Claros Mortgage Trust Inc

Previous wording

The following discussion should be read in conjunction with our unaudited consolidated financial statements and notes thereto appearing elsewhere in this quarterly report on Form 10-Q. References herein to “Claros Mortgage Trust,” “Company”, “we”, “us” or “our” refer to Claros Mortgage Trust, Inc. and its subsidiaries unless the context specifically requires otherwise. References to our “Manager” refer to Claros REIT Management LP and references to our “Sponsor” refer to Mack Real Estate Credit Strategies, L.P. (“MRECS”), the CRE lending and debt investment business affiliated with our Manager and Mack Real Estate Group, LLC (“MREG”). Although MRECS and MREG are distinct legal entities, for convenience, references to our “Sponsor” are deemed to include references to MRECS and MREG, individually or collectively, as appropriate for the context and unless otherwise indicated.

Current wording

The following discussion should be read in conjunction with our unaudited consolidated financial statements and notes thereto appearing elsewhere in this quarterly report on Form 10-Q. References herein to “Claros Mortgage Trust,” “Company,” “we,” “us” or “our” refer to Claros Mortgage Trust, Inc. and its subsidiaries unless the context specifically requires otherwise. References to our “Manager” refer to Claros REIT Management LP and references to our “Sponsor” refer to Mack Real Estate Credit Strategies, L.P. (“MRECS”), the CRE lending and debt investment business affiliated with our Manager and Mack Real Estate Group, LLC (“MREG”). Although MRECS and MREG are distinct legal entities, for convenience, references to our “Sponsor” are deemed to include references to MRECS and MREG, individually or collectively, as appropriate for the context and unless otherwise indicated. References to “CRE” throughout this Quarterly Report on Form 10-Q means commercial real estate.

Previous wording

As a CRE finance company, we believe the key financial measures and indicators for our business are net income (loss) per share, Distributable Earnings (Loss) per share, Distributable Earnings per share prior to realized gains and losses, which includes principal charge-offs, dividends declared per share, book value per share, adjusted book value per share, Net Debt-to-Equity Ratio and Total Leverage Ratio. During the three months ended March 31, 2024, we had net loss per share of $(0.39), Distributable Loss per share of ($0.12), Distributable Earnings per share prior to realized losses of $0.20, and dividends declared per share of $0.25. As of March 31, 2024, our book value per share was $15.55, our adjusted book value per share was $16.47, our Net-Debt-to-Equity Ratio was 2.4x, and our Total Leverage Ratio was 2.8x. We use Net Debt-to-Equity Ratio and Total Leverage Ratio, financial measures which are not prepared in accordance with GAAP, to evaluate our financial leverage, which in the case of our Total Leverage Ratio, makes certain adjustments that we believe provide a more conservative measure of our financial condition.

Current wording

As a CRE finance company, we believe the key financial measures and indicators for our business are net income (loss) per share, Distributable Earnings (Loss) per share, Distributable Earnings per share prior to realized gains and losses, which includes principal charge-offs, dividends declared per share, book value per share, adjusted book value per share, Net Debt-to-Equity Ratio and Total Leverage Ratio. During the three months ended June 30, 2024, we had net loss per share of $(0.09), Distributable Earnings per share of $0.20, Distributable Earnings per share prior to realized losses of $0.21, and dividends declared per share of $0.25. As of June 30, 2024, our book value per share was $15.27, our adjusted book value per share was $16.44, our Net Debt-to-Equity Ratio was 2.4x, and our Total Leverage Ratio was 2.8x. We use Net Debt-to-Equity Ratio and Total Leverage Ratio, financial measures which are not prepared in accordance with GAAP, to evaluate our financial leverage, which in the case of our Total Leverage Ratio, makes certain adjustments that we believe provide a more conservative measure of our financial condition.

Previous wording

Net (Loss) Income Per Share and Dividends Declared Per Share

Current wording

Net Loss Per Share and Dividends Declared Per Share

Previous wording

The following table sets forth the calculation of basic and diluted net (loss) income per share and dividends declared per share ($ in thousands, except share and per share data):

Current wording

The following table sets forth the calculation of basic and diluted net loss per share and dividends declared per share ($ in thousands, except share and per share data):

Previous wording

Distributable Earnings (Loss) is a non-GAAP measure used to evaluate our performance excluding the effects of certain transactions, non-cash items and GAAP adjustments, as determined by our Manager. Distributable Earnings (Loss) is a non-GAAP measure, which we define as net income (loss) in accordance with GAAP, excluding (i) non-cash stock-based compensation expense, (ii) real estate depreciation and amortization, (iii) any unrealized gains or losses from mark-to-market valuation changes (other than permanent impairments) that are included in net income (loss) for the applicable period, (iv) one-time events pursuant to changes in GAAP and (v) certain non-cash items, which in the judgment of our Manager, should not be included in Distributable Earnings (Loss). Furthermore, the Company presents Distributable Earnings prior to realized gains and losses, which includes principal charge-offs, as the Company believes this more easily allows our Board, Manager, and investors to compare our operating performance to our peers, to assess our ability to declare and pay dividends, and to determine our compliance with certain financial covenants. Pursuant to the Management Agreement, we use Core Earnings, which is substantially the same as Distributable Earnings (Loss) excluding incentive fees, to determine the incentive fees we pay our Manager.

