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What changed in ACRES Commercial Realty Corp.'s 10-K — 2022 vs 2023

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Paragraph-level year-over-year comparison of ACRES Commercial Realty Corp.'s 2022 and 2023 10-K annual filings, covering the Business, Risk Factors, Legal Proceedings, Cybersecurity, MD&A and Market Risk sections. Every new, removed and edited paragraph is highlighted side-by-side so you can see exactly what management changed in the 2023 report.

+458 added−549 removedSource: 10-K (2024-03-07) vs 10-K (2023-03-07)

Top changes in ACRES Commercial Realty Corp.'s 2023 10-K

458 paragraphs added · 549 removed · 362 edited across 5 sections

Item 1. Business

Business — how the company describes what it does

53 edited+15 added−20 removed64 unchanged
Biggest changeWith respect to each fiscal quarter commencing with the quarter ending December 31, 2022, an incentive management fee calculated and payable in arrears in an amount, not less than zero, equal to: • for the first full calendar quarter ending December 31, 2022 , the product of (a) 20% and (b) the excess of (i) EAD of the Company for such calendar quarter, over (ii) the product of (A) the Company’s book value equity as of the end of such calendar quarter, and (B) 7% per annum; • for each of the second, third and fourth full calendar quarters following the calendar quarter ending December 31, 2022 , the excess of (1) the product of (a) 20% and (b) the excess of (i) EAD of the Company for the calendar quarter(s) following September 30, 2022, over (ii) the product of (A) the Company’s book value equity in the calendar quarter(s) following September 30, 2022, and (B) 7% per annum, over (2) the sum of any incentive compensation paid to the Manager with respect to the prior calendar quarter(s) following September 30, 2022 (other than the most recent calendar quarter); and • for each calendar quarter thereafter , the excess of (1) the product of (a) 20% and (b) the excess of (i) EAD of the Company for the previous 12-month period, over (ii) the product of (A) the Company’s book value equity in the previous 12-month period, and (B) 7% per annum, over (2) the sum of any incentive compensation paid to the Manager with respect to the first three calendar quarters of such previous 12-month period; provided, however, that no incentive compensation shall be payable with respect to any calendar quarter unless EAD for the twelve (Back to Index) 13 (Back to Index) most recently completed calendar quarters (or such lesser number of completed calendar quarters from September 30, 2022) in the aggregate is greater than zero. • Per-loan underwriting and review fees in connection with valuations of and potential investments in certain subordinate commercial mortgage pass-through certificates, in amounts approved by a majority of the independent directors. • Reimbursement of expenses for personnel of our Manager or its affiliates for their services in connection with the making of fixed-rate commercial real estate loans by us, in an amount equal to one percent of the principal amount of each such loan made. • Reimbursement of out-of-pocket expenses and certain other costs incurred by our Manager and its affiliates that relate directly to us and our operations. • Reimbursement of our Manager’s and its affiliates’ expenses for (A) the wages, salaries and benefits of our Chief Financial Officer, and (B) a portion of the wages, salaries and benefits of accounting, finance, tax and investor relations professionals, in proportion to such personnel’s percentage of time allocated to our operations.
Biggest changeWith respect to each fiscal quarter commencing with the quarter ending December 31, 2022, an incentive management fee calculated and payable in arrears in an amount, not less than zero, equal to: • for the first full calendar quarter ending December 31, 2022 , the product of (a) 20% and (b) the excess of (i) EAD of the Company for such calendar quarter, over (ii) the product of (A) the Company’s book value equity as of the end of such calendar quarter, and (B) 7% per annum; • for each of the second, third and fourth full calendar quarters following the calendar quarter ending December 31, 2022 , the excess of (1) the product of (a) 20% and (b) the excess of (i) EAD of the Company for the calendar quarter(s) following September 30, 2022, over (ii) the product of (A) the Company’s book value equity in the calendar quarter(s) following September 30, 2022, and (B) 7% per annum, over (2) the sum of any incentive compensation paid to the Manager with respect to the prior calendar quarter(s) following September 30, 2022 (other than the most recent calendar quarter); and • for each calendar quarter thereafter , the excess of (1) the product of (a) 20% and (b) the excess of (i) EAD of the Company for the previous 12-month period, over (ii) the product of (A) the Company’s book value equity in the previous 12-month period, and (B) 7% per annum, over (2) the sum of any incentive compensation paid to the Manager with respect to the first three calendar quarters of such previous 12-month period; provided, however, that no incentive compensation shall be payable with respect to any calendar quarter unless EAD for the twelve most recently completed calendar quarters (or such lesser number of completed calendar quarters from September 30, 2022) in the aggregate is greater than zero.
Our interest in ACRES RF does not constitute an “investment security” for purposes of the 40% test, but our interests in RSO Equity and our investments in the common shares of Resource Capital Trust I and RCC Trust II, both of which are held directly by ACRES Commercial Realty Corp., do.
Our interest in ACRES RF does not constitute an “investment security” for purposes of the 40% test, but our former interests in RSO Equity and our investments in the common shares of Resource Capital Trust I and RCC Trust II, both of which are held directly by ACRES Commercial Realty Corp., do.
Based upon current conditions in the credit markets for collateralized debt obligations and collateralized loan obligations (sometimes, collectively, referred to as CDOs and CLOs) we expect to modestly increase leverage through new CRE debt securitizations and the continued use of our senior secured financing facility and term financing facilities.
Based upon current conditions in the credit markets for collateralized loan obligations (sometimes, collectively, referred to as CLOs) we expect to modestly increase leverage through new CRE debt securitizations and the continued use of our senior secured financing facility and term financing facilities.
We believe that ACRES Realty Funding, Inc., (“ACRES RF”) the subsidiary that at December 31, 2022 held substantially all of our CRE loan assets, is excluded from Investment Company Act regulation under Section 3(c)(5)(C), a provision designed for companies that do not issue redeemable securities and are primarily engaged in the business of purchasing or otherwise acquiring mortgages and other liens on and interests in real estate.
We believe that ACRES Realty Funding, Inc., (“ACRES RF”) the subsidiary that at December 31, 2023 held substantially all of our CRE loan assets, is excluded from Investment Company Act regulation under Section 3(c)(5)(C), a provision designed for companies that do not issue redeemable securities and are primarily engaged in the business of purchasing or otherwise acquiring mortgages and other liens on and interests in real estate.
Mezzanine loans may also have prepayment lockouts, penalties, minimum profit hurdles and other mechanisms to protect and enhance returns in the event of premature repayment. At December 31, 2022, our loan portfolio included one mezzanine loan with no carrying value. Preferred equity investments. Historically, we have invested in preferred equity investments in entities that own or acquire CRE properties.
Mezzanine loans may also have prepayment lockouts, penalties, minimum profit hurdles and other mechanisms to protect and enhance returns in the event of premature repayment. At December 31, 2023, our loan portfolio included one mezzanine loan with no carrying value. Preferred equity investments. Historically, we have invested in preferred equity investments in entities that own or acquire CRE properties.
The risks on our long-term financing agreements, principally our term financing facilities, are managed by seeking to match the maturity and repricing dates of our financed investments with the maturities and repricing dates of our long-term financing facilities.
The risks on our long-term financing agreements, principally our term financing facilities, are managed by seeking to match the maturities and repricing dates of our financed investments with the maturities and repricing dates of our long-term financing facilities.
With respect to our portfolio at December 31, 2022, our whole loan investments had loan-to-collateral value, or LTV, ratios that typically do not exceed 85%. Typically, our whole loans are structured with an original term of up to three years, with one-year extensions that bring the loan to a maximum term of five years.
With respect to our portfolio at December 31, 2023, our whole loan investments had loan-to-collateral value, or LTV, ratios that typically do not exceed 85%. Typically, our whole loans are structured with an original term of up to three years, with one-year extensions that bring the loan to a maximum term of five years.
At December 31, 2022, we held four investments in real estate acquired through direct equity investments and two investments in real estate acquired from lending activities (i.e. through the receipt of the deeds-in-lieu of foreclosure on the properties that collateralized former non-performing loans). At December 31, 2022, two of these investments were classified as held for sale.
At December 31, 2023, we held four investments in real estate acquired through direct equity investments and two investments in real estate acquired from lending activities (i.e. through the receipt of the deeds-in-lieu of foreclosure on the properties that collateralized former non-performing loans). At December 31, 2023, two of these investments were classified as held for sale.
(Back to Index) 14 (Back to Index) Our Manager may terminate the Management Agreement at its option, (A) in the event that we default in the performance or observance of any material term, condition or covenant contained in the Management Agreement and such default continues for a period of 30 days after written notice thereof, or (B) without payment of a termination fee by us, if we become regulated as an investment company under the Investment Company Act, with such termination deemed to occur immediately before such event.
Our Manager may terminate the Management Agreement at its option, (A) in the event that we default in the performance or observance of any material term, condition or covenant contained in the Management Agreement and such default continues for a period of 30 days after written notice thereof, or (B) without payment of a termination fee by us, if we become regulated as an investment company under the Investment Company Act, with such termination deemed to occur immediately before such event.
Additionally, we seek to match investment and financing maturity and repricing dates using securitization vehicles structured by our Manager and, subject to the availability of markets for securitization financings, we expect to continue to use securitizations in the future to accomplish our long-term match funding financing strategy.
Additionally, we seek to match investment and financing maturities and repricing dates using securitization vehicles structured by our Manager and, subject to the availability of markets for securitization financings, we expect to continue to use securitizations in the future to accomplish our long-term match funding financing strategy.
Our goal is to allocate 90% to 100% of our equity to our CRE assets. Managing our investment portfolio . At December 31, 2022, we managed $2.1 billion of assets, including $1.5 billion of assets that were financed and held in variable interest entities.
Our goal is to allocate 90% to 100% of our equity to our CRE assets. Managing our investment portfolio . At December 31, 2023, we managed $2.2 billion of assets, including $1.5 billion of assets that were financed and held in variable interest entities.
Historically, we have held “whole pool certificates” in mortgage loans, although, at December 31, 2022 and 2021, we had no whole pool certificates in our portfolios. Pursuant to existing SEC staff guidance, we consider whole pool certificates to be Qualifying Interests.
Historically, we have held “whole pool certificates” in mortgage loans, although, at December 31, 2023 and 2022, we had no whole pool certificates in our portfolios. Pursuant to existing SEC staff guidance, we consider whole pool certificates to be Qualifying Interests.
The Management Agreement’s current contract term ends on July 31, 2023, and the agreement provides for automatic one-year renewals on such date and on each July 31 thereafter until terminated. Our Board reviews our Manager’s performance annually.
The Management Agreement’s current contract term ends on July 31, 2024, and the agreement provides for automatic one-year renewals on such date and on each July 31 thereafter until terminated. Our Board reviews our Manager’s performance annually.
Additionally, our CRE loan portfolio comprised one fully reserved $4.7 million mezzanine loan at December 31, 2022. Our Business Strategy The core components of our business strategy are: Investment in CRE assets . We are currently invested in CRE whole loans, CRE mezzanine loans and CRE investments.
Additionally, our CRE loan portfolio comprised one fully reserved $4.7 million mezzanine loan at December 31, 2023. Our Business Strategy The core components of our business strategy are: Investment in CRE assets . We are currently invested in CRE whole loans, CRE mezzanine loans and CRE equity investments.
(Back to Index) 11 (Back to Index) CRE Investments We may invest directly in the ownership of CRE equity investments by making direct investments where NOL carryforwards exist and can absorb the creation of REIT taxable income or by restructuring CRE loans and taking control of the properties where we believe we can protect capital and ultimately generate capital appreciation.
(Back to Index) 10 (Back to Index) Investments in Real Estate We may invest directly in the ownership of CRE equity investments by making direct investments where NOL carryforwards exist and can absorb the creation of REIT taxable income or by restructuring CRE loans and taking control of the properties where we believe we can protect capital and ultimately generate capital appreciation.
(Back to Index) 5 (Back to Index) The negative impact of COVID-19 on our commercial mortgage-backed securities, or CMBS, investments and 2020 results created a net operating loss (“NOL”) carryforwards and net capital loss carryforwards (“CLCFs”).
(Back to Index) 7 (Back to Index) The negative impact of COVID-19 on our commercial mortgage-backed securities, or CMBS, investments and 2020 results created net operating loss (“NOL”) carryforwards and net capital loss carryforwards (“CLCFs”).
(Back to Index) 15 (Back to Index) Our other subsidiaries, RCC Commercial, Inc., or RCC Commercial, RCC Commercial II, Inc., or Commercial II, RCC Commercial III, Inc., or Commercial III, RCC TRS, LLC, or RCC TRS, Resource TRS, LLC, or Resource TRS, and RSO EquityCo, LLC, or RSO Equity, do not qualify for the Section 3(c)(5)(C) exclusion.
(Back to Index) 14 (Back to Index) RCC TRS, LLC, or RCC TRS, and our other former subsidiaries, RCC Commercial, Inc., or RCC Commercial, RCC Commercial II, Inc., or Commercial II, RCC Commercial III, Inc., or Commercial III, Resource TRS, LLC, or Resource TRS, and RSO EquityCo, LLC, or RSO Equity, do not qualify for the Section 3(c)(5)(C) exclusion.
Our site also contains our code of business conduct and ethics, corporate governance guidelines and the charters of the audit committee, nominating and governance committee and compensation committee of our Board. A complete list of our filings is available on the SEC’s website at http://www.sec.gov . (Back to Index) 16 (Back to Index)
Our site also contains our code of business conduct and ethics, corporate governance guidelines and the charters of the audit committee, nominating and environmental, social and governance committee and compensation committee of our Board. A complete list of our filings is available on the SEC’s website at http://www.sec.gov . (Back to Index) 15 (Back to Index)
(Back to Index) 7 (Back to Index) Floating-Rate Loan Portfolio and Borrowings As discussed in the “Managing our interest rate, pricing and liquidity risk” section above, our investments in floating-rate assets and utilization of floating-rate borrowings expose us to interest rate risk.
Floating-Rate Loan Portfolio and Borrowings As discussed in the “Managing our interest rate, pricing and liquidity risk” section above, our investments in floating-rate assets and utilization of floating-rate borrowings expose us to interest rate risk.
After we make investments, our Manager actively monitors them for early detection of trouble or deterioration. If a default occurs, we will use our senior management team’s asset management experience in seeking to mitigate the severity of any loss and to optimize the recovery from assets collateralizing the investment. Managing our interest rate, pricing and liquidity risk .
After we make investments, our Manager actively monitors them for early detection of trouble or deterioration. If a default occurs, we will use our senior management team’s asset management experience in seeking to mitigate the severity of any loss and to optimize the recovery from assets collateralizing the investment.
Risk Factors - Risks Related to Our Investments - We may face competition for suitable investments.” (Back to Index) 12 (Back to Index) Management Agreement We have a management agreement, amended and restated on July 31, 2020 and further amended on February 16, 2021, or the “Management Agreement,” with our Manager pursuant to which our Manager provides the day-to-day management of our operations.
Risk Factors - Risks Related to Our Investments - We may face competition for suitable investments.” (Back to Index) 11 (Back to Index) Management Agreement We have a management agreement, amended and restated on July 31, 2020 and further amended on February 16, 2021, May 6, 2022 and February 15, 2024, or the “Management Agreement,” with our Manager pursuant to which our Manager provides the day-to-day management of our operations.
Regulatory Aspects of Our Investment Strategy: Exclusion from Regulation Under the Investment Company Act We operate our business so as to be excluded from regulation under the Investment Company Act.
(Back to Index) 13 (Back to Index) Regulatory Aspects of Our Investment Strategy: Exclusion from Regulation Under the Investment Company Act We operate our business so as to be excluded from regulation under the Investment Company Act.
We do not intend to obtain ratings on these investments. We expect our typical A-note investments to have LTV ratios not exceeding 70% and will generally be structured with an original term of up to three years, with one-year extensions that bring the loan to a maximum term of five years. We expect to hold any A-note investments to maturity.
We expect our typical A-note investments to have LTV ratios not exceeding 70% and will generally be structured with an original term of up to three years, with one-year extensions that bring the loan to a maximum term of five years. We expect to hold any A-note investments to maturity.
We did not hold any preferred equity investments at December 31, 2022.
We did not hold any preferred equity investments at December 31, 2023.
In most cases the sponsors will need to fund additional equity into the properties to cover these costs as the property may not generate sufficient cash flow to pay these costs. At December 31, 2022, 88.8% of the par value of our CRE loan portfolio had interest rate caps in place with a weighted-average maturity of 1.1 years.
In most cases the sponsors will need to fund additional equity into the properties to cover these costs as the property may not generate sufficient cash flow to pay these costs. At December 31, 2023, 85.4% of the par value of our CRE loan portfolio had interest rate caps in place with a weighted-average maturity of six months.
(Back to Index) 10 (Back to Index) The following charts describe the property type and the geographic breakdown, by National Council of Real Estate Investment Fiduciaries (“NCREIF”) region of our CRE loan portfolio at December 31, 2022 (based on carrying value): The total CRE loan portfolio, at carrying value, was $2.0 billion at December 31, 2022.
(Back to Index) 9 (Back to Index) The following charts describe the property type and the geographic breakdown, by National Council of Real Estate Investment Fiduciaries (“NCREIF”) region of our CRE loan portfolio at December 31, 2023 (based on carrying value): The total CRE loan portfolio, at carrying value, was $1.8 billion at December 31, 2023.
We engage in a number of business activities that are vulnerable to interest rate, pricing and liquidity risk and we seek to manage those risks.
(Back to Index) 5 (Back to Index) Managing our interest rate, pricing and liquidity risk . We engage in a number of business activities that are vulnerable to interest rate, pricing and liquidity risk and we seek to manage those risks.
(2) Includes real estate-related right of use assets of $19.5 million, mortgage payable of $18.2 million, intangible assets of $8.9 million, lease liabilities of $42.9 million and other liabilities of $64,000. (3) Includes property held for sale-related liabilities of $3.0 million. (4) There are no stated rates associated with these investments.
(2) Includes real estate-related right of use assets of $19.2 million, mortgages payable of $41.8 million, intangible assets of $7.9 million, lease liabilities of $43.5 million and other liabilities of $27,000. (3) Includes property held for sale-related liabilities of $3.0 million. (4) There are no stated rates associated with these investments.
We do not intend to obtain ratings on these investments. We expect our typical B-note investments to have LTV ratios between 55% and 80% and will generally be structured with an original term of up to three years, with one-year extensions that bring the loan to a maximum term of five years.
We expect our typical B-note investments to have LTV ratios between 55% and 80% and will generally be structured with an original term of up to three years, with one-year extensions that bring the loan to a maximum term of five years. We expect to hold any B-note investments to maturity.
Our Manager’s investment committee has the discretion, without the need for further approval by our Board, to increase the amount of leverage we incur above our targeted range for individual asset classes subject, however, to any leverage constraints that may be imposed by existing financing arrangements. We use borrowing and securitization strategies to accomplish our long-term match funding financing strategy.
Our Manager’s investment committee has the discretion, without the need for further approval by our Board, to increase the amount of leverage we incur above our targeted range for individual asset classes subject, however, to any leverage constraints that may be imposed by existing financing arrangements.
(Back to Index) 9 (Back to Index) In addition to the accrued interest receivable on a B-note, we may earn fees charged to the borrower under the note or additional income by receiving principal payments in excess of the discounted price (below par value) we paid to acquire the note.
We did not hold any B-note investments at December 31, 2023. In addition to the accrued interest receivable on a B-note, we may earn fees charged to the borrower under the note or additional income by receiving principal payments in excess of the discounted price (below par value) we paid to acquire the note.
