Item 1. Financial Statements
CIM REAL ESTATE FINANCE TRUST, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts) (Unaudited)
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| September 30, 2022 | | December 31, 2021 |
| ASSETS | | | |
| Real estate assets: | | | |
| Land | $ | 585,100 | | | $ | 655,273 | |
| Buildings, fixtures and improvements | 1,479,525 | | | 1,706,902 | |
| Intangible lease assets | 279,806 | | | 314,832 | |
| Condominium developments | 153,569 | | | 171,080 | |
| Total real estate assets, at cost | 2,498,000 | | | 2,848,087 | |
| Less: accumulated depreciation and amortization | (258,216) | | | (235,481) | |
| Total real estate assets, net | 2,239,784 | | | 2,612,606 | |
| Investment in unconsolidated entities | 132,375 | | | 109,547 | |
Real estate-related securities ($470,121 and $41,981 held at fair value as of September 30, 2022 and December 31, 2021, respectively) | 470,121 | | | 105,471 | |
| Loans held-for-investment and related receivables, net | 4,022,726 | | | 2,624,101 | |
| Less: Current expected credit losses | (29,584) | | | (15,201) | |
| Total loans held-for-investment and related receivables, net | 3,993,142 | | | 2,608,900 | |
| Cash and cash equivalents | 124,836 | | | 107,381 | |
| Restricted cash | 62,941 | | | 36,792 | |
| Rents and tenant receivables, net | 32,957 | | | 58,948 | |
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| Prepaid expenses, derivative assets and other assets | 52,410 | | | 16,279 | |
| Deferred costs, net | 16,212 | | | 7,214 | |
| Assets held for sale | — | | | 1,299,638 | |
| Total assets | $ | 7,124,778 | | | $ | 6,962,776 | |
| LIABILITIES AND STOCKHOLDERS’ EQUITY | | | |
| Repurchase facilities, notes payable and credit facilities, net | $ | 4,358,187 | | | $ | 4,143,205 | |
| Accrued expenses and accounts payable | 29,390 | | | 45,872 | |
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| Due to affiliates | 14,556 | | | 14,594 | |
| Intangible lease liabilities, net | 19,512 | | | 24,896 | |
| Distributions payable | 13,337 | | | 13,252 | |
| Deferred rental income, derivative liabilities and other liabilities | 8,436 | | | 21,282 | |
| Total liabilities | 4,443,418 | | | 4,263,101 | |
| Commitments and contingencies (Note 11) | | | |
| Redeemable common stock | 169,748 | | | 170,714 | |
| STOCKHOLDERS’ EQUITY | | | |
Preferred stock, $0.01 par value per share; 10,000,000 shares authorized, none issued and outstanding | — | | | — | |
Common stock, $0.01 par value per share; 490,000,000 shares authorized, 437,262,738 and 437,373,981 shares issued and outstanding as of September 30, 2022 and December 31, 2021, respectively | 4,373 | | | 4,374 | |
| Capital in excess of par value | 3,529,404 | | | 3,529,126 | |
| Accumulated distributions in excess of earnings | (1,000,420) | | | (1,008,561) | |
| Accumulated other comprehensive (loss) income | (21,737) | | | 2,949 | |
| Total stockholders’ equity | 2,511,620 | | | 2,527,888 | |
| Non-controlling interests | (8) | | | 1,073 | |
| Total equity | 2,511,612 | | | 2,528,961 | |
| Total liabilities, redeemable common stock, non-controlling interests and stockholders’ equity | $ | 7,124,778 | | | $ | 6,962,776 | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
CIM REAL ESTATE FINANCE TRUST, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share amounts) (Unaudited)
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| Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2022 | | 2021 | | 2022 | | 2021 |
| Revenues: | | | | | | | |
| Rental and other property income | $ | 43,559 | | | $ | 70,794 | | | $ | 170,803 | | | $ | 223,026 | |
| Interest income | 66,222 | | | 19,755 | | | 142,669 | | | 48,168 | |
| Total revenues | 109,781 | | | 90,549 | | | 313,472 | | | 271,194 | |
| Operating expenses: | | | | | | | |
| General and administrative | 3,435 | | | 3,076 | | | 10,590 | | | 11,109 | |
| Property operating | 4,432 | | | 11,157 | | | 17,408 | | | 32,632 | |
| Real estate tax | 1,793 | | | 7,591 | | | 10,530 | | | 27,516 | |
| Expense reimbursements to related parties | 3,428 | | | 2,516 | | | 10,899 | | | 8,387 | |
| Management fees | 12,915 | | | 11,703 | | | 39,613 | | | 35,035 | |
| Transaction-related | 9 | | | 6 | | | 462 | | | 37 | |
| Depreciation and amortization | 16,948 | | | 22,801 | | | 54,104 | | | 73,186 | |
| Real estate impairment | 527 | | | 891 | | | 19,814 | | | 5,268 | |
| Increase (decrease) in provision for credit losses | 5,664 | | | (1,792) | | | 15,315 | | | (1,101) | |
| Total operating expenses | 49,151 | | | 57,949 | | | 178,735 | | | 192,069 | |
| Gain on disposition of real estate and condominium developments, net | 4,454 | | | 34,033 | | | 118,135 | | | 80,502 | |
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| Merger-related expenses, net | — | | | (398) | | | — | | | (398) | |
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| Operating income | 65,084 | | | 66,235 | | | 252,872 | | | 159,229 | |
| Other expense: | | | | | | | |
| Gain on investment in unconsolidated entities | 2,195 | | | — | | | 8,858 | | | — | |
| Unrealized loss on equity security | (9,030) | | | — | | | (15,440) | | | — | |
| Interest expense and other, net | (39,366) | | | (20,381) | | | (98,453) | | | (56,863) | |
| Loss on extinguishment of debt | (3,344) | | | (3,251) | | | (19,584) | | | (4,729) | |
| Total other expense | (49,545) | | | (23,632) | | | (124,619) | | | (61,592) | |
| Net income | $ | 15,539 | | | $ | 42,603 | | | $ | 128,253 | | | $ | 97,637 | |
| Net income allocated to noncontrolling interest | 129 | | | — | | | 66 | | | — | |
| Net income attributable to the Company | $ | 15,410 | | | $ | 42,603 | | | $ | 128,187 | | | $ | 97,637 | |
| Weighted average number of common shares outstanding: | | | | | | | |
| Basic and diluted | 437,298,345 | | | 362,705,253 | | | 437,339,348 | | | 362,387,909 | |
| Net income per common share: | | | | | | | |
| Basic and diluted | $ | 0.04 | | | $ | 0.12 | | | $ | 0.29 | | | $ | 0.27 | |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
CIM REAL ESTATE FINANCE TRUST, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands) (Unaudited)
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| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2022 | | 2021 | | 2022 | | 2021 |
| Net income | $ | 15,539 | | | $ | 42,603 | | | $ | 128,253 | | | $ | 97,637 | |
| Other comprehensive (loss) income | | | | | | | |
| Unrealized (loss) gain on real estate-related securities | (8,709) | | | (813) | | | (24,496) | | | 1,239 | |
| Reclassification adjustment for realized gain included in income as other income | — | | | — | | | — | | | (648) | |
| Unrealized gain (loss) on interest rate swaps | 78 | | | (84) | | | 2,361 | | | (13) | |
| Amount of (gain) loss reclassified from other comprehensive (loss) income into income as interest expense and other, net | (2,613) | | | (170) | | | (2,551) | | | 3,033 | |
| Total other comprehensive (loss) income | (11,244) | | | (1,067) | | | (24,686) | | | 3,611 | |
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| Comprehensive income | 4,295 | | | 41,536 | | | 103,567 | | | 101,248 | |
| Comprehensive income attributable to noncontrolling interest | 129 | | | — | | | 66 | | | — | |
| Comprehensive income attributable to the Company | $ | 4,166 | | | $ | 41,536 | | | $ | 103,501 | | | $ | 101,248 | |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
CIM REAL ESTATE FINANCE TRUST, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands, except share amounts) (Unaudited)
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| | Common Stock | | Capital in Excess
of Par Value | | Accumulated
Distributions in Excess of Earnings | | Accumulated Other Comprehensive Income (Loss) | | Total
Stockholders’
Equity | | Non-Controlling Interests | | Total Equity |
| | Number of
Shares | | Par Value | | | |
| Balance as of January 1, 2022 | 437,373,981 | | | $ | 4,374 | | | $ | 3,529,126 | | | $ | (1,008,561) | | | $ | 2,949 | | | $ | 2,527,888 | | | $ | 1,073 | | | $ | 2,528,961 | |
| Issuance of common stock | 1,329,825 | | | 13 | | | 9,561 | | | — | | | — | | | 9,574 | | | — | | | 9,574 | |
| Equity-based compensation | — | | | — | | | 37 | | | — | | | — | | | 37 | | | — | | | 37 | |
Distributions declared on common stock — $0.09 per common share | — | | | — | | | — | | | (40,018) | | | — | | | (40,018) | | | — | | | (40,018) | |
| Redemptions of common stock | (1,345,814) | | | (13) | | | (9,676) | | | — | | | — | | | (9,689) | | | — | | | (9,689) | |
| Changes in redeemable common stock | — | | | — | | | 115 | | | — | | | — | | | 115 | | | — | | | 115 | |
| Distributions to non-controlling interests | — | | | — | | | — | | | — | | | — | | | — | | | (14) | | | (14) | |
| Comprehensive income (loss) | — | | | — | | | — | | | 39,092 | | | (3,397) | | | 35,695 | | | 9 | | | 35,704 | |
| Balance as of March 31, 2022 | 437,357,992 | | | $ | 4,374 | | | $ | 3,529,163 | | | $ | (1,009,487) | | | $ | (448) | | | $ | 2,523,602 | | | $ | 1,068 | | | $ | 2,524,670 | |
| Issuance of common stock | 1,325,282 | | | 13 | | | 9,529 | | | — | | | — | | | 9,542 | | | — | | | 9,542 | |
| Equity-based compensation | 22,892 | | | — | | | 120 | | | — | | | — | | | 120 | | | — | | | 120 | |
Distributions declared on common stock — $0.09 per common share | — | | | — | | | — | | | (40,018) | | | — | | | (40,018) | | | — | | | (40,018) | |
| Redemptions of common stock | (1,395,095) | | | (14) | | | (10,030) | | | — | | | — | | | (10,044) | | | — | | | (10,044) | |
| Changes in redeemable common stock | — | | | — | | | 503 | | | — | | | — | | | 503 | | | — | | | 503 | |
| Distributions to non-controlling interests | — | | | — | | | — | | | — | | | — | | | — | | | (16) | | | (16) | |
| Comprehensive income (loss) | — | | | — | | | — | | | 73,685 | | | (10,045) | | | 63,640 | | | (72) | | | 63,568 | |
| Balance as of June 30, 2022 | 437,311,071 | | | $ | 4,373 | | | $ | 3,529,285 | | | $ | (975,820) | | | $ | (10,493) | | | $ | 2,547,345 | | | $ | 980 | | | $ | 2,548,325 | |
| Issuance of common stock | 1,326,177 | | | 13 | | | 9,535 | | | — | | | — | | | 9,548 | | | — | | | 9,548 | |
| Equity-based compensation | — | | | — | | | 120 | | | — | | | — | | | 120 | | | — | | | 120 | |
Distributions declared on common stock — $0.09 per common share | — | | | — | | | — | | | (40,010) | | | — | | | (40,010) | | | — | | | (40,010) | |
| Redemptions of common stock | (1,374,510) | | | (13) | | | (9,884) | | | — | | | — | | | (9,897) | | | — | | | (9,897) | |
| Changes in redeemable common stock | — | | | — | | | 348 | | | — | | | — | | | 348 | | | — | | | 348 | |
| Distributions to non-controlling interests | — | | | — | | | — | | | — | | | — | | | — | | | (1,117) | | | (1,117) | |
| Comprehensive income (loss) | — | | | — | | | — | | | 15,410 | | | (11,244) | | | 4,166 | | | 129 | | | 4,295 | |
| Balance as of September 30, 2022 | 437,262,738 | | | $ | 4,373 | | | $ | 3,529,404 | | | $ | (1,000,420) | | | $ | (21,737) | | | $ | 2,511,620 | | | $ | (8) | | | $ | 2,511,612 | |
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CIM REAL ESTATE FINANCE TRUST, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands, except share amounts) (Unaudited) — Continued
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| | Common Stock | | Capital in Excess
of Par Value | | Accumulated
Distributions in Excess of Earnings | | Accumulated
Other Comprehensive (Loss) Income | | Total
Stockholders’
Equity | | Non-Controlling Interests | | Total Equity |
| | Number of
Shares | | Par Value | | | |
| Balance as of January 1, 2021 | 362,001,968 | | | $ | 3,620 | | | $ | 3,157,859 | | | $ | (961,006) | | | $ | (2,047) | | | $ | 2,198,426 | | | $ | — | | | $ | 2,198,426 | |
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| Equity-based compensation | — | | | — | | | 40 | | | — | | | — | | | 40 | | | — | | | 40 | |
Distributions declared on common stock — $0.09 per common share | — | | | — | | | — | | | (32,906) | | | — | | | (32,906) | | | — | | | (32,906) | |
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| Comprehensive (loss) income | — | | | — | | | — | | | (2,753) | | | 3,377 | | | 624 | | | — | | | 624 | |
| Balance as of March 31, 2021 | 362,001,968 | | | $ | 3,620 | | | $ | 3,157,899 | | | $ | (996,665) | | | $ | 1,330 | | | $ | 2,166,184 | | | $ | — | | | $ | 2,166,184 | |
| Issuance of common stock | 917,769 | | | 9 | | | 6,651 | | | — | | | — | | | 6,660 | | | — | | | 6,660 | |
| Equity-based compensation | 4,104 | | | — | | | 49 | | | — | | | — | | | 49 | | | — | | | 49 | |
Distributions declared on common stock — $0.09 per common share | — | | | — | | | — | | | (32,948) | | | — | | | (32,948) | | | — | | | (32,948) | |
| Changes in redeemable common stock | — | | | — | | | (173,628) | | | — | | | — | | | (173,628) | | | — | | | (173,628) | |
| Comprehensive income | — | | | — | | | — | | | 57,787 | | | 1,301 | | | 59,088 | | | — | | | 59,088 | |
| Balance as of June 30, 2021 | 362,923,841 | | | $ | 3,629 | | | $ | 2,990,971 | | | $ | (971,826) | | | $ | 2,631 | | | $ | 2,025,405 | | | $ | — | | | $ | 2,025,405 | |
| Issuance of common stock | 1,334,145 | | | 13 | | | 9,591 | | | — | | | — | | | 9,604 | | | — | | | 9,604 | |
| Equity-based compensation | — | | | — | | | 62 | | | — | | | — | | | 62 | | | — | | | 62 | |
Distributions declared on common stock — $0.09 per common share | — | | | — | | | — | | | (32,967) | | | — | | | (32,967) | | | — | | | (32,967) | |
| Redemptions of common stock | (1,712,796) | | | (17) | | | (12,315) | | | — | | | — | | | (12,332) | | | — | | | (12,332) | |
| Changes in redeemable common stock | — | | | — | | | 2,999 | | | — | | | — | | | 2,999 | | | — | | | 2,999 | |
| Comprehensive income (loss) | — | | | — | | | — | | | 42,603 | | | (1,067) | | | 41,536 | | | — | | | 41,536 | |
| Balance as of September 30, 2021 | 362,545,190 | | | $ | 3,625 | | | $ | 2,991,308 | | | $ | (962,190) | | | $ | 1,564 | | | $ | 2,034,307 | | | $ | — | | | $ | 2,034,307 | |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
CIM REAL ESTATE FINANCE TRUST, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands) (Unaudited)
| | | | | | | | | | | |
| Nine Months Ended September 30, |
| 2022 | | 2021 |
| Cash flows from operating activities: | | | |
| Net income | $ | 128,253 | | | $ | 97,637 | |
| Adjustments to reconcile net loss to net cash provided by operating activities: | | | |
| Depreciation and amortization, net | 54,155 | | | 71,535 | |
| Amortization of deferred financing costs | 9,130 | | | 6,616 | |
| Amortization of fair value adjustment of mortgage notes payable assumed | — | | | (149) | |
| Amortization and accretion on deferred loan fees | (7,337) | | | (1,945) | |
| Amortization of premiums and discounts on credit investments | (2,762) | | | (6,368) | |
| Capitalized interest income on real estate-related securities and loans held-for-investment | (888) | | | (703) | |
| Equity-based compensation | 277 | | | 151 | |
| Straight-line rental income | (4,855) | | | (4,398) | |
| Write-offs for uncollectible lease-related receivables | (1,088) | | | 109 | |
| Gain on disposition of real estate assets and condominium developments, net | (118,135) | | | (80,502) | |
| Loss (gain) on sale of credit investments, net | 464 | | | (902) | |
| Gain on investment in unconsolidated entities | (8,858) | | | — | |
| Gain on sale of marketable security | (22) | | | — | |
| Unrealized loss on equity security | 15,462 | | | — | |
| Amortization of fair value adjustment and gain on interest rate swaps | (2,417) | | | (2,887) | |
| (Gain) loss on interest rate caps | (4,252) | | | 171 | |
| Impairment of real estate assets | 19,814 | | | 5,268 | |
| Increase (decrease) in provision for credit losses | 15,315 | | | (1,101) | |
| Write-off of deferred financing costs | 8,092 | | | 2,951 | |
| Return on investment in unconsolidated entities | 4,217 | | | — | |
| Changes in assets and liabilities: | | | |
| Rents and tenant receivables, net | 66,914 | | | 18,228 | |
| Prepaid expenses and other assets | (32,224) | | | (10,247) | |
| Accrued expenses and accounts payable | (3,466) | | | 7,040 | |
| Deferred rental income and other liabilities | (10,380) | | | (3,387) | |
| Due to affiliates | (38) | | | 401 | |
| Net cash provided by operating activities | 125,371 | | | 97,518 | |
| Cash flows from investing activities: | | | |
| Investment in unconsolidated entities | (79,475) | | | — | |
| Return of investment in unconsolidated entities | 625 | | | — | |
| Investment in real estate-related securities | (433,219) | | | (171,880) | |
| Investment in liquid senior loans | (160,928) | | | (266,978) | |
| Investment in real estate assets and capital expenditures | (16,524) | | | (23,391) | |
| Investment in corporate senior loans | (74,801) | | | — | |
| Origination and acquisition of loans held-for-investment | (1,310,406) | | | (720,134) | |
| Origination and exit fees received on loans held-for-investment | 13,977 | | | 7,320 | |
| Principal payments received on loans held-for-investment | 156,920 | | | 285,104 | |
| Principal payments received on real estate-related securities | 16,157 | | | 31 | |
| Net proceeds from sale of real estate-related securities | 132 | | | 27,625 | |
| Net proceeds from disposition of real estate assets and condominium developments | 1,278,609 | | | 459,705 | |
| Net proceeds from sale of liquid senior loans | 52,868 | | | 55,224 | |
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| Redemption of investment in unconsolidated entities | 60,663 | | | — | |
| Proceeds from the settlement of insurance claims | 619 | | | 58 | |
| Net cash used in investing activities | $ | (494,783) | | | $ | (347,316) | |
CIM REAL ESTATE FINANCE TRUST, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands) (Unaudited) — Continued
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| Nine Months Ended September 30, |
| 2022 | | 2021 |
| Cash flows from financing activities: | | | |
| Redemptions of common stock | $ | (29,630) | | | $ | (12,332) | |
| Distributions to stockholders | (91,297) | | | (82,541) | |
| Proceeds from borrowings | 2,303,006 | | | 2,217,489 | |
| Repayments of borrowings, and prepayment penalties | (1,748,868) | | | (1,633,426) | |
| Termination of interest rate swaps | (239) | | | (6,401) | |
| Payment of loan deposits | — | | | (650) | |
| Refund of loan deposits | — | | | 565 | |
| Distributions to non-controlling interests | (1,147) | | | — | |
| Deferred financing costs paid | (18,809) | | | (34,712) | |
| Net cash provided by financing activities | 413,016 | | | 447,992 | |
| Net increase in cash and cash equivalents and restricted cash | 43,604 | | | 198,194 | |
| Cash and cash equivalents and restricted cash, beginning of period | 144,173 | | | 128,408 | |
| Cash and cash equivalents and restricted cash, end of period | $ | 187,777 | | | $ | 326,602 | |
| Reconciliation of cash and cash equivalents and restricted cash to the condensed consolidated balance sheets: | | | |
| Cash and cash equivalents | $ | 124,836 | | | $ | 289,840 | |
| Restricted cash | 62,941 | | | 36,762 | |
| Total cash and cash equivalents and restricted cash | $ | 187,777 | | | $ | 326,602 | |
| Supplemental Disclosures of Non-Cash Investing and Financing Activities: | | | |
| Distributions declared and unpaid | $ | 13,337 | | | $ | 10,985 | |
| Accrued capital expenditures | $ | 1,590 | | | $ | 1,374 | |
| Accrued deferred financing costs | $ | 1,868 | | | $ | 40 | |
| Real estate acquired via foreclosure | $ | — | | | $ | 191,990 | |
| Foreclosure of assets securing the mezzanine loans | $ | — | | | $ | (79,968) | |
| Mortgage notes payable assumed in connection with foreclosure of assets securing the mezzanine loans | $ | — | | | $ | 102,553 | |
| Mortgage notes payable assumed by buyer in connection with disposition of real estate assets | $ | (356,477) | | | $ | (31,801) | |
| Equity security received in connection with disposition of real estate assets | $ | (53,388) | | | $ | — | |
| Change in interest income capitalized to loans held-for-investment | $ | — | | | $ | (9,469) | |
| Common stock issued through distribution reinvestment plan | $ | 28,664 | | | $ | 16,264 | |
| Change in fair value of derivative instruments | $ | 2,252 | | | $ | 5,907 | |
| Change in fair value of real estate-related securities | $ | (24,497) | | | $ | 591 | |
| Conversion of preferred units to loans held-for-investment | $ | 68,242 | | | $ | — | |
| Supplemental Cash Flow Disclosures: | | | |
| Interest paid | $ | 79,201 | | | $ | 52,200 | |
| Cash paid for taxes | $ | 1,318 | | | $ | 1,851 | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
CIM REAL ESTATE FINANCE TRUST, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2022 (Unaudited)
NOTE 1 — ORGANIZATION AND BUSINESS
CIM Real Estate Finance Trust, Inc. (the “Company”) is a non-exchange traded real estate investment trust (“REIT”) formed as a Maryland corporation on July 27, 2010, that elected to be taxed, and operates its business to qualify, as a REIT for U.S. federal income tax purposes beginning with its taxable year ended December 31, 2012. The Company operates a diversified portfolio of short duration senior secured loans, core commercial real estate primarily consisting of net leased properties located throughout the United States, and other credit investments. As of September 30, 2022, the Company owned 384 properties, comprised of 11.0 million rentable square feet of commercial space located in 44 states. As of September 30, 2022, the rentable square feet at these properties was 99.3% leased, including month-to-month agreements, if any. As of September 30, 2022, the Company’s loan portfolio consisted of 346 loans with a net book value of $4.0 billion, and investments in real estate-related securities of $470.1 million. As of September 30, 2022, the Company owned condominium developments with a net book value of $153.6 million.
