Claros Mortgage Trust Inc

Previous wording

We make forward-looking statements herein and will make forward-looking statements in future filings with the SEC, press releases or other written or oral communications within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). For these statements, we claim the protections of the safe harbor for forward-looking statements contained in such Sections. Forward-looking statements are subject to substantial risks and uncertainties, many of which are difficult to predict and are generally beyond our control. These forward-looking statements include information about possible or assumed future results of our business, financial condition, liquidity, results of operations, plans and objectives. When we use the words “believe,” “expect,” “anticipate,” “estimate,” “plan,” “continue,” “intend,” “should,” “may” or similar expressions, it intends to identify forward-looking statements. Statements regarding the following subjects, among others, may be forward-looking: our business and investment strategy; changes in interest rates and their impact on our borrowers and on the availability and cost of our financing; our projected operating results; defaults by borrowers in paying debt service on outstanding loans; the timing of cash flows, if any, from our investments; the state of the U.S. and global economy generally or in specific geographic regions; reduced demand for office, multifamily or retail space, including as a result of the increase in remote and/or hybrid work trends which allow work from remote locations other than the employer’s office premises; governmental actions and initiatives and changes to government policies; the amount of commercial mortgage loans requiring refinancing; our ability to obtain and maintain financing arrangements on attractive terms, or at all; our ability to maintain compliance with covenants under our financing arrangements; current and prospective financing costs and advance rates for our target assets; our expected leverage; general volatility of the capital markets and the markets in which we may invest and our borrowers operate in; the impact of a protracted decline in the liquidity of capital markets on our business; the state of the regional, national, and global banking systems; the uncertainty surrounding the strength of the national and global economies; the return on or impact of current and future investments, including our loan portfolio and real estate owned investments; allocation of investment opportunities to us by our Manager and our Sponsor; changes in the market value of our investments; effects of hedging instruments on our target assets; rates of default, decreased recovery rates, and/or increased loss severity rates on our target assets and related impairment charges, including as it relates to our real estate owned investments; the degree to which our hedging strategies…

Excerpt shortened here; the source contains the full paragraph.

Current wording

We make forward-looking statements herein and will make forward-looking statements in future filings with the SEC, press releases or other written or oral communications within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). For these statements, we claim the protections of the safe harbor for forward-looking statements contained in such Sections. Forward-looking statements are subject to substantial risks and uncertainties, many of which are difficult to predict and are generally beyond our control. These forward-looking statements include information about possible or assumed future results of our business, financial condition, liquidity, results of operations, plans and objectives. When we use the words “believe,” “expect,” “anticipate,” “estimate,” “plan,” “continue,” “intend,” “should,” “may” or similar expressions, it intends to identify forward-looking statements. Statements regarding the following subjects, among others, may be forward-looking: our business and investment strategy; changes in interest rates and their impact on our borrowers and on the availability and cost of our financing; our projected operating results; defaults by borrowers in paying debt service on outstanding loans; the timing of cash flows, if any, from our investments; the state of the U.S. and global economy generally or in specific geographic regions; reduced demand for office, multifamily or retail space, including as a result of the increase in remote and/or hybrid work trends which allow work from remote locations other than the employer’s office premises; governmental actions and initiatives and changes to government policies; the amount of commercial mortgage loans requiring refinancing; our ability to obtain and maintain financing arrangements on attractive terms, or at all; our ability to maintain compliance with covenants under our financing arrangements; current and prospective financing costs and advance rates for our target assets; our expected leverage; general volatility of the capital markets and the markets in which we may invest and our borrowers operate in; the impact of a protracted decline in the liquidity of capital markets on our business; the state of the regional, national, and global banking systems; the uncertainty surrounding the strength of the national and global economies; the return on or impact of current and future investments, including our loan portfolio and real estate owned investments; allocation of investment opportunities to us by our Manager and our Sponsor; changes in the market value of our investments; effects of hedging instruments on our target assets; rates of default, decreased recovery rates, and/or increased loss severity rates on our target assets and related impairment charges, including as it relates to our real estate owned investments; the degree to which our hedging strategies…

Excerpt shortened here; the source contains the full paragraph.

Previous wording

We were organized as a Maryland corporation on April 29, 2015 and commenced operations on August 25, 2015, and our common stock is traded on the New York Stock Exchange, or NYSE, under the symbol “CMTG.” We have elected and believe we have qualified to be taxed as a REIT for U.S. federal income tax purposes commencing with our taxable year ended December 31, 2015. We are externally managed and advised by our Manager, an investment adviser registered with the Securities and Exchange Commission (“SEC”) pursuant to the Investment Advisers Act of 1940, as amended (the “Advisers Act”). We operate our business in a manner that permits us to maintain our exclusion from registration under the Investment Company Act of 1940, as amended (the “1940 Act”).

