ARES COMMERCIAL REAL ESTATE CORPORATION Overview
We are a specialty finance company primarily engaged in originating and
investing in commercial real estate ("CRE") loans and related investments. We
are externally managed by ACREM, a subsidiary of Ares Management Corporation
(NYSE: ARES) ("Ares Management"), a publicly traded, leading global alternative
asset manager, pursuant to the terms of the amended and restated management
agreement dated July 26, 2022 , between us and our Manager (the "Management
Agreement"). From the commencement of our operations in late 2011, we have been
primarily focused on directly originating and managing a diversified portfolio
of CRE debt-related investments for our own account.
We were formed and commenced operations in late 2011. We are a Maryland
corporation and completed our initial public offering in May 2012 . We have
elected and qualified to be taxed as a REIT for United States federal income tax
purposes under the Internal Revenue Code of 1986, as amended, commencing with
our taxable year ended December 31, 2012 . We generally will not be subject to
United States federal income taxes on our REIT taxable income as long as we
annually distribute to stockholders an amount at least equal to our REIT taxable
income prior to the deduction for dividends paid and comply with various other
requirements as a REIT. We also operate our business in a manner that is
intended to permit us to maintain our exemption from registration under the 1940
Act.
Developments During the First Quarter of 2023:
•ACRE closed the sale of the senior mortgage loan collateralized by a residential property inCalifornia and was in maturity default due to the failure of the borrower to repay the outstanding principal balance of the loan by theMay 2021 maturity date. ACRE recognized a realized loss of$5.6 million as the carrying value, not including the current expected credit losses ("CECL") reserve, exceeded the sale price of the loan. •ACRE entered into a sale agreement with a third party to sell a senior mortgage loan with outstanding principal of$27.4 million , which is collateralized by an office property located inIllinois and is in maturity default due to the failure of the borrower to repay the outstanding principal balance of the loan by theJanuary 2023 maturity date. As ofMarch 31, 2023 , the sale had not yet closed and the loan was reclassified from held for investment to held for sale and is carried at fair value. The sale closed inApril 2023 . ACRE did not recognize any unrealized gain or loss upon reclassifying the loan to held for sale as the carrying value was equal to fair value as determined by the agreed upon sale price of the loan.
Trends Affecting Our Business
Global markets continued to see volatility during the first quarter of 2023, fueled by continued high inflation and interest rates and geopolitical uncertainty. In response to heightened inflation, theFederal Reserve may continue to raise interest rates, which has continued to result in uncertainty for the economy and for our borrowers. In addition, during the first quarter of 2023, several financial institutions in theU.S. and abroad, sustained liquidity problems resulting in volatility in the financial markets and concerns with respect to market-wide liquidity problems. These current macroeconomic conditions may continue or aggravate and could cause theU.S. economy or other global economies to experience an economic slowdown or recession. We continue to monitor the uncertainty surrounding inflation, rising interest rates and market-wide liquidity problems; however, the full impact that these factors may have on our business remains uncertain.
Factors Impacting Our Operating Results
The results of our operations are affected by a number of factors and primarily depend on, among other things, the level of our net interest income, the market value of our assets and the supply of, and demand for, commercial mortgage loans, CRE debt and other financial assets in the marketplace. Our net interest income, which reflects the amortization of origination fees and direct costs, is recognized based on the contractual rate and the outstanding principal balance of the loans we originate. Interest rates will vary according to the type of investment, conditions in the financial markets, creditworthiness of our borrowers, competition and other factors, none of which can be predicted with any certainty. Our operating results may also be impacted by credit losses in excess of initial anticipations or unanticipated credit events experienced by borrowers. Stock Repurchase Program OnJuly 26, 2022 , our Board of Directors approved a stock repurchase program of up to$50.0 million , which is expected to be in effect untilJuly 26, 2023 , or until the approved dollar amount has been used to repurchase shares (the "Repurchase Program"). Pursuant to the Repurchase Program, we may repurchase shares of our common stock in amounts, at prices and at such times as we deem appropriate, subject to market conditions and other considerations, including all applicable 37 -------------------------------------------------------------------------------- Table of Contents legal requirements. Repurchases may include purchases on the open market or privately negotiated transactions, under Rule 10b5-1 trading plans, under accelerated share repurchase programs, in tender offers and otherwise. The Repurchase Program does not obligate us to acquire any particular amount of shares of our common stock and may be modified or suspended at any time at our discretion. We did not conduct any repurchases under the Repurchase Program during the three months endedMarch 31, 2023 .