Current wording

Distributable Earnings (Loss) is a non-GAAP measure used to evaluate our performance excluding the effects of certain transactions, non-cash items and GAAP adjustments, as determined by our Manager. Distributable Earnings (Loss) is a non-GAAP measure, which we define as net income (loss) in accordance with GAAP, excluding (i) non-cash stock-based compensation expense, (ii) real estate owned depreciation and amortization, (iii) any unrealized gains or losses from mark-to-market valuation changes (other than permanent impairments) that are included in net income (loss) for the applicable period, (iv) one-time events pursuant to changes in GAAP and (v) certain non-cash items, which in the judgment of our Manager, should not be included in Distributable Earnings (Loss). Furthermore, the Company presents Distributable Earnings prior to realized gains and losses, which includes principal charge-offs, as the Company believes this more easily allows our Board, Manager, and investors to compare our operating performance to our peers, to assess our ability to declare and pay dividends, and to determine our compliance with certain financial covenants. Pursuant to the Management Agreement, we use Core Earnings, which is substantially the same as Distributable Earnings (Loss) excluding incentive fees, to determine the incentive fees we pay our Manager.

Previous wording

The following table provides a reconciliation of net (loss) income to Distributable (Loss) Earnings and Distributable Earnings prior to realized losses ($ in thousands, except share and per share data):

Current wording

The following table provides a reconciliation of net loss to Distributable Earnings (Loss) and Distributable Earnings prior to realized losses ($ in thousands, except share and per share data):

Previous wording

In April 2024, we sold a senior loan collateralized by two multifamily properties under development located in Irvine, CA and equity interests therein to an unaffiliated purchaser with a then carrying value and unpaid principal balance of $216.8 million and $218.4 million, respectively. As of March 31, 2024, the loan had carrying value and unpaid principal balance of $214.4 million and $216.0 million, respectively, and we determined that this loan met the held-for-sale criteria and was not considered in determining our general CECL reserve. The loan receivable held-for-sale is presented on our consolidated balance sheet net of a $42.3 million principal charge-off, representing the difference between the carrying value before principal charge-off and the sales price of the loan, and is attributable to the construction status of the loan’s collateral status and its $44.9 million of remaining unfunded commitments. The loan was on non-accrual status effective October 1, 2023 and was risk rated 4.

Current wording

In April 2024, we sold a senior loan, which was collateralized by two multifamily properties under development located in Irvine, CA and a pledge of equity interests in the borrower, to an unaffiliated purchaser with a then carrying value and unpaid principal balance of $216.8 million and $218.4 million, respectively. During the three months ended March 31, 2024, in anticipation of this loan sale, we classified the loan as held-for-sale and recognized a $42.3 million principal charge-off, representing the difference between the carrying value before principal charge-off and the sales price of the loan. Such principal charge-off was attributable to the construction status of the loan’s collateral asset and its $44.9 million of remaining unfunded commitments. During the three months ended June 30, 2024, we recorded an additional principal charge-off of $0.6 million relating to transaction costs incurred. The loan was on non-accrual status effective October 1, 2023 and was risk rated 4.

Previous wording

Our loans receivable held-for-sale as of December 31, 2023 were comprised of the following loans ($ in thousands):

Current wording

As of June 30, 2024, we have no loans receivable classified as held-for-sale. As of December 31, 2023, our loans receivable held-for-sale were comprised of the following loans ($ in thousands):

Previous wording

LTV represents “loan-to-value” or “loan-to-cost”, which is calculated as our total loan commitment from time to time, as if fully funded, plus any financings that are pari passu with or senior to our loan, divided by our estimate of either (1) the value of the underlying real estate, determined in accordance with our underwriting process (typically consistent with, if not less than, the value set forth in a third-party appraisal) or (2) the borrower’s projected, fully funded cost basis in the asset, in each case as we deem appropriate for the relevant loan and other loans with similar characteristics. Underwritten values and projected costs should not be assumed to reflect our judgment of current market values or project costs, which may have changed materially since the date of origination. LTV is updated only in connection with a partial loan paydown and/or release of collateral, material changes to expected project costs, the receipt of a new appraisal (typically in connection with financing or refinancing activity) or a change in our loan commitment. Totals represent weighted average based on loan commitment, including non-consolidated senior interests and pari passu interests. Loans with specific CECL reserves are reflected as 100% LTV.