A majority of the Company’s business is conducted through CIM Real Estate Finance Operating Partnership, LP, a Delaware limited partnership, of which the Company is the sole general partner and owns, directly or indirectly, 100% of the partnership interests.
The Company is externally managed by CIM Real Estate Finance Management, LLC, a Delaware limited liability company (“CMFT Management”), which is an affiliate of CIM Group, LLC (“CIM”). CIM is a community-focused real estate and infrastructure owner, operator, lender and developer. CIM is headquartered in Los Angeles, CA, with offices in Atlanta, GA, Bethesda, MD, Chicago, IL, Dallas, TX, New York, NY, Orlando, FL, Phoenix, AZ and Tokyo, Japan. CIM also maintains additional offices across the Unites States, as well as in Korea, Hong Kong and the United Kingdom to support its platform.
CCO Group, LLC is a subsidiary of CIM and owns and controls CMFT Management, the Company’s manager, and is the indirect owner of CCO Capital, LLC (“CCO Capital”), the Company’s dealer manager, and CREI Advisors, LLC (“CREI Advisors”), the Company’s property manager. CCO Group, LLC and its subsidiaries (collectively, “CCO Group”) serve as the Company’s sponsor. The Company relies upon CIM Capital IC Management, LLC, the Company’s investment advisor (the “Investment Advisor”), to provide substantially all of the Company’s day-to-day management with respect to investments in securities and certain other investments.
On January 26, 2012, the Company commenced its initial public offering on a “best efforts” basis of up to a maximum of $2.975 billion in shares of common stock (the “Initial Offering”). The Company ceased issuing shares in the Initial Offering on April 4, 2014. At the completion of the Initial Offering, a total of approximately 297.4 million shares of common stock had been issued, including approximately 292.3 million shares of common stock sold to the public pursuant to the primary portion of the Initial Offering and approximately 5.1 million shares of common stock issued pursuant to the distribution reinvestment plan (“DRIP”) portion of the Initial Offering. The remaining approximately 404,000 unsold shares from the Initial Offering were deregistered.
The Company registered $247.0 million of shares of common stock under the DRIP (the “Initial DRIP Offering”) pursuant to a Registration Statement on Form S-3 (Registration No. 333-192958), which was filed with the U.S. Securities and Exchange Commission (the “SEC”) on December 19, 2013 and automatically became effective with the SEC upon filing. The Company ceased issuing shares under the Initial DRIP Offering effective as of June 30, 2016. At the completion of the Initial DRIP Offering, a total of approximately $241.7 million of shares of common stock had been issued. The remaining $5.3 million of unsold shares from the Initial DRIP Offering were deregistered.
The Company registered an additional $600.0 million of shares of common stock under the DRIP (the “Secondary DRIP Offering,” and together with the Initial DRIP Offering, the “DRIP Offerings,” and the DRIP Offerings collectively with the Initial Offering, the “Offerings”) pursuant to a Registration Statement on Form S-3 (Registration No. 333-212832), which was filed with the SEC on August 2, 2016 and automatically became effective with the SEC upon filing. The Company began to issue shares under the Secondary DRIP Offering on August 2, 2016 and continues to issue shares under the Secondary DRIP Offering.
The Company’s board of directors (the “Board”) establishes an updated estimated per share net asset value (“NAV”) of the Company’s common stock on at least an annual basis for purposes of assisting broker-dealers that participated in the Initial Offering in meeting their customer account reporting obligations under Financial Industry Regulatory Authority Rule 2231.
CIM REAL ESTATE FINANCE TRUST, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2022 (Unaudited) – (Continued)
Distributions are reinvested in shares of the Company’s common stock for participants in the DRIP at the estimated per share NAV as determined by the Board. Additionally, the estimated per share NAV as determined by the Board serves as the per share NAV for purposes of the share redemption program. As of September 30, 2022, the estimated per share NAV of the Company’s common stock was $7.20, which was established by the Board on May 25, 2021 using a valuation date of March 31, 2021. Commencing on May 26, 2021, $7.20 served as the per share NAV under the DRIP. The Board previously established a per share NAV as of August 31, 2015, September 30, 2016, December 31, 2016, December 31, 2017, December 31, 2018, December 31, 2019, March 31, 2020, and June 30, 2020. The Company’s estimated per share NAVs are not audited or reviewed by its independent registered public accounting firm.
NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The summary of significant accounting policies presented below is designed to assist in understanding the Company’s condensed consolidated financial statements. These accounting policies conform to accounting principles generally accepted in the United States of America (“GAAP”) in all material respects, and have been consistently applied in preparing the accompanying condensed consolidated financial statements.
Principles of Consolidation and Basis of Presentation
The condensed consolidated financial statements of the Company have been prepared in accordance with the rules and regulations of the SEC regarding interim financial reporting, including the instructions to Form 10-Q and Article 10 of Regulation S-X, and do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, the statements for the interim periods presented include all adjustments, which are of a normal and recurring nature, necessary for a fair presentation of the results for such periods. Results for these interim periods are not necessarily indicative of full year results. The information included in this Quarterly Report on Form 10-Q should be read in conjunction with the Company’s audited consolidated financial statements as of and for the year ended December 31, 2021, and related notes thereto, set forth in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021. The condensed consolidated financial statements should also be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in this Quarterly Report on Form 10-Q.
The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.
In determining whether the Company has controlling interests in an entity and the requirement to consolidate the accounts in that entity, the Company analyzes its credit and real estate investments in accordance with standards set forth in GAAP to determine whether they are variable interest entities (“VIEs”), and if so, whether the Company is the primary beneficiary. The Company’s judgment with respect to its level of influence or control over an entity and whether the Company is the primary beneficiary of a VIE involves consideration of various factors, including the form of the Company’s ownership interest, the Company’s voting interest, the size of the Company’s investment (including loans), and the Company’s ability to participate in major policy-making decisions. The Company’s ability to correctly assess its influence or control over an entity affects the presentation of these credit and real estate investments on the Company’s condensed consolidated financial statements. During the nine months ended September 30, 2022, the Company disposed of two properties previously owned through a consolidated joint venture arrangement (the “Consolidated Joint Venture”) and therefore determined it no longer had a controlling financial interest in the Consolidated Joint Venture as of September 30, 2022. See Note 4 — Real Estate Assets for additional information.
CIM REAL ESTATE FINANCE TRUST, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2022 (Unaudited) – (Continued)
Reclassifications
Certain amounts in the Company’s prior period condensed consolidated financial statements have been reclassified to conform to the current period presentation. Other than as shown below, these reclassifications had no effect on previously reported totals or subtotals. The reclassifications have been made to the condensed consolidated balance sheet as of December 31, 2021, and to the condensed consolidated statement of cash flows for the nine months ended September 30, 2021 as follows (in thousands):
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| | | | | | | As previously reported | | Reclassifications | | As Revised | | | | | | |
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| Condensed Consolidated Balance Sheets | | | | | | | | | | | | | | | | | |
| Rents and tenant receivables, net | | | | | | | $ | 61,468 | | | $ | (2,520) | | | $ | 58,948 | | | | | | | |
| Prepaid expenses and other assets | | | | | | | $ | 13,759 | | | $ | 2,520 | | | $ | 16,279 | | | | | | | |
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| Rents and tenant receivables, net | | | | | | | | | | | | | $ | 15,889 | | | $ | 2,339 | | | $ | 18,228 | |
| Prepaid expenses and other assets | | | | | | | | | | | | | $ | (7,908) | | | $ | (2,339) | | | $ | (10,247) | |
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Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Real Estate Assets
Real estate assets are stated at cost, less accumulated depreciation and amortization. The Company considers the period of future benefit of each respective asset to determine the appropriate useful life. The estimated useful lives of the Company’s real estate assets by class are generally as follows:
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| Buildings | 40 years |
| Site improvements | 15 years |
| Tenant improvements | Lesser of useful life or lease term |
| Intangible lease assets | Lease term |
Recoverability of Real Estate Assets
The Company continually monitors events and changes in circumstances that could indicate that the carrying amounts of its real estate assets may not be recoverable. Impairment indicators that the Company considers include, but are not limited to: bankruptcy or other credit concerns of a property’s major tenant, such as a history of late payments, lease concessions and other factors; a significant decrease in a property’s revenues due to lease terminations; vacancies; co-tenancy clauses; reduced lease rates; changes in anticipated holding periods; and significant increases to budgeted costs for units under development. When indicators of potential impairment are present, the Company assesses the recoverability of the assets by determining whether the carrying amount of the assets will be recovered through the undiscounted future cash flows expected from the use of the assets and their eventual disposition. In the event that such expected undiscounted future cash flows do not exceed the carrying amount, the Company will adjust the real estate assets to their respective fair values and recognize an impairment loss. Generally, fair value is determined using a discounted cash flow analysis and recent comparable sales transactions. During the nine months ended September 30, 2022, as part of the Company’s quarterly impairment review procedures, the Company recorded impairment charges of $11.9 million related to 19 properties, all of which was due to sales prices that were less than their respective carrying values. Additionally, during the nine months ended September 30, 2022, certain condominium units
CIM REAL ESTATE FINANCE TRUST, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2022 (Unaudited) – (Continued)
were deemed to be impaired and their carrying values were reduced to their estimated fair value, resulting in impairment charges of $7.9 million. The Company’s impairment assessment as of September 30, 2022 was based on the most current information available to the Company, including expected holding periods. If the Company’s expected holding periods for assets change, subsequent tests for impairment could result in additional impairment charges in the future. The Company cannot provide any assurance that additional material impairment charges with respect to the Company’s real estate assets will not occur during 2022 or in future periods. During the nine months ended September 30, 2021, the Company recorded impairment charges of $5.3 million related to 11 properties, of which impairment at seven properties was due to sales prices that were less than their respective carrying values and impairment at four properties was due to vacancy. The assumptions and uncertainties utilized in the evaluation of the impairment of real estate assets are discussed in detail in Note 3 — Fair Value Measurements. See also Note 4 — Real Estate Assets for further discussion regarding real estate investment activity.
Assets Held for Sale
When a real estate asset is identified by the Company as held for sale, the Company will cease recording depreciation and amortization of the assets related to the property and estimate its fair value, net of selling costs. If, in management’s opinion, the fair value, net of selling costs, of the asset is less than the carrying amount of the asset, an adjustment to the carrying amount is then recorded to reflect the estimated fair value of the property, net of selling costs. As of September 30, 2022, there were no assets identified as held for sale. As of December 31, 2021, in connection with the Purchase and Sale Agreement (as defined in Note 4 — Real Estate Assets), the Company identified 81 properties with a carrying value of $1.3 billion as held for sale, all of which were disposed of during the nine months ended September 30, 2022.
Dispositions of Real Estate Assets
Gains and losses from dispositions are recognized once the various criteria relating to the terms of sale and any subsequent involvement by the Company with the asset sold are met. A discontinued operation includes only the disposal of a component of an entity and represents a strategic shift that has (or will have) a major effect on an entity’s financial results. The Company’s dispositions during the nine months ended September 30, 2022 and 2021 did not qualify for discontinued operations presentation and thus, the results of the properties and condominiums that were sold will remain in operating income, and any associated gains or losses from the dispositions are included in gain on disposition of real estate and condominium developments, net. See Note 4 — Real Estate Assets for a discussion of the disposition of individual properties and condominiums during the nine months ended September 30, 2022.
Allocation of Purchase Price of Real Estate Assets
Upon the acquisition of real properties, the Company allocates the purchase price to acquired tangible assets, consisting of land, buildings and improvements, and to identified intangible assets and liabilities, consisting of the value of above- and below-market leases and the value of in-place leases and other intangibles, based in each case on their relative fair values. The Company utilizes independent appraisals to assist in the determination of the fair values of the tangible assets of an acquired property (which includes land and buildings). The information in the appraisal, along with any additional information available to the Company’s management, is used in estimating the amount of the purchase price that is allocated to land. Other information in the appraisal, such as building value and market rents, may be used by the Company’s management in estimating the allocation of purchase price to the building and to intangible lease assets and liabilities. The appraisal firm has no involvement in management’s allocation decisions other than providing this market information.
The determination of the fair values of the real estate assets and liabilities acquired requires the use of significant assumptions with regard to the current market rental rates, rental growth rates, capitalization and discount rates, interest rates and other variables. The use of alternative estimates may result in a different allocation of the Company’s purchase price, which could materially impact the Company’s results of operations.
Certain acquisition-related expenses related to asset acquisitions are capitalized and allocated to tangible and intangible assets and liabilities, as described above. Acquisition-related manager expense reimbursements are expensed as incurred and are included in expense reimbursements to related parties in the accompanying condensed consolidated statements of operations. Other acquisition-related expenses continue to be expensed as incurred and are included in transaction-related expenses in the accompanying condensed consolidated statements of operations.
Investment in Unconsolidated Entities
On March 31, 2022, the Company fully redeemed its $60.7 million investment in CIM UII Onshore, L. P. (“CIM UII Onshore”). Prior to redemption, the Company had less than 5% ownership of CIM UII Onshore and accounted for its
CIM REAL ESTATE FINANCE TRUST, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2022 (Unaudited) – (Continued)
investment under the equity method. The equity method of accounting requires the investment to be initially recorded at cost, including transaction costs incurred to finalize the investment, and subsequently adjusted for the Company’s share of equity in CIM UII Onshore’s earnings and distributions. Prior to redemption, the Company recorded its share of CIM UII Onshore’s profits or losses on a quarterly basis as an adjustment to the carrying value of the investment on the Company’s condensed consolidated balance sheet and such share is recognized as a profit or loss on the condensed consolidated statements of operations. The Company recorded its share of CIM UII Onshore’s gain, totaling $5.2 million during the nine months ended September 30, 2022, in the condensed consolidated statements of operations. During the nine months ended September 30, 2022, the Company received distributions of $531,000 related to its investment in CIM UII Onshore, all of which was recognized as a return on investment. As of December 31, 2021, the Company’s investment in CIM UII Onshore had a carrying value of $56.0 million.
CMFT MT JV Holdings, LLC, an indirect wholly-owned subsidiary of the Company, is engaged in an unconsolidated joint venture arrangement through CIM NP JV Holdings, LLC (“NP JV Holdings”) (the “Unconsolidated Joint Venture”), of which it owns 50% of the outstanding equity. Through the Unconsolidated Joint Venture, which holds approximately 91% of the membership interest in NewPoint JV, LLC (the “NewPoint JV”) pursuant to the terms of the Operating Agreement entered into between the Unconsolidated Joint Venture and NewPoint Bridge Lending, LLC, the Company indirectly owns approximately 45% of the outstanding equity of the NewPoint JV on a fully diluted basis. The Company accounts for its investment under the equity method. The equity method of accounting requires the investment to be initially recorded at cost, including transaction costs incurred to finalize the investment, and is subsequently adjusted for the Company’s share of equity in NP JV Holdings’ earnings and distributions, including unrealized gains and losses as a result of changes in fair value of the NewPoint JV. The Company records its share of NP JV Holdings’ profits or losses on a quarterly basis as an adjustment to the carrying value of the investment on the Company’s condensed consolidated balance sheet and such share is recognized as a profit or loss on the condensed consolidated statements of operations. The Company recorded a gain totaling $3.7 million, which represented its share of NP JV Holdings’ gain, during the nine months ended September 30, 2022 in the condensed consolidated statements of operations. During the nine months ended September 30, 2022, the Company contributed an additional $79.5 million in NP JV Holdings. As of September 30, 2022, the Company’s aggregate investment in NP JV Holdings of $132.4 million is included in investment in unconsolidated entities on the condensed consolidated balance sheets. The Company received $4.3 million in distributions related to its investment in NP JV Holdings during the nine months ended September 30, 2022.
Noncontrolling Interest in Consolidated Joint Venture
From December 2021 to July 2022, the Company determined it had a controlling interest in the Consolidated Joint Venture and, therefore, met the requirements for consolidation. During the nine months ended September 30, 2022, the Company recorded net income of $66,000 and paid distributions of $1.1 million to the noncontrolling interest.
During the nine months ended September 30, 2022, the Company disposed of the underlying properties previously owned through the Consolidated Joint Venture, as further discussed in Note 4 — Real Estate Assets. Therefore, the Company determined it no longer had a controlling financial interest in the Consolidated Joint Venture as of September 30, 2022.
Restricted Cash
The Company had $62.9 million and $36.8 million in restricted cash as of September 30, 2022 and December 31, 2021, respectively. Included in restricted cash was $6.7 million and $7.8 million held by lenders in lockbox accounts, as of September 30, 2022 and December 31, 2021, respectively. As part of certain debt agreements, rents from certain encumbered properties are deposited directly into a lockbox account, from which the monthly debt service payment is disbursed to the lender and the excess is disbursed to the Company. Also included in restricted cash was $56.2 million and $29.0 million of construction reserves, amounts held by lenders in escrow accounts for real estate taxes and other lender reserves for certain properties, in accordance with the associated lender’s loan agreement as of September 30, 2022 and December 31, 2021, respectively.
Real Estate-Related Securities
Real estate-related securities consists primarily of the Company’s investments in commercial mortgage-backed securities (“CMBS”) and equity securities. The Company determines the appropriate classification for real estate-related securities at the time of purchase and reevaluates such designation as of each balance sheet date.
As of September 30, 2022, the Company classified its investments in CMBS as available-for-sale as the Company is not actively trading the securities; however, the Company may sell them prior to their maturity. These investments are carried at their estimated fair value with unrealized gains and losses reported in other comprehensive (loss) income. During the nine
CIM REAL ESTATE FINANCE TRUST, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2022 (Unaudited) – (Continued)
months ended September 30, 2022, the Company invested $433.2 million in CMBS. As of September 30, 2022, the Company had investments in 16 CMBS with an estimated aggregate fair value of $432.2 million.