Loans Held for Investment Portfolio
As ofMarch 31, 2023 , our portfolio included 53 loans held for investment, excluding 157 loans that were repaid, sold, converted to real estate owned or transferred to held for sale since inception. As ofMarch 31, 2023 , the aggregate originated commitment under these loans at closing was approximately$2.5 billion and outstanding principal was$2.2 billion . During the three months endedMarch 31, 2023 , we funded approximately$26.4 million of outstanding principal, received repayments of$72.8 million of outstanding principal, sold one loan with outstanding principal of$14.3 million to a third party and transferred one loan to held for sale with outstanding principal of$27.4 million . As ofMarch 31, 2023 , 80.8% of our loans have LIBOR or SOFR floors, with a weighted average floor of 0.99%, 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).
Other than as set forth in Note 3 to our consolidated financial statements
included in this quarterly report on Form 10-Q, as of
Our loans held for investment are accounted for at amortized cost. The following
table summarizes our loans held for investment as of
As of March 31, 2023
Weighted
Average
Carrying Amount Outstanding Weighted Average Unleveraged Effective Remaining Life
(1) Principal (1) Yield (Years)
Senior mortgage loans $ 2,135,368 $ 2,155,816 8.5 % (2) 9.2 % (3) 1.4
Subordinated debt and preferred equity investments 37,837 39,098 7.8 % (2) 14.7 % (3)
2.6
Total loans held for investment portfolio
8.5 % (2) 9.2 % (3) 1.4
_______________________________
(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, 2023 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, 2023 as weighted by the total outstanding principal balance of each interest accruing loan (excludes loans on non-accrual status as ofMarch 31, 2023 ). 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 2022 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. 38 -------------------------------------------------------------------------------- Table of Contents RECENT DEVELOPMENTS InApril 2023 , the senior mortgage loan held by us on a multifamily property located inWashington received a partial April interest payment, which triggered an event of default under the loan agreement. As ofMay 1, 2023 , the outstanding principal balance of the seniorWashington loan is$18.8 million . InApril 2023 , we closed the sale of the senior mortgage loan collateralized by an office property located inIllinois that was in maturity default due to the failure of the borrower to repay the outstanding principal balance of the loan by the maturity date. As ofMarch 31, 2023 , the loan was classified as held for sale and was carried at fair value of$27.4 million , which was equal to the final sale price. Our Board of Directors declared a regular cash dividend of$0.33 per common share and a supplemental cash dividend of$0.02 per common share for the second quarter of 2023. The second quarter 2023 and supplemental cash dividends will be payable onJuly 18, 2023 to common stockholders of record as ofJune 30, 2023 . 39 -------------------------------------------------------------------------------- Table of Contents RESULTS OF OPERATIONS The following table sets forth a summary of our consolidated results of operations for the three months endedMarch 31, 2023 and 2022 ($ in thousands): For the three months ended March 31, 2023 2022 Total revenue$ 26,501 $ 24,023 Total expenses 6,198 10,508 Provision for current expected credit losses 21,019 (594) Realized losses on loans sold 5,613 - Gain on sale of real estate owned - 2,197 Income (loss) before income taxes (6,329) 16,306 Income tax expense, including excise tax 110 105 Net income (loss) attributable to common stockholders