Current wording

Origination LTV represents “loan-to-value” or “loan-to-cost,” which is calculated as our total loan commitment upon origination, as if fully funded, plus any financings that are pari passu with or senior to our loan, divided by our estimate of either (1) the value of the underlying real estate, determined in accordance with our underwriting process (typically consistent with, if not less than, the value set forth in a third-party appraisal) or (2) the borrower’s projected, fully funded cost basis in the asset, in each case as we deem appropriate for the relevant loan and other loans with similar characteristics. Underwritten values and projected costs should not be assumed to reflect our judgment of current market values or project costs, which may have changed materially since the date of origination. Weighted average origination LTV of 67.8% is based on loan commitment, including non-consolidated senior interests and pari passu interests, and excludes risk rated 5 loans.

Previous wording

On June 30, 2023, we acquired legal title to a mixed-use property located in New York, NY and the equity interests therein through an assignment-in-lieu of foreclosure, and is comprised of office, retail, and signage components. As of March 31, 2024, the mixed-use property appears as part of real estate owned, net and related lease intangibles, net appear within other assets and other liabilities on our consolidated balance sheet. As of March 31, 2024, our mixed-use real estate owned property and related net lease intangibles were pledged as collateral to our term participation facility. Effective April 2024, such pledge was released.

Current wording

On June 30, 2023, we acquired legal title to a mixed-use property located in New York, NY and the equity interests in the borrower through an assignment-in-lieu of foreclosure, and is comprised of office, retail, and signage components. As of June 30, 2024, the mixed-use property appears as part of real estate owned, net and related lease intangibles, net appear within other assets and other liabilities on our consolidated balance sheet.

Previous wording

During the three months ended March 31, 2024, we recorded a provision for current expected credit losses of $70.0 million, which consisted of a $22.7 million increase in our general CECL reserve and a $47.3 million increase in our specific CECL reserve prior to principal charge-offs. The increase in general CECL reserves was primarily attributable to changes in the historical loss rate of the analogous dataset and changes in risk ratings and non-accrual status within our loan portfolio, offset by the seasoning of our loan portfolio and a reduction in the size of our loan portfolio subject to determination of the general CECL reserve. As of March 31, 2024, our total current expected credit loss reserve was $180.4 million, which represents 2.6% of the unpaid principal balance of our loan receivable held-for-investment portfolio.

Current wording

During the six months ended June 30, 2024, we recorded a provision for current expected credit losses of $103.9 million, which consisted of a $55.4 million increase in our general CECL reserve and a $48.5 million increase in our specific CECL reserve prior to principal charge-offs. The increase in general CECL reserves was primarily attributable to changes in the historical loss rate of the analogous dataset and changes in risk ratings, non-accrual status, and expected remaining duration within our loan portfolio, offset by the reduction in the size of our loan portfolio subject to determination of the general CECL reserve. As of June 30, 2024, our total current expected credit loss reserve was $213.7 million

Previous wording

During the three months ended March 31, 2023, we recorded a reversal of current expected credit losses of $3.2 million, which was primarily attributable to the seasoning of our loan portfolio and a reduction in our loan portfolio’s total commitments. As of March 31, 2023, our total current expected credit loss reserve was $143.1 million.

Current wording

During the six months ended June 30, 2023, we recorded a provision for current expected credit losses of $38.2 million, which included a $44.6 million increase in our specific CECL reserve prior to a principal charge-off and a reversal of $6.4 million of general CECL reserves. This reversal of general CECL reserves was primarily attributable to the seasoning of our loan portfolio and a reduction in the size of our loan portfolio. As of June 30, 2023, our total current expected credit loss reserve was $117.7 million.

Previous wording

As of December 31, 2023, we had a specific CECL reserve of $31.2 million in connection with a senior loan with a borrower that is experiencing financial difficulty. During the three months ended March 31, 2024, we recorded additional specific CECL reserves totaling $0.3 million as a result of protective advances made, resulting in a total specific CECL reserve of $31.5 million. The loan is secured by land in Arlington, VA and as of March 31, 2024, had an unpaid principal balance and carrying value prior to any specific CECL reserve of $151.6 million and is in maturity default. Effective January 1, 2023, this loan was placed on non-accrual status.

Current wording

As of December 31, 2023, we had a specific CECL reserve of $31.2 million in connection with a senior loan with a borrower that is experiencing financial difficulty and which is secured by land in Arlington, VA. During the six months ended June 30, 2024, we recorded additional specific CECL reserves totaling $0.9 million as a result of protective advances made, resulting in a total specific CECL reserve of $32.1 million. As of June 30, 2024, the loan had an unpaid principal balance and carrying value prior to any specific CECL reserve of $152.2 million and is in maturity default. Effective January 1, 2023, this loan was placed on non-accrual status.