Current wording

We were organized as a Maryland corporation on April 29, 2015 and commenced operations on August 25, 2015, and our common stock is traded on the New York Stock Exchange, or NYSE, under the symbol “CMTG.” We have elected and believe we have qualified to be taxed as a REIT for U.S. federal income tax purposes commencing with our taxable year ended December 31, 2015. We are externally managed and advised by our Manager, an investment adviser registered with the U.S. Securities and Exchange Commission (the “SEC”) pursuant to the Investment Advisers Act of 1940, as amended (the “Advisers Act”). We operate our business in a manner that permits us to maintain our exclusion from registration under the 1940 Act.

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 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.

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 charge-offs of principal and/or accrued interest receivable, 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 September 30, 2024, we had net loss per share of $0.40, Distributable Loss per share of $0.17, Distributable Earnings per share prior to realized losses of $0.22, and dividends declared per share of $0.10. As of September 30, 2024, our book value per share was $14.83, our adjusted book value per share was $15.96, 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

We intend to declare and pay regular quarterly dividends to our stockholders, although all future distributions will be declared and paid at the discretion of the Board and will depend upon cash generated by operating activities, our financial condition, capital requirements, annual distribution requirements under the REIT provisions of the Code and such other factors as the Board deems relevant.

Current wording

We intend to declare and pay regular quarterly dividends to our stockholders, although all future distributions will be declared and paid at the discretion of the Board and will depend upon cash generated by operating activities, our financial condition, capital requirements, annual distribution requirements under the REIT provisions of the Internal Revenue Code and such other factors as the Board deems relevant.

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 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.

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 charge-offs of principal and/or accrued interest receivable, 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

While Distributable Earnings (Loss) excludes the impact of our provision for or reversal of current expected credit loss reserve, principal charge-offs are recognized through Distributable Earnings (Loss) when deemed non-recoverable. Non-recoverability is determined (i) upon the resolution of a loan (i.e., when the loan is repaid, fully or partially, or when we acquire title in the case of foreclosure, deed-in-lieu of foreclosure, or assignment-in-lieu of foreclosure), or (ii) with respect to any amount due under any loan, when such amount is determined to be uncollectible.

Current wording

While Distributable Earnings (Loss) excludes the impact of our provision for or reversal of current expected credit loss reserve, charge-offs of principal and/or accrued interest receivable are recognized through Distributable Earnings (Loss) when deemed non-recoverable. Non-recoverability is determined (i) upon the resolution of a loan (i.e., when the loan is repaid, fully or partially, when we acquire title in the case of foreclosure, deed-in-lieu of foreclosure, or assignment-in-lieu of foreclosure, or when the loan is sold for an amount less than its carrying value), or (ii) with respect to any amount due under any loan, when such amount is determined to be uncollectible.

Previous wording

The table below summarizes the reconciliation from weighted average diluted shares under GAAP to the weighted average diluted shares used for Distributable Earnings (Loss) and Distributable Earnings prior to realized gains and losses for the three months ended June 30, 2024 and March 31, 2024:

Current wording

The table below summarizes the reconciliation from weighted average diluted shares under GAAP to the weighted average diluted shares used for Distributable (Loss) Earnings and Distributable Earnings prior to realized losses for the three months ended September 30, 2024 and June 30, 2024:

Previous 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):

Current wording

The following table provides a reconciliation of net loss to Distributable (Loss) Earnings 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, 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.

Current wording

Principal charge-off 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. The loan sold in April 2024.

Previous wording

In January 2024, we sold three senior loans to an unaffiliated purchaser. As of December 31, 2023, we determined that these loans met the held-for-sale criteria and were not considered in determining our general CECL reserve. The loans receivable held-for-sale were presented net of a $7.5 million principal charge-off, representing the difference between the carrying values before principal charge-off and the sales price of the loans. Two of the three loans were sold at their respective carrying values, while the principal charge-off was allocated and attributable to the construction status of the third loan’s collateral asset and its $105.0 million of remaining unfunded commitments.

Current wording

Principal charge-off attributable to the construction status of the loan’s collateral asset and its $105.0 million of remaining unfunded commitments.