The following tables set forth select details of our consolidated results of operations for the three months endedMarch 31, 2023 and 2022 ($ in thousands): Net Interest Margin For the three months ended March 31, 2023 2022 Interest income$ 49,500 $ 33,364 Interest expense (22,999) (12,013) Net interest margin$ 26,501 $ 21,351 For the three months endedMarch 31, 2023 and 2022, net interest margin was approximately$26.5 million and$21.4 million , respectively. For the three months endedMarch 31, 2023 and 2022, interest income of$49.5 million and$33.4 million , respectively, was generated by weighted average earning assets of$2.3 billion and$2.4 billion , respectively, offset by$23.0 million and$12.0 million , respectively, of interest expense, unused fees and amortization of deferred loan costs. The weighted average borrowings under the Wells Fargo Facility, the Citibank Facility, the CNB Facility, the MetLife Facility and the Morgan Stanley Facility (individually defined below and collectively, the "Secured Funding Agreements"), Notes Payable (as defined below), the Secured Term Loan, Secured Borrowings and securitization debt (as defined below) were$1.7 billion for the three months endedMarch 31, 2023 and$1.8 billion for the three months endedMarch 31, 2022 . The increase in net interest margin for the three months endedMarch 31, 2023 compared to the three months endedMarch 31, 2022 primarily relates to the benefit received from our interest rate hedging derivative contracts for the three months endedMarch 31, 2023 and the benefit received from the increase in LIBOR and SOFR rates on our loans held for investment for the three months endedMarch 31, 2023 . This was partially offset by a decrease in our weighted average earning assets and weighted average borrowings for the three months endedMarch 31, 2023 .
Revenue 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 the three months endedMarch 31, 2023 , there was no revenue from real estate owned as we closed the sale of the hotel property to a third party onMarch 1, 2022 . For the three months endedMarch 31, 2022 , revenue from real estate owned was$2.7 million . Revenues consisted of room sales, food and beverage sales and other hotel revenues. 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. 40
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Operating Expenses
For the three
months ended
March 31,
2023 2022
Management and incentive fees to affiliate $ 3,010 $ 2,974
Professional fees 771 778
General and administrative expenses 1,685 1,613
General and administrative expenses reimbursed to affiliate 732 834
Expenses from real estate owned - 4,309
Total expenses $ 6,198 $ 10,508
See the Related Party Expenses, Other Expenses and Expenses from Real Estate
Owned discussions below for the cause of the decrease in operating expenses for
the three months ended March 31, 2023 compared to the three months ended March
31, 2022 .
Related Party Expenses
For the three months ended March 31, 2023 , related party expenses included $3.0
million in management fees due to our Manager pursuant to the Management
Agreement. No incentive fees were incurred for the three months ended March 31,
2023 . For the three months ended March 31, 2023 , related party expenses also
included $0.7 million for our share of allocable general and administrative
expenses for which we were required to reimburse our Manager pursuant to the
Management Agreement. 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. The increase in
management fees for the three months ended March 31, 2023 compared to the three
months ended March 31, 2022 primarily relates to an increase in our weighted
average stockholders' equity for the three months ended March 31, 2023 as a
result of the public offering of 7,000,000 shares of our common stock in May
2022 , which generated net proceeds of approximately $103.2 million . The decrease
in incentive fees for the three months ended March 31, 2023 compared to the
three months ended March 31, 2022 primarily relates to our Core Earnings
(defined below) for the twelve months ended March 31, 2023 exceeding the 8%
minimum return by a lower margin than the twelve months ended March 31, 2022 .
"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 hotel 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. The decrease in allocable general and administrative
expenses due to our Manager for the three months ended March 31, 2023 compared
to the three months ended March 31, 2022 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. This was partially offset by the inclusion
of additional eligible expense reimbursements per the Amended and Restated
Management Agreement for the three months ended March 31, 2023 that became
effective during the three months ended September 30, 2022 .