We did not hold any A-note investments at December 31, 2022. Subordinate interests in whole loans (B-notes ). To a lesser extent, we may invest in subordinate interests in whole loans, referred to as B-notes, which we will either directly originate or purchase from third parties. B-notes are loans secured by a first mortgage but are subordinated to an A-note.
We did not hold any A-note investments at December 31, 2023. (Back to Index) 8 (Back to Index) Subordinate interests in whole loans (B-notes ). To a lesser extent, we may invest in subordinate interests in whole loans, referred to as B-notes, which we will either directly originate or purchase from third parties.
The Mountain region constituted 16.2% of our portfolio, of which 68.8% was in Arizona, and its collateral comprised 76.5% multifamily properties. We view our investment and credit strategies as being adequately diversified across property types in the Southwest, Southeast and Mountain regions.
The Mountain region constituted 15.0% of our portfolio, of which 62.4% was in Arizona, and its collateral comprised 92.3% multifamily properties. We view our investment and credit strategies as being adequately diversified across property types in the Southwest, Southeast and Mountain regions.
Our unsecured junior subordinated debentures use three-month LIBOR as the contractual benchmark interest rate. In March 2021, the United Kingdom’s, or U.K.’s, Financial Conduct Authority (“FCA”) announced that it would cease publication of the one-week and the two-month USD LIBOR immediately after December 31, 2021, and cease publication of the remaining tenors immediately after June 30, 2023.
In March 2021, the United Kingdom’s, or U.K.’s, Financial Conduct Authority (“FCA”) announced that it would cease publication of the one-week and the two-month USD LIBOR immediately after December 31, 2021, and cease publication of the remaining tenors immediately after June 30, 2023. In July 2021, the U.S.
As funds become available for investment or reinvestment, we seek to maintain diversification by property type and geographic location while allocating our capital to investment opportunities that we believe are the most economically attractive.
We manage our investment risk by maintaining a diversified portfolio of CRE mortgage loans and other CRE-related investments. As funds become available for investment or reinvestment, we seek to maintain diversification by property type or geographic location while allocating our capital to investment opportunities that we believe are the most economically attractive.
Historically, we have used the London Interbank Offered Rate (“LIBOR”) as the benchmark interest rate for our floating-rate whole loans and we have been exposed to LIBOR through our floating-rate borrowings. Many of our floating-rate whole loans, CRE securitizations and term warehouse financing facilities included one-month LIBOR as the original contractual benchmark interest rate.
Historically, we have used the London Interbank Offered Rate (“LIBOR”) as the benchmark interest rate for our floating-rate whole loans and we have been exposed to LIBOR through our floating-rate borrowings.
At December 31, 2022, our CRE loan portfolio comprised $2.1 billion of floating-rate CRE whole loans with a weighted average spread of 3.78% over the one-month benchmark interest rates utilized, which have a weighted average floor of 0.68%, excluding one whole loan without a benchmark floor.
During the year ended December 31, 2023, we selectively originated three CRE loans with total commitments of $68.2 million. At December 31, 2023, our CRE loan portfolio at par comprised $1.9 billion of floating-rate CRE whole loans with a weighted average spread of 3.77% over the one-month benchmark interest rates utilized, which have a weighted average floor of 0.70%.
(Back to Index) 8 (Back to Index) Investment Portfolio The table below summarizes the amortized costs and net carrying amounts of our investments at December 31, 2022, classified by asset type (dollars in thousands, except amounts in footnotes): At December 31, 2022 Amortized Cost Net Carrying Amount (1) Percent of Portfolio Weighted Average Coupon Loans held for investment: CRE whole loans, floating-rate $ 2,052,890 $ 2,038,787 93.56 % 7.99% CRE mezzanine loan 4,700 — 0.00 % 10.00% 2,057,590 2,038,787 93.56 % Other investments: Investments in unconsolidated entities 1,548 1,548 0.07 % N/A (4) Investments in real estate (2) 88,132 88,132 4.04 % N/A (4) Properties held for sale (3) 50,744 50,744 2.33 % N/A (4) 140,424 140,424 6.44 % Total investment portfolio $ 2,198,014 $ 2,179,211 100.00 % (1) Net carrying amount includes an allowance for credit losses of $18.8 million.
Investment Portfolio The table below summarizes the amortized costs and net carrying amounts of our investments at December 31, 2023, classified by asset type (dollars in thousands, except amounts in footnotes): At December 31, 2023 Amortized Cost Net Carrying Amount (1) Percent of Portfolio Weighted Average Coupon Loans held for investment: CRE whole loans, floating-rate $ 1,852,393 $ 1,828,336 91.93 % 9.15% CRE mezzanine loan 4,700 — 0.00 % 10.00% 1,857,093 1,828,336 91.93 % Other investments: Investments in unconsolidated entities 1,548 1,548 0.08 % N/A (4) Investments in real estate (2) 99,338 99,338 4.99 % N/A (4) Properties held for sale (3) 59,580 59,580 3.00 % N/A (4) 160,466 160,466 8.07 % Total investment portfolio $ 2,017,559 $ 1,988,802 100.00 % (1) Net carrying amount includes an allowance for credit losses of $28.8 million.
The Southwest region constituted 23.2% of our portfolio, of which 100.0% was in Texas, and its collateral comprised 95.6% multifamily properties. The Southeast region constituted 21.5% of our portfolio, of which 79.5% was in Florida, and its collateral comprised 85.7% multifamily properties.
The Southwest region constituted 26.6% of our portfolio, of which 100.0% was in Texas, and its collateral comprised 96.1% multifamily properties. The Southeast region constituted 22.0% of our portfolio, of which 73.3% was in Florida, and its collateral comprised 80.1% multifamily properties.
B-note lenders have the same obligations, collateral and borrower as the A-note lender, but typically are subordinated in recovery upon a default to the A-note lender. B-notes share certain credit characteristics with second mortgages in that both are subject to greater credit risk with respect to the underlying mortgage collateral than the corresponding first mortgage or A-note.
B-notes share certain credit characteristics with second mortgages in that both are subject to greater credit risk with respect to the underlying mortgage collateral than the corresponding first mortgage or A-note. We do not intend to obtain ratings on these investments.
(2) Includes a right of use associated with an acquired ground lease of $42.4 million accounted for as an operating lease, an above-market lease intangible asset of $19.0 million and a customer list intangible of $402,000. Amortization of the above-market lease intangible is booked to real estate expenses on the consolidated statements of operations.
Also includes $44.9 million of construction in progress, which is also not depreciable until placed in service. (2) Primarily comprises a $19.2 million right of use asset, associated with a $43.2 million ground lease accounted for as an operating lease. Amortization is booked to real estate expenses on the consolidated statements of operations.
In July 2021, the U.S. Federal Reserve, in conjunction with the Alternative Reference Rates Committee, a steering committee comprising large U.S. financial institutions, has identified Secured Overnight Financing Rate (“SOFR”) as its preferred alternative rate for LIBOR. All variable rate loans originated by us beginning January 1, 2022 have been benchmarked to SOFR.
Federal Reserve, in conjunction with the Alternative Reference Rates Committee, a steering committee comprising large U.S. financial institutions, has identified Secured Overnight Financing Rate (“SOFR”) as its preferred alternative rate for LIBOR. Following this announcement, we began to transition the contractual benchmark rates of existing floating-rate whole loans and borrowings to alternate rates.
Our Manager and its affiliates also provide us with a Chief Financial Officer and a sufficient number of additional accounting, finance, tax and investor relations professionals.
Our Manager and its affiliates also provide us with a Chief Financial Officer and a sufficient number of additional accounting, finance, tax and investor relations professionals. Our Manager receives fees and is reimbursed for its expenses as follows: • A monthly base management fee equal to 1/12th of the amount of our equity multiplied by 1.50%.
The subordination of a B-note is generally evidenced by an intercreditor or participation agreement between the holders of the A-note and the B-note. In some instances, the B-note lender may require a security interest in the stock or other equity interests of the borrower as part of the transaction.
In some instances, the B-note lender may require a security interest in the stock or other equity interests of the borrower as part of the transaction. B-note lenders have the same obligations, collateral and borrower as the A-note lender, but typically are subordinated in recovery upon a default to the A-note lender.
Additionally, we have NOL carryforwards of $60.1 million and CLCFs of $1.0 million at our taxable REIT subsidiaries (“TRSs”). As of December 31, 2022, we have acquired equity investments in CRE properties to utilize CLCFs in our QRSs.
Additionally, we have NOL carryforwards of $60.2 million, of which $20.4 million have an indefinite carryforward period and $39.8 million begin to expire in 2044, and CLCFs of $1.0 million, which are set to expire on December 31, 2024, at our taxable REIT subsidiaries (“TRSs”).
Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources,” and Note 12 contained in “Item 8. Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements” of this report. We continuously monitor our compliance with all of the financial covenants.
Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements” of this report. We continuously monitor our compliance with all of the financial covenants. We were in compliance with all financial covenants, as defined in the respective agreements, at December 31, 2023. Diversification of investments .
Substantially all of our CRE loans held at December 31, 2022 were whole loans. We expect to hold our whole loans to maturity. Senior interests in whole loans (A-notes ). We may invest in senior interests in whole loans, referred to as A-notes, either directly originated or purchased from third parties.
At December 31, 2023, our loan portfolio included 2 related-party whole loan syndications with a par value of $46.4 million. Senior interests in whole loans (A-notes ). We may invest in senior interests in whole loans, referred to as A-notes, either directly originated or purchased from third parties. We do not intend to obtain ratings on these investments.
The following table summarizes the investments in real estate at December 31, 2022 (in thousands, except amounts in footnotes): December 31, 2022 Cost Basis Accumulated Depreciation & Amortization Carrying Value Assets acquired: Investments in real estate, equity: Investments in real estate (1) $ 123,219 $ (2,251 ) $ 120,968 Right of use assets (2) 19,664 (205 ) 19,459 Intangible assets (3) 11,474 (2,594 ) 8,880 Subtotal 154,357 (5,050 ) 149,307 Investments in real estate from lending activities: Properties held for sale (4) 53,769 — 53,769 Total 208,126 (5,050 ) 203,076 Liabilities assumed: Investments in real estate, equity: Mortgage payable 18,089 155 18,244 Other liabilities 247 (183 ) 64 Lease liabilities (5) 43,260 (393 ) 42,867 Subtotal 61,596 (421 ) 61,175 Investments in real estate from lending activities: Liabilities held for sale 3,025 — 3,025 Total 64,621 (421 ) 64,200 Total net investments in real estate and properties held for sale (6) $ 143,505 $ 138,876 (1) Includes $38.4 million of land, which is not depreciable.
The following table summarizes the investments in real estate at December 31, 2023 (in thousands, except amounts in footnotes): December 31, 2023 Cost Basis Accumulated Depreciation & Amortization Carrying Value Assets acquired: Investments in real estate, equity: Investments in real estate (1) $ 162,662 $ (5,041 ) $ 157,621 Right of use assets (2)(3) 19,664 (478 ) 19,186 Intangible assets (4) 11,474 (3,592 ) 7,882 Subtotal 193,800 (9,111 ) 184,689 Investments in real estate from lending activities: Properties held for sale (5) 62,605 — 62,605 Total 256,405 (9,111 ) 247,294 Liabilities assumed: Investments in real estate, equity: Mortgages payable 40,297 1,489 41,786 Other liabilities 247 (220 ) 27 Lease liabilities (3)(6) 43,538 — 43,538 Subtotal 84,082 1,269 85,351 Investments in real estate from lending activities: Liabilities held for sale (7) 3,025 — 3,025 Total 87,107 1,269 88,376 Total net investments in real estate and properties held for sale (8) $ 169,298 $ 158,918 (1) Includes $38.4 million of land, which is not depreciable.
(Back to Index) 6 (Back to Index) At December 31, 2022, our CRE securitizations, financing facilities with debt outstanding, and mortgage payable were as follows (in thousands): Outstanding Borrowings (1) Value of Collateral Equity at Risk (2) At December 31, 2022: CRE Securitizations ACR 2021-FL1 $ 671,397 $ 802,643 $ 127,420 ACR 2021-FL2 562,159 700,000 133,000 Senior Secured Financing Facility Massachusetts Mutual Life Insurance Company $ 87,890 $ 196,837 $ 105,818 CRE -Term Warehouse Financing Facilities JPMorgan Chase Bank, N.A. $ 186,783 $ 255,095 $ 68,768 Morgan Stanley Mortgage Capital Holdings LLC 141,505 198,455 56,817 Mortgage Payable Readycap Commercial, LLC $ 18,244 $ 25,400 $ 6,602 Total $ 1,667,978 $ 2,178,430 (1) CRE securitizations, senior secured financing facility and mortgage payable include deferred debt issuance costs.
At December 31, 2023, our financing arrangements were as follows (in thousands): Outstanding Borrowings (1) Value of Collateral Equity at Risk (2) At December 31, 2023: CRE Securitizations ACR 2021-FL1 $ 640,797 $ 770,460 $ 127,420 ACR 2021-FL2 563,773 700,000 133,000 Senior Secured Financing Facility Massachusetts Mutual Life Insurance Company $ 61,568 $ 157,722 $ 93,518 CRE -Term Warehouse Financing Facilities JPMorgan Chase Bank, N.A. $ 74,694 $ 125,044 $ 49,570 Morgan Stanley Mortgage Capital Holdings LLC 93,894 129,037 35,471 Mortgages Payable ReadyCap Commercial, LLC $ 19,365 $ 25,400 $ 5,672 Oceanview Life and Annuity Company (3) 7,330 58,339 34,180 Florida Pace Funding Agency (3) 15,091 — — Total $ 1,476,512 $ 1,966,002 (1) CRE securitizations, senior secured financing facility and mortgages payable include deferred debt issuance costs.
We generate our income primarily from the spread between the revenues we receive from our assets and the cost to finance our ownership of those assets, including corporate debt. In December 2019, a novel strain of coronavirus (“COVID-19”) was identified.
We generate our income primarily from the spread between the revenues we receive from our interest-bearing assets and the cost to finance our ownership of those assets, including corporate debt. We also derive rental income from our direct equity investments in commercial real estate property. We typically target transitional floating-rate CRE loans between $10.0 million and $100.0 million.
These equity investments offer the opportunity for enhanced capital appreciation returns that may be reinvested into the loan origination pipeline when and if realized. We typically target transitional floating-rate CRE loans between $10.0 million and $100.0 million. During the year ended December 31, 2022 we originated 19 CRE loans with total commitments of $610.8 million.
In previous years we have acquired equity investments in CRE properties to utilize CLCFs in our REIT. These equity investments offer the opportunity for capital appreciation returns that may be reinvested into the loan origination pipeline when and if realized.
The CRE securitizations, senior secured financing facility, term warehouse financing facilities and mortgage payable charge a floating rate of interest. For more information concerning our CRE securitizations, senior secured financing facility, term facilities and mortgage payable, see “Item 7.
(3) Value of collateral and equity at risk related to Oceanview Life and Annuity Company also applies to Florida Pace Funding Agency. The CRE securitizations, senior secured financing facility, term warehouse financing facilities, mortgages payable with ReadyCap Commercial, LLC and Oceanview Life and Annuity Company charge a floating rate of interest.
(5) Lease liabilities include one ground lease at a hotel property with a remaining term of 93 years. Lease expense for this liability for the year ended December 31, 2022 was $1.1 million. (6) Excludes items of working capital, either acquired or assumed. Competition See “Item 1A.
(5) Includes one property acquired in November 2020 and one property acquired via deed-in-lieu of foreclosure in June 2023. (6) Primarily comprises a $43.2 million ground lease with a remaining term of 93 years. Lease expenses for the year ended December 31, 2023 were $2.7 million. (7) Comprises an operating lease liability.
Removed
The resulting spread of COVID-19 throughout the globe led the World Health Organization to designate COVID-19 as a pandemic and numerous countries, including the U.S, to declare national emergencies.
Added
The mortgage payable with Florida Pace Funding Agency charges a fixed rate of interest. For more information concerning our financing arrangements, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources,” and Note 11 contained in “Item 8.
Removed
Many countries responded to the initial and ensuing outbreaks of COVID-19 by instituting quarantines and restrictions on travel and limiting operations of non-essential offices and retail centers, which resulted in the closure or remote operation of non-essential businesses and increased rates of unemployment and market disruption in connection with the economic uncertainty.
Added
(Back to Index) 6 (Back to Index) We use borrowing and securitization strategies to accomplish our long-term match funding financing strategy.
Removed
While the U.S. and certain countries around the world have eased restrictions and financial markets and unemployment rates have stabilized to some degree, the pandemic continues to cause uncertainty in the U.S. and global economies, generally, and the CRE industry in particular.
Added
At December 31, 2023, our entire portfolio of floating rate whole loans and floating rate borrowings have transitioned to SOFR.
Removed
The aforementioned quarantines and travel restrictions contributed significantly to economic disruptions across the country that directly impacted our borrowers and their ability to pay and to stay current with their debt obligations in 2019 and 2020, causing significant increases in our provisions for credit losses.
Added
At December 31, 2023, after the utilization of the dividends paid deduction, we estimate that we will generate $19.0 million of taxable income that we will offset with our available NOLs. We have $46.6 million of NOL carryforwards, which was reported on our tax return filed in October 2023 for the 2022 tax year.
Removed
During this height of the pandemic, we used a variety of legal and structural options to manage credit risk effectively, including through forbearance and extension provisions or agreements.
Added
We also have $121.9 million of CLCFs from prior years, which are set to expire on December 31, 2025.
Removed
As of December 31, 2022, we have substantially reversed those provisions due to significant improvements in our current and expected macroeconomic operating environments as well as due to improvements in collateral operating performance and market liquidity. We continue to actively and responsibly manage corporate liquidity and operations in light of the market disruptions caused by COVID-19.
Added
Substantially all of our CRE loans held at December 31, 2023 were whole loans. We expect to hold our whole loans to maturity. Whole Loan Participations.
Removed
However, it is inherently difficult to accurately assess the continuing impact of the pandemic as well as other domestic or global events on our revenues, profitability and financial position. In response, we are focused on maintaining sufficient liquidity while still growing our loan origination business.
Added
We may opportunistically invest in participations of whole loans with third-parties or with related parties, whereby we purchase or otherwise share in the ownership interests of a whole loan made by another financial institution (the lead financial institution) to a borrower with whom we do not have a direct lending relationship on a pari passu basis.
Removed
We continuously monitor the effects of domestic and global events on our operations and financial position to ensure that we remain responsive and adaptable to the dynamic changes in our operating environment.
Added
In this arrangement the lead financial institution fully maintains the lending relationship and all communications with the borrower; however, we re-underwrite the investment subject to our underwriting standards for whole loans prior to investing. This type of investment allows us to strategically diversify risk, share in the profits of the lead financial institution and further diversify our asset holdings.
Removed
Our 2020 tax return, completed in October 2021, resulted in NOL carryforwards of $47.7 million and CLCFs of $136.9 million, including net capital loss carryforwards from prior years, at our qualified REIT subsidiaries ("QRSs"). Our 2021 tax return, completed in October 2022, resulted in NOL utilization of $1.1 million and CLCF utilization of $15.0 million.
Added
We expect our investments in participation loans to have LTV ratios not to exceed 85%. At December 31, 2023, our loan portfolio included 2 related-party whole loan participations with a par value of $59.7 million. Whole Loan Syndications.
Removed
We were in compliance with all financial covenants, as defined in the respective agreements, at December 31, 2022. Diversification of investments . We manage our investment risk by maintaining a diversified portfolio of CRE mortgage loans and other CRE-related investments.
Added
We may also opportunistically invest in the syndications of whole loans with third-parties or with related parties, whereby we co-originate a whole loan to a borrower with another financial institution on a pari passu basis, as well as maintain a direct lending relationship with the borrower.
Removed
Additionally, all of our floating-rate whole loans contain provisions that provide for the transition of the contractual benchmark interest rate to an alternative rate.
Added
In this arrangement each lender in the syndicate has a separate promissory note with the borrower, subject to a co-lender agreement. This type of investment allows us to strategically diversify risk, as well as further diversify our asset holdings and borrower base. We expect our investments in whole loan syndications to have LTV ratios not to exceed 85%.
Removed
At December 31, 2022, our loan portfolio had a carrying value of $2.0 billion of floating rate loans, 68.3% or $1.4 billion of which have interest rates tied to LIBOR and 31.7% or $646.2 million of which have interest rates tied to SOFR. In September 2021 and January 2022, the term warehouse financing facilities with JPMorgan Chase Bank, N.A.
Added
B-notes are loans secured by a first mortgage but are subordinated to an A-note. The subordination of a B-note is generally evidenced by an intercreditor or participation agreement between the holders of the A-note and the B-note.
Removed
(“JPMorgan Chase”) and Morgan Stanley Mortgage Capital Holdings LLC (“Morgan Stanley”), respectively, were amended to allow for the transition to alternative rates, including rates tied to SOFR, subject to benchmark transition events.
Added
(3) Refer to Note 9 in the Notes to the Consolidated Financial Statements for additional information on our remaining operating leases. (4) Primarily comprises a franchise intangible of $4.7 million, a management contract intangible of $2.9 million and a customer list intangible of $223,000.
Removed
Additionally, during the year ended December 31, 2022, we entered into a loan agreement to finance the acquisition of a student housing complex, which uses SOFR as its benchmark interest rate.