Previous wording

As of December 31, 2023, we had a specific CECL reserve of $20.5 million in connection with a senior loan with a borrower that is experiencing financial difficulty. During the three months ended March 31, 2024, we recorded additional specific CECL reserves totaling $0.4 million based on changes to the collateral value, resulting in a total specific CECL reserve of $20.9 million. The loan is secured by an office building in San Francisco, CA and a pledge of equity interests therein. As of March 31, 2024, this loan had an unpaid principal balance and carrying value prior to any specific CECL reserve of $112.4 million and $112.2 million, respectively, and is in maturity default. Effective September 1, 2023, this loan was placed on non-accrual status.

Current wording

As of December 31, 2023, we had a specific CECL reserve of $20.5 million in connection with a senior loan with a borrower that is experiencing financial difficulty and which is secured by an office building in San Francisco, CA and a pledge of equity interests in the borrower. During the six months ended June 30, 2024, we recorded additional specific CECL reserves totaling $0.4 million based on changes to the collateral value, resulting in a total specific CECL reserve of $20.9 million. As of June 30, 2024, the loan had an unpaid principal balance and carrying value prior to any specific CECL reserve of $112.4 million and $112.2 million, respectively, and is in maturity default. Effective September 1, 2023, this loan was placed on non-accrual status.

Previous wording

As of December 31, 2023, we had a specific CECL reserve of $20.0 million in connection with a senior loan with a borrower that is experiencing financial difficulty. During the three months ended March 31, 2024, we recorded additional specific CECL reserves totaling $4.4 million based on changes to the collateral value, resulting in a total specific CECL reserve of $24.4 million. The loan is secured by an office building in Atlanta, GA and a pledge of equity interests therein. As of March 31, 2024, this loan had an unpaid principal balance and carrying value prior to any specific CECL reserve of $71.5 million and $71.1 million, respectively, and an initial maturity date of August 27, 2024. Effective September 1, 2023, this loan was placed on non-accrual status.

Current wording

As of December 31, 2023, we had a specific CECL reserve of $20.0 million in connection with a senior loan with a borrower that is experiencing financial difficulty and which is secured by an office building in Atlanta, GA and a pledge of equity interests in the borrower. During the six months ended June 30, 2024, we recorded additional specific CECL reserves totaling $4.4 million based on changes to the collateral value, resulting in a total specific CECL reserve of $24.4 million. As of June 30, 2024, the loan had an unpaid principal balance and carrying value prior to any specific CECL reserve of $71.5 million and $71.1 million, respectively, and an initial maturity date of August 27, 2024. Effective September 1, 2023, this loan was placed on non-accrual status.

Previous wording

As of December 31, 2023 and March 31, 2024, we had a specific CECL reserve of $0.9 million in connection with a subordinate loan with a borrower that is experiencing financial difficulty. The loan is secured by the equity interests in a retail condo in Brooklyn, NY and, as of March 31, 2024, had an unpaid principal balance and carrying value prior to any specific CECL reserve of $0.9 million and is in maturity default. Effective June 30, 2023, the loan was placed on non-accrual status.

Current wording

As of June 30, 2023 and December 31, 2023, we had a specific CECL reserve of $0.9 million in connection with a subordinate loan with a borrower that is experiencing financial difficulty and which is secured by the equity interests in a retail condo in Brooklyn, NY. As of June 30, 2024, the loan had an unpaid principal balance and carrying value prior to any specific CECL reserve of $0.9 million and is in maturity default. Effective June 30, 2023, the loan was placed on non-accrual status.

Previous wording

Weighted average spread over the applicable benchmark rate is based on unpaid principal balance. SOFR as of March 31, 2024 was 5.33%. Fixed rate loans are presented as a spread over the relevant floating benchmark rates.

Current wording

Weighted average spread over the applicable benchmark rate is based on unpaid principal balance. SOFR as of June 30, 2024 was 5.34%. Fixed rate loans are presented as a spread over the relevant floating benchmark rates.

Previous wording

We finance certain of our loans using repurchase agreements and a term participation facility. As of March 31, 2024, aggregate borrowings outstanding under our repurchase agreements and term participation facility totaled $4.1 billion, with a weighted average spread of SOFR plus 2.72% per annum based on unpaid principal balance. As of March 31, 2024, outstanding borrowings under these facilities had a weighted average term to initial maturity and fully extended maturity of 1.0 years and 2.3 years, respectively, assuming all conditions to extend are met.

Current wording

We finance certain of our loans using repurchase agreements and a term participation facility. As of June 30, 2024, aggregate borrowings outstanding under our repurchase agreements and term participation facility totaled $4.0 billion, with a weighted average spread of SOFR plus 2.69% per annum based on unpaid principal balance. As of June 30, 2024, the loans securing the outstanding borrowings under these facilities had a weighted average term to initial maturity and fully extended maturity of 0.8 years and 2.3 years, respectively, assuming all conditions to extend are met.