In addition, the Company had an investment in an equity security with an estimated aggregate fair value of $37.9 million as of September 30, 2022, which is comprised of RTL Common Stock (as defined in Note 4 — Real Estate Assets) received as consideration in connection with the Purchase and Sale Agreement. These investments are carried at their estimated fair value with unrealized gains and losses reported on the condensed consolidated statements of operations. During the nine months ended September 30, 2022, the Company recorded $2.7 million of dividend income on RTL Common Stock, which is included in interest expense and other, net on the condensed consolidated statements of operations. The Company also recorded $15.5 million of unrealized loss on RTL Common Stock during the nine months ended September 30, 2022, which is included in unrealized loss on equity security in the condensed consolidated statements of operations.
The Company monitors its available-for-sale securities for changes in fair value. A loss is recognized when the Company determines that a decline in the estimated fair value of a security below its amortized cost has resulted from a credit loss or other factors. The Company records impairments related to credit losses through current expected credit losses. However, the allowance is limited by the amount that the fair value is less than the amortized cost basis. The Company considers many factors in determining whether a credit loss exists, including, but not limited to, the extent to which the fair value is less than the amortized cost basis, recent events specific to the security, industry or geographic area, the payment structure of the security, the failure of the issuer of the security to make scheduled interest or principal payments, and external credit ratings and recent changes in such ratings. The analysis of determining whether a credit loss exists requires significant judgments and assumptions. The use of alternative judgments and assumptions could result in a different conclusion. During the nine months ended September 30, 2022 and 2021, the Company did not record current expected credit losses related to CMBS.
The amortized cost of real estate-related securities is adjusted for amortization of premiums and accretion of discounts to maturity computed under the effective interest method and is recorded in the accompanying condensed consolidated statements of operations in interest income. Upon the sale of a security, the realized net gain or loss is computed on the specific identification method.
Interest earned is either received in cash or capitalized to real estate-related securities in the Company’s condensed consolidated balance sheets. Interest is capitalized when certain conditions are met as specified in each security agreement. During the three and nine months ended September 30, 2022, the Company capitalized $280,000 and $826,000, respectively, of interest income to real estate-related securities. During the three and nine months ended September 30, 2021, the Company capitalized $268,000 and $703,000, respectively, of interest income to real estate-related securities.
Loans Held-for-Investment
The Company’s loans held-for-investment include loans related to real estate assets, as well as credit investments, including commercial mortgage loans and other loans and securities related to commercial real estate assets, as well as corporate loan opportunities that are consistent with the Company’s investment strategy and objectives. The Company intends to hold the loans held-for-investment for the foreseeable future or until maturity. Loans held-for-investment are carried on the Company’s condensed consolidated balance sheets at amortized cost, net of any current expected credit losses. Discounts or premiums, origination fees and exit fees are amortized as a component of interest income using the effective interest method over the life of the respective loans, or on a straight-line basis when it approximates the effective interest method. Upon the sale of a loan, the realized net gain or loss is computed on the specific identification method.
Interest earned is either received in cash or capitalized to loans held-for-investment and related receivables, net in the Company’s condensed consolidated balance sheets. Interest is capitalized when certain conditions are met as specified in each loan agreement. During the nine months ended September 30, 2022, the Company capitalized $62,000 of interest income to loans held-for-investment.
Accrual of interest income is suspended on nonaccrual loans. Loans that are past due 90 days or more as to principal or interest, or where reasonable doubt exists as to timely collection, are generally considered nonperforming and placed on nonaccrual status. Interest collected is recognized on a cash basis by crediting income when received. Loans may be restored to accrual status when all principal and interest are current and full repayment of the remaining contractual principal and interest are reasonably assured. As of September 30, 2022, the Company did not have nonaccrual loans.
CIM REAL ESTATE FINANCE TRUST, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2022 (Unaudited) – (Continued)
Current Expected Credit Losses
The Company adopted Accounting Standards Update (“ASU”) No. 2016-13, Financial Instruments - Credit Losses (Topic 326) (“ASU 2016-13”), on January 1, 2020. Current expected credit losses (“CECL”) required under ASU 2016-13 reflects the Company’s current estimate of potential credit losses related to the Company’s loans held-for-investment included in the condensed consolidated balance sheets. Changes to current expected credit losses are recognized through net income on the Company’s condensed consolidated statements of operations. While ASU 2016-13 does not require any particular method for determining current expected credit losses, it does specify current expected credit losses should be based on relevant information about past events, including historical loss experience, current portfolio and market conditions, and reasonable and supportable forecasts for the duration of each respective loan. In addition, other than a few narrow exceptions, ASU 2016-13 requires that all financial instruments subject to the credit loss model have some amount of loss reserve to reflect the GAAP principal underlying the credit loss model that all loans, debt securities, and similar assets have some inherent risk of loss, regardless of credit quality, subordinate capital, or other mitigating factors.
The Company estimates the current expected credit loss for its first mortgage loans primarily using the Weighted Average Remaining Maturity method, which has been identified as an acceptable method for estimating CECL reserves in the Financial Accounting Standards Board (“FASB”) Staff Q&A Topic 326, No. 1. This method requires the Company to reference historic loan loss data across a comparable data set and apply such loss rate to each loan investment over its expected remaining term, taking into consideration expected economic conditions over the relevant timeframe. The Company considers loan investments that are both (i) expected to be substantially repaid through the operation or sale of the underlying collateral, and (ii) for which the borrower is experiencing financial difficulty, to be “collateral-dependent” loans. For such loans that the Company determines that foreclosure of the collateral is probable, the Company measures the expected losses based on the difference between the fair value of the collateral less costs to sell and the amortized cost basis of the loan as of the measurement date. For collateral-dependent loans that the Company determines foreclosure is not probable, the Company applies a practical expedient to estimate expected losses using the difference between the collateral’s fair value (less costs to sell the asset if repayment is expected through the sale of the collateral) and the amortized cost basis of the loan. For the Company’s liquid senior loans and corporate senior loans, the Company uses a probability of default and loss given default method using a comparable data set. The Company may use other acceptable alternative approaches in the future depending on, among other factors, the type of loan, underlying collateral, and availability of relevant historical market loan loss data.
Quarterly, the Company evaluates the risk of all loans and assigns a risk rating based on a variety of factors, grouped as follows: (i) loan and credit structure, including the as-is loan-to-value (“LTV”) ratio and structural features; (ii) quality and stability of real estate value and operating cash flow, including debt yield, dynamics of the geography, property type and local market, physical condition, stability of cash flow, leasing velocity and quality and diversity of tenancy; (iii) performance against underwritten business plan; and (iv) quality, experience and financial condition of sponsor, borrower and guarantor(s).
Based on a 5-point scale, the Company’s loans are rated “1” through “5,” from least risk to greatest risk, respectively, which ratings are defined as follows:
1-Outperform — Most satisfactory asset quality and liquidity, good leverage capacity. A “1” rating maintains predictable and strong cash flows from operations. The trends and outlook for the credit's operations, balance sheet, and industry are neutral to favorable. Collateral, if appropriate, exceeds performance metrics;
2-Meets or Exceeds Expectations — Acceptable asset quality, moderate excess liquidity, modest leverage capacity. A “2” rating could have some financial/non-financial weaknesses which are offset by strengths; however, the credit demonstrates an ample current cash flow from operations. The trends and outlook for the credit's operations, balance sheet, and industry are generally positive or neutral. Collateral performance, if appropriate, meets or exceeds substantially all performance metrics included in original or current underwriting / business plan;
3-Satisfactory — Acceptable asset quality, somewhat strained liquidity, minimal leverage capacity. A “3” rating is at times characterized by acceptable cash flows from operations. The trends and conditions of the credit's operations and balance sheet are neutral. Collateral performance, if appropriate, meets or is on track to meet underwriting; business plan can reasonably be achieved;
4-Underperformance — The debt investment possesses credit deficiencies or potential weaknesses which deserve management’s close and continued attention. The portfolio company’s operations and/or balance sheet have demonstrated an adverse trend or deterioration which, while serious, has not reached the point where the liquidation of debt is jeopardized. These weaknesses are generally considered correctable by the borrower in the
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2022 (Unaudited) – (Continued)
normal course of business but may weaken the asset or inadequately protect the Company’s credit position if not checked or corrected. Collateral performance, if appropriate, falls short of original underwriting, material differences exist from business plan, or both; technical milestones have been missed; defaults may exist, or may soon occur absent material improvement; and
5-Default/Possibility of Loss — The debt investment is protected inadequately by the current enterprise value or paying capacity of the obligor or of the collateral, if any. The underlying company’s operations have well-defined weaknesses based upon objective evidence, such as recurring or significant decreases in revenues and cash flows. Major variance from business plan; loan covenants or technical milestones have been breached; timely exit from loan via sale or refinancing is questionable; risk of principal loss. Collateral performance, if appropriate, is significantly worse than underwriting.
The Company generally assigns a risk rating of “3” to all newly originated or acquired loans held-for-investment during a most recent quarter, except in the case of specific circumstances warranting an exception.
Leases
The Company has lease agreements with lease and non-lease components. The Company has elected to not separate non-lease components from lease components for all classes of underlying assets (primarily real estate assets) and will account for the combined components as rental and other property income. Non-lease components included in rental and other property income include certain tenant reimbursements for maintenance services (including common-area maintenance services or “CAM”), real estate taxes, insurance and utilities paid for by the lessor but consumed by the lessee. As a lessor, the Company has further determined that this policy will be effective only on a lease that has been classified as an operating lease and the revenue recognition pattern and timing is the same for both types of components. The Company is not a party to any material leases where it is the lessee.
Significant judgments and assumptions are inherent in not only determining if a contract contains a lease, but also the lease classification, terms, payments, and, if needed, discount rates. Judgments include the nature of any options, including if they will be exercised, evaluation of implicit discount rates and the assessment and consideration of “fixed” payments for straight-line rent revenue calculations.
Lease costs represent the initial direct costs incurred in the origination, negotiation and processing of a lease agreement. Such costs include outside broker commissions and other independent third-party costs and are amortized over the life of the lease on a straight-line basis. Costs related to salaries and benefits, supervision, administration, unsuccessful origination efforts and other activities not directly related to completed lease agreements are expensed as incurred. Upon successful lease execution, leasing commissions are capitalized.
Development Activities
Project costs and expenses, including interest incurred, associated with the development, construction and lease-up of a real estate project are capitalized as construction in progress. During the nine months ended September 30, 2022 and 2021, the Company capitalized $10.9 million and $5.9 million, respectively, of expenses associated with the development of condominiums acquired via foreclosure, which is included in condominium developments in the accompanying condensed consolidated balance sheets. Included in the amounts capitalized during the nine months ended September 30, 2022 and 2021 was $1.1 million and $1.4 million, respectively, of capitalized interest expense.
Revenue Recognition
Revenue from leasing activities
Rental and other property income is primarily derived from fixed contractual payments from operating leases, and therefore, is generally recognized on a straight-line basis over the term of the lease, which typically begins the date the tenant takes control of the space. When the Company acquires a property, the terms of existing leases are considered to commence as of the acquisition date for the purpose of this calculation. Variable rental and other property income consists primarily of tenant reimbursements for recoverable real estate taxes and operating expenses which are included in rental and other property income in the period when such costs are incurred, with offsetting expenses in real estate taxes and property operating expenses, respectively, within the condensed consolidated statements of operations. The Company defers the recognition of variable rental and other property income, such as percentage rents, until the specific target that triggers the contingent rental income is achieved.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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The Company continually reviews whether collection of lease-related receivables, including any straight-line rent, and current and future operating expense reimbursements from tenants are probable. The determination of whether collectability is probable takes into consideration the tenant’s payment history, the financial condition of the tenant, business conditions in the industry in which the tenant operates and economic conditions in the area in which the property is located. Upon the determination that the collectability of a receivable is not probable, the Company will record a reduction to rental and other property income for amounts previously recorded and a decrease in the outstanding receivable. Revenue from leases where collection is deemed to be not probable is recorded on a cash basis until collectability becomes probable. Management’s estimate of the collectability of lease-related receivables is based on the best information available at the time of estimate. The Company does not use a general reserve approach and lease-related receivables are adjusted and taken against rental and other property income only when collectability becomes not probable.
Revenue from lending activities
Interest income from the Company’s loans held-for-investment and real estate-related securities is comprised of interest earned on loans and the accretion and amortization of net loan origination fees and discounts. Interest income on loans is accrued as earned, with the accrual of interest suspended when the related loan becomes a nonaccrual loan. Interest income on the Company’s liquid senior loans is accrued as earned beginning on the settlement date.
Reportable Segments
The Company’s segment information reflects how the chief operating decision makers review information for operational decision-making purposes. The Company has two reportable segments:
Credit — engages primarily in acquiring and originating loans, either directly or through co-investments in joint ventures, related to real estate assets. The Company may acquire first and second lien mortgage loans, mezzanine loans, bridge loans, wraparound mortgage loans, construction mortgage loans on real property and loans on leasehold interest mortgages. This segment also includes investments in real estate-related securities, liquid senior loans and corporate senior loans.
Real estate — engages primarily in acquiring and managing income-producing retail properties that are primarily single-tenant properties, which are leased to creditworthy tenants under long-term net leases. The commercial properties are geographically diversified throughout the United States and have similar economic characteristics.
See Note 16 — Segment Reporting for a further discussion regarding these segments.
Recent Accounting Pronouncements
From time to time, new accounting pronouncements are issued by various standard setting bodies that may have an impact on the Company’s accounting and reporting. Except as otherwise stated below, the Company is currently evaluating the effect that certain new accounting requirements may have on the Company’s accounting and related reporting and disclosures in the Company’s condensed consolidated financial statements.
In January 2021, the FASB issued ASU No. 2021-01, Reference Rate Reform (Topic 848) (“ASU 2021-01”). The amendments in ASU 2021-01 clarify that certain optional expedients and exceptions for contract modifications and hedge accounting apply to derivative instruments that use an interest rate for margining, discounting, or contract price alignment that is modified as a result of the discontinuation of the use of the London Interbank Offered Rate (“LIBOR”) as a benchmark interest rate due to reference rate reform. ASU 2021-01 is effective immediately for all entities with the option to apply retrospectively as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020, and can be applied prospectively to any new contract modifications made on or after January 7, 2021. The Company currently uses LIBOR and SOFR as its benchmark interest rate for its derivative instruments. The Company has evaluated the impact of this ASU’s adoption, and has determined that this ASU will not have a material impact on its condensed consolidated financial statements.
In June 2022, the FASB issued ASU No. 2022-03, Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions. The amendments in this update clarify the guidance in Topic 820 when measuring the fair value of an equity security subject to contractual sale restrictions and introduce new disclosure requirements related to such equity securities. The amendments are effective for fiscal years beginning after December 15, 2023, with early adoption permitted. The Company is currently evaluating the impact of this guidance on its condensed consolidated financial statements.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2022 (Unaudited) – (Continued)
NOTE 3 — FAIR VALUE MEASUREMENTS
GAAP defines fair value, establishes a framework for measuring fair value and requires disclosures about fair value measurements. GAAP emphasizes that fair value is intended to be a market-based measurement, as opposed to a transaction-specific measurement.
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date under current market conditions. Depending on the nature of the asset or liability, various techniques and assumptions can be used to estimate the fair value. Assets and liabilities are measured using inputs from three levels of the fair value hierarchy, as follows:
Level 1 — Inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date. An active market is defined as a market in which transactions for the assets or liabilities occur with sufficient frequency and volume to provide pricing information on an ongoing basis.
Level 2 — Inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active (markets with few transactions), inputs other than quoted prices that are observable for the asset or liability (i.e., interest rates, yield curves, etc.), and inputs that are derived principally from or corroborated by observable market data correlation or other means (market corroborated inputs).
Level 3 — Unobservable inputs, which are only used to the extent that observable inputs are not available, reflect the Company’s assumptions about the pricing of an asset or liability.
The following describes the methods the Company uses to estimate the fair value of the Company’s financial assets and liabilities:
Real estate-related securities — The Company generally determines the fair value of its real estate-related securities by utilizing broker-dealer quotations, reported trades or valuation estimates from pricing models to determine the reported price. Pricing models for real estate-related securities are generally discounted cash flow models that usually consider the attributes applicable to a particular class of security (e.g., credit rating, seniority), current market data, and estimated cash flows for each class and incorporate deal collateral performance such as prepayment speeds and default rates, as available. Depending upon the significance of the fair value inputs used in determining these fair values, these securities are valued using Level 1, Level 2 or Level 3 inputs. As of September 30, 2022, the Company concluded that $401.1 million of its CMBS fell under Level 2 and $31.1 million of its CMBS fell under Level 3.
The Company’s equity security investment is valued using Level 1 inputs. The estimated fair value of the Company’s equity security is based on quoted market prices that are readily and regularly available in an active market.
Credit facilities and notes payable — The fair value is estimated by discounting the expected cash flows based on estimated borrowing rates available to the Company as of the measurement date. Current and prior period liabilities’ carrying and fair values exclude net deferred financing costs. These financial instruments are valued using Level 2 inputs. As of September 30, 2022, the estimated fair value of the Company’s debt was $4.27 billion, compared to a carrying value of $4.38 billion. The estimated fair value of the Company’s debt as of December 31, 2021 was $4.11 billion, compared to a carrying value of $4.17 billion.
Derivative instruments — The Company’s derivative instruments are comprised of interest rate caps. All derivative instruments are carried at fair value and are valued using Level 2 inputs. The fair value of these instruments is determined using interest rate market pricing models. In addition, credit valuation adjustments are incorporated into the fair values to account for the Company’s potential nonperformance risk and the performance risk of the respective counterparties.
Although the Company has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with those derivatives utilize Level 3 inputs, such as estimates of current credit spreads, to evaluate the likelihood of default by the Company and its counterparties. However, as of September 30, 2022 and December 31, 2021, the Company assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and determined that the credit valuation adjustments are not significant to the overall valuation of the Company’s derivatives. As a result, the Company has determined that its derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2022 (Unaudited) – (Continued)
Loans held-for-investment — The Company’s loans held-for-investment are recorded at cost upon origination and adjusted by net loan origination fees and discounts. The Company estimates the fair value of its loans held-for-investment by performing a present value analysis for the anticipated future cash flows using an appropriate market discount rate taking into consideration the credit risk. The Company has determined that its commercial real estate (“CRE”) loans held-for-investment and corporate senior loans are classified in Level 3 of the fair value hierarchy. The Company’s liquid senior loans are classified as Level 2 or Level 3 depending on the number of market quotations or indicative prices from pricing services that are available, and whether the depth of the market is sufficient to transact at those prices in amounts approximating the Company’s investment position at the measurement date. As of September 30, 2022, $471.5 million and $189.8 million of the Company’s liquid senior loans were classified in Level 2 and Level 3 of the fair value hierarchy, respectively. As of December 31, 2021, $560.4 million and $94.1 million of the Company’s liquid senior loans were classified in Level 2 and Level 3 of the fair value hierarchy, respectively. As of September 30, 2022, the estimated fair value of the Company’s loans held-for-investment and related receivables, net was $4.0 billion, which approximated carrying value. As of December 31, 2021, the estimated fair value of the Company’s loans held-for-investment was $2.63 billion, compared to their carrying value of $2.61 billion.
Other financial instruments — The Company considers the carrying values of its cash and cash equivalents, restricted cash, tenant receivables, accounts payable and accrued expenses, other liabilities, due to affiliates and distributions payable to approximate their fair values because of the short period of time between their origination and their expected realization as well as their highly-liquid nature. Due to the short-term maturities of these instruments, Level 1 inputs are utilized to estimate the fair value of these financial instruments.
Considerable judgment is necessary to develop estimated fair values of financial assets and liabilities. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize, or be liable for, upon disposition of the financial assets and liabilities. The Company evaluates its hierarchy disclosures each quarter and depending on various factors, it is possible that an asset or liability may be classified differently from quarter to quarter. The Company does not expect that changes in classifications between levels will be frequent.