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Item 1A. Risk Factors

Risk Factors — what could go wrong, per management

74 edited+19 added−37 removed292 unchanged
Biggest change(Back to Index) 17 (Back to Index) • Increases in interest rates and other factors could reduce the value of our investments, result in reduced earnings or losses and reduce our ability to pay distributions. • Changes in the method for determining the benchmark rate (LIBOR or a replacement of LIBOR) may adversely affect the value of our loans, investments and borrowings and could affect our results of operations. • We record some of our portfolio investments, including those classified as assets held for sale, at fair value as estimated by our management and, as a result, there will be uncertainty as to the value of these investments. • We may face competition for suitable investments. • Many of our investments may be illiquid, which may result in our realizing less than their recorded value should we need to sell such investments quickly. • Our investments in real estate and commercial mortgage loans, mezzanine loans and CRE equity investments are subject to the risks inherent in owning the real estate securing or underlying those investments that could result in losses to us. • Our investments in real estate are subject to particular conditions that may have a negative impact on our results of operations. • Our investments in real estate are illiquid.
Biggest change(Back to Index) 16 (Back to Index) • Many of our investments may be illiquid, which may result in our realizing less than their recorded value should we need to sell such investments quickly. • Our investments in real estate and commercial mortgage loans, mezzanine loans and CRE equity investments are subject to the risks inherent in owning the real estate securing or underlying those investments that could result in losses to us. • Our investments in real estate are subject to particular conditions that may have a negative impact on our results of operations. • Our investments in real estate are illiquid.
A REIT may own up to 100% of the securities of one or more TRSs. A TRS may earn specified types of income or hold specified assets that would not be qualifying income or assets if earned or held directly by the parent REIT. Both the subsidiary and the REIT must jointly elect to treat the subsidiary as a TRS.
A REIT may own up to 100% of the securities of one or more TRSs. A TRS may earn types of income or hold assets that would not be qualifying income or assets if earned or held directly by the parent REIT. Both the subsidiary and the REIT must jointly elect to treat the subsidiary as a TRS.
Net operating income of an income producing property can be affected by, among other things: • tenant mix, success of tenant businesses, tenant bankruptcies and property management decisions; • property location and condition; • competition from comparable types of properties; • shifts in consumer habits or adoption of telework policies; • changes in laws that increase operating expenses or limit rents that may be charged; • any need to address environmental contamination at the property; • the occurrence of any uninsured casualty at the property; • changes in national, regional or local economic conditions and/or the conditions of specific industry segments in which the lessees may operate; (Back to Index) 28 (Back to Index) • declines in regional or local real estate values; • declines in regional or local rental or occupancy rates; • increases in interest rates, real estate tax rates and other operating expenses; • the availability of debt or equity financing; • increases in costs of construction material; • changes in governmental rules, regulations and fiscal policies, including environmental legislation and zoning laws; and • acts of God, terrorism, pandemic, social unrest and civil disturbances.
Net operating income of an income producing property can be affected by, among other things: • tenant mix, success of tenant businesses, tenant bankruptcies and property management decisions; • property location and condition; • competition from comparable types of properties; • shifts in consumer habits or adoption of telework policies; • changes in laws that increase operating expenses or limit rents that may be charged; • any need to address environmental contamination at the property; • the occurrence of any uninsured casualty at the property; • changes in national, regional or local economic conditions and/or the conditions of specific industry segments in which the lessees may operate; • declines in regional or local real estate values; • declines in regional or local rental or occupancy rates; • increases in interest rates, real estate tax rates and other operating expenses; • the availability of debt or equity financing; • increases in costs of construction material; • changes in governmental rules, regulations and fiscal policies, including environmental legislation and zoning laws; and • acts of God, terrorism, pandemic, social unrest and civil disturbances.
There is no requirement that a domestic TRS distribute its after-tax net income to its parent REIT or their stockholders and our U.S. TRSs may determine not to make any distributions to us. However, non-U.S.
There is no requirement that a domestic TRS distribute its after-tax net income to its parent REIT or their stockholders and our U.S. TRS may determine not to make any distributions to us. However, non-U.S.
In addition, we will incur a 4% nondeductible excise tax on the amount, if any, by which our distributions in any calendar year are less than the sum of: • 85% of our ordinary income for that year; • 95% of our capital gain net income for that year; and (Back to Index) 38 (Back to Index) • 100% our undistributed taxable income from prior years.
In addition, we will incur a 4% nondeductible excise tax on the amount, if any, by which our distributions in any calendar year are less than the sum of: • 85% of our ordinary income for that year; • 95% of our capital gain net income for that year; and (Back to Index) 35 (Back to Index) • 100% our undistributed taxable income from prior years.
Revenue Procedure 2011-16, as modified and superseded by Revenue Procedure 2014-51, provides a safe harbor pursuant to which we will not be required to redetermine the fair market value of the real property securing a loan for purposes of the REIT gross income and asset tests in connection with a loan modification that is: (1) occasioned by a borrower default; or (2) made at a time when we reasonably believe that the modification to the loan will substantially reduce a significant risk of default on the original loan.
(Back to Index) 37 (Back to Index) Revenue Procedure 2011-16, as modified and superseded by Revenue Procedure 2014-51, provides a safe harbor pursuant to which we will not be required to redetermine the fair market value of the real property securing a loan for purposes of the REIT gross income and asset tests in connection with a loan modification that is: (1) occasioned by a borrower default; or (2) made at a time when we reasonably believe that the modification to the loan will substantially reduce a significant risk of default on the original loan.
Management’s Discussion and Analysis of Financial Condition and Results of Operation - Liquidity and Capital Resources.” If any of our CRE debt securitizations fail to meet collateralization or other tests relevant to the most senior debt issued and outstanding by the CRE debt securitization issuer, an event of default may occur under that CRE debt securitization.
Management’s Discussion and Analysis of Financial Condition and Results of Operation - Liquidity and Capital Resources.” If any of our CRE debt securitizations fail to meet collateralization, interest coverage or other tests relevant to the most senior debt issued and outstanding by the CRE debt securitization issuer, an event of default may occur under that CRE debt securitization.
If that occurs, our Manager’s ability to manage the CRE debt securitization likely would be terminated and our ability to attempt to cure any defaults in the CRE debt securitization would be limited, which would increase the likelihood of a reduction or elimination of cash flow and returns to us in those CLOs for an indefinite time.
If that occurs, our Manager’s ability to manage the CRE debt securitization likely would be terminated and our ability to attempt to cure any defaults in the CRE debt securitization would be limited, which would increase the likelihood of a reduction or elimination of cash flow and returns to us in those CRE debt securitizations for an indefinite time.
In addition, we will indemnify our Manager, ACRES and their officers and affiliates for any actions taken by them in good faith. (Back to Index) 35 (Back to Index) We have not established a minimum distribution payment level and we cannot assure you of our ability to make distributions in the future.
In addition, we will indemnify our Manager, ACRES and their officers and affiliates for any actions taken by them in good faith. (Back to Index) 32 (Back to Index) We have not established a minimum distribution payment level and we cannot assure you of our ability to make distributions in the future.
While we believe that our allowance for credit losses at December 31, 2022 is adequate to cover our anticipated losses, we cannot assure you that it will not increase in the future. Any increase in our allowance for credit losses will reduce our income and, if sufficiently large, could cause us to incur significant losses.
While we believe that our allowance for credit losses at December 31, 2023 is adequate to cover our anticipated losses, we cannot assure you that it will not increase in the future. Any increase in our allowance for credit losses will reduce our income and, if sufficiently large, could cause us to incur significant losses.
We are subject to other risks in connection with any acquisition, development and redevelopment/expansion activities, including the following: (Back to Index) 30 (Back to Index) • acquisition or construction costs of a project may be higher than projected, potentially making the project unfeasible or unprofitable; • development, redevelopment or expansions may take considerably longer than expected, delaying the commencement due to supply chain disruptions; • we may be unable to obtain zoning, occupancy or other governmental approvals; and • occupancy rates and rents may not meet our projections and the project may not be accretive.
We are subject to other risks in connection with any acquisition, development and redevelopment/expansion activities, including the following: • acquisition or construction costs of a project may be higher than projected, potentially making the project unfeasible or unprofitable; • development, redevelopment or expansions may take considerably longer than expected, delaying the commencement due to supply chain disruptions; • we may be unable to obtain zoning, occupancy or other governmental approvals; and • occupancy rates and rents may not meet our projections and the project may not be accretive.
Using leverage subjects us to risks associated with debt financing, including the risks that: • the cash provided by our operating activities will not be sufficient to meet required payments of principal and interest, • the cost of financing may increase relative to the income from the assets financed, reducing the income we have available to pay distributions, and • our investments may have maturities that differ from the maturities of the related financing and, consequently, the risk that the terms of any refinancing we obtain will not be as favorable as the terms of existing financing.
Using leverage subjects us to risks associated with debt financing, including the risks that: • the cash provided by our operating activities will not be sufficient to meet required payments of principal and interest, • the cost of financing may increase relative to the income from the assets financed, reducing the income we have available to pay distributions, and (Back to Index) 18 (Back to Index) • our investments may have maturities that differ from the maturities of the related financing and, consequently, the risk that the terms of any refinancing we obtain will not be as favorable as the terms of existing financing.
(Back to Index) 18 (Back to Index) Risks Related to Impact of Current Economic Conditions If current economic and market conditions were to deteriorate, our ability to obtain the capital and financing necessary for growth may be limited, which could limit our profitability, ability to make distributions and the market price of our common stock.
(Back to Index) 17 (Back to Index) Risks Related to Impact of Current Economic Conditions If current economic and market conditions were to deteriorate, our ability to obtain the capital and financing necessary for growth may be limited, which could limit our profitability, ability to make distributions and the market price of our common stock.
In certain situations, we may: • acquire investments subject to rights of senior classes and servicers under inter-creditor or servicing agreements; • acquire only a minority and/or non-controlling participation in an underlying investment; • co-invest with third parties through partnerships, joint ventures or other entities, thereby acquiring non-controlling interests; or • rely on independent third-party management or strategic partners with respect to the management of an asset.
In certain situations, we may: • acquire investments subject to rights of senior classes and servicers under inter-creditor or servicing agreements; • acquire only a minority and/or non-controlling participation in an underlying investment; • co-invest with third parties through partnerships, joint ventures or other entities, thereby acquiring non-controlling interests; or (Back to Index) 25 (Back to Index) • rely on independent third-party management or strategic partners with respect to the management of an asset.
(Back to Index) 33 (Back to Index) Risks Related to Our Organization and Structure Our charter and bylaws contain provisions that may inhibit potential acquisition bids that you and other stockholders may consider favorable, and the market price of our common stock may be lower as a result.
(Back to Index) 30 (Back to Index) Risks Related to Our Organization and Structure Our charter and bylaws contain provisions that may inhibit potential acquisition bids that you and other stockholders may consider favorable, and the market price of our common stock may be lower as a result.
(Back to Index) 36 (Back to Index) Rapid changes in the values of our real estate-related investments may make it more difficult for us to maintain our qualification as a REIT or exclusion from regulation under the Investment Company Act.
(Back to Index) 33 (Back to Index) Rapid changes in the values of our real estate-related investments may make it more difficult for us to maintain our qualification as a REIT or exclusion from regulation under the Investment Company Act.
(Back to Index) 37 (Back to Index) We may realize excess inclusion income that would increase our tax liability and that of our stockholders. Excess inclusion income could result if we hold a residual interest in a REMIC or if we were to own an interest in a taxable mortgage pool.
(Back to Index) 34 (Back to Index) We may realize excess inclusion income that would increase our tax liability and that of our stockholders. Excess inclusion income could result if we hold a residual interest in a REMIC or if we were to own an interest in a taxable mortgage pool.
Many credit providers, including banks, may need to obtain additional capital before they will be able to expand their lending activities. We are unable to evaluate the effects these programs and conditions will have upon our financial condition, income, or ability to make distributions to our stockholders. ITEM 1B. UNRESOLVED STAFF COMMENTS None.
Many credit providers, including banks, may need to obtain additional capital before they will be able to expand (Back to Index) 38 (Back to Index) their lending activities. We are unable to evaluate the effects these programs and conditions will have upon our financial condition, income, or ability to make distributions to our stockholders. ITEM 1B. UNRESOLVED STAFF COMMENTS None.
In addition, the liquidity of the equity securities of CLOs is constrained and, because they represent a leveraged investment in the CRE debt securitization’s assets, the value of the equity securities will generally have greater fluctuations than the value of the underlying collateral.
In addition, the liquidity of the equity securities of CRE debt securitizations is constrained and, because they represent a leveraged investment in the CRE debt securitization’s assets, the value of the equity securities will generally have greater fluctuations than the value of the underlying collateral.
If our CRE debt securitization financings fail to meet their performance tests, including over-collateralization requirements, our net income and cash flow from these CRE debt securitizations will be eliminated.
If our CRE debt securitization financings fail to meet their performance tests, including over-collateralization and interest coverage requirements, our net income and cash flow from these CRE debt securitizations will be eliminated.
Our commercial mortgage loans and mezzanine loans are subject to the risks inherent in owning the real estate securing or underlying those investments that could result in losses to us.
Our investments in real estate and commercial mortgage loans, mezzanine loans and CRE equity investments are subject to the risks inherent in owning the real estate securing or underlying those investments that could result in losses to us.
Our Manager has great latitude within the broad investment guidelines in determining the types of investments it makes for us. Poor investment decisions could impair our ability to make distributions to our stockholders. Termination of the Management Agreement by us without cause is difficult and could be costly.
Our Manager has great latitude within the broad investment guidelines in determining the types of investments it makes for us. Poor investment decisions could impair our ability to make distributions to our stockholders. (Back to Index) 29 (Back to Index) Termination of the Management Agreement by us without cause is difficult and could be costly.
(Back to Index) 41 (Back to Index) In addition, we have acquired in the past and may continue to acquire mezzanine loans, which are loans secured by equity interest in a partnership or limited liability company that directly or indirectly owns real property, and preferred equity investments, which are senior equity interests in entities that own or acquire real properties.
In addition, we have acquired in the past and may continue to acquire mezzanine loans, which are loans secured by equity interest in a partnership or limited liability company that directly or indirectly owns real property, and preferred equity investments, which are senior equity interests in entities that own or acquire real properties.
If we issue debt securities, the terms may restrict our ability to make cash distributions, require us to obtain approval to sell our assets or otherwise restrict our operations in ways that could make it difficult to execute our investment strategy and achieve our investment objectives.
(Back to Index) 20 (Back to Index) If we issue debt securities, the terms may restrict our ability to make cash distributions, require us to obtain approval to sell our assets or otherwise restrict our operations in ways that could make it difficult to execute our investment strategy and achieve our investment objectives.
In the event that we are unable to meet these collateral obligations, our financial condition could deteriorate rapidly. Risks Related to Our Operations We may change our investment strategy without stockholder consent, which may result in riskier investments than those currently targeted.
In the event that we are unable to meet these collateral obligations, our financial condition could deteriorate rapidly. (Back to Index) 21 (Back to Index) Risks Related to Our Operations We may change our investment strategy without stockholder consent, which may result in riskier investments than those currently targeted.
We currently have investments in mezzanine debt. These types of investments carry a higher degree of risk of loss than senior secured debt investments such as our whole loan investments because, in the event of default and foreclosure, holders of senior liens will be paid in full before mezzanine investors.
These types of investments carry a higher degree of risk of loss than senior secured debt investments such as our whole loan investments because, in the event of default and foreclosure, holders of senior liens will be paid in full before mezzanine investors.
The participants of these agreements may have interests that may not be aligned with ours and may be able to take actions to which we object but will be bound if our investment interest represents a noncontrolling interest. We may be adversely affected by such actions.
The participants of these agreements may have interests that may not be aligned with ours and may be able to take actions to which we object but will be bound if our investment interest represents a non-controlling interest. We may be adversely affected by such actions.
(Back to Index) 32 (Back to Index) Our Manager and ACRES will face conflicts of interest relating to the allocation of investment opportunities and such conflicts may not be resolved in our favor, which could limit our ability to acquire assets and, in turn, limit our ability to make distributions and reduce your overall investment return.
Our Manager and ACRES will face conflicts of interest relating to the allocation of investment opportunities and such conflicts may not be resolved in our favor, which could limit our ability to acquire assets and, in turn, limit our ability to make distributions and reduce your overall investment return.
Accordingly, unlike other REITs, we may be subject to additional risk regarding our ability to qualify and maintain our qualification as a REIT. (Back to Index) 22 (Back to Index) Historically, we have financed most of our investments through CRE debt securitizations and have retained the equity.
Accordingly, unlike other REITs, we may be subject to additional risk regarding our ability to qualify and maintain our qualification as a REIT. Historically, we have financed most of our investments through CRE debt securitizations and have retained the equity.
Additionally, our co-lenders, servicers or joint venture partners may have financial difficulties and may not be able to perform their financial obligations in accordance with their respective agreements, in which case we may be obligated to perform on their behalf.
Additionally, our co-lenders, servicers or joint venture partners may have financial difficulties and may not be able to perform their (Back to Index) 28 (Back to Index) financial obligations in accordance with their respective agreements, in which case we may be obligated to perform on their behalf.
We risk loss of principal on defaulted CRE loans we hold to the extent of any deficiency between the value we can realize from the sale of the collateral securing the loan upon foreclosure and the loan’s principal and accrued interest.
(Back to Index) 26 (Back to Index) We risk loss of principal on defaulted CRE loans we hold to the extent of any deficiency between the value we can realize from the sale of the collateral securing the loan upon foreclosure and the loan’s principal and accrued interest.
(Back to Index) 40 (Back to Index) We may lose our REIT qualification or be subject to a penalty tax if we modify mortgage loans or acquire distressed debt in a way that causes us to fail our REIT gross income or asset tests.
We may lose our REIT qualification or be subject to a penalty tax if we modify mortgage loans or acquire distressed debt in a way that causes us to fail our REIT gross income or asset tests.
The extent of the impact of COVID-19 will depend on future developments, including new information that may emerge about the severity of the pandemic, the timing, scope and effectiveness of additional governmental responses to the pandemic, including the potential re-imposition of quarantines, states of emergencies, restrictions on travel and stay-at-home orders and the ensuing reactions by consumers, companies, governmental entities and global markets.
The extent of the impact of COVID-19, or any future pandemics or epidemics, will depend on future developments, including new information that may emerge about the severity of the pandemic or epidemic, the timing, scope and effectiveness of additional governmental responses to the pandemic or epidemic, including the potential re-imposition of quarantines, states of emergencies, restrictions on travel and stay-at-home orders and the ensuing reactions by consumers, companies, governmental entities and global markets.
Excess inclusion income also is generated if we issue debt obligations, such as certain CRE debt securitizations, with two or more maturities and the terms of the payments on these obligations bore a relationship to the payments that we received on our mortgage related securities securing those debt obligations.
Excess inclusion income also is generated if we issue debt obligations, such as certain CRE debt securitizations, with two or more maturities and the terms of the payments on these obligations bear a relationship to the payments that we receive on our mortgage related securities securing those debt obligations.
Accordingly, if over-collateralization tests are not met, distributions on the subordinated debt and equity we hold in these CLOs will cease, resulting in a substantial reduction in our cash flow.
Accordingly, if over-collateralization tests are not met, distributions on the subordinated debt and equity we hold in these CRE debt securitizations will cease, resulting in a substantial reduction in our cash flow.
(Back to Index) 21 (Back to Index) We are exposed to loss if lenders under our repurchase agreements, warehouse facilities, senior secured financing facility or other short-term financings liquidate the assets securing those facilities.
We are exposed to loss if lenders under our repurchase agreements, warehouse facilities, senior secured financing facility or other short-term financings liquidate the assets securing those facilities.
(Back to Index) 27 (Back to Index) We may not have control over certain of our CRE loans and CRE investments. Our ability to manage our portfolio of loans and investments may be limited by the form in which they are made.
We may not have control over certain of our CRE loans and CRE investments. Our ability to manage our portfolio of loans and investments may be limited by the form in which they are made.
(Back to Index) 29 (Back to Index) The CECL model may require us to increase our allowance for credit losses and therefore may have a material adverse effect on our business, financial condition and results of operations.