Previous wording

The following table details our individual loan receivables held-for-investment based on unpaid principal balances as of June 30, 2024 ($ in thousands):

Current wording

The following table details our individual loans receivable held-for-investment based on unpaid principal balances as of September 30, 2024 ($ in thousands):

Previous 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.

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 70.0% is based on loan commitment, including non-consolidated senior interests and pari passu interests, and excludes risk rated 5 loans.

Previous wording

Refer to Note 5 to our consolidated financial statements for additional details.

Current wording

See Note 5 to our consolidated financial statements for additional details.

Previous wording

Our Manager evaluates the credit quality of each of our loans receivable on an individual basis and assigns a risk rating at least quarterly. We have developed a loan grading system for all of our outstanding loans receivable that are collateralized directly or indirectly by real estate. Grading criteria include, but are not limited to, as-is or as-stabilized debt yield, term of loan, property type, property or collateral location, loan type and other more subjective variables that include, but is not limited to, as-is or as-stabilized collateral value, market conditions, industry conditions and sponsor’s financial stability. While evaluating the credit quality of each loan within our portfolio, we assess these quantitative and qualitative factors as a whole and with no pre-prescribed weight on their impact to our determination of a loan’s risk rating. However, based upon the facts and circumstances for each loan and the overall market conditions, we may consider certain previously mentioned factors more or less relevant than others. We utilize the grading system to determine each loan’s risk of loss and to provide a determination as to whether an individual loan is impaired and whether a specific CECL reserve is necessary. Based on a 5-point scale, the loans are graded “1” through “5,” from less risk to greater risk, respectively. The weighted average risk rating of our total loan portfolio was 3.4 as of June 30, 2024.

Current wording

Our Manager evaluates the credit quality of each of our loans receivable on an individual basis and assigns a risk rating at least quarterly. We have developed a loan grading system for all of our outstanding loans receivable that are collateralized directly or indirectly by real estate. Grading criteria include, but are not limited to, as-is or as-stabilized debt yield, term of loan, property type, property or collateral location, loan type, structure, collateral cash flow volatility and other more subjective variables that include, but are not limited to, as-is or as-stabilized collateral value, market conditions, industry conditions, borrower/sponsor financial stability, and borrower/sponsor exit plan. While evaluating the credit quality of each loan within our portfolio, we assess these quantitative and qualitative factors as a whole and with no pre-prescribed weight on their impact to our determination of a loan’s risk rating. However, based upon the facts and circumstances for each loan and the overall market conditions, we may consider certain previously mentioned factors more or less relevant than others. We utilize the grading system to determine each loan’s risk of loss and to provide a determination as to whether an individual loan is impaired and whether a specific CECL reserve is necessary. Based on a 5-point scale, the loans are graded “1” through “5,” from less risk to greater risk, respectively. The weighted average risk rating of our total loan portfolio was 3.5 as of September 30, 2024.

Previous wording

The current expected credit loss reserve required under GAAP reflects our current estimate of potential credit losses related to our loan commitments. See Note 2 to our consolidated financial statements for further detail of our current expected credit loss reserve methodology.

Current wording

The current expected credit loss reserve required under GAAP reflects our current estimate of potential credit losses related to our loan commitments, which may fluctuate depending on market conditions and changes in our loan portfolio. See Note 2 to our consolidated financial statements for further detail of our current expected credit loss reserve methodology.

Previous 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

Current wording

During the nine months ended September 30, 2024, we recorded a provision for current expected credit losses of $182.6 million, which consisted of a $45.5 million increase in our general CECL reserve and a $137.1 million increase in our specific CECL reserve prior to principal and accrued interest receivable 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. As of September 30, 2024, our total current expected credit loss reserve was $237.1 million.

Previous 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.

Current wording

During the nine months ended September 30, 2023, we recorded a provision for current expected credit losses of $148.4 million, which included a $151.5 million increase in our specific CECL reserve prior to a principal charge-off and a reversal of $3.1 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, offset by deteriorating macroeconomic conditions. As of September 30, 2023, our total current expected credit loss reserve was $154.9 million.

Previous wording

Fair market values used to determine specific CECL reserves are calculated using a discounted cash flow model, a sales comparison approach, or a market capitalization approach. Estimates of fair market values used to determine specific CECL reserves as of June 30, 2024 include assumptions of property specific cash flows over estimated holding periods, assumptions of property redevelopment costs, assumptions of leasing activities, discount rates ranging from 6.0% to 9.5%, and market and terminal capitalization rates ranging from 6.0% to 8.3%. These assumptions are based upon the nature of the properties, recent sales and lease comparables, and anticipated real estate and capital market conditions.