Items Measured at Fair Value on a Recurring Basis
In accordance with the fair value hierarchy described above, the following tables show the fair value of the Company’s financial assets and liabilities that are required to be measured at fair value on a recurring basis as of September 30, 2022 and December 31, 2021 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Balance as of
September 30, 2022 | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
| Financial assets: | | | | | | | |
| CMBS | $ | 432,195 | | | $ | — | | | $ | 401,050 | | | $ | 31,145 | |
| Equity security | 37,926 | | | 37,926 | | | — | | | — | |
| Interest rate caps | 4,705 | | | — | | | 4,705 | | | — | |
| | | | | | | |
| Total financial assets | $ | 474,826 | | | $ | 37,926 | | | $ | 405,755 | | | $ | 31,145 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Balance as of
December 31, 2021 | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
Financial assets: | | | | | | | |
| CMBS | $ | 41,871 | | | $ | — | | | $ | — | | | $ | 41,871 | |
| Preferred units | 63,490 | | | — | | | — | | | 63,490 | |
| Marketable security | 110 | | | 110 | | | — | | | — | |
| Interest rate caps | 179 | | | — | | | 179 | | | — | |
Total financial assets | $ | 105,650 | | | $ | 110 | | | $ | 179 | | | $ | 105,361 | |
| Financial liabilities: | | | | | | | |
| Interest rate swaps | $ | (2,466) | | | $ | — | | | $ | (2,466) | | | $ | — | |
| Total financial liabilities | $ | (2,466) | | | $ | — | | | $ | (2,466) | | | $ | — | |
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2022 (Unaudited) – (Continued)
The following are reconciliations of the changes in financial assets with Level 3 inputs in the fair value hierarchy for the nine months ended September 30, 2022 (in thousands):
| | | | | | | | |
| | Level 3 |
Beginning Balance, January 1, 2022 | | $ | 105,361 | |
Total gains and losses: | | |
| Unrealized loss included in other comprehensive (loss) income, net | | (12,487) | |
Purchases and payments received: | | |
Conversion of preferred units (1) | | (68,243) | |
Purchases | | 4,752 | |
| Discounts, net | | 936 | |
| Capitalized interest income | | 826 | |
| | |
Ending Balance, September 30, 2022 | | $ | 31,145 | |
____________________________________(1) Reflects the Company’s investment in preferred units which matured during the nine months ended September 30, 2022 and was redeemed in exchange for an investment in a first mortgage loan. Refer to Note 8 — Loans Held-For-Investment for further discussion.
Items Measured at Fair Value on a Non-Recurring Basis (Including Impairment Charges)
Certain financial and nonfinancial assets and liabilities are measured at fair value on a nonrecurring basis and are subject to fair value adjustments in certain circumstances, such as when there is evidence of impairment. The Company’s process for identifying and recording impairment related to real estate assets and intangible assets is discussed in Note 2 — Summary of Significant Accounting Policies.
As discussed in Note 4 — Real Estate Assets, during the nine months ended September 30, 2022, real estate assets related to 19 properties were deemed to be impaired and their carrying values were reduced to an estimated fair value of $114.1 million, resulting in impairment charges of $11.9 million. Additionally, during the nine months ended September 30, 2022, certain condominium units were deemed to be impaired and their carrying values were reduced to their estimated fair value, resulting in impairment charges of $7.9 million. During the nine months ended September 30, 2021, real estate assets related to 11 properties were deemed to be impaired and their carrying values were reduced to an estimated fair value of $43.1 million, resulting in impairment charges of $5.3 million. The Company estimates fair values using Level 3 inputs and a combined income and market approach, specifically using discounted cash flow analysis and recent comparable sales transactions. The evaluation of real estate assets for potential impairment requires the Company’s management to exercise significant judgment and to make certain key assumptions, including, but not limited to, the following: (1) terminal capitalization rates; (2) discount rates; (3) the number of years the property will be held; (4) property operating expenses; and (5) re-leasing assumptions, including the number of months to re-lease, market rental income and required tenant improvements. There are inherent uncertainties in making these estimates such as market conditions and the future performance and sustainability of the Company’s tenants. The Company determined that the selling prices used to determine the fair values were Level 2 inputs.
The following summarizes the ranges of discount rates and terminal capitalization rates used for the Company’s impairment test for the real estate assets during the nine months ended September 30, 2022 and 2021:
| | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, |
| 2022 | | 2021 |
| Discount Rate | | Terminal Capitalization Rate | | Discount Rate | | Terminal Capitalization Rate |
8.0% – 9.7% | | 7.5% – 9.2% | | 8.0% – 9.7% | | 7.5% – 9.2% |
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2022 (Unaudited) – (Continued)
The following table presents the impairment charges by asset class recorded during the nine months ended September 30, 2022 and 2021 (in thousands):
| | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, | | |
| | 2022 | | 2021 | | | | |
| Asset class impaired: | | | | | | | | |
| Land | | $ | 2,041 | | | $ | 997 | | | | | |
| Buildings, fixtures and improvements | | 8,793 | | | 4,138 | | | | | |
| Intangible lease assets | | 1,039 | | | 263 | | | | | |
| | | | | | | | |
| Intangible lease liabilities | | (4) | | | (130) | | | | | |
| Condominium developments | | 7,945 | | | — | | | | | |
| Total impairment loss | | $ | 19,814 | | | $ | 5,268 | | | | | |
NOTE 4 — REAL ESTATE ASSETS
2022 Property Acquisitions
During the nine months ended September 30, 2022, the Company did not acquire any properties.
2022 Condominium Development Project
During the nine months ended September 30, 2022, the Company capitalized $10.9 million of expenses associated with the development of condominiums acquired via foreclosure, which is included in condominium developments in the accompanying condensed consolidated balance sheets.
2022 Condominium Dispositions
During the nine months ended September 30, 2022, the Company disposed of condominium units for an aggregate sales price of $24.2 million, resulting in proceeds of $22.0 million after closing costs and a gain of $3.1 million. The Company has no continuing involvement that would preclude sale treatment with these condominium units. The gain on sale of condominium units is included in gain on disposition of real estate and condominium developments, net in the condensed consolidated statements of operations.
2022 Property Dispositions
On December 20, 2021, certain subsidiaries of the Company entered into an Agreement of Purchase and Sale, as amended (the “Purchase and Sale Agreement”), with American Finance Trust, Inc. (now known as The Necessity Retail REIT, Inc.) (NASDAQ: RTL) (“RTL”), American Finance Operating Partnership, L.P. (now known as The Necessity Retail REIT Operating Partnership, L.P.) (“RTL OP”), and certain of their subsidiaries (collectively, the “Purchaser”) to sell to the Purchaser 79 shopping centers and two single-tenant properties encompassing approximately 9.5 million gross rentable square feet of commercial space across 27 states for total consideration of $1.32 billion (the “Purchase Price”). The Purchase Price included the Purchaser’s option to seek the assumption of certain existing debt, and Purchaser’s issuance of up to $53.4 million in value of RTL’s Class A common stock, par value $0.01 per share (“RTL Common Stock”), or Class A units in RTL OP (“RTL OP Units”), subject to certain limits described more fully in the Purchase and Sale Agreement.
During the nine months ended September 30, 2022, the Company disposed of 130 properties, including 65 retail properties, 56 anchored shopping centers, six industrial properties and three office buildings, and an outparcel of land for an aggregate gross sales price of $1.71 billion, resulting in proceeds of $1.67 billion after closing costs and a gain of $115.0 million. Included in this amount of properties disposed were the two properties previously owned through the Consolidated Joint Venture. The sale of 81 of these properties closed pursuant to the Purchase and Sale Agreement for total consideration of $1.33 billion, which consisted of $1.28 billion in cash proceeds and $53.4 million of RTL Common Stock, which shares are subject to certain registration rights as described in the Purchase and Sale Agreement. Such shares are included in real estate-related securities in the condensed consolidated balance sheets. During the nine months ended September 30, 2022, the Company recognized earnout income of $68.7 million related to the disposition of properties pursuant to the Purchase and Sale Agreement, and recorded a related receivable of $20.3 million, which is included in prepaid expenses and other assets in the condensed consolidated balance sheets as of September 30, 2022. The Company has no continuing involvement that would preclude sale
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2022 (Unaudited) – (Continued)
treatment with these properties. The gain on sale of real estate, including the earnout income, is included in gain on disposition of real estate and condominium developments, net in the condensed consolidated statements of operations.
2022 Impairment
The Company performs quarterly impairment review procedures, primarily through continuous monitoring of events and changes in circumstances that could indicate that the carrying value of certain of its real estate assets may not be recoverable. See Note 2 — Summary of Significant Accounting Policies for a discussion of the Company’s accounting policies regarding impairment of real estate assets.
During the nine months ended September 30, 2022, 19 properties totaling approximately 832,000 square feet with a carrying value of $126.0 million were deemed to be impaired and their carrying values were reduced to an estimated fair value of $114.1 million, resulting in impairment charges of $11.9 million, which were recorded in the condensed consolidated statements of operations. Additionally, during the nine months ended September 30, 2022, certain condominium units were deemed to be impaired and their carrying values were reduced to their estimated fair value, resulting in impairment charges of $7.9 million, which were recorded in the condensed consolidated statements of operations. See Note 3 — Fair Value Measurements for a further discussion regarding these impairment charges.
2021 Property Acquisitions
During the nine months ended September 30, 2021, the Company did not acquire any properties.
2021 Assets Acquired Via Foreclosure
During the nine months ended September 30, 2021, the Company completed foreclosure proceedings to take control of the assets which previously secured its eight mezzanine loans, including 75 condominium units and 21 rental units across four buildings, including certain units that are under development. No land was acquired in connection with the foreclosure.
The following table summarizes the purchase price allocation for the real estate acquired via foreclosure (in thousands):
| | | | | |
| As of September 30, 2021 |
| |
| Buildings, fixtures and improvements | $ | 192,182 | |
| Acquired in-place leases and other intangibles | 134 | |
| |
| Intangible lease liabilities | (326) | |
| Total purchase price | $ | 191,990 | |
In connection with the foreclosure, the Company assumed $102.6 million of mortgage notes payable related to the assets, as further discussed in Note 10 — Repurchase Facilities, Credit Facilities and Notes Payable.
2021 Condominium Development Project
During the nine months ended September 30, 2021, the Company capitalized $5.9 million of expenses as construction in progress associated with the development of condominiums acquired via foreclosure, which is included in condominium developments in the accompanying condensed consolidated balance sheets.
2021 Condominium Dispositions
During the nine months ended September 30, 2021, the Company disposed of condominium units for an aggregate sales price of $28.6 million, resulting in proceeds of $26.5 million after closing costs and a gain of $4.9 million. The Company has no continuing involvement that would preclude sale treatment with these condominium units. The gain on sale of condominium units is included in gain on disposition of real estate and condominium developments, net in the condensed consolidated statements of operations.
2021 Property Dispositions and Real Estate Assets Held for Sale
During the nine months ended September 30, 2021, the Company disposed of 113 retail properties, for an aggregate gross sales price of $484.4 million, resulting in proceeds of $470.2 million after closing costs and a gain of $75.6 million. The Company has no continuing involvement that would preclude sale treatment with these properties.
CIM REAL ESTATE FINANCE TRUST, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2022 (Unaudited) – (Continued)
As of September 30, 2021, there was one property classified as held for sale with a carrying value of $1.3 million included in assets held for sale in the accompanying condensed consolidated balance sheets. Subsequent to September 30, 2021, the Company disposed of this property.
2021 Impairment
During the nine months ended September 30, 2021, 11 properties totaling approximately 260,000 square feet with a carrying value of $48.4 million were deemed to be impaired and their carrying values were reduced to an estimated fair value of $43.1 million, resulting in impairment charges of $5.3 million, which were recorded in the condensed consolidated statements of operations. See Note 3 — Fair Value Measurements for a further discussion regarding these impairment charges.
NOTE 5 — INTANGIBLE LEASE ASSETS AND LIABILITIES
Intangible lease assets and liabilities consisted of the following as of September 30, 2022 and December 31, 2021 (in thousands, except weighted average life remaining):
| | | | | | | | | | | |
| September 30, 2022 | | December 31, 2021 |
Intangible lease assets: | | | |
In-place leases and other intangibles, net of accumulated amortization of $82,454 and $73,923, respectively (with a weighted average life remaining of 11.3 years and 11.4 years, respectively) | | | |
| $ | 182,337 | | | $ | 224,931 | |
Acquired above-market leases, net of accumulated amortization of $4,000 and $3,204, respectively (with a weighted average life remaining of 13.0 years and 13.3 years, respectively) | | | |
| 11,015 | | | 12,774 | |
| Total intangible lease assets, net | $ | 193,352 | | | $ | 237,705 | |
| Intangible lease liabilities: | | | |
Acquired below-market leases, net of accumulated amortization of $5,117 and $9,043, respectively (with a weighted average life remaining of 12.7 years and 11.5 years, respectively) | | | |
| $ | 19,512 | | | $ | 24,896 | |
Amortization of the above-market leases is recorded as a reduction to rental and other property income, and amortization expense for the in-place leases and other intangibles is included in depreciation and amortization in the accompanying condensed consolidated statements of operations. Amortization of below-market leases is recorded as an increase to rental and other property income in the accompanying condensed consolidated statements of operations.
The following table summarizes the amortization related to the intangible lease assets and liabilities for the three and nine months ended September 30, 2022 and 2021 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| In-place lease and other intangible amortization | $ | 5,866 | | | $ | 6,865 | | | $ | 18,978 | | | $ | 22,066 | |
| Above-market lease amortization | $ | 272 | | | $ | 590 | | | $ | 893 | | | $ | 1,839 | |
| Below-market lease amortization | $ | 469 | | | $ | 1,240 | | | $ | 1,532 | | | $ | 4,083 | |
CIM REAL ESTATE FINANCE TRUST, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2022 (Unaudited) – (Continued)
As of September 30, 2022, the estimated amortization relating to the intangible lease assets and liabilities is as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | Amortization |
| | In-Place Leases and
Other Intangibles | | Above-Market Leases | | Below-Market Leases |
| Remainder of 2022 | | $ | 5,723 | | | $ | 272 | | | $ | 458 | |
| 2023 | | 22,067 | | | 1,081 | | | 1,802 | |
| 2024 | | 20,664 | | | 975 | | | 1,675 | |
| 2025 | | 17,702 | | | 916 | | | 1,603 | |
| 2026 | | 15,947 | | | 871 | | | 1,595 | |
| Thereafter | | 100,234 | | | 6,900 | | | 12,379 | |
| Total | | $ | 182,337 | | | $ | 11,015 | | | $ | 19,512 | |
NOTE 6 — INVESTMENT IN UNCONSOLIDATED ENTITIES
On December 16, 2021, as a result of the merger with CIM Income NAV, Inc. (“CIM Income NAV”) (the “CIM Income NAV Merger”), the Company acquired a limited partnership interest in CIM UII Onshore. CIM UII Onshore’s sole purpose is to invest all of its assets in CIM Urban Income Investments, L.P. (“CIM Urban Income”), which is a private institutional fund that acquires, owns and operates substantially stabilized, diversified real estate and real estate-related assets in urban markets primarily located throughout North America.
During the nine months ended September 30, 2022, the Company recognized an equity method net gain of $5.2 million related to its investment in CIM UII Onshore. The Company recognized distributions of $531,000 related to its investment in CIM UII Onshore during the nine months ended September 30, 2022, all of which was recognized as a return on investment. On March 31, 2022, the Company fully redeemed its $60.7 million investment in CIM UII Onshore, which represented less than 5% ownership of CIM UII Onshore and approximated fair value.
Additionally, during the year ended December 31, 2021, the Company entered into the Unconsolidated Joint Venture, of which the Company owns 50% of the outstanding equity. The Unconsolidated Joint Venture holds approximately 91% of the membership interest in the NewPoint JV. Through the Unconsolidated Joint Venture, the Company has a 45% interest in the NewPoint JV and accounts for its investment under the equity method. The primary purpose of the NewPoint JV is to source, underwrite, close and service on an ongoing basis multifamily bridge loans, participation interests, and other debt instruments such as loans. As of September 30, 2022, the carrying value of the Company’s investment in NP JV Holdings was $132.4 million, which approximates fair value and is included in investment in unconsolidated entities on the condensed consolidated balance sheets. The Company received $4.3 million in distributions related to its investment in NP JV Holdings during the nine months ended September 30, 2022, $3.7 million of which was recognized as a return on investment and $625,000 of which was recognized as a return of investment and reduced the invested capital and the carrying amount.
NOTE 7 — REAL ESTATE-RELATED SECURITIES
As of September 30, 2022, the Company had real estate-related securities with an aggregate estimated fair value of $470.1 million, which included 16 CMBS investments and an investment in a publicly-traded equity security. The CMBS mature on various dates from July 2023 through June 2058 and have interest rates ranging from 6.5% to 10.2% as of September 30, 2022, with one CMBS earning a zero coupon rate. The following is a summary of the Company’s real estate-related securities as of September 30, 2022 (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | Real Estate-Related Securities |
| | Amortized Cost Basis | | Unrealized Loss | | Fair Value |
| CMBS | | $ | 453,894 | | | $ | (21,699) | | | $ | 432,195 | |
| Equity security | | 53,388 | | | (15,462) | | | 37,926 | |
| | | | | | |
| Total real estate-related securities | | $ | 507,282 | | | $ | (37,161) | | | $ | 470,121 | |
CIM REAL ESTATE FINANCE TRUST, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2022 (Unaudited) – (Continued)
The following table provides the activity for the real estate-related securities during the nine months ended September 30, 2022 (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | Amortized Cost Basis | | Unrealized Gain (Loss) | | Fair Value |
Real estate-related securities as of January 1, 2022 | | $ | 102,674 | | | $ | 2,797 | | | $ | 105,471 | |
| Face value of real estate-related securities acquired | | 507,915 | | | — | | | 507,915 | |
Investment in preferred units, net (1) | | (63,490) | | | — | | | (63,490) | |
Premiums and discounts on purchase of real estate-related securities, net of acquisition costs | | (26,060) | | | — | | | (26,060) | |
| Amortization of discount on real estate-related securities | | 1,684 | | | — | | | 1,684 | |
| Realized gain on sale of real estate-related securities | | (110) | | | (22) | | | (132) | |
| Capitalized interest income on real estate-related securities | | 826 | | | — | | | 826 | |
| Principal payments received on real estate-related securities | | (16,157) | | | — | | | (16,157) | |
Unrealized loss on real estate-related securities | | — | | | (39,936) | | | (39,936) | |
Real estate-related securities as of September 30, 2022 | | $ | 507,282 | | | $ | (37,161) | | | $ | 470,121 | |
____________________________________(1) Included in this balance is $68.2 million of the Company’s investment in preferred units which were redeemed during the nine months ended September 30, 2022 in exchange for an investment in a first mortgage loan, as further discussed in Note 8 — Loans Held-For-Investment.
During the nine months ended September 30, 2022, the Company invested $433.2 million in CMBS. During the same period, the Company sold one marketable security with an aggregate carrying value of $110,000 resulting in net proceeds of $132,000 and a gain of $22,000. The Company also received $53.4 million in an equity security during the nine months ended September 30, 2022 as consideration in connection with the Purchase and Sale Agreement. Unrealized gains and losses on CMBS are recorded in other comprehensive (loss) income, with a portion of the amount subsequently reclassified into interest expense and other, net in the accompanying condensed consolidated statements of operations as securities are sold and gains and losses are recognized. Unrealized gains and losses on the equity security are reported on the condensed consolidated statements of operations. During the nine months ended September 30, 2022, the Company recorded $39.9 million of unrealized loss on its real estate-related securities, $24.5 million of which is included in other comprehensive (loss) income in the accompanying condensed consolidated statements of comprehensive income. The remaining $15.4 million of unrealized loss on the Company’s equity security is included in unrealized loss on equity security in the accompanying condensed consolidated statements of operations.
The scheduled maturities of the Company’s CMBS as of September 30, 2022 are as follows (in thousands):
| | | | | | | | | | | | | | |
| | CMBS |
| | Amortized Cost | | Estimated Fair Value |
| Due within one year | | $ | — | | | $ | — | |
| Due after one year through five years | | 413,059 | | | 401,050 | |
| Due after five years through ten years | | — | | | — | |
| Due after ten years | | 40,835 | | | 31,145 | |
| Total | | $ | 453,894 | | | $ | 432,195 | |
Actual maturities of real estate-related securities can differ from contractual maturities because borrowers on certain corporate credit securities may have the right to prepay their respective debt obligations at any time. In addition, factors such as prepayments and interest rates may affect the yields on such securities.