The CECL model may require us to increase our allowance for credit losses and therefore may have a material adverse effect on our business, financial condition and results of operations.
As a result, we may generate less cash flow than taxable income in a particular year. It is also possible that a loss that we treat as an ordinary loss would be recharacterized as a capital loss.
As a result, we may generate less cash flow than taxable income in a particular year. It is also possible that a loss that we treat as an ordinary loss would be re-characterized as a capital loss.
(Back to Index) 23 (Back to Index) Depending upon market conditions, we intend to seek financing through CRE debt securitizations, which would expose us to risks relating to the accumulation of assets for use in the CRE debt securitizations.
Depending upon market conditions, we intend to seek financing through CRE debt securitizations, which would expose us to risks relating to the accumulation of assets for use in the CRE debt securitizations.
However, our Board may amend our bylaws in the future to repeal this exemption. (Back to Index) 34 (Back to Index) Business combinations.
However, our Board may amend our bylaws in the future to repeal this exemption. (Back to Index) 31 (Back to Index) Business combinations.
In addition, when purchasing CLO equity, we have relied and may rely on opinions or advice of counsel regarding the qualification of interests in the debt of such CLOs for U.S. federal income tax purposes. The inaccuracy of any such opinions, advice or statements may adversely affect our REIT qualification and result in significant corporate-level tax.
In addition, when purchasing CRE debt securitization equity, we have relied and may rely on opinions or advice of counsel regarding the qualification of interests in the debt of such CRE debt securitizations for U.S. federal income tax purposes. The inaccuracy of any such opinions, advice or statements may adversely affect our REIT qualification and result in significant corporate-level tax.
The B-notes in which we may invest may be subject to additional risks relating to the privately negotiated structure and terms of the transaction, which may result in losses to us. We may invest in B-notes.
(Back to Index) 27 (Back to Index) The B-notes in which we may invest may be subject to additional risks relating to the privately negotiated structure and terms of the transaction, which may result in losses to us. We may invest in B-notes.
Dividends paid by REITs are generally not eligible for the reduced 15% maximum tax rate for dividends paid to individuals (20% for those with taxable income above certain thresholds that are adjusted annually under current law).
Dividends paid by REITs do not qualify for the reduced tax rates provided for under current law. Dividends paid by REITs are generally not eligible for the reduced 15% maximum tax rate for dividends paid to individuals (20% for those with taxable income above certain thresholds that are adjusted annually under current law).
Although at December 31, 2022, all of our CRE debt securitizations met their performance tests, we cannot assure you that our CRE debt securitizations will satisfy the performance tests in the future. For information concerning compliance by our CRE debt securitizations with their over-collateralization tests, see “Item 7.
Although at December 31, 2023, all of our CRE debt securitizations met their performance tests, we cannot assure you that our CRE debt securitizations will satisfy the performance tests in the future. For information concerning compliance by our CRE debt securitizations with their over-collateralization tests and interest coverage tests, see “Item 7.
Risks Related to O ur REIT Status and Certain Other Tax Items Complying with REIT requirements may cause us to forgo otherwise attractive opportunities.
Risks Related to Our REIT Status and Certain Other Tax Items Complying with REIT requirements may cause us to forgo otherwise attractive opportunities.
(Back to Index) 25 (Back to Index) Computer malware, viruses, computer hacking and phishing attacks have become more prevalent in our industry and may occur on our systems. We rely heavily on our financial, accounting and other data processing systems.
Computer malware, viruses, computer hacking and phishing attacks have become more prevalent in our industry and may occur on our systems. We rely heavily on our financial, accounting and other data processing systems.
Exantas Real Estate TRS, Inc. (“XAN RE TRS”) will pay federal, state and local income tax on its taxable income, and its after-tax net income is available for distribution to us but is not required to be distributed to us. Income that is not distributed to us by our U.S.
Exantas Real Estate TRS, Inc. (“XAN RE TRS”) will pay federal, state and local income tax on its taxable income, and its after-tax net income is available for distribution to us but is not required to be distributed to us.
(Back to Index) 20 (Back to Index) The rapid development of the pandemic and the resulting economic effects have created uncertainty surrounding the ultimate impact of the COVID-19 pandemic on the global economy generally, and the CRE business in particular.
The rapid development of the pandemic and the resulting economic effects have created uncertainty surrounding the ultimate impact of the COVID-19 pandemic on the global economy generally, and the CRE business in particular.
If long-term rates increase, the market value of our assets would decline. Even if assets underlying investments we may own in the future are guaranteed by one or more persons, including government or government-sponsored agencies, those guarantees do not protect against declines in market value of the related assets caused by interest rate changes.
Even if assets underlying investments we may own in the future are guaranteed by one or more persons, including government or government-sponsored agencies, those guarantees do not protect against declines in market value of the related assets caused by interest rate changes.
In connection with the forward-looking statements that appear in this annual report, you should carefully review the factors discussed below and the cautionary statements referred to in “Forward-Looking Statements.” Risk Factors Summary Our risk factors include discussion of risks to our business attributable to the impact of current economic conditions, risks related to our financing, risks related to our operations, risks related to our investments, risks related to our Manager, risks related to our organization and structure, tax risks and general risks, including as follows: • If current economic and market conditions were to deteriorate, our ability to obtain the capital and financing necessary for growth may be limited, which could limit our profitability, ability to make distributions and the market price of our common stock. • The outbreak of widespread contagious disease, such as COVID-19, has caused, and may continue to cause, disruptions to the United States and global economy and to our business, which has had, and may continue to have, an adverse impact on our financial condition, our results of operations and our liquidity and capital resources. • Our portfolio has been financed in material part through the use of leverage that may reduce the return on our investments and cash available for distribution. • Our repurchase agreements, warehouse facilities and other short-term financings have credit risks that could result in losses. • We are exposed to loss if lenders under our repurchase agreements, warehouse facilities, senior secured financing facility or other short-term financings liquidate the assets securing those facilities.
In connection with the forward-looking statements that appear in this annual report, you should carefully review the factors discussed below and the cautionary statements referred to in “Forward-Looking Statements.” Risk Factors Summary Our risk factors include discussion of risks to our business attributable to the impact of current economic conditions, risks related to our financing, risks related to our operations, risks related to our investments, risks related to our Manager, risks related to our organization and structure, tax risks and general risks, including as follows: • If current economic and market conditions were to deteriorate, our ability to obtain the capital and financing necessary for growth may be limited, which could limit our profitability, ability to make distributions and the market price of our common stock. • Our portfolio has been financed in material part through the use of leverage that may reduce the return on our investments and cash available for distribution. • Our repurchase agreements, warehouse facilities and other short-term financings have credit risks that could result in losses. • We are exposed to loss if lenders under our repurchase agreements, warehouse facilities, senior secured financing facility or other short-term financings liquidate the assets securing those facilities.
As a result, we cannot project the ultimate adverse impact of the COVID-19 pandemic on the global economy or our business, including our financial condition and performance.
As a result, we cannot project the ultimate adverse impact of COVID-19 and any future pandemics or epidemics, on the global economy or our business, including our financial condition and performance.
Since the base management fee is based on our outstanding equity, our Manager could be incentivized to recommend strategies that increase our equity, and there may be circumstances where increasing our equity will not optimize the returns for our stockholders.
Since the base management fee is based on our outstanding equity, our Manager could be incentivized to recommend strategies that increase our equity, and there may be circumstances where increasing our equity will not optimize the returns for our stockholders. In addition to its base management fee, our Manager is entitled to receive incentive compensation.
CRE debt securitization equity receives distributions from the CRE debt securitization only if the CRE debt securitization generates enough income to first pay the holders of its debt securities and its expenses. • If our CRE debt securitization financings fail to meet their performance tests, including over-collateralization requirements, our net income and cash flow from these CRE debt securitizations will be eliminated. • If we issue debt securities, the terms may restrict our ability to make cash distributions, require us to obtain approval to sell our assets or otherwise restrict our operations in ways that could make it difficult to execute our investment strategy and achieve our investment objectives. • Depending upon market conditions, we intend to seek financing through CRE debt securitizations, which would expose us to risks relating to the accumulation of assets for use in the CRE debt securitizations. • We may change our investment strategy without stockholder consent, which may result in riskier investments than those currently targeted. • Our business is highly dependent on communications and information systems, and systems failures or cybersecurity incidents could significantly disrupt our business, which may, in turn, negatively affect the market price of our common stock and our ability to operate our business. • Declines in the market values of our investments may reduce periodic reported results, credit availability and our ability to make distributions.
CRE debt securitization equity receives distributions from the CRE debt securitization only if the CRE debt securitization generates enough income to first pay the holders of its debt securities and its expenses. • If our CRE debt securitization financings fail to meet their performance tests, including over-collateralization and interest coverage requirements, our net income and cash flow from these CRE debt securitizations will be eliminated. • If we issue debt securities, the terms may restrict our ability to make cash distributions, require us to obtain approval to sell our assets or otherwise restrict our operations in ways that could make it difficult to execute our investment strategy and achieve our investment objectives. • Depending upon market conditions, we intend to seek financing through CRE debt securitizations, which would expose us to risks relating to the accumulation of assets for use in the CRE debt securitizations. • We may change our investment strategy without stockholder consent, which may result in riskier investments than those currently targeted. • Our business is highly dependent on communications and information systems, and systems failures or cybersecurity incidents could significantly disrupt our business, which may, in turn, negatively affect the market price of our common stock and our ability to operate our business. • Declines in the market values of our investments may reduce periodic reported results, credit availability and our ability to make distributions. • Increases in interest rates and other factors could reduce the value of our investments, result in reduced earnings or losses and reduce our ability to pay distributions. • We record some of our portfolio investments, including those classified as assets held for sale, at fair value as estimated by our management and, as a result, there will be uncertainty as to the value of these investments. • We may face competition for suitable investments.
Our business is highly dependent on communications and information systems, and systems failures or cybersecurity incidents could significantly disrupt our business, which may, in turn, negatively affect the market price of our common stock and our ability to operate our business. We depend on the information systems of our Manager, ACRES and third parties.
(Back to Index) 22 (Back to Index) Our business is highly dependent on communications and information systems, and systems failures or cybersecurity incidents could significantly disrupt our business, which may, in turn, negatively affect the market price of our common stock and our ability to operate our business.
Investing in mezzanine debt, preferred equity, mezzanine or other subordinated tranches of CMBS involves greater risks of loss than senior secured debt investments. Subject to maintaining our qualification as a REIT and exclusion from regulation under the Investment Company Act, we may invest in mezzanine debt, preferred equity and mezzanine or other subordinated tranches of CMBS.
Subject to maintaining our qualification as a REIT and exclusion from regulation under the Investment Company Act, we may invest in mezzanine debt, preferred equity and mezzanine or other subordinated tranches of CMBS. We currently have investments in mezzanine debt.
A prolonged economic slowdown or lengthy or severe recession causing declining real estate values could impair our investments and harm our operations. We believe the risks associated with our business will be more severe during periods of economic slowdown or recession if these periods are accompanied by declining real estate values.
We believe the risks associated with our business will be more severe during periods of economic slowdown or recession if these periods are accompanied by declining real estate values.
Financing our REIT qualifying assets with repurchase agreements and warehouse facilities could adversely affect our ability to qualify as a REIT. We have entered into and intend to enter into, sale and repurchase agreements under which we nominally sell certain REIT qualifying assets to a counterparty and simultaneously enter into an agreement to repurchase the sold assets.
We have entered into and intend to enter into, sale and repurchase agreements under which we nominally sell certain REIT qualifying assets to a counterparty and simultaneously enter into an agreement to repurchase the sold assets.
The REIT provisions of the Code substantially limit our ability to hedge MBS and related borrowings. Under these provisions, our annual gross income from qualifying and non-qualifying hedges of our borrowings, together with any other income not generated from qualifying real estate assets, cannot exceed 25% of our gross income.
Under these provisions, our annual gross income from non-qualifying hedges of our borrowings, together with any other income not generated from qualifying real estate assets, cannot exceed 25% of our gross income.
However, there will be little or no income available to the CLO equity if there are excessive defaults by the issuers of the underlying collateral, which would significantly reduce the value of that interest. Reductions in the value of the equity interests we have in a CRE debt securitization, if we determine that they are other-than-temporary, will reduce our earnings.
However, there will be little or no income available to the CRE debt securitization equity if there are excessive defaults by the issuers of the underlying collateral, which would significantly reduce the value of that interest.
Any failure or interruption of our systems or cyber-attacks or security breaches of our networks or systems could cause delays or other problems in our lending activities.
We depend on the information systems of our Manager, ACRES and third parties. Any failure or interruption of our systems or cyber-attacks or security breaches of our networks or systems could cause delays or other problems in our lending activities.
(Back to Index) 24 (Back to Index) We believe earnings available for distribution ("EAD"), a non-GAAP financial measure, is an appropriate measure to evaluate our performance and ability to pay dividends; however, in certain instances EAD may not be reflective of actual economic results.
Furthermore, a change in our asset allocation could result in our making investments in asset categories different from those described in this report. We believe earnings available for distribution ("EAD"), a non-GAAP financial measure, is an appropriate measure to evaluate our performance and ability to pay dividends; however, in certain instances EAD may not be reflective of actual economic results.
While we may, through our TRSs retain earnings as new capital, we are subject to REIT qualification requirements that limit the value of TRS stock and securities relative to the other assets owned by a REIT.
While we may, through our TRSs retain earnings as new capital, we are subject to REIT qualification requirements that limit the value of TRS stock and securities relative to the other assets owned by a REIT. A prolonged economic slowdown or lengthy or severe recession causing declining real estate values could impair our investments and harm our operations.
Increases in interest rates and other factors could reduce the value of our investments, result in reduced earnings or losses and reduce our ability to pay distributions. A significant risk associated with our investment in CRE-related loans, and, historically, our CMBS and other debt investments is the risk that either or both of long-term and short-term interest rates increase significantly.
A significant risk associated with our investment in CRE-related loans, and, historically, our CMBS and other debt investments is the risk that either or both of long-term and short-term interest rates increase significantly. If long-term rates increase, the market value of our assets would decline.
FCA announced that it would phase out LIBOR as a benchmark by the end of 2021. In March 2021, the FCA announced that it would cease publication of the one-week and two-month USD LIBOR immediately after December 31, 2021 and cease publication of the remaining tenors immediately after June 30, 2023. Additionally, the U.S.
In March 2021, the United Kingdom’s, or U.K.’s, Financial Conduct Authority (“FCA”) announced that it would cease publication of the one-week and the two-month USD LIBOR immediately after December 31, 2021, and cease publication of the remaining tenors immediately after June 30, 2023. In July 2021, the U.S.
Legislative, regulatory or administrative changes could be enacted or promulgated at any time, either prospectively or with retroactive effect, and may adversely affect our stockholders and/or us.
Legislative, regulatory or administrative changes could be enacted or promulgated at any time, either prospectively or with retroactive effect, and may adversely affect our stockholders and/or us. The U.S. federal tax rules that affect REITs are under review constantly by persons involved in the legislative process, the IRS and the U.S.
We will monitor the compliance of our investments in TRSs with the rules relating to value of assets and transactions not on an arm’s-length basis. We cannot assure you, however, that we will be able to comply with such rules. (Back to Index) 39 (Back to Index) Complying with REIT requirements may limit our ability to hedge effectively.
We cannot assure you, however, that we will be able to comply with such rules. (Back to Index) 36 (Back to Index) Complying with REIT requirements may limit our ability to hedge effectively. The REIT provisions of the Code substantially limit our ability to hedge MBS and related borrowings.
Our Manager’s fee structure may not create proper incentives, and the incentive compensation we pay our Manager may increase the investment risk of our portfolio.
Our Manager’s fee structure may not create proper incentives, and the incentive compensation we pay our Manager may increase the investment risk of our portfolio. Our Manager is entitled to receive a base management fee equal to 1/12th of our equity, as defined in the Management Agreement, multiplied by 1.50%.
TRS will not be subject to the REIT 90% distribution requirement and therefore will not be available for distributions to our stockholders. We anticipate that the aggregate value of the securities we hold in our TRS will be less than 20% of the value of our total assets, including our TRS securities.
We anticipate that the aggregate value of the securities we hold in our TRS will be less than 20% of the value of our total assets, including our TRS securities. We will monitor the compliance of our investments in TRSs with the rules relating to value of assets and transactions not on an arm’s-length basis.
The COVID-19 pandemic has had, and may continue to have, a material adverse impact on our financial condition, liquidity and results of operations and the market price of our common stock and preferred stock. We expect that these impacts are likely to continue to some extent as the longer-term macro-economic effects of the pandemic continue.
Outbreaks of contagious diseases, such as COVID-19 or any future pandemic or epidemic, may have a material adverse impact on our financial condition, liquidity and results of operations and the market price of our common stock and preferred stock.
Changes in the method for determining the benchmark rate (LIBOR or a replacement of LIBOR) may adversely affect the value of our loans, investments and borrowings and could affect our results of operations.
The transition away from reference rates and the use of alternative replacement reference rates may adversely affect the value of our loans, investments and borrowings and could affect our results of operations.
Federal Reserve encouraged companies to cease using LIBOR as a benchmark rate by December 31, 2021. The U.S. Federal Reserve, in conjunction with the Alternative Reference Rates Committee, a steering committee comprising large U.S. financial institutions, has identified SOFR, a new index calculated by short-term repurchase agreements backed by U.S. Treasury securities, as its preferred alternative rate for LIBOR.
Federal Reserve, in conjunction with the Alternative Reference Rates Committee, a steering committee comprising large U.S. financial institutions, identified Secured Overnight Financing Rate (“SOFR”) as its preferred alternative rate for LIBOR. Following this announcement, we began to transition the contractual benchmark rates of existing floating-rate whole loans and borrowings to alternate rates.
For each of the second, third and fourth full calendar quarters following the calendar quarter ended December 31, 2022, the calculation will be the excess of the product of 20% and the excess of our EAD for the calendar quarter(s) following September 30, 2022, over the product of our book value equity in the calendar quarter(s) following September 30, 2022, and 7% per annum, over the sum of any incentive compensation paid to our Manager with respect to the prior calendar quarter(s) following September 30, 2022 (other than the most recent calendar quarter).
This compensation is equal to the excess of (1) the product of (a) 20% and (b) the excess of (i) our EAD, as defined in the Management Agreement, for the previous 12-month period, over (ii) the product of (A) our book value equity (as defined in the Management Agreement) in the previous 12-month period, and (B) 7% per annum, over (2) the sum of any incentive compensation paid to our Manager with respect to the first three calendar quarters of such previous 12-month period; provided, however, that no incentive compensation shall be payable with respect to any calendar quarter unless EAD (as defined in the Management Agreement) for the 12 most recently completed calendar quarters (or such lesser number of completed calendar quarters from September 30, 2022) in the aggregate is greater than zero.
Historically, we have utilized LIBOR as a benchmark interest rate for the pricing of our CRE loans and have been exposed to LIBOR through our issuance of notes on our securitizations and the use of term facilities and repurchase agreements. In July 2017, the U.K.
Historically, we have used the London Interbank Offered Rate (“LIBOR”) as the benchmark interest rate for our floating-rate whole loans and we have been exposed to LIBOR through our floating-rate borrowings.
Removed
In December 2019, COVID-19 was identified and the resulting global proliferation of the virus led the World Health Organization to designate COVID-19 as a pandemic and numerous countries, including the U.S., to declare national emergencies.
Added
We expect that while the direct impacts of COVID-19 have subsided, indirect impacts are likely to continue to some extent as the longer-term macro-economic effects of the pandemic continue.
Removed
Many countries have responded to the outbreak by instituting quarantines and restrictions on travel, which has resulted in the closure or remote operation of non-essential businesses.
Added
(Back to Index) 19 (Back to Index) Financing our REIT qualifying assets with repurchase agreements and warehouse facilities could adversely affect our ability to qualify as a REIT.
Removed
While the U.S. and certain countries around the world have eased restrictions and financial markets and unemployment rates have stabilized to some degree, the pandemic continues to cause uncertainty on the U.S. and global economies, generally, and the CRE business in particular.
Added
Reductions in the value of the equity interests we have in a CRE debt securitization, if we determine that they are other-than-temporary, will reduce our earnings.