Previous wording

We finance certain of our loans via secured financings that are generally non-recourse and are term matched to the underlying loan. We refer to such financings as notes payable and they are secured by the related loans receivable. As of March 31, 2024, five of our loans were financed with notes payable.

Current wording

We finance certain of our loans via secured financings that are generally non-recourse and are term matched to the underlying loan. We refer to such financings as notes payable and they are secured by the related loans receivable. As of June 30, 2024, four of our loans were financed with notes payable.

Previous wording

We have a secured term loan which we originally entered into on August 9, 2019. Our secured term loan is presented net of any original issue discount and transaction expenses which are deferred and recognized as interest expense over the life of the loan using the effective interest method. The secured term loan matures on August 9, 2026 and as of March 31, 2024 has an unpaid principal balance of $723.5 million and a carrying value of $711.9 million.

Current wording

We have a secured term loan which we originally entered into on August 9, 2019. Our secured term loan is presented net of any original issue discount and transaction expenses which are deferred and recognized as interest expense over the life of the loan using the effective interest method. The secured term loan matures on August 9, 2026 and as of June 30, 2024 has an unpaid principal balance of $721.6 million and a carrying value of $711.2 million.

Previous wording

On February 8, 2021 we assumed a $300.0 million securitized senior mortgage in connection with a foreclosure of a hotel portfolio. On February 7, 2024, we modified our debt related to real estate owned to provide for, among other things, an extension of the contractual maturity date to November 9, 2024, a $10.0 million principal paydown, and the designation of a portion of the loan becoming partial recourse to us. Concurrent with this modification, we purchased an interest rate cap with a notional amount of $280.0 million and a strike rate of 5.00% through the extended contractual maturity date for $0.5 million. As of March 31, 2024, our debt related to real estate owned has an unpaid principal balance of $280.0 million, a carrying value of $277.6 million and a stated rate of SOFR plus 2.90%. See Derivatives below for further detail of our interest rate cap.

Current wording

On February 8, 2021 we assumed a $300.0 million securitized senior mortgage in connection with a foreclosure of a hotel portfolio. On February 7, 2024, we modified our debt related to real estate owned to provide for, among other things, an extension of the contractual maturity date to November 9, 2024, a $10.0 million principal paydown, and the designation of a portion of the loan becoming partial recourse to us. Concurrent with this modification, we purchased an interest rate cap with a notional amount of $280.0 million and a strike rate of 5.00% through the extended contractual maturity date for $0.5 million. As of June 30, 2024, our debt related to real estate owned has an unpaid principal balance of $280.0 million, a carrying value of $278.6 million and a stated rate of SOFR plus 2.90%. See Derivatives below for further detail of our interest rate cap.

Previous wording

Changes in the fair value of our interest rate cap are recorded as an unrealized gain or loss on interest rate cap on our consolidated statements of operations and the fair value is recorded in other assets on our consolidated balance sheets. Proceeds received from our counterparty related to the interest rate cap are recorded as proceeds from interest rate cap on our consolidated statements of operations. As of March 31, 2024 and December 31, 2023, the fair value of the interest rate cap was $0.4 million and $0.9 million, respectively. During the three months ended March 31, 2024 and 2023, we recognized approximately $0.9 million and $1.2 million respectively, as proceeds from interest rate cap.

Current wording

Changes in the fair value of our interest rate cap are recorded as an unrealized gain or loss on interest rate cap on our consolidated statements of operations and the fair value is recorded in other assets on our consolidated balance sheets. Proceeds received from our counterparty related to the interest rate cap are recorded as proceeds from interest rate cap on our consolidated statements of operations. As of June 30, 2024 and December 31, 2023, the fair value of the interest rate cap was $0.3 million and $0.9 million, respectively. During the three months ended June 30, 2024 and 2023, we recognized $0.2 million and $1.5 million, respectively, of proceeds from interest rate cap. During the six months ended June 30, 2024 and 2023, we recognized $1.1 million and $2.7 million, respectively, of proceeds from interest rate cap.

Previous wording

On June 29, 2022, we entered into a full recourse revolving credit facility with $150.0 million in capacity. The facility generally provides interim financing for eligible loans for up to 180 days at an initial advance rate between 55% to 75%, which begins to decline after the 90th day. The facility matures on June 29, 2025 and we incur interest at a rate of SOFR, plus a 0.10% credit spread adjustment, plus a spread of 2.25%. With the consent of our lenders, and subject to certain conditions, the commitment of the facility may be increased up to $500.0 million. As of March 31, 2024 and December 31, 2023, we had no outstanding balance on the facility.

Current wording

On June 29, 2022, we entered into a full recourse revolving credit facility with $150.0 million in capacity. The facility generally provides interim financing for eligible loans for up to 180 days at an initial advance rate of up to 75%, which declines after the 30th day. The facility matures on June 29, 2025 and we incur interest at a rate of SOFR, plus a 0.10% credit spread adjustment, plus a spread of 2.25%. With the consent of our lenders, and subject to certain conditions, the commitment of the facility may be increased up to $500.0 million. As of June 30, 2024 and December 31, 2023, we had no outstanding balance on the facility.