In estimating credit losses related to real estate-related securities, management considers a variety of factors, including, but not limited to, the extent to which the fair value is less than the amortized cost basis, recent events specific to the security, industry or geographic area, the payment structure of the security, the failure of the issuer of the security to make scheduled interest or principal payments, and external credit ratings and recent changes in such ratings. As of September 30, 2022, the Company had no credit losses related to real estate-related securities.
CIM REAL ESTATE FINANCE TRUST, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2022 (Unaudited) – (Continued)
NOTE 8 — LOANS HELD-FOR-INVESTMENT
The Company’s loans held-for-investment consisted of the following as of September 30, 2022 and December 31, 2021 (in thousands):
| | | | | | | | | | | | | | |
| | As of September 30, | | As of December 31, |
| | 2022 | | 2021 |
| | | | |
First mortgage loans (1) | | $ | 3,259,744 | | | $ | 1,968,585 | |
| Total CRE loans held-for-investment and related receivables, net | | 3,259,744 | | | 1,968,585 | |
| Liquid senior loans | | 705,750 | | | 655,516 | |
| Corporate senior loans | | 57,232 | | | — | |
| Loans held-for-investment and related receivables, net | | $ | 4,022,726 | | | $ | 2,624,101 | |
| | | | |
| Less: Current expected credit losses | | $ | (29,584) | | | $ | (15,201) | |
| Total loans held-for-investment and related receivable, net | | $ | 3,993,142 | | | $ | 2,608,900 | |
____________________________________
(1) As of September 30, 2022, first mortgage loans included $20.1 million of contiguous mezzanine loan components that, as a whole, have expected credit quality similar to that of a first mortgage loan.
The following table details overall statistics for the Company’s loans held-for-investment as of September 30, 2022 and December 31, 2021 (dollar amounts in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| CRE Loans (1) (2) | | Liquid Senior Loans | | Corporate Senior Loans |
| September 30, 2022 | | December 31, 2021 | | September 30, 2022 | | December 31, 2021 | | September 30, 2022 | | December 31, 2021 |
| Number of loans | 29 | | | 22 | | | 313 | | | 295 | | | 4 | | | — | |
| Principal balance | $ | 3,283,523 | | | $ | 1,985,722 | | | $ | 711,947 | | | $ | 659,007 | | | $ | 58,031 | | | $ | — | |
| Net book value | $ | 3,244,737 | | | $ | 1,958,655 | | | $ | 691,981 | | | $ | 650,245 | | | $ | 56,424 | | | $ | — | |
| Weighted-average interest rate | 5.9 | % | | 3.3 | % | | 6.7 | % | | 3.7 | % | | 9.2 | % | | — | % |
| | | | | | | | | | | |
Weighted-average maximum years to maturity | 3.9 | | 4.3 | | 4.9 | | 5.1 | | 4.8 | | 0.0 |
Unfunded loan commitments (3) | $ | 338,539 | | | $ | 209,368 | | | $ | 1,886 | | | $ | 1,562 | | | $ | 4,324 | | | $ | — | |
____________________________________
(1)As of September 30, 2022, 100% of the Company’s CRE loans by principal balance earned a floating rate of interest, primarily indexed to U.S. dollar LIBOR and the Secured Overnight Financing Rate (“SOFR”).
(2)Maximum maturity date assumes all extension options are exercised by the borrowers; however, the Company’s CRE loans may be repaid prior to such date.
(3)Unfunded loan commitments are subject to the satisfaction of borrower milestones and are not reflected in the accompanying condensed consolidated balance sheets. This balance does not include unsettled liquid senior loan purchases of $6.3 million that are included in cash and cash equivalents in the accompanying condensed consolidated balance sheets.
CIM REAL ESTATE FINANCE TRUST, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2022 (Unaudited) – (Continued)
Activity relating to the Company’s loans held-for-investment portfolio was as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| CRE Loans | | Liquid Senior Loans | Corporate Senior Loans | | Total Loan Portfolio |
| Balance, January 1, 2022 | $ | 1,958,655 | | | $ | 650,245 | | | $ | — | | | $ | 2,608,900 | |
Loan originations and acquisitions (1) | 1,378,649 | | | 164,325 | | | 75,851 | | | 1,618,825 | |
| Sale of loans | — | | | (53,332) | | | — | | | (53,332) | |
| Principal repayments received | (80,911) | | | (58,189) | | | (17,820) | | | (156,920) | |
| Capitalized interest | 62 | | | — | | | — | | | 62 | |
Deferred fees and other items (2) | (13,978) | | | (3,397) | | | (1,050) | | | (18,425) | |
| Accretion and amortization of fees and other items | 7,337 | | | 827 | | | 251 | | | 8,415 | |
| Current expected credit losses | (5,077) | | | (8,498) | | | (808) | | | (14,383) | |
Balance, September 30, 2022 | $ | 3,244,737 | | | $ | 691,981 | | | $ | 56,424 | | | $ | 3,993,142 | |
____________________________________
(1)The Company’s investment in preferred units, which was previously recorded in real estate-related securities on the accompanying condensed consolidated balance sheets, was redeemed during the nine months ended September 30, 2022 in exchange for an investment in a first mortgage loan. The converted investment in preferred units of $68.2 million is included in the CRE loans balance with an all-in-rate of 9.4% and an initial maturity date of October 9, 2023.
(2)Other items primarily consist of purchase discounts or premiums and deferred origination expenses.
Current Expected Credit Losses
Current expected credit losses reflect the Company’s current estimate of potential credit losses related to the loans held-for-investment included in the Company’s condensed consolidated balance sheets. Refer to Note 2 — Summary of Significant Accounting Policies for further discussion of the Company’s current expected credit losses.
The following table presents the activity in the Company’s current expected credit losses by loan type for the nine months ended September 30, 2022 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | First Mortgage Loans | | Unfunded First Mortgage Loans (1) | | Liquid Senior Loans | | Unfunded or Unsettled Liquid Senior Loans (1) | | Corporate Senior Loans | | Unfunded Corporate Senior Loans (1) | | Total |
| Current expected credit losses as of January 1, 2022 | | | | $ | 9,930 | | | $ | — | | | $ | 5,271 | | | $ | — | | | $ | — | | | $ | — | | | $ | 15,201 | |
| | | | | | | | | | | | | | | | |
| Provision for credit losses | | | | 1,312 | | | 360 | | | 2,581 | | | 400 | | | 56 | | | — | | | 4,709 | |
Current expected credit losses as of March 31, 2022 | | | | $ | 11,242 | | | $ | 360 | | | $ | 7,852 | | | $ | 400 | | | $ | 56 | | | $ | — | | | $ | 19,910 | |
| Provision for (reversal of) credit losses | | | | 1,832 | | | 170 | | | 2,338 | | | (96) | | | 615 | | | 83 | | | 4,942 | |
Current expected credit losses as of June 30, 2022 | | | | $ | 13,074 | | | $ | 530 | | | $ | 10,190 | | | $ | 304 | | | $ | 671 | | | $ | 83 | | | $ | 24,852 | |
| Provision for (reversal of) credit losses | | | | 1,933 | | | 121 | | | 3,579 | | | (85) | | | 137 | | | (21) | | | 5,664 | |
Current expected credit losses as of September 30, 2022 | | | | $ | 15,007 | | | $ | 651 | | | $ | 13,769 | | | $ | 219 | | | $ | 808 | | | $ | 62 | | | $ | 30,516 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
____________________________________
(1)Current expected losses for unfunded or unsettled loan commitments are included in accrued expenses and accounts payable in the condensed consolidated balance sheets.
Changes to current expected credit losses are recognized through net income on the Company’s condensed consolidated statements of operations.
CIM REAL ESTATE FINANCE TRUST, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2022 (Unaudited) – (Continued)
Troubled Debt Restructuring
An individual financial instrument is classified as a troubled debt restructuring when there is a reasonable expectation that the financial instrument’s contractual terms will be modified in a manner that grants concessions to the borrower who is experiencing financial difficulties. Concessions could include term extensions, payment deferrals, interest rate reductions, principal forgiveness, forbearance, or other actions designed to maximize the Company’s collection on the financial instrument. Current expected credit losses for financial instruments that are troubled debt restructurings are determined individually.
The Company also classifies a financial instrument as a troubled debt restructuring when receivables from third parties, real estate, or other assets are transferred from the debtor to the creditor in order to fully or partially satisfy a debt, such as in the event of a foreclosure or repossession. During the year ended December 31, 2019, the borrower on the Company’s eight mezzanine loans became delinquent on certain required reserve payments. Throughout 2020, the borrower remained delinquent on the required reserve payments and became delinquent on principal and interest. As a result, the Company classified the loans as a troubled debt restructuring and commenced foreclosure proceedings during the year ended December 31, 2020. Upon completing foreclosure in January 2021, the Company took control of the assets which previously secured the loans, including 75 condominium units and 21 rental units across four buildings. As a result of the foreclosure, the Company recorded a $58.0 million decrease to its provision for credit losses related to its mezzanine loans during the three months ended March 31, 2021.
Risk Ratings
As further described in Note 2 — Summary of Significant Accounting Policies, the Company evaluates its loans held-for-investment portfolio on a quarterly basis. Each quarter, the Company assesses the risk factors of each loan, and assigns a risk rating based on several factors. Factors considered in the assessment include, but are not limited to, loan and credit structure, current LTV ratio, debt yield, collateral performance, and the quality and condition of the sponsor, borrower, and guarantor(s). Loans are rated “1” (less risk) through “5” (greater risk), which ratings are defined in Note 2 — Summary of Significant Accounting Policies.
CIM REAL ESTATE FINANCE TRUST, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2022 (Unaudited) – (Continued)
The Company’s primary credit quality indicator is its risk ratings, which are further discussed above. The following table presents the net book value of the Company’s loans held-for-investment portfolio as of September 30, 2022 by year of origination, loan type, and risk rating (dollar amounts in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Amortized Cost of Loans Held-For-Investment by Year of Origination (1) |
| | | | As of September 30, 2022 |
| | Number of Loans | | 2022 | | 2021 | | 2020 | | 2019 | | Total |
| First mortgage loans by internal risk rating: | | | | | | | | | | | | |
| 1 | | — | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| 2 | | — | | — | | | — | | | — | | | — | | | — | |
| 3 | | 29 | | 1,238,852 | | | 1,819,168 | | | 152,458 | | | 49,266 | | | 3,259,744 | |
| 4 | | — | | — | | | — | | | — | | | — | | | — | |
| 5 | | — | | — | | | — | | | — | | | — | | | — | |
| Total first mortgage loans | | 29 | | 1,238,852 | | | 1,819,168 | | | 152,458 | | | 49,266 | | | 3,259,744 | |
| Liquid senior loans by internal risk rating: | | | | | | | | | | | | |
| 1 | | — | | — | | | — | | | — | | | — | | | — | |
| 2 | | 2 | | — | | | — | | | 5,312 | | | — | | | 5,312 | |
| 3 | | 305 | | 132,470 | | | 338,755 | | | 213,813 | | | 3,017 | | | 688,055 | |
| 4 | | 6 | | 3,298 | | | — | | | 9,085 | | | — | | | 12,383 | |
| 5 | | — | | — | | | — | | | — | | | — | | | — | |
| Total liquid senior loans | | 313 | | 135,768 | | | 338,755 | | | 228,210 | | | 3,017 | | | 705,750 | |
| Corporate senior loans by internal risk rating: | | | | | | | | | | | | |
| 1 | | — | | — | | | — | | | — | | | — | | | — | |
| 2 | | — | | — | | | — | | | — | | | — | | | — | |
| 3 | | 4 | | 57,232 | | | — | | | — | | | — | | | 57,232 | |
| 4 | | — | | — | | | — | | | — | | | — | | | — | |
| 5 | | — | | — | | | — | | | — | | | — | | | — | |
| Total corporate senior loans | | 4 | | 57,232 | | | — | | | — | | | — | | | 57,232 | |
| Less: Current expected credit losses | | | | | | | | | | | | (29,584) | |
| Total loans held-for-investment and related receivables, net | | 346 | | | | | | | | | | $ | 3,993,142 | |
Weighted Average Risk Rating (2) | | | | | | | | | | | | 3.0 | |
____________________________________
(1) Date loan was originated or acquired by the Company. Origination dates are subsequently updated to reflect material loan modifications.
(2) Weighted average risk rating calculated based on carrying value at period end.
NOTE 9 — DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In the normal course of business, the Company uses certain types of derivative instruments for the purpose of managing or hedging its interest rate risk. During the nine months ended September 30, 2022, two of the Company’s interest rate swap agreements matured, four of the Company’s interest rate cap agreements matured, the Company terminated three interest rate swap agreements prior to the maturity dates, and the Company entered into one interest rate cap agreement. As of September 30, 2022, the Company had two non-designated interest rate cap agreements.
CIM REAL ESTATE FINANCE TRUST, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2022 (Unaudited) – (Continued)
The following table summarizes the terms of the Company’s interest rate cap agreements as of September 30, 2022 and December 31, 2021 (dollar amounts in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Outstanding Notional | | | | | | | | Fair Value of Assets (Liabilities) as of |
| Balance Sheet | | Amount as of | | Interest | | Effective | | Maturity | | September 30, | | December 31, |
| Location | | September 30, 2022 | | Rates (1) | | Dates | | Dates | | 2022 | | 2021 |
| Interest Rate Caps | Prepaid expenses, derivative assets and other assets | | $ | 712,000 | | | 7.51% to 7.78% | | 7/15/2021 to 9/13/2022 | | 7/15/2023 to 10/9/2023 | | $ | 4,705 | | | $ | 179 | |
| | | | | | | | | | | | | |
| Interest Rate Swap | Deferred rental income, derivative liabilities and other liabilities | | $ | — | | | —% | | — |
| — | | $ | — | | | $ | (2,466) | |
____________________________________
(1)The interest rate consists of the underlying index capped to a fixed rate as of September 30, 2022.
Additional disclosures related to the fair value of the Company’s derivative instruments are included in Note 3 — Fair Value Measurements. The notional amount under the derivative instruments is an indication of the extent of the Company’s involvement in each instrument, but does not represent exposure to credit, interest rate or market risks.
Accounting for changes in the fair value of a derivative instrument depends on the intended use and designation of the derivative instrument. The Company has interest rate caps that are used to manage exposure to interest rate movements, but do not meet the requirements to be designated as hedging instruments. The change in fair value of the derivative instruments that are not designated as hedges is recorded directly to earnings in interest expense and other, net on the accompanying condensed consolidated statements of operations. During the nine months ended September 30, 2022, the Company had interest rate swaps designated as cash flow hedges in order to hedge the variability of the anticipated cash flows on its variable rate debt. The change in fair value of the derivative instruments designated as hedges is recorded in other comprehensive (loss) income, with a portion of the amount subsequently reclassified to interest expense as interest payments are made on the Company’s variable rate debt. For the three and nine months ended September 30, 2022, the amount of gain reclassified from other comprehensive (loss) income as a decrease to interest expense was $2.6 million for both periods. For the three months ended September 30, 2021, the amount of gain reclassified from other comprehensive (loss) income as a decrease to interest expense was $170,000. For the nine months ended September 30, 2021, the amount of loss reclassified from other comprehensive (loss) income as an increase to interest expense was $3.0 million. The total unrealized loss on interest rate swaps of $20,000 as of September 30, 2022, and the total unrealized gain on interest rate swaps of $152,000 as of December 31, 2021, respectively, is included in accumulated other comprehensive (loss) income in the accompanying condensed consolidated statements of stockholders’ equity. During the next 12 months, the Company estimates that $20,000 will be reclassified from other comprehensive (loss) income as an increase to interest expense. The Company includes cash flows from interest rate swap agreements in net cash flows provided by operating activities on its condensed consolidated statements of cash flows, as the Company’s accounting policy is to present cash flows from hedging instruments in the same category in its condensed consolidated statements of cash flows as the category for cash flows from the hedged items.
The Company has agreements with each of its derivative counterparties that contain provisions whereby if the Company defaults on certain of its unsecured indebtedness, the Company could also be declared in default on its derivative obligations, resulting in an acceleration of payment. If the Company had breached any of these provisions, it could have been required to settle its obligations under the agreements at their aggregate termination value, inclusive of interest payments and accrued interest. In addition, the Company is exposed to credit risk in the event of non-performance by its derivative counterparties. The Company believes it mitigates its credit risk by entering into agreements with creditworthy counterparties. The Company records credit risk valuation adjustments on its derivative instruments based on the credit quality of the Company and the respective counterparty. There were no events of default related to the derivative instruments as of September 30, 2022.
NOTE 10 — REPURCHASE FACILITIES, CREDIT FACILITIES AND NOTES PAYABLE
As of September 30, 2022, the Company had $4.4 billion of debt outstanding, including net deferred financing costs, with a weighted average years to maturity of 3.3 years and a weighted average interest rate of 4.5%. The weighted average years to maturity is computed using the scheduled repayment date as specified in each loan agreement where applicable. The weighted average interest rate is computed using the interest rate in effect until the scheduled repayment date.
CIM REAL ESTATE FINANCE TRUST, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2022 (Unaudited) – (Continued)
The following table summarizes the debt balances as of September 30, 2022 and December 31, 2021, and the debt activity for the nine months ended September 30, 2022 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | During the Nine Months Ended September 30, 2022 | | |
| | Balance as of December 31, 2021 | | Debt Issuances & Assumptions (1) | | Repayments & Modifications (2) | | Accretion & (Amortization) | | Balance as of
September 30, 2022 |
| Notes payable – fixed rate debt | $ | 471,967 | | | $ | — | | | $ | (435,320) | | (4) | $ | — | | | $ | 36,647 | |
| Notes payable – variable rate debt | 70,268 | | | 470,860 | | | (70,268) | | | — | | | 470,860 | |
| First lien mortgage loan | 650,000 | | | — | | | (515,993) | | | — | | | 134,007 | |
| ABS mortgage notes | 770,775 | | | — | | | (5,805) | | | — | | | 764,970 | |
| Credit facilities | 910,000 | | | 767,000 | | | (985,500) | | | — | | | 691,500 | |
| Repurchase facilities | 1,298,414 | | | 1,065,146 | | | (80,967) | | | — | | | 2,282,593 | |
| Total debt | 4,171,424 | | | 2,303,006 | | | (2,093,853) | | | — | | | 4,380,577 | |
| | | | | | | | | |
Deferred costs – credit facility (3) | (143) | | | (999) | | | 89 | | | 321 | | | (732) | |
| Deferred costs – fixed rate debt and first lien mortgage loan | (11,678) | | | — | | | 7,648 | | | 2,422 | | | (1,608) | |
| Deferred costs – variable rate debt | (271) | | | (6,141) | | | — | | | 647 | | | (5,765) | |
| Deferred costs – ABS mortgage notes | (16,127) | | | — | | | 382 | | | 1,460 | | | (14,285) | |
| Total debt, net | $ | 4,143,205 | | | $ | 2,295,866 | | | $ | (2,085,734) | | | $ | 4,850 | | | $ | 4,358,187 | |
| | | | | | | | | |
____________________________________
(1)Includes deferred financing costs incurred during the period.
(2)In connection with the repayment of certain mortgage notes, the Company recognized a loss on extinguishment of debt of $19.6 million during the nine months ended September 30, 2022.
(3)Deferred costs related to the term portion of the CIM Income NAV Credit Facility and the CMFT Credit Facility (both defined below).
(4)Includes mortgage notes of $356.5 million that were assumed by buyer in connection with disposition of real estate assets.
Notes Payable
As of September 30, 2022, the Company had fixed rate debt outstanding of $36.6 million. The fixed rate debt has interest rates ranging from 4.1% to 4.5% per annum. The fixed rate debt outstanding matures on various dates from December 2024 through February 2025. Should a loan not be repaid by its scheduled repayment date, the applicable interest rate may increase as specified in the respective loan agreement. The aggregate balance of gross real estate assets, net of gross intangible lease liabilities, securing the fixed rate debt outstanding was $59.4 million as of September 30, 2022. Each of the mortgage notes payable comprising the fixed rate debt is secured by the respective properties on which the debt was placed.
As of September 30, 2022, the Company had $470.9 million of variable rate debt outstanding, which included $421.5 million of borrowings financed through a note on note financing arrangement with Massachusetts Mutual Life Insurance Company (the “Mass Mutual Financing”). In addition, upon completing foreclosure proceedings to take control of the assets which previously secured the Company’s mezzanine loans in January 2021, the Company assumed $102.6 million in variable rate debt related to the underlying properties (the “Assumed Variable Rate Debt”). During the nine months ended September 30, 2022, the Company refinanced the Assumed Variable Rate Debt and paid down the outstanding balance. The amended borrowing agreement related to the refinanced Assumed Variable Rate Debt provides for borrowings up to $62.0 million. As of September 30, 2022, the amount outstanding on the refinanced Assumed Variable Rate Debt totaled $49.4 million. The Company’s outstanding variable rate debt had a weighted average interest rate of 5.3% as of September 30, 2022, and matures on various dates from October 2024 to January 2028.