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Item 5. Market for Registrant's Common Equity

Market for Common Equity — stock, dividends, buybacks

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Biggest change(Back to Index) 44 (Back to Index) The following table presents information about our common stock repurchases made during the year ended December 31, 2022 in accordance with our repurchase program (dollars in thousands, except per share amounts): Common Stock Total Number of Shares Purchased Average Price Paid per Share (1) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs Approximate Dollar Value of Shares that may yet be Purchased under the Plans or Programs January 3, 2022 - January 31, 2022 153,522 $ 12.53 153,522 $ 14,409 February 1, 2022 - February 28, 2022 85,777 12.05 85,777 13,377 March 1, 2022 - March 31, 2022 75,253 12.33 75,253 12,450 April 1, 2022 - April 29, 2022 60,410 13.06 60,410 11,662 May 2, 2022 - May 31, 2022 45,743 10.91 45,743 11,164 June 1, 2022 - June 30, 2022 131,577 9.19 131,577 9,957 July 1, 2022 - July 29, 2022 58,719 8.22 58,719 9,476 August 1, 2022 - August 31, 2022 81,586 9.58 81,586 8,696 September 1, 2022 - September 30, 2022 58,122 9.43 58,122 8,149 October 3, 2022 - October 31, 2022 39,057 8.69 39,057 7,810 November 1, 2022 - November 30, 2022 42,940 10.14 42,940 7,376 December 1, 2022 - December 31, 2022 16,272 9.76 16,272 7,217 Total 848,978 $ 10.75 848,978 (1) The average price paid per share as reflected above includes broker fees and commissions.
Biggest change(Back to Index) 42 (Back to Index) The following table presents information about our common stock repurchases made during the year ended December 31, 2023 in accordance with our repurchase program (dollars in thousands, except per share amounts): Common Stock Total Number of Shares Purchased Average Price Paid per Share (1) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs Approximate Dollar Value of Shares that may yet be Purchased under the Plans or Programs January 19, 2023 - January 31, 2023 9,822 $ 9.78 9,822 $ 7,121 February 1, 2023 - February 28, 2023 24,754 9.48 24,754 6,887 March 1, 2023 - March 31, 2023 45,168 9.39 45,168 6,464 April 3, 2023 - April 28, 2023 45,645 9.48 45,645 6,032 May 1, 2023 - May 31, 2023 62,001 8.61 62,001 5,499 June 1, 2023 - June 30, 2023 27,770 8.41 27,770 5,266 July 3, 2023 - July 31, 2023 29,242 9.01 29,242 5,003 August 1, 2023 - August 31, 2023 36,137 8.77 36,137 4,687 September 4, 2023 - September 29, 2023 17,918 8.29 17,918 4,539 October 2, 2023 - October 31, 2023 19,199 7.83 19,199 4,389 November 1, 2023 - November 30, 2023 42,291 7.68 42,291 14,065 December 1, 2023 - December 29, 2023 539,138 7.88 539,138 9,827 Total 899,085 $ 8.24 899,085 (1) The average price paid per share as reflected above includes broker fees and commissions.
NOL can generally be carried forward to offset both ordinary taxable income and capital gains in future years. The Tax Cuts and Jobs Act (“TCJA”) along with revisions made by the Coronavirus Aid, Relief, and Economic Security Act (“CARES”) reduced the deduction for NOLs to 80% of taxable income and granted an indefinite carryforward period.
NOL can generally be carried forward to offset both ordinary taxable income and capital gains in future years. The Tax Cuts and Jobs Act (“TCJA”) along with revisions made by the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act reduced the deduction for NOLs to 80% of taxable income and granted an indefinite carryforward period.
Our 8.625% Fixed-to-Floating Series C Cumulative Redeemable Preferred Stock, or Series C Preferred Stock, is listed on the NYSE and trades under the symbol “ACRPrC.” We have declared and paid the specified quarterly dividend per share of $0.5390625 through January 2023. No dividends are currently in arrears on the Series C Preferred Stock.
Our 8.625% Fixed-to-Floating Series C Cumulative Redeemable Preferred Stock, or Series C Preferred Stock, is listed on the NYSE and trades under the symbol “ACRPrC.” We have declared and paid the specified quarterly dividend per share of $0.5390625 through January 2024. No dividends are currently in arrears on the Series C Preferred Stock.
In May 2021, and subsequently in June 2021, we issued the 7.875% Series D Cumulative Redeemable Preferred Stock, or Series D Preferred Stock, which is listed on the NYSE and trades under the symbol “ACRPrD.” On October 4, 2021, we and our Manager entered into an Equity Distribution Agreement with JonesTrading Institutional Services LLC, as placement agent, pursuant to which we may issue and sell from time to time up to 2.2 million shares of the Series D Preferred Stock.
Our 7.875% Series D Cumulative Redeemable Preferred Stock, or Series D Preferred Stock, is listed on the NYSE and trades under the symbol “ACRPrD.” In October 2021, we and our Manager entered into an Equity Distribution Agreement with JonesTrading Institutional Services LLC, as placement agent, pursuant to which we may issue and sell from time to time up to 2.2 million shares of the Series D Preferred Stock.
Manager Incentive Plan at December 31, 2022: (a) (b) (c) Plan Category Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans Excluding Securities Reflected in Column (a) Equity compensation approved by security holders: Restricted stock (1) 583,333 N/A Equity compensation plans not approved by security holders N/A N/A Total 583,333 1,034,155 (1) All restricted stock awards consist of unvested shares.
Manager Incentive Plan at December 31, 2023: (a) (b) (c) Plan Category Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans Excluding Securities Reflected in Column (a) Equity compensation approved by security holders: Restricted stock (1) 416,675 N/A Equity compensation plans not approved by security holders N/A N/A Total 416,675 1,034,155 (1) All restricted stock awards consist of unvested shares.
Performance Graph The following line graph presentation compares cumulative total shareholder returns on our common stock with the Russell 2000 Index and the FTSE NAREIT All REIT Index for the period from December 31, 2017 to December 31, 2022.
Performance Graph The following line graph presentation compares cumulative total shareholder returns on our common stock with the Russell 2000 Index and the FTSE NAREIT All REIT Index for the period from December 31, 2018 to December 31, 2023.
The graph and table assume that $100 was invested in each of our common stock, the Russell 2000 Index and the FTSE NAREIT All REIT Index on December 31, 2017, and that all dividends were reinvested. This data is furnished by the Research Data Group. *$100 invested on December 31, 2017 in stock or index, including reinvestment of dividends.
The graph and table assume that $100 was invested in each of our common stock, the Russell 2000 Index and the FTSE NAREIT All REIT Index on December 31, 2018, and that all dividends were reinvested. This data is furnished by the Research Data Group.
In December 2021, we issued additional Series D Preferred Stock pursuant to this agreement. We have declared and paid the specified quarterly dividend per share of $0.4921875 through January 2023. No dividends are currently in arrears on the Series D Preferred Stock. Issuer Purchases of Equity Securities In March 2016, our Board approved a securities repurchase program.
We have declared and paid the specified quarterly dividend per share of $0.4921875 through January 2024. No dividends are currently in arrears on the Series D Preferred Stock. Issuer Purchases of Equity Securities In March 2016, our Board approved a securities repurchase program.
The following table summarizes our current and estimated tax loss carryforwards (dollars in millions): Tax Year Recognized REIT (QRS) Tax Loss Carryforwards TRS Tax Loss Carryforwards Tax Asset Item Operating Capital Operating Capital Net Operating Loss Carryforwards: Cumulative as of 2021 2021 Return $ 46.6 $ — $ 60.1 $ — Net Capital Loss Carryforwards: Cumulative as of 2021 2021 Return — 121.9 — 1.0 Total tax asset estimates $ 46.6 $ 121.9 $ 60.1 $ 1.0 Useful life Unlimited 5 years Various 5 years During the year ended December 31, 2021, we generated $1.1 million of taxable income which was offset by our cumulative NOL, leaving $46.6 million to carry forward to future years.
The following table summarizes our current and estimated tax loss carryforwards (dollars in millions): Tax Year Recognized REIT (QRS) Tax Loss Carryforwards TRS Tax Loss Carryforwards Tax Asset Item Operating Capital Operating Capital Net Operating Loss Carryforwards: Cumulative as of 2022 2022 Return $ 46.6 $ — $ 60.2 $ — Net Capital Loss Carryforwards: Cumulative as of 2022 2022 Return — 121.9 — 1.0 Total tax asset estimates $ 46.6 $ 121.9 $ 60.2 $ 1.0 Useful life Unlimited 5 years Various 5 years At December 31, 2023, we had $46.6 million of cumulative NOL to carry forward to future years.
We also recognized net capital loss carryforwards as finalized in our 2020 tax return. During the year ended December 31, 2022, all taxable income was distributed in the form of a preferred share distribution, and therefore, no common share distribution was required.
We also recognized net capital loss carryforwards as finalized in our 2020 tax return. During the year ended December 31, 2023, all taxable income was offset by our NOLs, and therefore, no common share distribution was required.
The following table summarizes certain information about our 2005 Stock Incentive Plan, Third Amended and Restated Omnibus Equity Compensation Plan and ACRES Commercial Realty Corp.
Such information was obtained through our registrar and transfer agent. (Back to Index) 41 (Back to Index) The following table summarizes certain information about our 2005 Stock Incentive Plan, Third Amended and Restated Omnibus Equity Compensation Plan and ACRES Commercial Realty Corp.
In November 2021, our Board authorized and approved the continued use of our existing share repurchase program to repurchase an additional $20.0 million of our outstanding common stock. At December 31, 2022, $7.2 million remains available under this repurchase program.
In November 2021, our Board authorized and approved the continued use of our existing share repurchase program to repurchase an additional $20.0 million of our outstanding common stock. In November 2023, our Board authorized and approved the repurchase of an additional $10.0 million of outstanding shares of both common and preferred stock.
These tax assets are analyzed and disclosed quarterly in our financial statements. As of December 31, 2022, our TRSs have $39.9 million of pre-TCJA NOLs, some of which are set to expire beginning in 2044, $20.2 million of NOLs with an indefinite carryforward period and net capital loss carryforwards of $1.0 million.
At December 31, 2023, our TRSs have $60.2 million of NOLs comprising: $39.8 million of pre-TCJA NOLs, some of which are set to expire beginning in 2044 and $20.4 million of NOLs with an indefinite carryforward period. Additionally, our TRSs have cumulative total net capital losses of $1.0 million, which are set to expire on December 31, 2024.
The 206 holders of record include Cede & Co., which holds shares as nominee for The Depository Trust Company, which itself holds shares on behalf of the beneficial owners of our common stock. Such information was obtained through our registrar and transfer agent.
At March 4, 2024, there were 7,748,393 shares of common stock outstanding held by 196 holders of record. The 196 holders of record include Cede & Co., which holds shares as nominee for The Depository Trust Company, which itself holds shares on behalf of the beneficial owners of our common stock.
Additionally, $15.0 million of net capital gains was reported on our tax return for the year ended December 31, 2021. This was offset with our cumulative total net capital losses, leaving $121.9 million to carry forward to future years. No capital losses expired during 2021. We also have tax assets in our taxable REIT subsidiaries (“TRS”).
Additionally, we have cumulative total net capital losses of $121.9 million, which are set to expire on December 31, 2025. We also have tax assets in our taxable REIT subsidiaries (“TRS”). These tax assets are analyzed and disclosed quarterly in our financial statements.
Removed
On February 16, 2021, we completed a one-for-three reverse stock split, which reduced the number of shares of our common stock that were issued and outstanding immediately prior to the effectiveness of the reverse stock split.
Added
At December 31, 2023, $9.8 million remains available under this repurchase program.
Removed
At the date of the stock split, the number of shares of our authorized common stock was not affected by the reverse stock split and the par value of our common stock remained unchanged at $0.001 per share.
Removed
The reverse stock split reduced the number of shares of our common stock that were outstanding at February 16, 2021 from 29,194,460 to 9,731,371 after the cancellation of all fractional shares. No fractional shares were issued in connection with the reverse stock split.
Removed
Stockholders who otherwise held fractional shares of our common stock as a result of the reverse stock split received a cash payment in lieu of such fractional shares.
Removed
(Back to Index) 43 (Back to Index) In May 2021, we filed an amendment to our charter to decrease the total number of authorized shares from 225,000,000 to 141,666,666 shares, consisting of 41,666,666 shares of common stock, $0.001 par value per share (decreased from 125,000,000 shares of common stock) and 100,000,000 shares of preferred stock, $0.001 par value per share.
Removed
The reduction in authorized shares of common stock is in proportion to the 1-for-3 reverse split noted above. At March 6, 2023, there were 8,685,452 shares of common stock outstanding held by 206 holders of record.