Current wording

Fair market values used to determine specific CECL reserves are calculated using a discounted cash flow model, a sales comparison approach, or a market capitalization approach. Estimates of fair market values used to determine specific CECL reserves as of September 30, 2024 include assumptions of property specific cash flows over estimated holding periods, assumptions of property redevelopment costs, assumptions of leasing activities, discount rates ranging from 6.0% to 9.5%, and market and terminal capitalization rates ranging from 5.25% to 8.25%. These assumptions are based upon the nature of the properties, recent sales and lease comparables, recent and projected property cash flows, and anticipated real estate and capital market conditions.

Previous 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.

Current wording

Weighted average spread over the applicable benchmark rate is based on unpaid principal balance. SOFR as of September 30, 2024 was 4.85%.

Previous 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.

Current wording

We finance certain of our loans using repurchase agreements and a term participation facility. As of September 30, 2024, aggregate borrowings outstanding under our repurchase agreements and term participation facility totaled $3.8 billion, with a weighted average spread of SOFR plus 2.73% per annum based on unpaid principal balance. As of September 30, 2024, the loans securing the outstanding borrowings under these facilities had a weighted average term to initial maturity and fully extended maturity of 0.7 years and 2.1 years, respectively, assuming all conditions to extend are met.

Previous wording

We finance certain of our loans via the sale of a participation in such loans, and we present the loan participations sold as a liability on our consolidated balance sheet when such arrangements do not qualify as sales under GAAP. In instances where we have multiple loan participations with the same lender, the financings are generally not cross-collateralized. Each of our loan participations sold is generally term-matched to its underlying loan. As of June 30, 2024, one of our loans was financed with a loan participation sold.

Current wording

We may finance certain of our loans via the sale of a participation in such loans, and we present the loan participations sold as a liability on our consolidated balance sheet when such arrangements do not qualify as sales under GAAP. In instances where we have multiple loan participations with the same lender, the financings are generally not cross-collateralized. Each of our loan participations sold is generally term-matched to its underlying loan. As of September 30, 2024, we had no loan participations sold.

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 June 30, 2024, four of our loans were financed with notes payable.

Current wording

We finance certain of our loans via secured financings that are term matched to the underlying loan, some of which are partially recourse to us. We refer to such financings as notes payable and they are secured by the related loans receivable. As of September 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 June 30, 2024 has an unpaid principal balance of $721.6 million and a carrying value of $711.2 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 September 30, 2024 has an unpaid principal balance of $719.7 million and a carrying value of $710.5 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 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.

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 September 30, 2024, our debt related to real estate owned has an unpaid principal balance of $280.0 million, a carrying value of $279.7 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 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.

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 September 30, 2024 the fair value of our interest rate cap was de minimis, and as of December 31, 2023, the fair value of our interest rate cap was $0.9 million. During the three months ended September 30, 2024 and 2023, we recognized $0.2 million and $1.7 million, respectively, of proceeds from interest rate cap. During the nine months ended September 30, 2024 and 2023, we recognized $1.3 million and $4.4 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 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.

Current wording

On June 29, 2022, we entered into a full recourse revolving credit facility with $150.0 million in capacity, which generally provided interim financing for eligible loans for up to 180 days at an initial advance rate of up to 75%. As of December 31, 2023, we had no outstanding balance on the facility. On September 25, 2024, we terminated this facility, at which point we had no outstanding balance.

Previous 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.

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 and term participation 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 $1.86 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 (which includes our secured term loan); and (iii) our indebtedness shall not exceed 77.8% of our total assets. As of September 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. The impact of macroeconomic conditions on the commercial real estate and capital markets, including high benchmark interest rates compared to recent historical standards, may make it more difficult for us to satisfy these covenants in the future. Non-compliance with financial covenants may result in our lenders exercising their rights and remedies as provided for in the respective agreements. As market conditions evolve, we may continue to work with our counterparties on modifying financial covenants as needed; however, there is no assurance that our counterparties will agree to such modifications.

Previous wording

The following table summarizes our non-consolidated senior interests and related retained subordinate interests as of June 30, 2024 ($ in thousands):

Current wording

The following table summarizes our non-consolidated senior interests and related retained subordinate interests, excluding for loans classified as held-for-sale, as of September 30, 2024 ($ in thousands):

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 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.

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 September 30, 2024, 97.9% 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 $1.2 billion of net floating rate exposure.