Previous wording

Our financing agreements generally contain certain financial covenants. For example, our ratio of earnings before interest, taxes, depreciation, and amortization (“EBITDA”), to interest charges, as defined in the agreements, shall be not less than either 1.3 to 1.0 or 1.5 to 1.0. Further, (i) our tangible net worth, as defined in the agreements, shall not be less than $2.06 billion as of each measurement date plus 75% of proceeds from future equity issuances; (ii) cash liquidity shall not be less than the greater of (x) $50 million or (y) 5% of our recourse indebtedness; and (iii) our indebtedness shall not exceed 77.8% of our total assets. As of March 31, 2024, we are in compliance with all covenants under our financing agreements. The requirements set forth in (i) through (iii) above are based upon the most restrictive financial covenants in place as of the reporting date. For the quarters ended December 31, 2023 and March 31, 2024, we modified certain of our EBITDA to interest charges covenants to provide for a minimum ratio of 1.3 to 1.0 for such covenants which previously required a minimum ratio of 1.4 to 1.0. Future compliance with our financial covenants is dependent upon the results of our operating activities, our financial condition, and the overall market conditions in which we and our borrowers operate. As market conditions evolve, we may work with our counterparties to request modifications of financial covenants as needed.

Current wording

Our financing agreements generally contain certain financial covenants. For example, our ratio of earnings before interest, taxes, depreciation, and amortization to interest charges (“Interest Coverage Ratio”), as defined in our repurchase agreements, term participation facility, and short-term funding facility, shall not be less than 1.3 to 1.0, whereas our ratio of earnings before interest, taxes, depreciation, and amortization to interest charges as defined in our secured term loan shall not be less than 1.5 to 1.0. Further, (i) our tangible net worth, as defined in the agreements, shall not be less than $1.91 billion as of each measurement date; (ii) cash liquidity shall not be less than the greater of (x) $50 million or (y) 5% of our recourse indebtedness; and (iii) our indebtedness shall not exceed 77.8% of our total assets. As of June 30, 2024, we are in compliance with all covenants under our financing agreements. The requirements set forth in (i) through (iii) above are based upon the most restrictive financial covenants in place as of the reporting date. Further, we have modified the Interest Coverage Ratio in our repurchase agreements and term participation facility to provide that for the quarters ended June 30, 2024 through September 30, 2025, our Interest Coverage Ratio shall not be less than 1.1 to 1.0. Future compliance with our financial covenants is dependent upon the results of our operating activities, our financial condition, and the overall market conditions in which we and our borrowers operate. As market conditions evolve, we may continue to work with our counterparties on modifying financial covenants as needed.

Previous wording

Non-consolidated senior interests are indexed to SOFR, which was 5.33% at March 31, 2024.

Current wording

Non-consolidated senior interests are indexed to SOFR, which was 5.34% at June 30, 2024.

Previous wording

Our business model seeks to minimize our exposure to changing interest rates by originating floating rate loans and financing them with floating rate liabilities. Further, we seek to match the benchmark index in the floating rate loans we originate with the benchmark index used in the related floating rate financings. Generally, we use SOFR as the benchmark index in both our floating rate loans and floating rate financings. As of March 31, 2024, 98.0% of our loans based on unpaid principal balance were floating rate and indexed to SOFR. The majority of our floating rate loans were financed with floating rate liabilities indexed to SOFR, which resulted in approximately $1.4 billion of net floating rate exposure.

Current wording

Our business model seeks to minimize our exposure to changing interest rates by originating floating rate loans and financing them with floating rate liabilities. Further, we seek to match the benchmark index in the floating rate loans we originate with the benchmark index used in the related floating rate financings. Generally, we use SOFR as the benchmark index in both our floating rate loans and floating rate financings. As of June 30, 2024, 98.1% of our loans receivable held-for-investment based on unpaid principal balance were floating rate and indexed to SOFR. All of our encumbered floating rate loans were financed with floating rate liabilities indexed to SOFR, which resulted in approximately $1.5 billion of net floating rate exposure.

Previous wording

Our floating rate loans and related liabilities are all indexed to SOFR, which as of March 31, 2024 was 5.33%. Includes $361.9 million of net floating rate exposure related to loans on non-accrual status. Excludes $74.0 million of net floating rate exposure related to a loan receivable with an unpaid principal balance of $216.0 million which is classified as held-for-sale as of March 31, 2024 and associated financing of $142.0 million.

Current wording

Our floating rate loans and related liabilities are all indexed to SOFR, which as of June 30, 2024 was 5.34%. Includes $434.0 million of net floating rate exposure related to loans on non-accrual status.