Item 7. Management's Discussion & Analysis

Management's Discussion & Analysis (MD&A) — revenue / margin commentary

209 edited+60 added−120 removed122 unchanged
Biggest changeThe following table provides a reconciliation from GAAP net (loss) income allocable to common shares to EAD allocable to common shares for the periods presented (dollars in thousands, except per share amounts and amounts in the footnotes): Years Ended December 31, 2022 Per Share Data 2021 Per Share Data Net (loss) income allocable to common shares - GAAP $ (8,799 ) $ (1.00 ) $ 18,036 $ 1.85 Realized gain on sale of investment in real estate (1,870 ) (0.21 ) — — Net (loss) income allocable to common shares - GAAP, adjusted $ (10,669 ) $ (1.21 ) $ 18,036 $ 1.85 Reconciling items from continuing operations: Non-cash equity compensation expense 3,562 0.40 1,722 0.18 Non-cash provision for (reversal of) CRE credit losses 12,295 1.39 (21,262 ) (2.18 ) Realized loss on sale of investment in real estate (372 ) (0.04 ) — — Realized loss on core activities (1)(2) — — (6,988 ) (0.72 ) Unrealized gain on core activities (1) — — (878 ) (0.09 ) Real estate depreciation and amortization 5,113 0.58 2,860 0.29 Non-cash amortization of discounts or premiums associated with borrowings 1,271 0.14 6,937 0.71 Net income from non-core assets (3) (787 ) (0.09 ) (247 ) (0.03 ) Reconciling items from CRE assets: Net interest income on legacy CRE assets (3) (29 ) — (637 ) (0.06 ) Earnings Available for Distribution allocable to common shares $ 10,384 $ 1.17 $ (457 ) $ (0.05 ) Weighted average common shares - diluted on Earnings Available for Distribution allocable to common shares 8,877 9,736 Earnings Available for Distribution per common share - diluted $ 1.17 $ (0.05 ) (1) In March 2021, the CMBS portfolio was sold for $3.0 million, representing a total realized loss of $5.2 million that was included in EAD during the year ended December 31, 2021.
Biggest changeThe following table provides a reconciliation from GAAP net (loss) income allocable to common shares to EAD allocable to common shares for the periods presented (dollars in thousands, except per share amounts and amounts in the footnotes): Years Ended December 31, 2023 Per Share Data 2022 Per Share Data Net income (loss) allocable to common shares - GAAP $ 2,968 $ 0.35 $ (8,799 ) $ (1.00 ) Realized gain on sale of investment in real estate (745 ) (0.09 ) (1,870 ) (0.21 ) Net income (loss) allocable to common shares - GAAP, adjusted $ 2,223 $ 0.26 $ (10,669 ) $ (1.21 ) Reconciling items from continuing operations: Non-cash equity compensation expense 2,578 0.30 3,562 0.40 Non-cash provision for CRE credit losses 10,902 1.27 12,295 1.39 Realized gain (loss) on sale of investment in real estate 745 0.09 (372 ) (0.04 ) Real estate depreciation and amortization 4,013 0.47 5,113 0.58 Non-cash amortization of discounts or premiums associated with borrowings — — 1,271 0.14 Net income (loss) from non-core assets (1) 104 0.01 (787 ) (0.09 ) Reconciling items from CRE assets: Net interest income on legacy CRE assets — — (29 ) — Earnings Available for Distribution allocable to common shares $ 20,565 $ 2.40 $ 10,384 $ 1.17 Weighted average common shares - diluted on Earnings Available for Distribution allocable to common shares 8,566 8,877 Earnings Available for Distribution per common share - diluted $ 2.40 $ 1.17 (1) Non-core assets are investments and securities owned by us at the initial measurement date in (i) commercial finance, (ii) middle market lending, (iii) residential mortgage lending, (iv) legacy CRE loans designated as held for sale and (v) other non-CRE assets included in assets held for sale.
Our net investment returns will be negatively impacted by the rising cost of our floating-rate liabilities that do not have floors until the benchmark interest rate is above the benchmark floor, at which point our floating-rate loans and floating-rate liabilities will be match funded, effectively locking in our net interest margin until the benchmark floor rate is activated again or the floating-rate loan is paid off or refinanced.
Our net investment returns will be negatively impacted by the rising cost of our floating-rate liabilities that do not have floors until the benchmark rate is above the benchmark floor, at which point our floating-rate loans and floating-rate liabilities will be match funded, effectively locking in our net interest margin until the benchmark floor rate is activated again or the floating-rate loan is paid off or refinanced.
Unfunded CRE Loan Commitments In the ordinary course of business, we make commitments to borrowers whose loans are in our CRE loan portfolio to provide additional loan funding in the future. Disbursement of funds pursuant to these commitments is subject to the borrower meeting pre-specified criteria.
Unfunded Commitments In the ordinary course of business, we make commitments to borrowers whose loans are in our CRE loan portfolio to provide additional loan funding in the future. Disbursement of funds pursuant to these commitments is subject to the borrower meeting pre-specified criteria.
Pursuant to the guarantees, Jason Pollack, Frank Dellaglio and ACRES RF (collectively, the "Guarantors"), for the benefit of Oceanview, provided limited "bad boy" guaranties to Oceanview pursuant to the Construction Loan Agreement until the earlier of the payment in full of the indebtedness or the date of a sale of the property pursuant to a foreclosure of the mortgage or deed or other transfer in lieu of foreclosure is accepted by Oceanview.
Pursuant to the guarantees, Jason Pollack, Frank Dellaglio and ACRES RF (collectively, the "Guarantors"), for the benefit of Oceanview, provided limited "bad boy" guaranties to Oceanview pursuant to the Construction Loan Agreement until the earlier of the payment in full of the indebtedness or the date of a sale of the property pursuant to a foreclosure of the mortgage or deed or other transfer in lieu of foreclosure is accepted by Oceanview.
Our objective is to provide our stockholders with total returns over time, including quarterly distributions and capital appreciation, while seeking to manage the risks associated with our investment strategies as well as to maximize long-term stockholder value by maintaining stability through our available liquidity and diversified CRE loan portfolio.
Our longer-term objective is to provide our stockholders with total returns over time, including quarterly distributions and capital appreciation, while seeking to manage the risks associated with our investment strategies as well as to maximize long-term stockholder value by maintaining stability through our available liquidity and diversified CRE loan portfolio.
The remedies for such events of default are also customary for this type of transaction. 5. Construction loan: We have entered into a loan agreement to finance the construction of a student housing complex. This loan is interest only and has a maximum principal balance of $48.0 million.
The remedies for such events of default are also customary for this type of transaction. 5. Construction loans: We have entered into a loan agreement to finance the construction of a student housing complex. This loan is interest only and has a maximum principal balance of $48.0 million.
In a business environment where benchmark interest rates are increasing significantly, cash flows of the CRE assets underlying our loans may not be sufficient to pay debt service on our loans, which could result in non-performance or default.
In a business environment where benchmark rates are increasing significantly, cash flows of the CRE assets underlying our loans may not be sufficient to pay debt service on our loans, which could result in non-performance or default.
Our benchmark floors provide asset yield protection when the benchmark interest rate falls below an in-place benchmark floor. Our net investment returns are enhanced by a decline in the cost of our floating-rate liabilities that do not have benchmark floors.
Our benchmark floors provide asset yield protection when the benchmark rate falls below an in-place benchmark floor. Our net investment returns are enhanced by a decline in the cost of our floating-rate liabilities that do not have benchmark floors.
Incentive Compensation Hurdle Prior to the quarter ended December 31, 2022, in accordance with the Management Agreement, incentive compensation was earned by our Manager when our EAD (as defined in the Management Agreement) for such quarter exceeded an amount equal to: (1) the weighted average of (a) book value (as defined in the Management Agreement) as of the end of such quarter divided by 10,293,783 shares and (b) the price per share (including the conversion price, if applicable) paid for common shares in each offering (or issuance, upon the conversion of convertible securities) by us subsequent to September 30, 2017, in each case at the time of issuance, multiplied by (2) the greater of (a) 1.75% and (b) 0.4375% plus one-fourth of the ten year treasury rate, as defined in the Management Agreement, for such quarter (the “Incentive Compensation Hurdle”).
(Back to Index) 70 (Back to Index) Incentive Compensation Hurdle Prior to the quarter ended December 31, 2022, in accordance with the Management Agreement, incentive compensation was earned by our Manager when our EAD (as defined in the Management Agreement) for such quarter exceeded an amount equal to: (1) the weighted average of (a) book value (as defined in the Management Agreement) as of the end of such quarter divided by 10,293,783 shares and (b) the price per share (including the conversion price, if applicable) paid for common shares in each offering (or issuance, upon the conversion of convertible securities) by us subsequent to September 30, 2017, in each case at the time of issuance, multiplied by (2) the greater of (a) 1.75% and (b) 0.4375% plus one-fourth of the ten year treasury rate, as defined in the Management Agreement, for such quarter (the “Incentive Compensation Hurdle”).
(4) The reinvestment period is the period in which principal proceeds received may be used to acquire new CRE loans or the funded commitments of existing collateral for reinvestment into the securitization.
(4) The reinvestment period is the period in which principal proceeds received may be used to acquire CRE loans or the funded commitments of existing collateral for reinvestment into the securitization.
(8) Unfunded commitments on our originated CRE loans generally fall into two categories: (i) pre-approved capital improvement projects and (ii) new or additional construction costs subject, in each case, to the borrower meeting specified criteria. Upon completion of the improvements or construction, we would receive additional interest income on the advanced amount.
(7) Unfunded commitments on our originated CRE loans generally fall into two categories: (i) pre-approved capital improvement projects and (ii) new or additional construction costs subject, in each case, to the borrower meeting specified criteria. Upon completion of the improvements or construction, we would receive additional interest income on the advanced amount.
The Guarantors also entered into a Completion Guaranty Agreement for the benefit of Oceanview to guaranty the timely completion of the project in accordance with the Construction Loan Agreement, as well as a Carry Guaranty Agreement, for the benefit of Oceanview to guaranty and the unconditional payment by Chapel Drive East, LLC of all customary or necessary costs and expenses incurred in connection with the operation, maintenance and management of the property and an Environmental Indemnity Agreement jointly and severally in favor of Oceanview whereby the Guarantors serving as Indemnitors provided environmental representations and warranties, covenants and (Back to Index) 68 (Back to Index) indemnifications (collectively the "Guaranties").
The Guarantors also entered into a Completion Guaranty Agreement for the benefit of Oceanview to guaranty the timely completion of the project in accordance with the Construction Loan Agreement, as well as a Carry Guaranty Agreement, for the benefit of Oceanview to guaranty and the unconditional payment by Chapel Drive East, LLC of all customary or necessary costs and expenses incurred in connection with the operation, maintenance and management of the property and an Environmental Indemnity Agreement jointly and severally in favor of Oceanview whereby the Guarantors serving as Indemnitors provided environmental representations and warranties, covenants and indemnifications (collectively the "Guaranties").
Our investments in unconsolidated entities at December 31, 2022 and 2021 comprised a 100% interest in the common shares of Resource Capital Trust I (“RCT I”) and RCC Trust II (“RCT II”), respectively, with a value of $1.5 million in the aggregate, or 3.0% of each trust.
Our investments in unconsolidated entities at December 31, 2023 and 2022 comprised a 100% interest in the common shares of Resource Capital Trust I (“RCT I”) and RCC Trust II (“RCT II”), respectively, with a value of $1.5 million in the aggregate, or 3.0% of each trust.
Off-Balance Sheet Arrangements General At December 31, 2022, we did not maintain any relationships with unconsolidated entities or financial partnerships that were established for the purpose of facilitating off-balance sheet arrangements or contractually narrow or limited purposes, although we do have interests in unconsolidated entities not established for those purposes.
Off-Balance Sheet Arrangements General At December 31, 2023, we did not maintain any relationships with unconsolidated entities or financial partnerships that were established for the purpose of facilitating off-balance sheet arrangements or contractually narrow or limited purposes, although we do have interests in unconsolidated entities not established for those purposes.
Through our investments in real estate, we earn revenue associated with rental operations and hotel operations, which are presented in real estate income on the consolidated statements of operations. Rental operating revenue consists of fixed contractual base rent arising from tenant leases at our office properties under operating leases.
Through our investments in real estate, we earn revenue associated with rental operations and hospitality operations, which are presented in real estate income on the consolidated statements of operations. Rental operating revenue consists of fixed contractual base rent arising from tenant leases at our office properties under operating leases.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS O F FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with our consolidated financial statements and accompanying notes included in “Item 8. Financial Statements and Supplementary Data” of this annual report on Form 10-K.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with our consolidated financial statements and accompanying notes included in “Item 8. Financial Statements and Supplementary Data” of this annual report on Form 10-K.
(2) Acquired CRE whole loans are grouped within each loan’s year of issuance. We had one additional mezzanine loan that was included in assets held for sale, and that loan had no carrying value at December 31, 2022 and 2021.
(2) Acquired CRE whole loans are grouped within each loan’s year of issuance. We had one additional mezzanine loan that was included in assets held for sale, and that loan had no carrying value at December 31, 2023 and 2022.
Mortgage Payable In April 2022, Chapel Drive West, LLC, a wholly owned subsidiary of Charles Street – ACRES FSU Student Venture, LLC (the "FSU Student Venture") entered into a loan agreement (the “Mortgage”) with Readycap Commercial, LLC (“Readycap”) to finance the acquisition of a student housing complex.
Mortgages Payable In April 2022, Chapel Drive West, LLC, a wholly owned subsidiary of Charles Street – ACRES FSU Student Venture, LLC (the "FSU Student Venture") entered into a loan agreement (the “Mortgage”) with ReadyCap Commercial, LLC (“ReadyCap”) to finance the acquisition of a student housing complex.
(Back to Index) 80 (Back to Index) While a loan exhibiting credit quality deterioration may remain on accrual status, the loan is placed on non-accrual status at such time as (i) management believes that scheduled debt service payments will not be met within the coming 12 months; (ii) the loan becomes 90 days past due; (iii) management determines the borrower is incapable of, or has ceased efforts toward, curing the cause of the credit deterioration; or (iv) the net realizable value of the loan’s underlying collateral approximates our carrying value for such loan.
(Back to Index) 77 (Back to Index) While a loan exhibiting credit quality deterioration may remain on accrual status, the loan is placed on nonaccrual status at such time as (i) management believes that scheduled debt service payments will not be met within the coming 12 months; (ii) the loan becomes 90 days past due; (iii) management determines the borrower is incapable of, or has ceased efforts toward, curing the cause of the credit deterioration; or (iv) the net realizable value of the loan’s underlying collateral approximates our carrying value for such loan.
(collectively, “ACRES”), a private commercial real estate lender exclusively dedicated to nationwide middle market CRE lending with a focus on multifamily, student housing, hospitality, office and industrial in top United States (“U.S.”) markets (the “ACRES acquisition”). Our Manager draws upon the management team of ACRES and its collective investment experience to provide its services.
(collectively, “ACRES”), a private commercial real estate lender exclusively dedicated to nationwide middle market CRE lending with a focus on multifamily, student housing, hospitality, office and industrial property in top United States (“U.S.”) markets. Our Manager draws upon the management team of ACRES and its collective investment experience to provide its services.
Credit quality indicators Commercial Real Estate Loans CRE loans are collateralized by a diversified mix of real estate properties and are assessed for credit quality based on the collective evaluation of several factors, including but not limited to: collateral performance relative to underwritten plan, time since origination, current implied and/or re-underwritten loan-to-collateral value (“LTV”) ratios, loan structure and exit plan.
(Back to Index) 58 (Back to Index) Credit quality indicators Commercial Real Estate Loans CRE loans are collateralized by a diversified mix of real estate properties and are assessed for credit quality based on the collective evaluation of several factors, including but not limited to: collateral performance relative to underwritten plan, time since origination, current implied and/or re-underwritten loan-to-collateral value (“LTV”) ratios, loan structure and exit plan.
In October 2021, the Wells Fargo Facility matured. In April 2018, an indirect wholly-owned subsidiary of ours entered into a master repurchase agreement (the “Barclays Facility”) with Barclays to finance the origination of CRE loans.
(“Wells Fargo”) to finance the origination of CRE loans. In October 2021, the Wells Fargo Facility matured. In April 2018, an indirect wholly-owned subsidiary of ours entered into a master repurchase agreement (the “Barclays Facility”) with Barclays to finance the origination of CRE loans.
We recognize hotel operating revenue when guest rooms are occupied, services have been provided or fees have been earned. Revenues are recorded net of any sales, occupancy or other taxes collected from customers on behalf of third parties.
We recognize hospitality operating revenue when guest rooms are occupied, services have been provided or fees have been earned. Revenues are recorded net of any sales, occupancy or other taxes collected from customers on behalf of third parties.
Commencing with the quarter ended December 31, 2022, incentive compensation was calculated and payable in arrears in an amount, not less than zero, equal to: (i) for the first full calendar quarter ended December 31, 2022 , the product of (a) 20% and (b) the excess of (i) our EAD (as defined in the Management Agreement) for such calendar quarter, over (ii) the product of (A) our book value equity (as defined in the Management Agreement) as of the end of such calendar quarter, and (B) 7% per annum; (Back to Index) 73 (Back to Index) (ii) for each of the second, third and fourth full calendar quarters following the calendar quarter ended December 31, 2022 , the excess of (1) the product of (a) 20% and (b) the excess of (i) our EAD (as defined in the Management Agreement) for the calendar quarter(s) following September 30, 2022, over (ii) the product of (A) our book value equity (as defined in the Management Agreement) in the calendar quarter(s) following September 30, 2022, and (B) 7% per annum, over (2) the sum of any incentive compensation paid to our Manager with respect to the prior calendar quarter(s) following September 30, 2022 (other than the most recent calendar quarter); and (iii) for each calendar quarter thereafter , the excess of (1) the product of (a) 20% and (b) the excess of (i) our EAD (as defined in the Management Agreement) for the previous 12-month period, over (ii) the product of (A) our book value equity (as defined in the Management Agreement) in the previous 12-month period, and (B) 7% per annum, over (2) the sum of any incentive compensation paid to our Manager with respect to the first three calendar quarters of such previous 12-month period; provided, however, that no incentive compensation shall be payable with respect to any calendar quarter unless EAD (as defined in the Management Agreement) for the 12 most recently completed calendar quarters (or such lesser number of completed calendar quarters from September 30, 2022) in the aggregate is greater than zero.
With respect to each fiscal quarter commencing with the quarter ended December 31, 2022, an incentive management fee calculated and payable in arrears in an amount, not less than zero, equal to: (i) for the first full calendar quarter ended December 31, 2022 , the product of (a) 20% and (b) the excess of (i) our EAD (as defined in the Management Agreement) for such calendar quarter, over (ii) the product of (A) our book value equity (as defined in the Management Agreement) as of the end of such calendar quarter, and (B) 7% per annum; (ii) for each of the second, third and fourth full calendar quarters following the calendar quarter ended December 31, 2022 , the excess of (1) the product of (a) 20% and (b) the excess of (i) our EAD (as defined in the Management Agreement) for the calendar quarter(s) following September 30, 2022, over (ii) the product of (A) our book value equity (as defined in the Management Agreement) in the calendar quarter(s) following September 30, 2022, and (B) 7% per annum, over (2) the sum of any incentive compensation paid to our Manager with respect to the prior calendar quarter(s) following September 30, 2022 (other than the most recent calendar quarter); and (iii) for each calendar quarter thereafter , the excess of (1) the product of (a) 20% and (b) the excess of (i) our EAD (as defined in the Management Agreement) for the previous 12-month period, over (ii) the product of (A) our book value equity (as defined in the Management Agreement) in the previous 12-month period, and (B) 7% per annum, over (2) the sum of any incentive compensation paid to our Manager with respect to the first three calendar quarters of such previous 12-month period; provided, however, that no incentive compensation shall be payable with respect to any calendar quarter unless EAD (as defined in the Management Agreement) for the 12 most recently completed calendar quarters (or such lesser number of completed calendar quarters from September 30, 2022) in the aggregate is greater than zero.
You are encouraged to reference the discussion and analysis of our results of operations for the year ended December 31, 2020 compared to the year ended December 31, 2021 in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” within that report.
You are encouraged to reference the discussion and analysis of our results of operations for the year ended December 31, 2021 compared to the year ended December 31, 2022 in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” within that report.
While on non-accrual status, we recognize interest income only when an actual payment is received if a credit analysis supports the borrower’s principal repayment capacity. When a loan is placed on non-accrual, previously accrued interest is reversed from interest income. We utilize the contractual life of our loans to estimate the period over which we measure expected credit losses.
While on nonaccrual status, we recognize interest income only when an actual payment is received if a credit analysis supports the borrower’s principal repayment capacity. When a loan is placed on nonaccrual, previously accrued interest is reversed from interest income. We utilize the contractual life of our loans to estimate the period over which we measure expected credit losses.
Estimates for prepayments and extensions are incorporated into the inputs for our CECL model. Modifications to loan terms, such as a modification in connection with a TDR, where a concession is granted to a borrower experiencing financial difficulty, may result in the extension of the loan’s life and an increase in the allowance for credit losses.
Estimates for prepayments and extensions are incorporated into the inputs for our CECL model. Modifications to loan terms, such as a modification in connection with a troubled debt restructuring ("TDR"), where a concession is granted to a borrower experiencing financial difficulty, may result in the extension of the loan’s life and an increase in the allowance for credit losses.
We sought to mitigate the potential impact on net income (loss) of adverse fluctuations in interest rates incurred on our borrowings by entering into hedging agreements. We classified our interest rate hedges as cash flow hedges, which are hedges that eliminate the risk of changes in the cash flows of a financial asset or liability.
Derivative Instruments Historically, we sought to mitigate the potential impact on net income (loss) of adverse fluctuations in interest rates incurred on our borrowings by entering into hedging agreements. We classified our interest rate hedges as cash flow hedges, which are hedges that eliminate the risk of changes in the cash flows of a financial asset or liability.
U.S. federal income tax law generally requires that a REIT distribute at least 90% of its REIT taxable income annually, determined without regard to the deduction for dividends paid and excluding net capital gains, and that it pay tax at regular corporate rates to the extent that it annually distributes less than 100% of its taxable income.
(Back to Index) 75 (Back to Index) U.S. federal income tax law generally requires that a REIT distribute at least 90% of its REIT taxable income annually, determined without regard to the deduction for dividends paid and excluding net capital gains, and that it pay tax at regular corporate rates to the extent that it annually distributes less than 100% of its taxable income.
Except as set forth below, at December 31, 2022, we had not guaranteed obligations of any unconsolidated entities or entered into any commitment or letter of intent to provide additional funding to any such entities.
Except as set forth below, at December 31, 2023, we had not guaranteed obligations of any unconsolidated entities or entered into any commitment or letter of intent to provide additional funding to any such entities.
All of the notes issued mature in June 2036, although we have the right to call the notes beginning on the payment date in May 2023 and thereafter. ACR 2021-FL2 In December 2021, we closed ACR 2021-FL2, a CRE debt securitization transaction that can finance up to $700.0 million of CRE loans.
All of the notes issued mature in June 2036, although we have the right to call the notes beginning on the payment date in May 2023 and thereafter. (Back to Index) 66 (Back to Index) ACR 2021-FL2 In December 2021, we closed ACR 2021-FL2, a CRE debt securitization transaction that can finance up to $700.0 million of CRE loans.
The facility has a maximum portfolio LTV of 85% and contains customary events of default, subject to certain materiality thresholds and grace periods, customary for this type of financing arrangement. 2. Term Warehouse Financing Facilities (CRE loans): Term warehouse financing facilities effectively allow us to borrow against loans that we own.
The facility has a maximum portfolio LTV of 85% and contains customary events of default, subject to certain materiality thresholds and grace periods, customary for this type of financing arrangement. (Back to Index) 72 (Back to Index) 2. Term Warehouse Financing Facilities (CRE loans): Term warehouse financing facilities effectively allow us to borrow against loans that we own.
During the years ended December 31, 2022 and 2021, we recorded accretion income, reported in interest expense on the consolidated statements of operations, of $91,000 in each year.
During the years ended December 31, 2023 and 2022, we recorded accretion income, reported in interest expense on the consolidated statements of operations, of $91,000 in each year.
We historically used derivative financial instruments, including interest rate swaps, to hedge a portion of the interest rate risk associated with our borrowings. In April 2020, we terminated all interest rate hedges in conjunction with the disposition of our financed commercial mortgage-backed securities (“CMBS”) portfolio.
(Back to Index) 48 (Back to Index) We historically used derivative financial instruments, including interest rate swaps, to hedge a portion of the interest rate risk associated with our borrowings. In April 2020, we terminated all interest rate hedges in conjunction with the disposition of our financed commercial mortgage-backed securities (“CMBS”) portfolio.
We move to cash basis operating lease income recognition in the period in which collectability of all lease payments is no longer considered probable. At such time, any uncollectible receivable balance will be written off. (Back to Index) 82 (Back to Index) Hotel operating revenue consists of amounts derived from hotel operations, including room sales and other hotel revenues.
We move to cash basis operating lease income recognition in the period in which collectability of all lease payments is no longer considered probable. At such time, any uncollectible receivable balance will be written off. Hospitality operating revenue consists of amounts derived from hotel operations, including room sales and other hotel revenues.