Other Expenses
For both the three months endedMarch 31, 2023 and 2022, professional fees were$0.8 million . For the three months endedMarch 31, 2023 and 2022, general and administrative expenses were$1.7 million and$1.6 million , respectively. The increase in general and administrative expenses for the three months endedMarch 31, 2023 compared to the three months endedMarch 31, 2022 primarily relates to an increase in stock-based compensation expense due to restricted stock and restricted stock unit awards granted afterMarch 31, 2022 . 41
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Expenses From Real Estate Owned
For the three months endedMarch 31, 2023 , there were no expenses from real estate owned as we closed the sale of the hotel property to a third party onMarch 1, 2022 . For the three months endedMarch 31, 2022 , expenses from real estate owned was comprised of the following ($ in thousands): For the three months ended March 31, 2022 Hotel operating expenses$ 3,631 Interest expense on note payable 678 Depreciation expense - Expenses from real estate owned$ 4,309 For the three months endedMarch 31, 2022 , hotel operating expenses were$3.6 million . Hotel operating expenses consisted 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 included housekeeping and front office wages and payroll taxes, reservation systems, room supplies, laundry services and other costs. Food and beverage expense primarily included the cost of food, the cost of beverages and associated labor costs. Other operating expenses included 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. For the three months endedMarch 31, 2022 , interest expense on our note payable was$0.7 million . 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 .
Provision for Current Expected Credit Losses
For the three months endedMarch 31, 2023 and 2022, the provision for current expected credit losses was$21.0 million and$(0.6) million , respectively. The increase in the provision for current expected credit losses for the three months endedMarch 31, 2023 compared to the three months endedMarch 31, 2022 is primarily due to specific CECL reserves that were assigned to two loans in the portfolio, changes to the loan portfolio and the impact of the current macroeconomic environment on certain assets, including high inflation and interest rates, partially offset by shorter average remaining loan term, loan sales and loan repayments during the three months endedMarch 31, 2023 . The current expected credit loss reserve ("CECL Reserve") takes into consideration our estimates relating to the impact of macroeconomic conditions on CRE properties and is not specific to any loan losses or impairments on our loans held for investment, unless the Company determines that a specific reserve is warranted for a select asset. 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 macroeconomic conditions.
Realized Losses on Loans Sold
InJanuary 2023 , we closed the sale of a senior mortgage loan with outstanding principal of$14.3 million , which was collateralized by a residential property located inCalifornia , to a third party. At the time of the sale, the senior mortgage loan was in maturity default due to the failure of the borrower to repay the outstanding principal balance of the loan by theMay 2021 maturity date. For the three months endedMarch 31, 2023 , we recognized a realized loss of$5.6 million in our consolidated statements of operations upon the sale of the senior mortgage loan as the carrying value exceeded the sale price of the loan.
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. 42
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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. As a
result of the current macroeconomic environment, borrowers may be unable to make
interest and principal payments timely, including at the maturity date of the
borrower's loan. We have increased our CECL Reserve to reflect this risk. 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. During the COVID-19 pandemic, to mitigate
the risk of future margin calls, we proactively engaged in discussions with
certain of our lenders to modify the terms of our borrowings on certain assets
within these facilities, in order to, among other things, reduce the amounts we
were borrowing against such assets and/or increase the borrowing spreads. If we
experience borrower default as a result of the current macroeconomic conditions,
we may not be able to negotiate modifications to our borrowings with our
lenders, similar to those negotiated during COVID-19, or to 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 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. 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.
As of
At the Market Stock Offering Program
OnNovember 22, 2019 , we entered into an equity distribution agreement (the "Equity Distribution Agreement"), governing an "at the market offering" program having an aggregate offering price of up to$100.0 million . During the three months endedMarch 31, 2023 , no shares of our common stock under the Equity Distribution Agreement were sold. The "at the market offering" program is currently unavailable.
Cash Flows
The following table sets forth changes in cash and cash equivalents for the
three months ended
For the three months ended March
31,
2023 2022
Net income (loss) $
(6,439)
17,695 14
Net cash provided by (used in) operating activities 11,256 16,215
Net cash provided by (used in) investing activities 70,058 89,680
Net cash provided by (used in) financing activities (68,828) (142,751)
Change in cash and cash equivalents $
12,486
During the three months ended
Operating Activities
For the three months endedMarch 31, 2023 and 2022, net cash provided by operating activities totaled$11.3 million and$16.2 million , respectively. For the three months endedMarch 31, 2023 , adjustments to net loss related to operating activities primarily included the provision for current expected credit losses of$21.0 million , accretion of discounts, deferred loan origination fees and costs of$1.8 million , amortization of deferred financing costs of$1.0 million , change in other assets of$8.6 million and realized losses on loans sold of$5.6 million . 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 discounts, 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 .