First Lien Mortgage Loan
On July 15, 2021, JPMorgan Chase Bank, N.A., as administrative agent (“JPMorgan Chase”), and DBR Investments Co. Limited originated a $650.0 million first lien mortgage loan (the “Mortgage Loan”) to 114 single purpose entities (the “Borrowers”), each of which is an affiliate of the Company and is managed on a day-to-day basis by affiliates of CIM. As of September 30, 2022, the Mortgage Loan is secured by, among other things, cross-collateralized and cross-defaulted first priority mortgages, deeds of trust, security agreements or other similar security instruments on the Borrowers’ fee simple interests in 51
CIM REAL ESTATE FINANCE TRUST, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2022 (Unaudited) – (Continued)
properties, comprised of 50 single-tenant retail properties and one office property. As of September 30, 2022, the aggregate balance of gross real estate assets, net of gross intangible lease liabilities, securing the notes was $332.1 million. Amounts outstanding on the Mortgage Loan totaled $134.0 million with a weighted average interest rate of 7.5% as of September 30, 2022. The Mortgage Loan is a floating-rate, interest-only, non-recourse loan with a two-year initial term ending on August 9, 2023, with three one-year extension options, subject to certain conditions.
ABS Mortgage Notes
On July 28, 2021, the Company issued $774.0 million aggregate principal amount of asset backed securities (“ABS”) mortgage notes, Series 2021-1 (the “Class A Notes”) in six classes, as shown below:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Class of Notes | | Initial Principal Balance | | Note Rate | | Anticipated Repayment Date | | Rated Final Payment Date | | Credit Rating (1) |
| A-1 (AAA) | | $ | 146,400,000 | | | 2.09% | | July 2028 | | July 2051 | | AAA (sf) |
| A-2 (AAA) | | $ | 219,600,000 | | | 2.57% | | July 2031 | | July 2051 | | AAA (sf) |
| A-3 (AA) | | $ | 39,200,000 | | | 2.51% | | July 2028 | | July 2051 | | AA (sf) |
| A-4 (AA) | | $ | 58,800,000 | | | 3.04% | | July 2031 | | July 2051 | | AA (sf) |
| A-5 (A) | | $ | 124,000,000 | | | 2.91% | | July 2028 | | July 2051 | | A (sf) |
| A-6 (A) | | $ | 186,000,000 | | | 3.44% | | July 2031 | | July 2051 | | A (sf) |
____________________________________(1)Reflects credit rating from Standard & Poor’s Financial Services LLC (“Standard & Poor’s”).
The collateral pool for the Class A Notes is comprised of 168 of the Company’s double- and triple-net leased single tenant properties, together with the related leases and certain other rights and interests. The aggregate balance of gross real estate assets, net of gross intangible lease liabilities, securing the Class A Notes was $977.3 million. As of September 30, 2022, amounts outstanding on the Class A Notes totaled $765.0 million with a weighted average interest rate of 2.8%. The Company may prepay the Class A Notes in full on or after the payment date beginning in July 2026 for the Class A-1 (AAA) Notes, the Class A-3 (AA) Notes and the Class A-5 (A) Notes, and on or after the payment date in July 2028 for the Class A-2 (AAA) Notes, the Class A-4 (AA) Notes and the Class A-6 (A) Notes.
Credit Facilities
CMFT SCF Borrower, LLC, an indirect wholly owned subsidiary of the Company (the “CMFT Borrowing Sub”), has a credit agreement (the “Credit Agreement”) with the lenders from time to time parties thereto, JPMorgan Chase, as administrative agent, letter of credit issuer and syndication agent, and PNC Bank, N.A., as syndication agent, which provides for borrowings in the initial amount of $300.0 million (the “CMFT Credit Facility”), which includes a $100.0 million term loan facility (the “CMFT Term Loan”) and the ability to borrow up to $200.0 million in revolving loans (the “CMFT Revolving Loans”) under a revolving credit facility (the “CMFT Revolving Facility”) with a $30.0 million letter of credit subfacility. The CMFT Term Loan and the CMFT Revolving Facility both mature on July 15, 2025.
Borrowings under the Credit Agreement bear interest at rates depending upon the type of loan specified by the CMFT Borrowing Sub, the interest period, and the Company’s adjusted leverage ratio. For alternate base rate (“ABR”) loans, the interest rate will be equal to the greater of: (a) JPMorgan Chase’s prime rate (as defined in the Credit Agreement), (b) the NYFRB Rate (as defined in the Credit Agreement) plus 0.50%, and (c) the Adjusted Term SOFR Rate (as defined in the Credit Agreement) plus 1.0% for the interest period plus the applicable rate. For term benchmark (“Term Benchmark”) loans and risk-free rate (“RFR”) loans, the interest rate is based on the Adjusted Term SOFR Rate or Adjusted Daily Simple SOFR (as defined in the Credit Agreement), respectively, for the applicable interest period plus the applicable rate. The applicable rate is based upon the adjusted leverage ratio, and for ABR Loans, ranges from 0.50% at an adjusted leverage ratio below 2.50:1.00 to 1.375% at an adjusted leverage ratio greater than 3.50:1.00. For Term Benchmark loans and RFR loans, the applicable rate is 1.00% higher than for ABR loans at each adjusted leverage ratio range.
In connection with the CMFT Credit Facility, certain subsidiaries of the Company, including the CMFT Borrowing Sub, entered into a collateral assignment of equity interest and security agreement, by which certain subsidiaries of the Company, including the CMFT Borrowing Sub, pledged equity interests in certain property-owning subsidiaries as collateral to secure on a first priority basis the obligations under the CMFT Credit Facility. The Company and certain subsidiaries of the Company
CIM REAL ESTATE FINANCE TRUST, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2022 (Unaudited) – (Continued)
also entered into a guaranty with the lenders, under which the Company and certain subsidiaries agreed to guarantee the CMFT Borrowing Sub’ obligations under the Credit Agreement.
As of September 30, 2022, the CMFT Term Loan and CMFT Revolving Loans outstanding totaled $100.0 million and $50.0 million, respectively. As of September 30, 2022, the Company had $150.0 million outstanding under the CMFT Credit Facility at a weighted average interest rate of 4.5% and $150.0 million in unused capacity, subject to borrowing availability. The Company had available borrowings of $150.0 million as of September 30, 2022.
The Company had a credit agreement (the “CIM Income NAV Credit Agreement”) with JPMorgan Chase, as administrative agent, and the lender parties thereto, that provided for borrowings of up to $425.0 million (the “CIM Income NAV Credit Facility”). The CIM Income NAV Credit Facility was set to mature on September 6, 2022. During the nine months ended September 30, 2022, the Company paid down the $212.5 million outstanding balance under the CIM Income NAV Credit Facility with proceeds from the closing of the CMFT Credit Facility and terminated the CIM Income NAV Credit Facility.
CMFT Corporate Credit Securities, LLC, an indirect wholly-owned, bankruptcy-remote subsidiary of the Company, has a revolving credit and security agreement (the “Third Amended Credit and Security Agreement”) with the lenders from time to time parties thereto, Citibank, N.A. (“Citibank”), as administrative agent, CMFT Securities Investments, LLC, a wholly-owned subsidiary of the Company (“CMFT Securities”), as equityholder and as collateral manager, Citibank (acting through its Agency & Trust division), as both a collateral agent and as a collateral custodian, and Virtus Group, LP, as collateral administrator. The Third Amended Credit and Security Agreement provides for available borrowings under the revolving credit facility to an aggregate principal amount up to $550.0 million (the “Credit Securities Revolver”). The Credit Securities Revolver may be increased from time to time pursuant to the Third Amended Credit and Security Agreement. As of September 30, 2022, the amounts borrowed and outstanding under the Credit Securities Revolver totaled $541.5 million at a weighted average interest rate of 5.2%.
Borrowings under the Third Amended Credit and Security Agreement will bear interest equal to the one-month Term SOFR (as defined in the Third Amended Credit and Security Agreement) for the relevant interest period, plus an applicable rate. The applicable rate is dependent on the type of loan being financed, which includes broadly syndicated, private and middle market loans meeting certain criteria as set forth in the Third Amended Credit and Security Agreement and ranges from 1.90% to 2.75% per annum during the first two years of the reinvestment period and 2.00% to 2.85% during the last year of the reinvestment period and 2.10% to 2.95% per annum during the amortization period (and, in each case, an additional 2.00% per annum following an event of default under the Third Amended Credit and Security Agreement). The reinvestment period began on December 31, 2019 (the “Closing Date”) and concludes on the earlier of (i) the date that is three years after June 23, 2022, the date the third amendment became effective, (ii) the final maturity date and (iii) the date on which the total assets under management of the Company and its wholly-owned subsidiaries is less than $1.25 billion (the “Reinvestment Period”). The final maturity date is the earliest to occur of: (i) the date that the Credit Securities Revolver is paid down and (ii) the second anniversary after the Reinvestment Period concludes. Borrowings under the Third Amended Credit and Security Agreement are secured by substantially all of the assets held by CMFT Corporate Credit Securities, LLC, which shall primarily consist of liquid senior secured loans subject to certain eligibility criteria under the Third Amended Credit and Security Agreement.
The Company believes it was in compliance with the financial covenants under the Company’s various fixed and variable rate debt agreements, as of September 30, 2022.
Repurchase Facilities
As of September 30, 2022, indirect wholly-owned subsidiaries of the Company (collectively, the “CMFT Lending Subs”), had Master Repurchase Agreements with Citibank, Barclays Bank PLC (“Barclays”), Wells Fargo Bank, N.A. (“Wells Fargo”), Deutsche Bank AG (“Deutsche Bank”), and J.P. Morgan Securities LLC (“J.P. Morgan”) (collectively, the “Repurchase Agreements”) to provide financing primarily through each bank’s purchase of the Company’s CRE mortgage loans and CMBS and future funding advances (the “Repurchase Facilities”).
The following table is a summary of the Repurchase Facilities as of September 30, 2022 (dollar amounts in thousands):
CIM REAL ESTATE FINANCE TRUST, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2022 (Unaudited) – (Continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Repurchase Facility | | Date of Agreement | | Maturity Date(1) | | Maximum Facility Size(2) | | Weighted Average Interest Rate | | Carrying Value of Loans Financed under Repurchase Facility | | Amount Financed |
| Citibank | | 6/4/2020 | | 8/17/2024 | | $ | 400,000 | | | 4.6% | (3) | $ | 460,573 | | | $ | 333,532 | |
| Barclays | | 9/21/2020 | | 9/21/2024 | | 1,250,000 | | | 4.7% | (3) | 1,171,039 | | | 915,452 | |
| Wells Fargo | | 5/20/2021 | | 8/30/2025 | | 750,000 | | | 4.4% | (3) | 887,423 | | | 693,616 | |
| Deutsche Bank | | 10/8/2021 | | 10/8/2023 | | 300,000 | | | 5.1% | (4) | 189,365 | | | 144,520 | |
| J.P. Morgan | | 6/1/2022 | | 10/7/2022 | (5) | (5) | | 4.1% | (6) | 351,647 | | | 195,473 | |
| Total | | | | | | $ | 2,700,000 | | | | | $ | 3,060,047 | | | $ | 2,282,593 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
__________________________________
(1)The repurchase facilities with Citibank and Barclays are set to mature in August 2024 and September 2024, with up to two one-year extension options. The repurchase facility with Wells Fargo was set to mature on May 19, 2024, with up to two one-year extension options. During the nine months ended September 30, 2022, the Company extended the initial facility termination date to August 30, 2025 under the Third Amendment to the Master Repurchase Agreement with Wells Fargo. The repurchase facility with Deutsche Bank (“Deutsche Bank Repurchase Facility”) was set to mature on October 8, 2022, with four one-year extension options, all of which are subject to certain conditions set forth in the Repurchase Agreements. During the nine months ended September 30, 2022, the Company exercised the Deutsche Bank Repurchase Facility’s first extension option, extending the date of maturity to October 8, 2023. Subsequent to September 30, 2022, the Company extended the current maturity date under the repurchase facility with Barclays (the “Barclays Repurchase Facility”), extending the maturity date to September 22, 2025, as discussed in Note 17 — Subsequent Events.
(2)During the nine months ended September 30, 2022, the Company increased the Barclays Repurchase Facility and the repurchase facility with Wells Fargo (the “Wells Fargo Repurchase Facility”) to provide up to $1.25 billion and $750.0 million, respectively, in financing.
(3)Advances under the Repurchase Agreements accrue interest at per annum rates based on the one-month LIBOR, Term SOFR (as such term is defined in the applicable Repurchase Agreement), 30-day SOFR average, or the daily compounded SOFR plus a spread ranging from 1.25% to 2.15% to be determined on a case-by-case basis between Citibank, Barclays or Wells Fargo and the CMFT Lending Subs.
(4)Under the Amended and Restated Master Repurchase Agreement with Deutsche Bank, advances under the repurchase agreement may be made based on one-month Term SOFR plus a spread designated by Deutsche Bank, and the interest rate used for certain existing advances under the existing Deutsche Bank Repurchase Facility may be converted from the one-month LIBOR to one-month SOFR plus a spread ranging from 1.90% to 2.75%.
(5)Facilities under the repurchase facility with J.P. Morgan (“J.P. Morgan Repurchase Facility”) carry a rolling term which is reset monthly. Such facilities carry no maximum facility size.
(6)Under the Master Repurchase Agreement with J.P. Morgan, advances under the repurchase agreement may be made based on one-month Term SOFR plus a spread designated by J.P. Morgan, which as of September 30, 2022, ranges from 1.10% to 1.35%.
The Repurchase Agreements provide for simultaneous agreements by Citibank, Barclays, Wells Fargo, Deutsche Bank and J.P. Morgan to re-sell such purchased CRE mortgage loans and CMBS back to CMFT Lending Subs at a certain future date or upon demand.
In connection with certain of the Repurchase Agreements, the Company (as the guarantor) entered into guaranties with Citibank, Barclays, Wells Fargo, and Deutsche Bank (the “Guaranties”), under which the Company agreed to guarantee up to 25% of the CMFT Lending Subs’ obligations under certain Repurchase Agreements.
The Repurchase Agreements and the Guaranties contain representations, warranties, covenants, conditions precedent to funding, events of default and indemnities that are customary for agreements of these types. In addition, the Guaranties contain financial covenants that require the Company to maintain: (i) minimum liquidity of not less than the lower of (a) $50.0 million and (b) the greater of (A) $10.0 million and (B) 5% of the Company’s recourse indebtedness, as defined in the Guaranties; (ii) minimum consolidated net worth greater than or equal to $1.0 billion plus (a) 75% of the equity issued by the Company following the respective closing dates of the Repurchase Agreements (the “Repurchase Closing Dates”) minus (b) the aggregate amount of any redemptions or similar transaction by the Company from the Repurchase Closing Dates; (iii) maximum leverage ratio of total indebtedness to total equity less than or equal to 80%; and (iv) minimum interest coverage ratio of EBITDA (as defined in the Guaranties) to interest expense equal to or greater than 1.40. The Company believes it was in compliance with the financial covenants under the Repurchase Agreements as of September 30, 2022.
CIM REAL ESTATE FINANCE TRUST, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2022 (Unaudited) – (Continued)
Maturities
The following table summarizes the scheduled aggregate principal repayments for the Company’s outstanding debt subsequent to September 30, 2022 (in thousands):
| | | | | |
| Principal Repayments |
| Remainder of 2022 | $ | 197,518 | |
| 2023 | 283,490 | |
| 2024 | 1,863,177 | |
| 2025 | 856,378 | |
| 2026 | — | |
| Thereafter | 1,180,014 | |
| Total | $ | 4,380,577 | |
NOTE 11 — COMMITMENTS AND CONTINGENCIES
Litigation
In the ordinary course of business, the Company may become subject to litigation and claims. The Company is not aware of any material pending legal proceedings, other than ordinary routine litigation incidental to the Company’s business, to which the Company is a party or of which the Company’s properties are the subject.
Unfunded Commitments
As of September 30, 2022, the Company had $344.7 million of unfunded loan commitments related to its existing CRE loans held-for-investment, corporate senior loans, and liquid senior loans, and $79.5 million of unfunded commitments related to the NewPoint JV. These commitments are not reflected in the accompanying condensed consolidated balance sheet.
As of September 30, 2022, the Company had $6.3 million of unsettled liquid senior loan acquisitions, $5.8 million of which settled subsequent to September 30, 2022. Unsettled acquisitions are included in cash and cash equivalents in the accompanying condensed consolidated balance sheet.
Environmental Matters
In connection with the ownership and operation of real estate, the Company may potentially be liable for costs and damages related to environmental matters. In addition, the Company may own or acquire certain properties that are subject to environmental remediation. Generally, the seller of the property, the tenant of the property and/or another third party is responsible for environmental remediation costs related to a property. Additionally, in connection with the purchase of certain properties, the respective sellers and/or tenants may agree to indemnify the Company against future remediation costs. The Company also carries environmental liability insurance on its properties that provides limited coverage for any remediation liability and/or pollution liability for third-party bodily injury and/or property damage claims for which the Company may be liable. The Company is not aware of any environmental matters which it believes are reasonably likely to have a material effect on its results of operations, financial condition or liquidity.
NOTE 12 — RELATED-PARTY TRANSACTIONS AND ARRANGEMENTS
The Company has incurred fees and expenses payable to CMFT Management and certain of its affiliates in connection with the acquisition, management and disposition of its assets. On August 20, 2019, the Company and CMFT Management entered into an Amended and Restated Management Agreement (the “Management Agreement”), which amended and restated that certain Advisory Agreement between the parties dated January 24, 2012.
Management and investment advisory fees
The Company pays CMFT Management a management fee, payable quarterly in arrears, equal to the greater of (a) $250,000 per annum ($62,500 per quarter) and (b) 1.50% per annum (0.375% per quarter) of the Company’s Equity (as defined in the Management Agreement).
CIM REAL ESTATE FINANCE TRUST, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2022 (Unaudited) – (Continued)
CMFT Securities has an investment advisory and management agreement dated December 6, 2019 (the “Investment Advisory and Management Agreement”) with the Investment Advisor. CMFT Securities was formed for the purpose of holding any securities investments and certain other investments made by the Company. The Investment Advisor, a wholly-owned subsidiary of CIM, is registered as an investment advisor under the Investment Advisers Act of 1940, as amended (the “Advisers Act”). Pursuant to the Investment Advisory and Management Agreement, the Investment Advisor manages the day-to-day business affairs of CMFT Securities and its investments in corporate credit and real estate-related securities (collectively, the “Managed Assets”), subject to the supervision of the Board. In connection with the services provided by the Investment Advisor, CMFT Securities pays the Investment Advisor an investment advisory fee (the “Investment Advisory Fee”), payable quarterly in arrears, equal to 1.50% per annum (0.375% per quarter) of CMFT Securities’ Equity (as defined in the Investment Advisory and Management Agreement). Because the Managed Assets are excluded from the calculation of management fees payable by the Company to CMFT Management pursuant to the Management Agreement, the total management and advisory fees payable by the Company to its external advisors are not increased as a result of the Investment Advisory and Management Agreement.
In addition, the Investment Advisor has a sub-advisory agreement dated December 6, 2019 (the “Sub-Advisory Agreement”) with OFS Capital Management, LLC (the “Sub-Advisor”) to act as an investment sub-advisor to CMFT Securities. The Sub-Advisor is registered as an investment adviser under the Advisers Act and is an affiliate of the Investment Advisor. The Sub-Advisor principally provides investment management services with respect to the corporate credit-related securities held by CMFT Securities and its subsidiaries. The Sub-Advisor may allocate a portion of these corporate credit-related securities to its other clients, including affiliates of CIM. On a quarterly basis, the Investment Advisor designates 50% of the sum of the Investment Advisory Fee and incentive compensation attributable to the assets for which Sub-Advisor has provided investment management services payable to the Investment Advisor as sub-advisory fees.