In October 2022, the Barclays Facility matured. (Back to Index) 67 (Back to Index) In October 2018, an indirect wholly-owned subsidiary of ours entered into a Master Repurchase and Securities Contract Agreement (the “JPMorgan Chase Facility”) with JPMorgan Chase to finance the origination of CRE loans.
In October 2022, the Barclays Facility matured. In October 2018, an indirect wholly-owned subsidiary of ours entered into a Master Repurchase and Securities Contract Agreement (the “JPMorgan Chase Facility”) with JPMorgan Chase to finance the origination of CRE loans.
Senior Unsecured Notes 5.75% Senior Unsecured Notes Due 2026 On August 16, 2021, we issued $150.0 million of our 5.75% Senior Unsecured Notes pursuant to our Indenture, dated August 16, 2021 (the “Base Indenture”), between Wells Fargo, now Computershare Trust Company, N.A.
(Back to Index) 67 (Back to Index) Senior Unsecured Notes 5.75% Senior Unsecured Notes Due 2026 On August 16, 2021, we issued $150.0 million of our 5.75% Senior Unsecured Notes pursuant to our Indenture, dated August 16, 2021 (the “Base Indenture”), between Wells Fargo, now Computershare Trust Company, N.A.
We have omitted discussion of the earliest of the three years covered by our consolidated financial statements presented in this report as that disclosure is included in our Annual Report on Form 10-K for the year ended December 31, 2021 filed with the Securities and Exchange Commission (“SEC”) on March 9, 2022.
We have omitted discussion of the earliest of the three years covered by our consolidated financial statements presented in this report as that disclosure is included in our Annual Report on Form 10-K for the year ended December 31, 2022 filed with the Securities and Exchange Commission (“SEC”) on March 7, 2023.
Deferred Tax Assets At both December 31, 2022 and 2021, our net deferred tax asset was zero, resulting from a full valuation allowance of $21.2 million and $21.4 million, respectively, on our gross deferred tax asset as we believed it was more likely than not that some or all of the deferred tax assets would not be realized.
Deferred Tax Assets At both December 31, 2023 and 2022, our net deferred tax asset was zero, resulting from a full valuation allowance of $21.1 million and $21.2 million, respectively, on our gross deferred tax asset as we believed it was more likely than not that some or all of the deferred tax assets would not be realized.
Senior Secured Financing Facility On July 31, 2020, our indirect, wholly owned subsidiary (“Holdings”), along with its direct wholly owned subsidiary (the “Borrower”), entered into a $250.0 million Loan and Servicing Agreement (the “MassMutual Loan Agreement”) with Massachusetts Mutual Life Insurance Company (“MassMutual”) and the other lenders party thereto (the “Lenders”).
(Back to Index) 63 (Back to Index) Senior Secured Financing Facility On July 31, 2020, our indirect, wholly owned subsidiary (“Holdings”), along with its direct wholly owned subsidiary (the “Borrower”), entered into a $250.0 million Loan and Servicing Agreement (the “MassMutual Loan Agreement”) with Massachusetts Mutual Life Insurance Company (“MassMutual”) and the other lenders party thereto (the “Lenders”).
Guarantees and Indemnifications In the ordinary course of business, we may provide guarantees and indemnifications that contingently obligate us to make payments to the guaranteed or indemnified party based on changes in the value of an asset, liability or equity security of the guaranteed or indemnified party.
(Back to Index) 76 (Back to Index) Guarantees and Indemnifications In the ordinary course of business, we may provide guarantees and indemnifications that contingently obligate us to make payments to the guaranteed or indemnified party based on changes in the value of an asset, liability or equity security of the guaranteed or indemnified party.
Construction Loan In January 2023, Chapel Drive East, LLC, a wholly owned subsidiary of the FSU Student Venture, entered into a loan agreement (the "Construction Loan Agreement") with Oceanview Life and Annuity Company ("Oceanview") to finance the construction of a student housing complex (the "Construction Loan").
(Back to Index) 65 (Back to Index) In January 2023, Chapel Drive East, LLC, a wholly owned subsidiary of the FSU Student Venture, entered into a loan agreement (the "Construction Loan Agreement") with Oceanview Life and Annuity Company ("Oceanview") to finance the construction of a student housing complex (the "Construction Loan").
At December 31, 2022 and 2021, we had unrealized gains of $256,000 and $347,000, respectively, attributable to two terminated interest rate swaps, in accumulated other comprehensive loss on the consolidated balance sheets, to be accreted into earnings over the remaining life of the debt.
At December 31, 2023 and 2022, we had unrealized gains of $164,000 and $256,000, respectively, attributable to two terminated interest rate swaps, in accumulated other comprehensive loss on the consolidated balance sheets, to be accreted into earnings over the remaining life of the debt.
(Back to Index) 69 (Back to Index) At December 31, 2022, we retain equity in the following securitizations (in thousands, except amounts in footnotes): Closing Date Maturity Date Reinvestment Period End (1) Total Note Paydowns from Closing Date through December 31, 2022 ACR 2021-FL1 May 2021 June 2036 May 2023 $ — ACR 2021-FL2 December 2021 January 2037 December 2023 $ — (1) The reinvestment period is the period in which principal proceeds received may be used to acquire new CRE loans or the funded commitments of existing collateral for reinvestment into the securitization.
At December 31, 2023, we retain equity in the following securitizations (in thousands, except amounts in footnotes): Closing Date Maturity Date Reinvestment Period End (1) Total Note Paydowns from Closing Date through December 31, 2023 ACR 2021-FL1 May 2021 June 2036 May 2023 $ 32,183 ACR 2021-FL2 December 2021 January 2037 December 2023 $ — (1) The reinvestment period is the period in which principal proceeds received may be used to acquire new CRE loans or the funded commitments of existing collateral for reinvestment into the securitization.
If our variable interest possesses both of these characteristics, we are deemed to be the primary beneficiary and would be required to consolidate the VIE. This assessment must be done on an ongoing basis. At December 31, 2022, we determined that we are the primary beneficiary of five VIEs that are consolidated.
If our variable interest possesses both of these characteristics, we are deemed to be the primary beneficiary and would be required to consolidate the VIE. This assessment must be done on an ongoing basis. At December 31, 2023, we determined that we are the primary beneficiary of two VIEs that are consolidated.
During the years ended December 31, 2022 and 2021, we recorded dividends from the investments in RCT I’s and RCT II’s common shares, reported in other revenue on the consolidated statements of operations, of $91,000 and $65,000, respectively. Investments in real estate and property held for sale.
During the years ended December 31, 2023 and 2022, we recorded dividends from the investments in RCT I’s and RCT II’s common shares, reported in other revenue on the consolidated statements of operations, of $145,000 and $91,000, respectively. Investments in real estate and property held for sale.
In the past, we have derived substantial operating cash from our equity investments in our CDOs and securitizations, which will cease if the CDOs and securitizations fail to meet certain tests. Through December 31, 2022, we did not experience difficulty in maintaining our existing CDO and securitization financing and passed all of the critical tests required by these financings.
In the past, we have derived substantial operating cash from our equity investments in our CDOs and securitizations, which would cease if the CDOs and securitizations fail to meet certain tests. Through December 31, 2023, we did not experience difficulty in maintaining our existing securitization financing and passed all of the critical tests required by these financings.
We depreciate investments in real estate and amortize intangible assets over the estimated useful lives of the assets as follows: Category Term Building 35 to 40 years Building improvements 8 to 35 years Site improvements 10 years Tenant improvements Shorter of lease term or expected useful life Furniture, fixtures and equipment 3 to 12 years Right of use assets 7 to 94 years Intangible assets 90 days to 18 years Lease liabilities 7 to 94 years Revenue Recognition Interest income from our loan portfolio is recognized over the life of each loan using the effective interest method and is recorded on the accrual basis.
(Back to Index) 78 (Back to Index) We depreciate investments in real estate and amortize intangible assets over the estimated useful lives of the assets as follows: Category Term Building 35 to 40 years Building improvements 5 to 39 years Site improvements 10 years Tenant improvements Shorter of lease term or expected useful life Furniture, fixtures and equipment 1 to 12 years Right of use assets 7 to 94 years Intangible assets 90 days to 18 years Lease liabilities 7 to 94 years Revenue Recognition Interest income from our loan portfolio is recognized over the life of each loan using the effective interest method and is recorded on the accrual basis.
At December 31, 2022 and 2021, we had unrealized losses in connection with the terminated hedges of $6.6 million and $8.5 million, respectively, which will be amortized into interest expense over the remaining life of the debt.
At December 31, 2023 and 2022, we had unrealized losses in connection with the terminated hedges of $5.0 million and $6.6 million, respectively, which will be amortized into interest expense over the remaining life of the debt.
At December 31, 2022 and 2021, we had losses of $6.6 million and $8.5 million, respectively, recorded in accumulated other comprehensive loss, which will be amortized into earnings over the remaining life of the debt.
At December 31, 2023 and 2022, we had losses of $5.0 million and $6.6 million, respectively, recorded in accumulated other comprehensive loss, which will be amortized into earnings over the remaining life of the debt.
(Back to Index) 70 (Back to Index) The Indenture contains restrictive covenants that, among other things, require us to maintain certain financial ratios. The foregoing limitations are subject to exceptions as set forth in the Supplemental Indenture. At December 31, 2022, we were in compliance with these covenants.
The Indenture contains restrictive covenants that, among other things, require us to maintain certain financial ratios. The foregoing limitations are subject to exceptions as set forth in the Supplemental Indenture. At December 31, 2023, we were in compliance with these covenants.
In addition to the Construction Loan, we entered into a financing agreement with Florida Pace Funding Agency to fund energy efficient building improvements and has a maximum principal balance of $15.5 million. This agreement charges fixed interest of 7.26% and matures in July 2053.
In addition to the Construction Loan, we entered into a financing agreement with Florida Pace Funding Agency to fund energy efficient building improvements and has a maximum principal balance of $15.5 million. This agreement charges fixed interest of 7.26% and matures in July 2053. Until July 2024, accrued interest will be added to the principal balance.
At December 31, 2022, we had unfunded commitments on 57 CRE whole loans. (9) Base management fees presented are based on an estimate of base management fees payable to our Manager over the next 12 months. Our Management Agreement also provides for an incentive compensation arrangement that is based on operating performance.
At December 31, 2023, we had unfunded commitments on 53 CRE whole loans. (8) Base management fees presented are based on an estimate of base management fees payable to our Manager over the next 12 months. Our Management Agreement also provides for an incentive compensation arrangement that is based on operating performance.
(8) Includes net amortization expense of $1.7 million and $1.9 million for the years ended December 31, 2022 and 2021, respectively, on 22 terminated interest rate swap agreements that were in net loss positions at the time of termination.
(8) Includes net amortization expense of $1.6 million and $1.7 million for the years ended December 31, 2023 and 2022, respectively, on 20 and 22 terminated interest rate swap agreements, respectively, that were in net loss positions at the time of termination.
Net Change in Interest Income for the Comparative Years Ended December 31, 2022 and 2021: Aggregate interest income increased by $25.2 million for the comparative years ended December 31, 2022 and 2021. We attribute the change to the following: CRE whole loans.
Net Change in Interest Income for the Comparative Years Ended December 31, 2023 and 2022: Aggregate interest income increased by $61.2 million for the comparative years ended December 31, 2023 and 2022. We attribute the change to the following: CRE whole loans.
ACR 2021-FL1 includes a reinvestment period, which ends in May 2023, that allows it to acquire CRE loans for reinvestment into the securitization using uninvested principal proceeds. ACR 2021-FL1 issued a total of $675.2 million of non-recourse, floating-rate notes to third parties at par.
ACR 2021-FL1 included a reinvestment period, which ended in May 2023, that allowed it to acquire CRE loans for reinvestment into the securitization using uninvested principal proceeds. ACR 2021-FL1 issued a total of $675.2 million of non-recourse, floating-rate notes to third parties at par.
(Back to Index) 52 (Back to Index) Net Interest Income The following table analyzes the change in interest income and interest expense for the comparative years ended December 31, 2022 and 2021 by changes in volume and changes in rates.
(Back to Index) 49 (Back to Index) Net Interest Income The following table analyzes the change in interest income and interest expense for the comparative years ended December 31, 2023 and 2022 by changes in volume and changes in rates.
During the years ended December 31, 2022 and 2021, we recorded amortization expense, reported in interest expense on the consolidated statements of operations, of $1.8 million and $1.9 million, respectively.
During the years ended December 31, 2023 and 2022, we recorded amortization expense, reported in interest expense on the consolidated statements of operations, of $1.7 million and $1.8 million, respectively.
The following table sets forth the distributions received by us and coverage test summaries for our active securitizations at the periods presented (in thousands, except amounts in footnotes): Cash Distributions For the Year Ended Overcollateralization Cushion (1) Annualized Interest Coverage Cushion (2)(3) Name December 31, 2022 December 31, 2021 At December 31, 2022 At the Initial Measurement Date At December 31, 2022 Reinvestment Period End (4) ACR 2021-FL1 $ 21,141 $ 17,727 $ 6,758 $ 6,758 $ 22,428 May 2023 ACR 2021-FL2 14,537 — 5,652 5,652 15,323 December 2023 (1) Overcollateralization cushion represents the amount by which the collateral held by the securitization issuer exceeds the minimum amount required.
The following table sets forth the distributions received by us and coverage test summaries for our active securitizations at the periods presented (in thousands, except amounts in footnotes): Cash Distributions For the Year Ended Overcollateralization Cushion (1) Annualized Interest Coverage Cushion (2)(3) Name December 31, 2023 December 31, 2022 At December 31, 2023 At the Initial Measurement Date At December 31, 2023 Reinvestment Period End (4) ACR 2021-FL1 $ 24,923 $ 21,141 $ 12,509 $ 6,758 $ 17,501 May 2023 ACR 2021-FL2 19,652 14,537 5,652 5,652 14,762 December 2023 (1) Overcollateralization cushion represents the amount by which the collateral held by the securitization issuer exceeds the minimum amount required.
The following table presents the effect of derivative instruments on our consolidated statements of operations for the years presented (in thousands): Realized and Unrealized Gain (Loss) (1) Consolidated Statements of Operations Location Year Ended December 31, 2022 Year Ended December 31, 2021 Interest rate swap contracts, hedging Interest expense $ (1,733 ) $ (1,851 ) (1) Negative values indicate a decrease to the associated consolidated statements of operations line items.
(Back to Index) 62 (Back to Index) The following table presents the effect of derivative instruments on our consolidated statements of operations for the years presented (in thousands): Realized and Unrealized Loss (1) Consolidated Statements of Operations Location Year Ended December 31, 2023 Year Ended December 31, 2022 Interest rate swap contracts, hedging Interest expense $ (1,593 ) $ (1,733 ) (1) Negative values indicate a decrease to the associated consolidated statements of operations line items.
The outstanding balance of our loan to ACRES Capital Corp., the parent of our Manager, was $11.3 million and $11.6 million at December 31, 2022 and 2021, respectively.
The outstanding balance of our loan to ACRES Capital Corp., the parent of our Manager, was $11.0 million and $11.3 million at December 31, 2023 and 2022, respectively.
Distributions We did not pay distributions on our common shares during the years ended December 31, 2020, 2021 and 2022 as we were focused on prudently retaining and managing sufficient excess liquidity in connection with the economic impact of the COVID-19 pandemic.
Distributions We did not pay distributions on our common shares during the year ended December 31, 2023 as we were focused on prudently retaining and managing sufficient excess liquidity in connection with the economic impact of the COVID-19 pandemic.
We calculated net loss per common share-diluted of $(0.87) and $(1.00) using the weighted average diluted shares outstanding during the three and twelve months ended December 31, 2022, respectively. (3) In November 2021, our Board authorized and approved the continued use of our existing share repurchase program to repurchase up to $20.0 million of our outstanding common stock.
We calculated net income per common share-diluted of $0.20 and $0.35 using the weighted average diluted shares outstanding during the three and twelve months ended December 31, 2023, respectively. (3) In November 2021, our Board authorized and approved the continued use of our existing share repurchase program to repurchase up to $20.0 million of our outstanding common stock.
Results of Operations Our net loss allocable to common shares for the year ended December 31, 2022 was $8.8 million, or $(1.00) per share-basic ($(1.00) per share-diluted), as compared to net income allocable to common shares of $18.0 million, or $1.85 per share-basic ($1.85 per share-diluted), for the year ended December 31, 2021.
Results of Operations Our net income allocable to common shares for the year ended December 31, 2023 was $3.0 million, or $0.35 per share-basic ($0.35 per share-diluted), as compared to net loss allocable to common shares of $8.8 million, or $(1.00) per share-basic ($(1.00) per share-diluted), for the year ended December 31, 2022.
At December 31, 2022, our par-value $2.1 billion floating-rate CRE loan portfolio, which includes one whole loan without a benchmark floor, had a weighted average benchmark floor of 0.68%. At December 31, 2021, our par-value $1.9 billion floating rate CRE loan portfolio, which includes one whole loan without a benchmark floor, had a weighted average benchmark floor of 0.75%.
At December 31, 2023, our par-value $1.9 billion floating-rate CRE loan portfolio had a weighted average benchmark floor of 0.70%. At December 31, 2022, our par-value $2.1 billion floating rate CRE loan portfolio, which included one whole loan without a benchmark floor, had a weighted average benchmark floor of 0.68%.
We are in the process of evaluating the impact of this guidance. Inflation Virtually all of our assets and liabilities are interest rate sensitive in nature. As a result, interest rates and other factors influence our performance far more than does inflation. Changes in interest rates do not necessarily correlate with inflation rates or changes in inflation rates.
Inflation Virtually all of our assets and liabilities are interest rate sensitive in nature. As a result, interest rates and other factors influence our performance far more than does inflation. Changes in interest rates do not necessarily correlate with inflation rates or changes in inflation rates.
The following table sets forth certain information with respect to our borrowings (dollars in thousands, except amounts in footnotes): December 31, 2022 December 31, 2021 Outstanding Borrowings Value of Collateral Number of Positions as Collateral Weighted Average Interest Rate Outstanding Borrowings Value of Collateral Number of Positions as Collateral Weighted Average Interest Rate Senior Secured Financing Facility Massachusetts Mutual Life Insurance Company (1) $ 87,890 $ 196,837 8 7.94% $ (3,432 ) $ 170,791 9 5.75% CRE - Term Warehouse Financing Facilities (2) JPMorgan Chase Bank, N.A.
The following table sets forth certain information with respect to our borrowings (dollars in thousands, except amounts in footnotes): December 31, 2023 December 31, 2022 Outstanding Borrowings Value of Collateral Number of Positions as Collateral Weighted Average Interest Rate Outstanding Borrowings Value of Collateral Number of Positions as Collateral Weighted Average Interest Rate Senior Secured Financing Facility Massachusetts Mutual Life Insurance Company (1) $ 61,568 $ 157,722 7 9.14% $ 87,890 $ 196,837 8 7.94% CRE - Term Warehouse Financing Facilities (2) JPMorgan Chase Bank, N.A.
No loan modifications during the year ended December 31, 2022 resulted in TDRs. Restricted Cash At December 31, 2022, we had restricted cash of $38.6 million, which consisted of $38.2 million held within our five consolidated securitization entities and $400,000 held in escrow for deposits or tax payments at our real estate properties or pledged with minimum reserve balance requirements.
At December 31, 2022, we had restricted cash of $38.6 million, which consisted of $38.2 million held within our five consolidated securitization entities and $400,000 held in escrow for deposits or tax payments at our real estate properties or pledged with minimum reserve balance requirements.
In most cases the sponsors will need to fund additional equity into the properties to cover these costs as the property may not generate sufficient cash flow to pay these costs. At December 31, 2022, 88.8% of the par value of our CRE loan portfolio had interest rate caps in place with a weighted-average maturity of 1.1 years.
In most cases the sponsors will need to fund additional equity into the properties to cover these costs as the property may not generate sufficient cash flow to pay these costs. At December 31, 2023, 85.4% of the par value of our CRE loan portfolio had interest rate caps in place with a weighted-average maturity of six months.
We generally utilize the following five types of financing arrangements: 1. Senior Secured Financing Facility: Our senior secured financing facility allows us to borrow against loans and real estate investments that we own.
Financing Availability We utilize a variety of financing arrangements to finance certain assets. We generally utilize the following five types of financing arrangements: 1. Senior Secured Financing Facility: Our senior secured financing facility allows us to borrow against loans and real estate investments that we own.
The ensuing macroeconomic factors, including expected increases in inflation, short-term interest rates, energy prices and continued global supply chain dislocation trending negative, compounded by an increase in portfolio credit risk indicated in property-level cash flows that collateralize our loans, resulted in a net provision of expected credit losses of $12.3 million during the year ended December 31, 2022.
During the year ended December 31, 2022, we recorded provisions for expected credit losses of $12.3 million, primarily driven by macroeconomic factors, including expected increases in inflation, short-term interest rates that collateralize our loans, energy prices and continued global supply chain dislocation trending negative, compounded by an increase in portfolio credit risk indicated in property-level cash flows.
At December 31, 2022 and 2021, $4.7 million and $2.3 million, respectively, of our allowance for credit losses resulted from collateral-dependent loans that were individually evaluated for credit losses, details of which follow: During the year ended December 31, 2022, we individually evaluated the following loans: • One office mezzanine loan in the Northeast region with a principal balance of $4.7 million.
At both December 31, 2023 and 2022, $4.7 million of our allowance for credit losses resulted from collateral-dependent loans that were individually evaluated for credit losses, details of which follow: At December 31, 2023 and 2022, we individually evaluated the following loans: • One office mezzanine loan in the Northeast region with a principal balance of $4.7 million at both December 31, 2023 and 2022.
(Back to Index) 47 (Back to Index) While the CRE whole loans included in the CRE loan portfolio are substantially composed of floating-rate loans benchmarked to market rates including the London Interbank Offered Rate (“LIBOR”) and the Secured Overnight Financing Rate (“SOFR”), asset yields are protected through the use of benchmark floors and minimum interest periods that typically range from 12 to 18 months at the time of a loan’s origination.
While the CRE whole loans included in the CRE loan portfolio are substantially composed of floating-rate loans benchmarked to the Secured Overnight Financing Rate (“SOFR”), asset yields are protected through the use of benchmark floors and minimum interest periods that typically range from 12 to 18 months at the time of a loan’s origination.
(2) Includes one whole loan with total amortized costs of $22.8 million and $8.0 million, respectively, in maturity default at December 31, 2022 and 2021, respectively. (3) The total amortized cost of CRE loans excluded accrued interest receivable of $11.9 million and $6.1 million at December 31, 2022 and 2021, respectively. (4) Fully reserved at December 31, 2022.
(2) Includes one CRE whole loan with an amortized cost of $22.8 million in maturity default at December 31, 2022. (3) The total amortized cost of CRE loans excluded accrued interest receivable of $11.8 million and $11.9 million at December 31, 2023 and 2022, respectively. (4) Fully reserved at both December 31, 2023 and 2022.
(Back to Index) 83 (Back to Index) Subsequent Events We have evaluated subsequent events through the filing of this report and determined that, except for the subsequent events referred to in Note 7, Note 8, Note 12 and Note 24 of our consolidated financial statements, there have not been any events that have occurred that would require adjustments to or disclosures in our consolidated financial statements.
Subsequent Events We have evaluated subsequent events through the filing of this report and determined that, except for the subsequent events referred to in Note 7, Note 13 and Note 17 of our consolidated financial statements, there have not been any events that have occurred that would require adjustments to or disclosures in our consolidated financial statements.
Because we have equity invested in each floating-rate loan, and because in all instances the benchmark interest rates are above our loan floors, the rise in interest rates expected by the market will result in an increase in our net interest income.
Because we have equity invested in each floating-rate loan, and because in all instances the benchmark rates are above our loan floors, the rise in interest rates resulted in an increase in our net interest income.
The increase of $638,000 for the comparative years ended December 31, 2022 and 2021 was primarily attributable to an increase in yields on our interest earning money market accounts and restricted cash in our CRE securitizations.
The increase of $2.4 million for the comparative years ended December 31, 2023 and 2022 was primarily attributable to an increase in yields on our interest earning money market accounts and restricted cash in our CRE securitizations.
Equity Total equity at December 31, 2022 was $441.3 million and gave effect to $6.4 million of net unrealized losses on our terminated cash flow hedges, shown as a component of accumulated other comprehensive loss.
Equity at December 31, 2022 was $441.3 million, comprising $226.5 million of preferred equity and $214.8 million of common equity, and gave effect to $6.4 million of net unrealized losses on our terminated cash flow hedges shown as a component of accumulated other comprehensive loss.
In January 2022, we entered into an amendment of the Note and Warrant Purchase Agreement that extended the time to July 2022 that we could elect to issue to Oaktree and MassMutual up to $75.0 million of principal of additional notes.
In January 2022, we entered into an amendment of the Note and Warrant Purchase Agreement that extended the time to July 2022 that we could elect to issue to Oaktree and MassMutual up to $75.0 million of principal of additional notes. We did not issue any additional notes under this agreement and it expired as of July 31, 2022.
The following table sets forth the distributions made by and liquidation details for our liquidated securitizations for the periods presented (in thousands): Cash Distributions For the Year Ended Liquidation Details Name December 31, 2022 December 31, 2021 Liquidation Date Remaining Assets at the Liquidation Date (1) XAN 2019-RSO7 $ — $ 9,339 May 2021 $ 391,168 XAN 2020-RSO9 (2) $ 14,308 $ 7,944 February 2022 $ 111,335 XAN 2020-RSO8 $ 1,628 $ 13,830 March 2022 $ 171,225 (1) The remaining assets at the liquidation date were distributed to us in exchange for our notes owned and preference shares in the respective securitization.
(Back to Index) 74 (Back to Index) The following table sets forth the distributions made by and liquidation details for our liquidated securitizations for the periods presented (in thousands): Cash Distributions For the Year Ended Liquidation Details Name December 31, 2023 December 31, 2022 Liquidation Date Remaining Assets at the Liquidation Date (1) XAN 2020-RSO9 (2) $ — $ 14,308 February 2022 $ 111,335 XAN 2020-RSO8 $ — $ 1,628 March 2022 $ 171,225 (1) The remaining assets at the liquidation date were distributed to us in exchange for our notes owned and preference shares in the respective securitization.