Previous wording

As of June 30, 2024, we have an interest rate cap on our debt related to real estate owned with a notional amount of $280.0 million, a strike rate of 5.00%, and a maturity date of November 15, 2024. The interest rate cap effectively limits the maximum interest rate of our debt related to real estate owned to 7.90%. We have not employed other interest rate derivatives (interest rate swaps, caps, collars or floors) to hedge our asset or liability portfolio, but we may do so in the future.

Current wording

As of September 30, 2024, we have an interest rate cap on our debt related to real estate owned with a notional amount of $280.0 million, a strike rate of 5.00%, and a maturity date of November 15, 2024. The interest rate cap effectively limits the maximum interest rate of our debt related to real estate owned to 7.90% through its maturity. We have not employed other interest rate derivatives (interest rate swaps, caps, collars or floors) to hedge our asset or liability portfolio, but we may do so in the future.

Previous 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.

Current wording

Total net revenue increased $0.4 million during the three months ended September 30, 2024, compared to the three months ended June 30, 2024. The increase is primarily due to an increase in revenue from real estate owned of $0.5 million due to slightly higher overall average occupancy and revenue per available room (“RevPAR”) levels at the hotel portfolio compared to the three months ended June 30, 2024, partially offset by a decrease in net interest income of $0.1 million, which was driven by a decrease in interest income of $2.3 million as a result of decreased average loans receivable balances and two loans being placed on non-accrual status effective July 1, 2024, partially offset by a decrease in interest expense of $2.1 million as a result of lower average borrowing levels during the three months ended September 30, 2024 compared to the three months ended June 30, 2024 as a result of continued deleveraging.

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 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:

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 $0.7 million during the three months ended September 30, 2024, as compared to the three months ended June 30, 2024, primarily due to:

Previous 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.

Current wording

an increase in stock-based compensation expense of $1.0 million due to the forfeiture of restricted stock units recognized during the three months ended June 30, 2024, which led to a reduction in expense for that quarter;

Previous 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;

Current wording

an increase in operating expenses from real estate owned of $0.9 million during the comparative period, due to slightly higher variable operating expenses in connection with slightly higher occupancy levels at the hotel portfolio;

Previous 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;

Current wording

partially offset by a decrease in general and administrative expenses of $1.2 million primarily as a result of a decrease 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 incurred during the three months ended June 30, 2024.

Previous 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.

Current wording

During the three months ended September 30, 2024, we recognized a $0.3 million unrealized loss on interest rate cap, compared to a $0.1 million unrealized loss on interest rate cap during the three months ended June 30, 2024. 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 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.

Current wording

During the three months ended September 30, 2024, we recognized a loss on extinguishment of debt of $0.3 million due to the recognition of unamortized deferred financing costs resulting from the termination of the short-term funding facility, partially offset by the reversal of previously recognized financing costs that were ultimately not owed upon the payoff of a loan participation. 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.

Previous wording

During the three months ended June 30, 2024, we recorded a provision for current expected credit losses of $33.9 million, which consisted of a $32.7 million increase in our general CECL reserve and a $1.2 million increase in our specific CECL reserve prior to a principal charge-off, 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. 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 reserve and a $47.3 million in our specific CECL reserve prior to a principal charge-off, 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.

Current wording

During the three months ended September 30, 2024, we recorded a provision for current expected credit losses of $78.8 million, which consisted of a $9.8 million reversal of our general CECL reserve and a $88.6 million increase in our specific CECL reserve prior to a principal and accrued interest receivable charge-off, primarily attributable to the reclassification of loans to held-for-sale and related charge-offs, 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. During the three months ended June 30, 2024, we recorded a provision for current expected credit losses of $33.9 million, which consisted of a $32.7 million increase in our general reserve and a $1.2 million in our specific CECL reserve prior to a principal charge-off, 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.

Previous 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):

Current wording

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

Previous 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.

Current wording

Total net revenue decreased $42.4 million during the nine months ended September 30, 2024, compared to the nine months ended September 30, 2023. The decrease is primarily due to a decrease in net interest income of $49.0 million, which was driven by a decrease in interest income of $58.1 million as a result of a decreased loans receivable balance and an increase in loans on non-accrual status during the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023, partially offset by a decrease in interest expense of $9.1 million primarily as a result of lower average borrowing levels. The decrease in total net revenue was partially offset by an increase in revenue from real estate owned of $6.6 million due to revenue generated from the mixed-use property we acquired legal title to on June 30, 2023 and higher overall average occupancy and RevPAR levels at the hotel portfolio compared to the nine months ended September 30, 2023.