Incentive compensation
CMFT Management is entitled to receive incentive compensation, payable with respect to each quarter, which is generally equal to the excess of (a) the product of (i) 20% and (ii) the excess of (A) Core Earnings (as defined in the Management Agreement) of the Company for the previous 12-month period, over (B) the product of (1) the Company’s Consolidated Equity (as defined in the Management Agreement) in the previous 12-month period, and (2) 7% per annum, over (b) the sum of any incentive compensation paid to CMFT Management with respect to the first three calendar quarters of such previous 12-month period (or such lesser number of completed calendar quarters preceding the applicable period, if applicable). During the three and nine months ended September 30, 2022 and 2021, no incentive compensation fees were incurred.
In addition, the Investment Advisor is eligible to receive a portion of the incentive compensation payable to CMFT Management pursuant to the Management Agreement. In the event that the incentive compensation is earned and payable with respect to any quarter, CMFT Management calculates the portion of the incentive compensation that was attributable to the Managed Assets and payable to the Investment Advisor.
Expense reimbursements to related parties
The Company reimburses CMFT Management, the Investment Advisor or their affiliates for certain expenses paid or incurred in connection with the services provided to the Company. The Company will reimburse CMFT Management, the Investment Advisor, or their affiliates for salaries and benefits paid to personnel who provide services to the Company, excluding the Company’s executive officers and any portfolio management, acquisitions or investment professionals.
The Company recorded fees and expense reimbursements as shown in the table below for services provided by CMFT Management or its affiliates related to the services described above during the periods indicated (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2022 | | 2021 | | 2022 | | 2021 |
| Management fees | $ | 12,915 | | | $ | 11,703 | | | $ | 39,613 | | | $ | 35,035 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Expense reimbursements to related parties (1) | $ | 3,428 | | | $ | 2,516 | | | $ | 10,899 | |
| $ | 8,387 | |
____________________________________(1)During the nine months ended September 30, 2022, the Company paid $984,000 of expense reimbursements attributable to earnout leasing costs under the Purchase and Sale Agreement, which are included in gain on disposition of real estate and condominium developments, net in the condensed consolidated statements of operations.
CIM REAL ESTATE FINANCE TRUST, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2022 (Unaudited) – (Continued)
Due to Affiliates
Of the amounts shown above, $14.6 million and $15.1 million had been incurred, but not yet paid, for services provided by CMFT Management or its affiliates in connection with the management and operating activities during the nine months ended September 30, 2022 and 2021, respectively, and such amounts were recorded as liabilities of the Company as of such dates.
Development Management Agreements
On January 7, 2021, the Company completed foreclosure proceedings to take control of the assets which previously secured its mezzanine loans, including 75 condominium units and 21 rental units across four buildings in New York. Upon foreclosure, and with the approval of the valuation, compensation and affiliate transactions committee of the Board, CIM NY Management, LLC, an affiliate of the Company’s manager, CMFT Management, entered into a Development Management Agreement with the indirect wholly owned subsidiaries of the Company that own each of the four buildings (the “Building Owners”), wherein CIM NY Management, LLC will act as project manager in overseeing the development and construction of property improvements in accordance with each respective Development Management Agreement (the “Development Services”). In consideration for the Development Services, CIM NY Management, LLC will receive a development management fee from the Building Owners equal to 4% of the aggregate gross project costs expended during the term of the Development Management Agreement, subject to the conditions in each respective Development Management Agreement. During the nine months ended September 30, 2022 and 2021, the Company recorded $337,000 and $85,000, respectively, in development management fees. Additionally, CIM NY Management, LLC is reimbursed by the Building Owners for expenses incurred in connection with the Development Services, including services provided that are incidental to but not part of the Development Services. The Development Management Agreement shall remain in effect until the project completion date, and is terminable by either party with fifteen days prior notice to the other party, with or without cause.
Affiliated Investments
In September 2021, the Company co-invested $68.4 million in preferred units and $138.8 million in a mortgage loan to a third-party for the purchase of a multi-family, office and retail building in Fort Lauderdale, Florida with CIM Real Assets & Credit Fund, a fund that is advised by affiliates of CMFT Management (“CIM RACR”). During the nine months ended September 30, 2022, the Company and CIM RACR upsized their investment in the preferred units with an additional $4.8 million and $364,000, respectively, and upsized their investment in the mortgage loan with an additional $6.4 million and $490,000, respectively. The Company subsequently redeemed its investment in the preferred units during the nine months ended September 30, 2022 in exchange for an investment in a first mortgage loan. As a result of the upsize and the conversion of preferred units, as of September 30, 2022, the Company had $203.6 million invested in the mortgage loan.
In October 2021, the Company invested in a $130.0 million first mortgage loan, with an initial advance of $119.0 million, to a third-party, the proceeds of which were used to finance the acquisition of a property from a fund that is advised by an affiliate of CMFT Management. As of September 30, 2022, $122.4 million of the first mortgage loan was outstanding. An affiliate of CMFT Management serves as the property manager for this property and has entered into a subordination agreement with the Company in connection with the loan.
In November 2021, the Company entered into the Unconsolidated Joint Venture (the “MT-FT JV”) with CMMT Holdings, LLC, a fund that is advised by an affiliate of CMFT Management, for the purposes of investing in the NewPoint JV. The Company owns 50% of the equity interests of the MT-FT JV and has committed to fund capital to the MT-FT JV up to $212.5 million, of which $133.0 million has been funded. For more information on the NewPoint JV, see Note 2 — Summary of Significant Accounting Policies.
In December 2021, the Company invested in a $155.0 million first mortgage loan, with an initial advance of $154.0 million, to a third-party, the proceeds of which were used to finance the acquisition of a property from a fund that is advised by an affiliate of CMFT Management. As of September 30, 2022, $154.0 million of the first mortgage loan was outstanding.
During the nine months ended September 30, 2022, the Company invested in a $147.0 million first mortgage loan, with an initial advance of $143.0 million, to a third-party, which was previously funded by a fund that is advised by an affiliate of CMFT Management. As of September 30, 2022, $144.7 million of the first mortgage loan was outstanding.
As a result of the CIM Income NAV Merger, the Company had an investment in CIM UII Onshore, a fund that is advised by an affiliate of CMFT Management, which was fully redeemed for $60.7 million during the nine months ended September 30, 2022. See Note 2 — Summary of Significant Accounting Policies for more information on the CIM UII Onshore investment.
CIM REAL ESTATE FINANCE TRUST, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2022 (Unaudited) – (Continued)
During the nine months ended September 30, 2022, the Company and CIM RACR co-invested $75.9 million and $14.7 million, respectively, in five corporate senior loans to a third-party. As of September 30, 2022, $58.0 million of the corporate senior loans was outstanding. The Sub-Advisor provided investment management services related to these corporate senior loans pursuant to the Sub-Advisory Agreement.
NOTE 13 — ECONOMIC DEPENDENCY
Under various agreements, the Company has engaged and may in the future engage CMFT Management or its affiliates to provide certain services that are essential to the Company, including asset management services, supervision of the management and leasing of properties owned by the Company, asset acquisition and disposition decisions, as well as other administrative responsibilities for the Company including accounting services and stockholder relations. As a result of these relationships, the Company is dependent upon CMFT Management or its affiliates. In the event that these companies are unable to provide the Company with these services, the Company would be required to find alternative providers of these services.
NOTE 14 — STOCKHOLDERS’ EQUITY
Equity-Based Compensation
On August 10, 2018, the Board approved the adoption of the Company’s 2018 Equity Incentive Plan (the “2018 Plan”), under which 400,000 of the Company’s shares of common stock were reserved for issuance. On April 27, 2022, the Board and the compensation committee of the Board approved the Amended and Restated CIM Real Estate Finance Trust, Inc. 2022 Equity Incentive Plan (the “2022 Plan”) and the 2022 Plan was approved by the Company’s stockholders at the Company’s 2022 Annual Meeting of Stockholders held on July 12, 2022. The 2022 Plan superseded and replaced the 2018 Plan. Awards that are granted on or after the effective date of the 2022 Plan are subject to the terms and provisions of the 2022 Plan. The total number of shares of Company common stock reserved and available for issuance under the 2022 Plan at any time during the term of the 2022 Plan are 250,000 shares, which is a reduction from 400,000 shares authorized for issuance under the 2018 Plan, and awards of approximately 250,000 shares of common stock were available for future grant at September 30, 2022. Under the 2022 Plan, the Board or the compensation committee of the Board has the authority to grant certain awards to employees, non-employee directors, and consultants or advisors of the Company, including stock option awards, restricted stock awards or deferred stock awards, which awards will further align such persons’ interests with the interests of the Company’s stockholders. The Board or the compensation committee of the Board also has the authority to determine the terms of any award granted pursuant to the 2022 Plan, including vesting schedules, restrictions and acceleration of any restrictions. The 2022 Plan may be amended or terminated by the Board or the compensation committee of the Board at any time, subject to the right of the Company’s stockholders to approve certain amendments.
As of September 30, 2022, the Company has granted awards of approximately 116,000 restricted shares in the aggregate to the independent members of the Board under the 2018 Plan. As of September 30, 2022, 73,000 of the restricted shares had vested based on one year of continuous service, and on October 1, 2022, 43,000 of the restricted shares vested based on one year of continuous service. The fair value of the Company’s share awards is determined using the Company’s per share NAV on the date of grant. Compensation expense related to the restricted shares is recognized over the vesting period. The Company recorded compensation expense of $120,000 and $277,000 for the three and nine months ended September 30, 2022, respectively, and $62,000 and $151,000 for the three and nine months ended September 30, 2021, respectively, related to the restricted shares, which is included in general and administrative expenses in the accompanying condensed consolidated statements of operations. All compensation expense related to these restricted shares was recognized ratably over the period of service prior to September 30, 2022. On October 1, 2022, as part of the annual retainers paid to the independent members of the Board and pursuant to the 2022 Plan, the independent members of the Board were each granted 11,111 restricted shares. The restricted shares will vest on October 1, 2023.
NOTE 15 — LEASES
The Company’s real estate assets are leased to tenants under operating leases for which the terms, expirations and extension options vary. The Company’s operating leases do not convey to the lessee the right to purchase the underlying asset upon expiration of the lease period. To determine whether a contract contains a lease, the Company reviews contracts to determine if the agreement conveys the right to control the use of an asset. The Company accounts for lease and non-lease components as a single, combined operating lease component. Non-lease components primarily consist of maintenance services, including CAM, real estate taxes, insurance and utilities paid for by the lessor but consumed by the lessee. Non-lease components are considered to be variable rental and other property income and are recognized in the period incurred.
CIM REAL ESTATE FINANCE TRUST, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2022 (Unaudited) – (Continued)
As of September 30, 2022, the Company’s leases had a weighted-average remaining term of 10.7 years. Certain leases include provisions to extend the lease agreements, options for early termination after paying a specified penalty, rights of first refusal to purchase the property at competitive market rates, and other negotiated terms and conditions. The Company retains substantially all of the risks and benefits of ownership of the real estate assets leased to tenants. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants.
As of September 30, 2022, the future minimum rental income from the Company’s real estate assets under non-cancelable operating leases, assuming no exercise of renewal options for the succeeding five fiscal years and thereafter, was as follows (in thousands):
| | | | | | | | |
| Future Minimum Rental Income |
| Remainder of 2022 | $ | 38,611 | |
| 2023 | 153,721 | |
| 2024 | 151,924 | |
| 2025 | 148,037 | |
| 2026 | 143,815 | |
| Thereafter | 1,104,039 | |
| Total | $ | 1,740,147 | |
A certain amount of the Company’s rental and other property income is from tenants with leases which are subject to contingent rent provisions. These contingent rents are subject to the tenant achieving periodic revenues in excess of specified levels. For the three and nine months ended September 30, 2022 and 2021, the amount of the contingent rent earned by the Company was not significant.
Rental and other property income during the three and nine months ended September 30, 2022 and 2021 consisted of the following (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2022 | | 2021 | | 2022 | | 2021 |
Fixed rental and other property income (1) | $ | 40,875 | | | $ | 60,031 | | | $ | 153,522 | | | $ | 190,632 | |
Variable rental and other property income (2) | 2,684 | | | 10,763 | | | 17,281 | | | 32,394 | |
| Total rental and other property income | $ | 43,559 | | | $ | 70,794 | | | $ | 170,803 | | | $ | 223,026 | |
__________________________________
(1)Consists primarily of fixed contractual payments from operating leases with tenants recognized on a straight-line basis over the lease term, including amortization of acquired above- and below-market leases, and is net of uncollectible lease-related receivables.
(2)Consists primarily of tenant reimbursements for recoverable real estate taxes and property operating expenses, and percentage rent.
The Company has one property subject to a non-cancelable operating ground lease with a remaining term of 10.9 years, with a lease liability (in deferred rental income, derivative liabilities and other liabilities) and a related right-of-use (“ROU”) asset (in prepaid expenses, derivative assets and other assets) of $2.2 million in the condensed consolidated balance sheets. The lease liability and ROU asset were initially measured at the present value of the future minimum lease payments using a discount rate of 4.3%. This reflects the Company’s incremental borrowing rate, which was calculated based on the interest rate the Company would incur to borrow on a fully collateralized basis over a term similar to the lease.
The Company recognized $63,000 and $188,000 of ground lease expense during the three and nine months ended September 30, 2022, of which $61,000 and $182,000 was paid in cash during the period it was recognized. As of September 30, 2022, the Company’s scheduled future minimum rental payments related to its operating ground lease is approximately $63,000 for the remainder of 2022, $250,000 annually for 2023 through 2027, and $1.4 million thereafter through the maturity date of the lease in August 2033.
CIM REAL ESTATE FINANCE TRUST, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2022 (Unaudited) – (Continued)
NOTE 16 — SEGMENT REPORTING
The Company has two reportable segments: real estate and credit. Corporate/other represents all corporate level and unallocated items and includes the Company’s other asset management activities and operating expenses. There were no changes in the structure of the Company’s internal organization that prompted the change in reportable segments. Prior period amounts have been revised to conform to the current year presentation shown below.
The following tables present segment reporting for the three and nine months ended September 30, 2022 and 2021 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Real Estate | | Credit | | Corporate/Other (1) | | Company Total |
Three Months Ended September 30, 2022 | | | | | | | |
| Rental and other property income | $ | 43,465 | | | $ | — | | | $ | 94 | | | $ | 43,559 | |
| Interest income | — | | | 66,222 | | | — | | | 66,222 | |
| Total revenues | 43,465 | | | 66,222 | | | 94 | | | 109,781 | |
| | | | | | | |
| General and administrative | 215 | | | 77 | | | 3,143 | | | 3,435 | |
| Property operating | 2,109 | | | — | | | 2,323 | | | 4,432 | |
| Real estate tax | 1,385 | | | — | | | 408 | | | 1,793 | |
| Expense reimbursements to related parties | — | | | — | | | 3,428 | | | 3,428 | |
| Management fees | 4,849 | | | 8,066 | | | — | | | 12,915 | |
| Transaction-related | 2 | | | — | | | 7 | | | 9 | |
| Depreciation and amortization | 16,948 | | | — | | | — | | | 16,948 | |
| Real estate impairment | 527 | | | — | | | — | | | 527 | |
| Increase in provision for credit losses | — | | | 5,664 | | | — | | | 5,664 | |
| Total operating expenses | 26,035 | | | 13,807 | | | 9,309 | | | 49,151 | |
| Gain (loss) on disposition of real estate and condominium developments, net | 4,604 | | | — | | | (150) | | | 4,454 | |
| | | | | | | |
| Operating income (loss) | 22,034 | | | 52,415 | | | (9,365) | | | 65,084 | |
| Other expense: | | | | | | | |
| Gain on investment in unconsolidated entities | — | | | 2,195 | | | — | | | 2,195 | |
| Unrealized (loss) on equity security | — | | | (9,030) | | | — | | | (9,030) | |
| Interest expense and other, net | (4,517) | | | (32,152) | | | (2,697) | | | (39,366) | |
| (Loss) gain on extinguishment of debt | (5,615) | | | — | | | 2,271 | | | (3,344) | |
| Segment net income (loss) | $ | 11,902 | | | $ | 13,428 | | | $ | (9,791) | | | $ | 15,539 | |
| Net income allocated to noncontrolling interest | 129 | | | — | | | — | | | 129 | |
| Segment net income (loss) attributable to the Company | 11,773 | | | 13,428 | | | (9,791) | | | 15,410 | |
Total assets as of September 30, 2022 | $ | 2,189,724 | | | $ | 4,725,858 | | | $ | 209,196 | | | $ | 7,124,778 | |
__________________________________(1)Includes condominium and rental units acquired via foreclosure during the year ended December 31, 2021.
CIM REAL ESTATE FINANCE TRUST, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2022 (Unaudited) – (Continued)
| | | | | | | | | | | | | | | | | | | | | | | |
| Real Estate | | Credit | | Corporate/Other (1) (2) | | Company Total |
Nine Months Ended September 30, 2022 | | | | | | | |
Rental and other property income | $ | 170,509 | | | $ | — | | | $ | 294 | | | $ | 170,803 | |
Interest income | — | | | 142,669 | | | — | | | 142,669 | |
Total revenues | 170,509 | | | 142,669 | | | 294 | | | 313,472 | |
| | | | | | | |
General and administrative | 494 | | | 246 | | | 9,850 | | | 10,590 | |
Property operating | 13,403 | | | — | | | 4,005 | | | 17,408 | |
Real estate tax | 9,251 | | | — | | | 1,279 | | | 10,530 | |
| Expense reimbursements to related parties | — | | | — | | | 10,899 | | | 10,899 | |
| Management fees | 17,176 | | | 22,437 | | | — | | | 39,613 | |
Transaction-related | 439 | | | — | | | 23 | | | 462 | |
Depreciation and amortization | 54,104 | | | — | | | — | | | 54,104 | |
| Real estate impairment | 11,869 | | | — | | | 7,945 | | | 19,814 | |
| Increase in provision for credit losses | — | | | 15,315 | | | — | | | 15,315 | |
Total operating expenses | 106,736 | | | 37,998 | | | 34,001 | | | 178,735 | |
| Gain on disposition of real estate and condominium developments, net | 115,050 | | | — | | | 3,085 | | | 118,135 | |
| | | | | | | |
Operating income (loss) | 178,823 | | | 104,671 | | | (30,622) | | | 252,872 | |
Other expense: | | | | | | | |
| Gain on investment in unconsolidated entities | — | | | 3,686 | | | 5,172 | | | 8,858 | |
| Unrealized (loss) gain on equity security | — | | | (15,462) | | | 22 | | | (15,440) | |
Interest expense and other, net | (27,527) | | | (61,332) | | | (9,594) | | | (98,453) | |
Loss on extinguishment of debt | (18,609) | | | — | | | (975) | | | (19,584) | |
Segment net income (loss) | $ | 132,687 | | | $ | 31,563 | | | $ | (35,997) | | | $ | 128,253 | |
| Net income allocated to noncontrolling interest | 66 | | | — | | | — | | | 66 | |
| Segment net income (loss) attributable to the Company | 132,621 | | | 31,563 | | | (35,997) | | | 128,187 | |
Total assets as of September 30, 2022 | $ | 2,189,724 | | | $ | 4,725,858 | | | $ | 209,196 | | | $ | 7,124,778 | |
__________________________________
(1)Includes condominium and rental units acquired via foreclosure during the year ended December 31, 2021.
(2)Includes the Company’s investment in CIM UII Onshore.
CIM REAL ESTATE FINANCE TRUST, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2022 (Unaudited) – (Continued)
| | | | | | | | | | | | | | | | | | | | | | | |
| Real Estate | | Credit | | Corporate/Other (1) | | Company Total |
Three Months Ended September 30, 2021 | | | | | | | |
Rental and other property income | $ | 70,694 | | | $ | — | | | $ | 100 | | | $ | 70,794 | |
Interest income | — | | | 19,755 | | | — | | | 19,755 | |
Total revenues | 70,694 | | | 19,755 | | | 100 | | | 90,549 | |
| | | | | | | |
General and administrative | 86 | | | 265 | | | 2,725 | | | 3,076 | |
Property operating | 7,555 | | | — | | | 3,602 | | | 11,157 | |
Real estate tax | 7,325 | | | — | | | 266 | | | 7,591 | |
| Expense reimbursements to related parties | — | | | — | | | 2,516 | | | 2,516 | |
| Management fees | 8,713 | | | 2,990 | | | — | | | 11,703 | |
Transaction-related | 6 | | | — | | | — | | | 6 | |
Depreciation and amortization | 22,801 | | | — | | | — | | | 22,801 | |
| Real estate impairment | 891 | | | — | | | — | | | 891 | |
| Decrease in provision for credit losses | — | | | (1,792) | | | — | | | (1,792) | |
Total operating expenses | 47,377 | | | 1,463 | | | 9,109 | | | 57,949 | |
| Gain on disposition of real estate and condominium developments, net | 30,657 | | | — | | | 3,376 | | | 34,033 | |
| Merger-related expenses, net | — | | | — | | | (398) | | | (398) | |
| | | | | | | |
Operating income (loss) | 53,974 | | | 18,292 | | | (6,031) | | | 66,235 | |
Other expense: | | | | | | | |
Interest expense and other, net | (12,820) | | | (5,117) | | | (2,444) | | | (20,381) | |
| Loss on extinguishment of debt | (249) | | | — | | | (3,002) | | | (3,251) | |
Segment net income (loss) | $ | 40,905 | | | $ | 13,175 | | | $ | (11,477) | | | $ | 42,603 | |
| | | | | | | |
Total assets as of September 30, 2021 | $ | 2,947,031 | | | $ | 1,866,913 | | | $ | 266,915 | | | $ | 5,080,859 | |
__________________________________
(1)Includes condominium and rental units acquired via foreclosure during the year ended December 31, 2021.