Previous wording

Total net revenue decreased $17.2 million during the three months ended March 31, 2024, compared to the three months ended December 31, 2023. The decrease is primarily due to a decrease in revenue from real estate owned of $12.3 million due to lower overall average occupancy, average daily rate (“ADR”), and revenue per available room (“RevPAR”) levels at the hotel portfolio compared to the three months ended December 31, 2023 due to expected seasonality, and a decrease in net interest income of $4.8 million, which was driven by a decrease in interest income of $10.1 million as a result of a decreased loans receivable balance and additional loans being placed on non-accrual status during the three months ended March 31, 2024, partially offset by a decrease in interest expense of $5.3 million as a result of decreased average borrowing levels during the three months ended March 31, 2024 compared to the three months ended December 31, 2023.

Current wording

Total net revenue increased $5.7 million during the three months ended June 30, 2024, compared to the three months ended March 31, 2024. The increase is primarily due to an increase in revenue from real estate owned of $8.7 million due to higher overall average occupancy, average daily rate (“ADR”), and revenue per available room (“RevPAR”) levels at the hotel portfolio compared to the three months ended March 31, 2024 due to the impact of expected seasonality, partially offset by a decrease in net interest income of $3.0 million, which was driven by a decrease in interest income of $5.7 million as a result of decreased average loans receivable balances and an additional loan being placed on non-accrual status during the three months ended June 30, 2024, and a decrease in interest expense of $2.7 million as a result of lower average borrowing levels during the three months ended June 30, 2024 compared to the three months ended March 31, 2024 as a result of the sale of the loan classified as held-for-sale in April 2024.

Previous wording

Expenses are primarily comprised of base management fees payable to our Manager, general and administrative expenses, stock-based compensation expense, operating expenses from real estate owned, interest expense from debt related to real estate owned, and depreciation and amortization on real estate owned and related in-place and other lease values. Expenses decreased by $1.5 million during the three months ended March 31, 2024, as compared to the three months ended December 31, 2023, primarily due to:

Current wording

Expenses are primarily comprised of base management fees payable to our Manager, general and administrative expenses, stock-based compensation expense, operating expenses from real estate owned, interest expense from debt related to real estate owned, and depreciation and amortization on real estate owned and related in-place and other lease values. Expenses increased by $2.0 million during the three months ended June 30, 2024, as compared to the three months ended March 31, 2024, primarily due to:

Previous wording

partially offset by an increase in general and administrative expenses of $0.2 million primarily as a result of an increase in non-recurring charges incurred over the comparative period generally related to professional fees, insurance expense, and other corporate level costs.

Current wording

an increase in general and administrative expenses of $1.0 million primarily as a result of an increase in non-recurring charges incurred over the comparative period generally related to professional fees, insurance expense, and other corporate level costs, including legal and professional fees related to establishing our ATM Agreement;

Previous wording

a decrease in operating expenses from real estate owned of $1.6 million during the comparative period, due to lower variable operating expenses in connection with lower occupancy levels at the hotel portfolio, partially offset by an increase in professional fees incurred primarily as a result of the modification of our debt related to real estate owned;

Current wording

an increase in operating expenses from real estate owned of $1.0 million during the comparative period, due to higher variable operating expenses in connection with higher occupancy levels at the hotel portfolio;

Previous wording

an increase in stock-based compensation of $1.0 million during the comparative period, due to restricted stock units granted during the first quarter of 2023;

Current wording

partially offset by a decrease in stock-based compensation expense of $0.4 million due to the forfeiture of restricted stock units during the three months ended June 30, 2024.

Previous wording

During the three months ended March 31, 2024, we recognized a $1.0 million unrealized loss on interest rate cap, compared to a $1.8 million unrealized loss on interest rate cap during three months ended December 31, 2023 driven by an unrealized loss of $0.9 million related to the maturity of the previously owned interest rate cap which expired on February 15, 2024 and an additional $0.1 million unrealized loss recognized on the new interest rate cap purchased. The fair value of the interest rate cap increases as interest rates increase, decreases as the interest rate cap approaches maturity, and further fluctuates following shifts in the forward curve.

Current wording

During the three months ended June 30, 2024, we recognized a $0.1 million unrealized loss on interest rate cap, compared to a $1.0 million unrealized loss on interest rate cap during the three months ended March 31, 2024 . In both cases, the unrealized loss was driven by a reduction in the remaining duration of the interest rate cap; however, the interest rate cap held prior to its February 15, 2024 maturity had a strike rate of 3.0%, which resulted in a higher value at December 31, 2023, and therefore a greater decline in value at maturity compared to the current interest rate cap which has a strike rate of 5.0%. The fair value of the interest rate cap increases as interest rates increase, decreases as the interest rate cap approaches maturity, and further fluctuates following shifts in the forward curve.