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Market Risk — interest-rate, FX, commodity exposure

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Biggest changeTo the extent that interest rate floors on our floating-rate CRE loans are in the money, our net interest will have a negative correlation with rising interest rates to the extent of those interest rate floors. Our floating-rate loan portfolio of $2.1 billion has a weighted-average one-month LIBOR floor of 0.68% at December 31, 2022.
Biggest changeThe remaining 0.3% of our CRE loan portfolio by par value has a contractual fixed rate of interest. To the extent that interest rate floors on our floating-rate CRE loans are in the money, our net interest will have a negative correlation with rising interest rates to the extent of those interest rate floors.
These macroeconomic conditions may persist into the future and impair our borrowers’ ability to comply with the terms under our loan agreements.
Macroeconomic conditions may persist into the future and impair our borrowers’ ability to comply with the terms under our loan agreements.
We maintain a robust asset management relationship with our borrowers and have utilized these relationships to address the potential impacts of the COVID-19 pandemic, rising interest rates and other macroeconomic factors on our loans secured by properties experiencing cash flow pressure.
We maintain a robust asset management relationship with our borrowers and have utilized these relationships to address rising interest rates, lingering impacts of the COVID-19 pandemic, and other macroeconomic factors on our loans secured by properties experiencing cash flow pressure.
ITEM 7A. QUANTITATIVE AND QUALITA TIVE DISCLOSURES ABOUT MARKET RISK At December 31, 2022, the primary components of our market risk were credit risk, counterparty risk, financing risk and interest rate risk, as described below.
ITEM 7A. QUANTITATIVE AND QUALITA TIVE DISCLOSURES ABOUT MARKET RISK At December 31, 2023, the primary components of our market risk were credit risk, counterparty risk, financing risk and interest rate risk, as described below.
In a business environment where benchmark interest rates are increasing significantly, cash flows of the CRE assets underlying our loans may not be sufficient to pay debt service on our loans, which could result in non-performance or default.
(Back to Index) 80 (Back to Index) In a business environment where benchmark interest rates are increasing significantly, cash flows of the CRE assets underlying our loans may not be sufficient to pay debt service on our loans, which could result in non-performance or default.
We generally seek to manage our interest rate risk by monitoring and adjusting, if necessary, the reset index and interest rate related to our borrowings. (Back to Index) 85 (Back to Index)
We generally seek to manage our interest rate risk by monitoring and adjusting, if necessary, the reset index and interest rate related to our borrowings. (Back to Index) 81 (Back to Index)
As of December 31, 2022, 99.8% of our CRE loan portfolio by par value earned a floating rate of interest and may be financed with liabilities that both pay interest at floating rates and that are fixed. Floating-rate loans financed with fixed rate liabilities have a negative correlation with declining interest rates to the extent of our financing.
At December 31, 2023, 99.7% of our CRE loan portfolio by par value earned a floating rate of interest and may be financed with liabilities that both pay interest at floating rates and that are fixed. Floating-rate loans financed with fixed rate liabilities have a negative correlation with declining interest rates to the extent of our financing.
Weakness or volatility in the financial markets, the CRE and mortgage markets or the economy generally, such as through the impact of the COVID-19 pandemic, could adversely affect one or more of our lenders or potential lenders and could cause one or more of our lenders or potential lenders to be unwilling or unable to provide us with financing, or to decrease the amount of our available financing, or to increase the costs of that financing.
Weakness or volatility in the financial markets, the CRE and mortgage markets or the economy generally could adversely affect one or more of our lenders or potential lenders and could cause one or more of our lenders or potential lenders to be unwilling or unable to provide us with financing, or to decrease the amount of our available financing, or to increase the costs of that financing.
In most cases the sponsors will need to fund additional equity into the properties to cover these costs as the property may not generate sufficient cash flow to pay these costs. At December 31, 2022, 88.8% of par value of our CRE loan portfolio had interest rate caps in place with a weighted-average maturity of 1.1 years.
In most cases the sponsors will need to fund additional equity into the properties to cover these costs as the property may not generate sufficient cash flow to pay these costs. At December 31, 2023, 85.4% of the par value of our CRE loan portfolio had interest rate caps in place with a weighted-average maturity of six months.
We mitigate this exposure by depositing our cash and cash equivalents and entering into financing agreements with high credit-quality institutions. (Back to Index) 84 (Back to Index) Financing Risk We finance our target assets using our CRE debt securitizations, a senior secured financing facility and warehouse financing facilities.
We mitigate this exposure by depositing our cash and cash equivalents and entering into financing agreements with high credit-quality institutions. Financing Risk We finance our target assets using our CRE debt securitizations, a senior secured financing facility, warehouse financing facilities, mortgage payable and construction loans.
The following table estimates the hypothetical impact on our net interest income assuming an immediate increase or decrease of 100 basis points in the applicable interest rate benchmark (in thousands, except per share data): Year Ended December 31, 2022 100 Basis Point Decrease (4) 100 Basis Point Increase Net Assets Subject to Interest Rate Sensitivity (1)(2)(3) Increase (Decrease) to Net Interest Income Increase (Decrease) to Net Interest Income Per Share Increase (Decrease) to Net Interest Income Increase (Decrease) to Net Interest Income Per Share $ 350,229 $ (4,891 ) $ (0.56 ) $ 3,539 $ 0.41 (1) Includes our floating-rate CRE loans at December 31, 2022.
The following table estimates the hypothetical impact on our net interest income assuming an immediate increase or decrease of 100 basis points in the applicable interest rate benchmark (in thousands, except per share data): Year Ended December 31, 2023 100 Basis Point Decrease (4) 100 Basis Point Increase Net Assets Subject to Interest Rate Sensitivity (1)(2)(3) Increase (Decrease) to Net Interest Income Increase (Decrease) to Net Interest Income Per Share Increase (Decrease) to Net Interest Income Increase (Decrease) to Net Interest Income Per Share $ 361,860 $ (3,644 ) $ (0.43 ) $ 3,669 $ 0.43 (1) Includes our floating-rate CRE loans at December 31, 2023.
Removed
The COVID-19 pandemic significantly impacted the CRE markets as numerous state, local, and federal regulations were issued that imposed restrictions on travel and economic activity to contain the spread of the contagion, causing reduced occupancy, requests from tenants for rent deferral or abatement, and delays in construction and development projects.
Added
Our floating-rate loan portfolio of $1.9 billion has a weighted-average benchmark floor of 0.70% at December 31, 2023.
Removed
While many of these restrictions have been lifted, the reduced economic activity experienced during the COVID-19 pandemic could still severely impact borrowers’ businesses, financial condition and liquidity and may result in borrowers being unwilling or unable to meet their obligations to us in part or in full.
Removed
The remaining 0.2% of our CRE loan portfolio by par value earned a fixed rate of interest and may be financed with liabilities that pay interest at fixed rates.
Removed
Additionally, all interest rate floors on our CRE loan portfolio were in the money at December 31, 2022.

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