Investing Activities
For the three months endedMarch 31, 2023 and 2022, net cash provided by investing activities totaled$70.1 million and$89.7 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 and from the sale of loans held for sale exceeding the cash used for the origination and funding of loans held for investment for the three months endedMarch 31, 2023 .
Financing Activities
For the three months endedMarch 31, 2023 , net cash used in financing activities totaled$68.8 million and primarily related to repayments of our Secured Funding Agreements of$19.7 million , repayments of debt of consolidated VIEs of$42.1 million and dividends paid of$19.3 million , partially offset by proceeds from our Secured Funding Agreements of$12.7 44 -------------------------------------------------------------------------------- Table of Contents million. 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$2.9 million .
Summary of Financing Agreements
The sources of financing, as applicable in a given period, under our Secured
Funding Agreements, Notes Payable and the Secured Term Loan (collectively, the
"Financing Agreements") are described in the following table ($ in thousands):
As of
March 31, 2023 December 31, 2022
Total Outstanding Total Outstanding
Commitment Balance Interest Rate Maturity Date Commitment Balance Interest Rate Maturity Date
Secured Funding Agreements:
Wells Fargo Facility $ 450,000 $ 261,039 Base Rate(1)+1.50 to 3.75%
$ 270,798 Base Rate(1)+1.50 to 3.75% December 15, 2025 (2) Citibank Facility 325,000 236,240
Base Rate(1)+1.50 to 2.10%
236,240 Base Rate(1)+1.50 to 2.10% January 13, 2025 (3)
CNB Facility 75,000 - SOFR+2.65% March 11, 2024 (4) 75,000 - SOFR+2.65% March 10, 2023 (4)
MetLife Facility 180,000 - Base Rate(1)+2.10 to 2.50% August 13, 2023 (5) 180,000
- Base Rate(1)+2.10 to 2.50% August 13, 2023 (5)
Morgan Stanley
Facility 250,000 200,874 SOFR+1.60 to 3.10% January 16, 2024 (6) 250,000 198,193 Base Rate(1)+1.50 to 3.00% January 16, 2024 (6)
Subtotal $ 1,280,000 $ 698,153 $ 1,280,000 $ 705,231
Notes Payable $ 105,000 $ 105,000 SOFR+2.00% July 28, 2025 (7) $ 105,000 $ 105,000 SOFR+2.00% July 28, 2025 (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 $ 1,535,000 $ 953,153 $ 1,535,000 $ 960,231 _____________________________
(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 two 12-month extensions at our option, each of which may be exercised 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)The maturity date of the master repurchase facility withCitibank, N.A . ("Citibank") (the "Citibank Facility") is subject to two 12-month extensions, each of which may be exercised at our option provided that certain conditions are met and applicable extension fees are paid. (4)InFebruary 2023 , we exercised a 12-month extension option on the secured revolving funding facility withCity National Bank (the "CNB Facility"). (5)The revolving master repurchase facility with Metropolitan Life Insurance Company (the "MetLife Facility") is subject to one 12-month extension, which may be exercised at our option provided that certain conditions are met and applicable extension fees are paid. (6)The master repurchase and securities contract with Morgan Stanley (the "Morgan Stanley Facility") is subject to one 12-month extension, which may be exercised at our option provided that certain conditions are met and applicable extension fees are paid. (7)A wholly owned subsidiary of ours is party to a Credit and Security Agreement with the lender referred to therein, which provides for a$105.0 million note (the "Notes Payable"). The$105.0 million note is subject to two 12-month extensions, each of which may be exercised at our option provided that certain conditions are met and applicable extension fees are paid. (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. 45
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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, 2023 , 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, 2023 , the carrying amount and outstanding principal of our CLO Securitizations was$735.8 million and$736.9 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.
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 macroeconomic 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 macroeconomic environment 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 or another alternative interest index rate commonly used for floating rate loans.
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 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. 46
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