Previous wording

During the three months ended March 31, 2024, we recognized a loss on extinguishment of debt of $2.2 million, inclusive of a $1.6 million spread maintenance payment and $0.6 million of unamortized deferred financing costs, as a result of the repayment of a note payable prior to maturity which occurred simultaneously with the sale of the associated loan receivable.

Current wording

During the three months ended June 30, 2024, we recognized a loss on extinguishment of debt of $1.0 million due to the recognition of unamortized deferred financing costs resulting from the repayment of financing balances prior to maturity. During the three months ended March 31, 2024, we recognized a loss on extinguishment of debt of $2.2 million, inclusive of a $1.6 million spread maintenance payment and $0.6 million of unamortized deferred financing costs, as a result of the repayment of a note payable prior to maturity.

Previous wording

The following table sets forth information regarding our consolidated results of operations for the three months ended March 31, 2024 and 2023 ($ in thousands, except per share data):

Current wording

The following table sets forth information regarding our consolidated results of operations for the six months ended June 30, 2024 and 2023 ($ in thousands, except per share data):

Previous wording

Total net revenue decreased $10.3 million during the three months ended March 31, 2024, compared to the three months ended March 31, 2023. The decrease is primarily due to a decrease in net interest income of $13.2 million, which was driven by an increase in interest expense of $9.9 million primarily as a result of higher average borrowing levels and reference rate increases, and a decrease in interest income of $3.3 million as a result of a decreased loans receivable balance and an increase in loans on non-accrual status during the three months ended March 31, 2024 compared to the three months ended March 31, 2023. The decrease in total net revenue was partially offset by an increase in revenue from real estate owned of $2.9 million due to higher overall average occupancy, ADR, and RevPAR levels at the hotel portfolio compared to the three months ended March 31, 2023 and revenue generated from the mixed-use property we acquired legal title to on June 30, 2023.

Current wording

Total net revenue decreased $26.7 million during the six months ended June 30, 2024, compared to the six months ended June 30, 2023. The decrease is primarily due to a decrease in net interest income of $32.4 million, which was driven by an increase in interest expense of $3.5 million primarily as a result of reference rate increases, and a decrease in interest income of $28.9 million as a result of a decreased loans receivable balance and an increase in loans on non-accrual status during the six months ended June 30, 2024 compared to the six months ended June 30, 2023. The decrease in total net revenue was partially offset by an increase in revenue from real estate owned of $5.7 million due to $3.7 million of revenue generated from the mixed-use property we acquired legal title to on June 30, 2023 and higher overall average occupancy, ADR, and RevPAR levels at the hotel portfolio compared to the six months ended June 30, 2023.

Previous wording

Expenses are primarily comprised of base management fees payable to our Manager, incentive fees payable to our Manager, general and administrative expenses, stock-based compensation expense, operating expenses from real estate owned, interest expense from debt related to real estate owned, and depreciation and amortization on real estate owned and related in-place and other lease values. Expenses increased by $2.2 million during the three months ended March 31, 2024, as compared to the three months ended March 31, 2023, primarily due to:

Current wording

Expenses are primarily comprised of base management fees payable to our Manager, incentive fees payable to our Manager, general and administrative expenses, stock-based compensation expense, operating expenses from real estate owned, interest expense from debt related to real estate owned, and depreciation and amortization on real estate owned and related in-place and other lease values. Expenses increased by $5.7 million during the six months ended June 30, 2024, as compared to the six months ended June 30, 2023, primarily due to:

Previous wording

an increase in operating expenses from real estate owned of $2.9 million during the comparative period, due to an increase in professional fees incurred primarily as a result of the modification of our debt related to real estate owned, an increase in variable operating expenses in connection with higher occupancy levels at the hotel portfolio, and expenses incurred at the mixed-use property we acquired legal title to on June 30, 2023;

Current wording

an increase in operating expenses from real estate owned of $5.5 million during the comparative period, due to an increase in professional fees incurred primarily as a result of the modification of our debt related to real estate owned, an increase in variable operating expenses in connection with higher occupancy levels at the hotel portfolio, and $2.5 million of expenses incurred at the mixed-use property we acquired legal title to on June 30, 2023;

Previous wording

an increase in interest expense on debt related to real estate owned of $0.9 million primarily as a result of reference rate increases over the comparative period;

Current wording

an increase in interest expense on debt related to real estate owned of $1.9 million primarily as a result of increased deferred financing costs recognized from fees incurred on the modification of our debt related to real estate owned in February 2024 and reference rate increases over the comparative period;

Previous wording

partially offset by a decrease in incentive fees of $1.6 million as a result of core earnings over the trailing four quarters being in excess of a 7% hurdle as of March 31, 2023 but below the hurdle as of March 31, 2024;

Current wording

partially offset by a decrease in incentive fees of $1.6 million as a result of core earnings over the trailing four quarters being in excess of a 7% hurdle as of June 30, 2023 but below the hurdle on a trailing four quarters basis in all subsequent periods;