
(5)
Morgan Stanley Facility 250,000 172,476
Base rate(1)+1.50 to 3.00%
226,901 LIBOR+1.50 to 3.00% January 16, 2023 (6) Subtotal$ 1,280,000 $ 740,022 $ 1,280,000 $ 840,047 Notes Payable$ 23,480 $ 22,835 LIBOR+3.75%September 5, 2022 (7)$ 51,755 $ 51,110 LIBOR+3.00 to 3.75% (7) Secured Term Loan$ 150,000 $ 150,000 4.50%November 12, 2026 (8)$ 150,000 $ 150,000 4.50%November 12, 2026 (8) Total$ 1,453,480 $ 912,857 $ 1,481,755 $ 1,041,157
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(1)The base rate is LIBOR for loans pledged prior toDecember 31, 2021 and SOFR for loans pledged subsequent toDecember 31, 2021 . (2)The maturity date of the master repurchase funding facility withWells 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. (3)InJanuary 2022 , we amended the Citibank Facility 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 . (4)InMarch 2022 , we exercised a 12-month extension option on the secured revolving funding facility withCity National Bank (the "CNB Facility"). (5)The maturity date of the revolving master repurchase facility withMetropolitan 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. (6)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. (7)A consolidated subsidiary of ours is party to a$23.5 million note agreement (the "Notes Payable") with the lender referred to therein that has an initial maturity date ofSeptember 5, 2022 , subject to two 12-month extensions at our option provided that certain conditions are met and applicable extension fees are paid. InMarch 2022 , the$28.3 43 -------------------------------------------------------------------------------- Table of Contents million note, which was secured by a hotel property located inNew York that was recognized as real estate owned in our consolidated balance sheets, was repaid in full and not extended. The outstanding principal on the note at the time of repayment was$28.3 million . (8)The maturity date of the Credit and Guaranty Agreement with the lenders referred to therein andCortland Capital Market Services LLC , as administrative agent and collateral agent for the lenders (the "Secured Term Loan") isNovember 12, 2026 and the interest rate on advances under the Secured Term Loan are 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. 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 ofMarch 31, 2022 , 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 ofMarch 31, 2022 , the carrying amount and outstanding principal of our CLO Securitizations was$861.8 million and$864.8 million , respectively. See Note 16 to our consolidated financial statements included in this quarterly report on Form 10-Q for additional terms and details of our CLO Securitizations.
Secured loans
As ofMarch 31, 2022 , 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 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 4.5-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 or SOFR curve.
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 44
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Table of Contents 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 and debt service requirements under 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 elect to make a portion of the Required Distribution in the form of a taxable stock distribution or distribution of debt securities.
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