CIM REAL ESTATE FINANCE TRUST, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2022 (Unaudited) – (Continued)
| | | | | | | | | | | | | | | | | | | | | | | |
| Real Estate | | Credit | | Corporate/Other (1) | | Company Total |
Nine Months Ended September 30, 2021 | | | | | | | |
Rental and other property income | $ | 222,691 | | | $ | — | | | $ | 335 | | | $ | 223,026 | |
Interest income | — | | | 48,168 | | | — | | | 48,168 | |
Total revenues | 222,691 | | | 48,168 | | | 335 | | | 271,194 | |
| | | | | | | |
General and administrative | 204 | | | 978 | | | 9,927 | | | 11,109 | |
Property operating | 22,297 | | | — | | | 10,335 | | | 32,632 | |
Real estate tax | 22,390 | | | — | | | 5,126 | | | 27,516 | |
| Expense reimbursements to related parties | — | | | — | | | 8,387 | | | 8,387 | |
| Management fees | 26,577 | | | 8,458 | | | — | | | 35,035 | |
Transaction-related | 37 | | | — | | | — | | | 37 | |
Depreciation and amortization | 73,186 | | | — | | | — | | | 73,186 | |
| Real estate impairment | 5,268 | | | — | | | — | | | 5,268 | |
| Decrease in provision for credit losses | — | | | (1,101) | | | — | | | (1,101) | |
Total operating expenses | 149,959 | | | 8,335 | | | 33,775 | | | 192,069 | |
| Gain on disposition of real estate and condominium developments, net | 75,633 | | | — | | | 4,869 | | | 80,502 | |
| Merger-related expenses, net | — | | | — | | | (398) | | | (398) | |
| | | | | | | |
Operating income (loss) | 148,365 | | | 39,833 | | | (28,969) | | | 159,229 | |
Other expense: | | | | | | | |
Interest expense and other, net | (20,649) | | | (12,005) | | | (24,209) | | | (56,863) | |
| Loss on extinguishment of debt | (1,621) | | | — | | | (3,108) | | | (4,729) | |
Segment net income (loss) | $ | 126,095 | | | $ | 27,828 | | | $ | (56,286) | | | $ | 97,637 | |
| | | | | | | |
Total assets as of September 30, 2021 | $ | 2,947,031 | | | $ | 1,866,913 | | | $ | 266,915 | | | $ | 5,080,859 | |
__________________________________
(1)Includes condominium and rental units acquired via foreclosure during the year ended December 31, 2021.
NOTE 17 — SUBSEQUENT EVENTS
Redemptions of Shares of Common Stock
Subsequent to September 30, 2022, the Company redeemed approximately 1.3 million shares for $9.6 million (at a redemption price of $7.20 per share). The remaining redemption requests received during the three months ended September 30, 2022 totaling approximately 23.9 million shares went unfulfilled.
Investment and Disposition Activity
Subsequent to September 30, 2022, the Company’s investment and disposition activity included the following:
•Disposed of one property and condominium units for an aggregate gross sales price of $14.1 million, resulting in net proceeds of $12.8 million after closing costs and a net gain of approximately $627,000.
•Purchased $55.0 million in CMBS.
•Settled $6.3 million of liquid senior loan purchases, $5.8 million of which were traded as of September 30, 2022, and sold $3.3 million of liquid senior loans.
•The extension option was exercised on two of the Company’s first mortgage loans for $101.4 million that were initially set to mature on November 7, 2022, extending the date of maturity to November 7, 2023.
CIM REAL ESTATE FINANCE TRUST, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2022 (Unaudited) – (Continued)
Financing Activity
Subsequent to September 30, 2022, the Company’s financing activity included the following:
•Extended the Barclays Repurchase Facility’s initial maturity date which was set to mature on September 21, 2024, to September 22, 2025.
•Borrowed $35.0 million under the CMFT Credit Facility.
•Financed CMBS under the J.P. Morgan Repurchase Facility for $31.3 million and repaid $5.3 million of borrowings under the J.P. Morgan Repurchase Facility.
•Increased borrowings on first mortgage loans under the Deutsche Bank Repurchase Facility for $1.7 million.
•Repaid $10.8 million of borrowings under the Mortgage Loan.
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis should be read in conjunction with the accompanying condensed consolidated financial statements and notes thereto appearing elsewhere in this Quarterly Report on Form 10-Q. We make statements in this section that are forward-looking statements within the meaning of the federal securities laws. Certain risks may cause our actual results, performance or achievements to differ materially from those expressed or implied by the following discussion. For a complete discussion of such risk factors, see Item 1A — Risk Factors of this Quarterly Report on Form 10-Q and the Company’s Annual Report on Form 10-K for the year ended December 31, 2021. Capitalized terms used herein, but not otherwise defined, shall have the meaning ascribed to those terms in “Part I — Financial Information” of this Quarterly Report on Form 10-Q, including the notes to the condensed consolidated financial statements contained therein, and the terms “we,” “us,” “our” and the “Company” refer to CIM Real Estate Finance Trust, Inc.
Forward-Looking Statements
This Quarterly Report on Form 10-Q includes “forward-looking statements” (within the meaning of the federal securities laws, 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”)) that reflect our expectations and projections about our future results, performance, prospects and opportunities. We have attempted to identify these forward-looking statements by the use of words such as “may,” “will,” “seek,” “expects,” “anticipates,” “believes,” “targets,” “intends,” “should,” “estimates,” “could,” “continue,” “assume,” “projects,” “plans” or similar expressions. These forward-looking statements are based on information currently available to us and are subject to a number of known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements. These factors include, among other things, those discussed below. In addition, these risks and uncertainties include those associated with (i) the scope, severity and duration of the current pandemic of COVID-19 and actions taken to contain the pandemic or mitigate its impact, (ii) the potential adverse effect of the COVID-19 pandemic on the financial condition, results of operations, cash flows and performance of the Company and its tenants, the real estate market and the global economy and financial markets, among others, and (iii) general economic, market and other conditions. We intend for all such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in Section 27A of the Securities Act and Section 21E of the Exchange Act, as applicable by law. We do not undertake to publicly update or revise any forward-looking statements, whether as a result of changes in underlying assumptions or new information, future events or otherwise, except as may be required to satisfy our obligations under federal securities law. The forward-looking statements should be read in light of the risk factors identified in Item 1A — Risk Factors of this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the year ended December 31, 2021.
The following are some, but not all, of the assumptions, risks, uncertainties and other factors that could cause our actual results to differ materially from those presented in our forward-looking statements:
•We may be unable to renew leases, lease vacant space or re-lease space as leases expire on favorable terms or at all.
•We are subject to risks associated with tenant, geographic and industry concentrations with respect to our investments and properties.
•Our properties, intangible assets and other assets, as well as the property securing our loans or other investments, may be subject to impairment charges.
•We could be subject to unexpected costs or unexpected liabilities that may arise from dispositions.
•We are subject to competition in the acquisition and disposition of properties and in the leasing of our properties and we may suffer delays or be unable to acquire, dispose of, or lease properties on advantageous terms.
•We are subject to risks associated with bankruptcies or insolvencies of our borrowers and tenants and from borrower or tenant defaults generally.
•Our credit and real estate investments subject us to the political, economic, capital markets and other conditions in the United States, including with respect to the effects of the COVID-19 pandemic and other events that impact the United States.
•We are subject to fluctuations in interest rates which could reduce our ability to generate income on our credit investments.
•We are subject to an increase in inflation that could increase our credit and real estate portfolio related costs at a higher rate than our rental income and other revenue and adversely impact demand for rental space and future extensions of our tenants’ leases.
•We are subject to competition from entities engaged in lending which may impact the availability of origination and acquisition opportunities acceptable to us.
•We have substantial indebtedness, which may affect our ability to pay distributions and expose us to interest rate fluctuation risk and the risk of default under our debt obligations.
•We are subject to risks associated with the incurrence of additional secured or unsecured debt.
•We may not be able to maintain profitability.
•We may not generate cash flows sufficient to pay our distributions to stockholders or meet our debt service obligations.
•Our continued compliance with debt covenants depends on many factors and could be impacted by current or future economic conditions, including those associated with the COVID-19 pandemic.
•We may be affected by risks resulting from losses in excess of insured limits.
•We may fail to remain qualified as a REIT for U.S. federal income tax purposes.
•We may be unable to successfully reposition our portfolio or list our shares on a national securities exchange in the timeframe we expect or at all.
Definitions
We use certain defined terms throughout this Quarterly Report on Form 10-Q that have the following meanings:
The phrase “annualized rental income” refers to the straight-line rental revenue under our leases on operating properties owned as of the respective reporting date, which includes the effect of rent escalations and any tenant concessions, such as free rent, and excludes any contingent rent, such as percentage rent. Management uses annualized rental income as a basis for tenant, industry and geographic concentrations and other metrics within the portfolio. Annualized rental income is not indicative of future performance.
Under a “net lease,” the tenant occupying the leased property (usually as a single tenant) does so in much the same manner as if the tenant were the owner of the property. The tenant generally agrees that it will either have no ability or only limited ability to terminate the lease or abate rent prior to the expiration of the term of the lease as a result of real estate driven events such as casualty, condemnation or failure by the landlord to fulfill its obligations under the lease. There are various forms of net leases, most typically classified as either triple-net or double-net. Triple-net leases typically require the tenant to pay all expenses associated with the property (e.g., real estate taxes, insurance, maintenance and repairs, including roof, structure and parking lot). Double-net leases typically hold the landlord responsible for the capital expenditures for the roof and structure, while the tenant is responsible for all lease payments and remaining operating expenses associated with the property (e.g., real estate taxes, insurance and maintenance).
Overview
We are primarily focused on originating, acquiring, financing and managing shorter duration senior secured loans, other related credit investments and core commercial real estate. Our investment strategy allows us to adapt over time in order to respond to evolving market conditions and to capitalize on investment opportunities that may arise at different points in the economic and real estate investment cycle. We are continuing our strategy as a credit focused REIT, balancing our existing core of necessity commercial real estate assets leased to creditworthy tenants under long-term net leases with a portfolio of commercial mortgage loans and other credit investments. Assuming the successful repositioning of our portfolio and subject to market conditions, we then expect to pursue a listing of our common stock on a national securities exchange, though we can provide no assurances that a listing will happen on that timeframe or at all.
We were formed on July 27, 2010, and we elected to be taxed, and conduct our operations to qualify, as a REIT for U.S. federal income tax purposes. We have no paid employees and are externally managed by CMFT Management and, with respect to investments in securities and certain other of our investments, our Investment Advisor, each of which is an affiliate of CIM, a community-focused real estate and infrastructure owner, operator, lender and developer.
As of September 30, 2022, our loan portfolio consisted of 346 loans with a net book value of $4.0 billion, and investments in real estate-related securities of $470.1 million.
As of September 30, 2022, we owned 384 properties, which consisted of 367 retail properties, nine office properties, and eight industrial properties, representing 25 industry sectors and comprising 11.0 million rentable square feet of commercial space located in 44 states, with a net book value of $2.2 billion. As of September 30, 2022, we owned condominium developments with a net book value of $153.6 million.
In furtherance of our strategy, during the nine months ended September 30, 2022, we disposed of 130 properties and an outparcel of land, including the two properties previously owned through the Consolidated Joint Venture, encompassing 11.7
million gross rentable square feet. On December 20, 2021, certain subsidiaries of the Company entered into the Purchase and Sale Agreement to sell 79 shopping centers and two single-tenant properties, for which we were to receive, in the aggregate, approximately $1.32 billion in total consideration at closing. During the nine months ended September 30, 2022, the sale of the 81 properties closed under the Purchase and Sale Agreement for total consideration of $1.33 billion, as further discussed in Note 4 — Real Estate Assets to the condensed consolidated financial statements in this Quarterly Report on Form 10-Q.
Our operating results and cash flows are primarily influenced by interest income from our credit investments, rental and other property income from our commercial properties, interest expense on our indebtedness and investment and operating expenses. CMFT Management reviews our investment portfolios and is in regular contact with our borrowers, monitoring performance of the collateral and enforcing our rights as necessary. In addition, as 99.3% of our rentable square feet was under lease, including any month-to-month agreements, as of September 30, 2022, with a weighted average remaining lease term of 10.7 years, we believe our exposure to changes in commercial rental rates on our portfolio is substantially mitigated, except for vacancies caused by tenant bankruptcies or other factors, including due to circumstances related to COVID-19. Our manager regularly monitors the creditworthiness of our tenants by reviewing each tenant’s financial results, any available credit rating agency reports on the tenant or guarantor, the operating history of the property with such tenant, the tenant’s market share and track record within its industry segment, the general health and outlook of the tenant’s industry segment and other information for changes and possible trends. If our manager identifies significant changes or trends that may adversely affect the creditworthiness of a tenant, it will gather a more in-depth knowledge of the tenant’s financial condition and, if necessary, attempt to mitigate the tenant credit risk by evaluating the possible sale of the property or identifying a possible replacement tenant should the current tenant fail to perform on the lease.
COVID-19
We are closely monitoring the negative impacts that the COVID-19 pandemic and the efforts to mitigate its spread are having on the economy, our tenants and our business. The extent to which the COVID-19 pandemic continues to impact our operations and those of our tenants will depend on future developments, including, among other factors, the duration, spread and resurgences of the virus, including certain variants thereof, along with related travel advisories and restrictions, the recovery time of the disrupted supply chains and industries, the impact of labor market interruptions, the impact of government interventions, the pace, scope and efficacy of vaccination programs, and general uncertainty as to the impact of COVID-19, including related variants, on the global economy.
Macroeconomic Environment
This year has been characterized by steep declines and significant volatility in global markets, driven by investor concerns over inflation, rising interest rates, slowing economic growth and geopolitical uncertainty. Inflation across many key economies reached generational highs, prompting central banks to take monetary policy tightening actions that have, and will likely continue to create headwinds to economic growth. The ongoing war between Russia and Ukraine is also contributing to mounting inflationary pressure.
Inflation has caused the Federal Reserve to continue raising interest rates, which has created further uncertainty for the economy and for our borrowers and tenants. Although the majority of our business model is such that rising interest rates will, all else being equal, correlate to increases in our net income, increases in interest rates may adversely affect our existing borrowers, tenants and owned property values. Additionally, rising rates and increasing costs may dampen consumer spending and slow corporate profit growth, which may negatively impact the collateral underlying certain of our loans. While there is debate among economists as to whether such factors, coupled with economic contraction in the U.S. in 2022, indicate that the U.S. has entered, or in the near term will enter, a recession, it remains difficult to predict the full impact of recent changes and any future changes in interest rates or inflation.
Operating Highlights and Key Performance Indicators
Activity from January 1, 2022 through September 30, 2022
Operating Results:
•Net income attributable to the Company of $128.2 million, or $0.29 per share.
•Declared aggregate distributions of $0.27 per share.
Credit Portfolio Activity:
•Invested $1.3 billion in first mortgage loans and received principal repayments on loans held-for-investment of $156.9 million.
•Invested $160.9 million in liquid senior loans and sold liquid senior loans for an aggregate gross sales price of $53.7 million.
•Invested $433.2 million in CMBS and sold one marketable security for an aggregate gross sales price of $132,000.
•Converted $68.2 million of preferred units into a CRE loan upon maturity.
•Invested $74.8 million in corporate senior loans.
Real Estate Portfolio Activity:
•Disposed of 130 properties and an outparcel of land, including the two properties previously owned through the Consolidated Joint Venture, for an aggregate sales price of $1.71 billion.
•Disposed of condominium units for an aggregate sales price of $24.2 million.
Financing Activity:
•Increased total debt by $209.2 million.
•Entered into a new repurchase agreement and increased maximum financing amounts on two existing repurchase facilities to provide up to $1.25 billion and $750.0 million, respectively, to finance a portfolio of existing and future commercial real estate mortgage loans and CMBS.
•Entered into a new credit agreement that provides for borrowings of up to $300.0 million, which includes a $100.0 million term loan facility and the ability to borrow up to $200.0 million in revolving loans under a revolving credit facility with a $30.0 million letter of credit subfacility.
•Paid down the $212.5 million outstanding balance under the CIM Income NAV Credit Facility and terminated the CIM Income NAV Credit Facility.
Portfolio Information
The following table shows the carrying value of our portfolio by investment type as of September 30, 2022 and 2021 (dollar amounts in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | As of September 30, |
| | 2022 | | 2021 |
| | Asset Count | | Carrying Value | | | | Asset Count | | Carrying Value | | |
| Loan Held-For-Investment | | | | | | | | | | | | |
| | | | | | | | | | | | |
| First mortgage loans | | 29 | | $ | 3,259,744 | | | 48.7 | % | | 11 | | $ | 890,804 | | | 19.2 | % |
| Liquid senior loans | | 313 | | 705,750 | | | 10.6 | % | | 262 | | 571,488 | | | 12.3 | % |
| Corporate senior loans | | 4 | | 57,232 | | | 0.9 | % | | — | | — | | | — | % |
| Less: Current expected credit losses | | | | (29,584) | | | (0.4) | % | | | | (11,219) | | | (0.2) | % |
| Total loans held-for-investment and related receivable, net | | 346 | | 3,993,142 | | | 59.8 | % | | 273 | | 1,451,073 | | | 31.2 | % |
| Real Estate-Related Securities | | | | | | | | | | | | |
| CMBS and equity security | | 17 | | 470,121 | | | 7.0 | % | | 15 | | 121,757 | | | 2.6 | % |
| Preferred units | | — | | — | | | — | % | | 1 | | 63,490 | | | 1.4 | % |
| Real Estate | | | | | | | | | | | | |
| Total real estate assets and intangible lease liabilities, net | | 384 | | 2,220,272 | | | 33.2 | % | | 403 | | 3,011,599 | | | 64.8 | % |
| Total Investment Portfolio | | 747 | | $ | 6,683,535 | | | 100.0 | % | | 692 | | $ | 4,647,919 | | | 100.0 | % |
Credit Portfolio Information
The following table details overall statistics for our credit portfolio as of September 30, 2022 (dollar amounts in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | CRE Loans (1) | | Liquid Senior Loans | | CMBS and Equity Security | | Corporate Senior Loans |
Number of investments (3) | | | | 29 | | | 313 | | | 17 | | | 4 | |
| Principal balance | | | | $ | 3,283,523 | | | $ | 711,947 | | | $ | 551,738 | | | $ | 58,031 | |
| Net book value | | | | $ | 3,244,737 | | | $ | 691,981 | | | $ | 470,121 | | | $ | 56,424 | |
| Unfunded loan commitments | | | | $ | 338,539 | | | $ | 1,886 | | | $ | — | | | $ | 4,324 | |
| Weighted-average interest rate | | | | 5.9 | % | | 6.7 | % | | 7.4 | % | | 9.2 | % |
Weighted-average maximum years to maturity (2) | | | | 3.9 | | 4.9 | | 4.3 | | | 4.8 |
____________________________________
(1)As of September 30, 2022, 100% of our loans by principal balance earned a floating rate of interest, primarily indexed to U.S. dollar LIBOR and SOFR.
(2)Maximum maturity date assumes all extension options are exercised by the borrower; however, our CRE loans may be repaid prior to such date.
(3)Table does not include our investment in the Unconsolidated Joint Venture, which had a carrying value of $132.4 million as of September 30, 2022.
Real Estate Portfolio Information
As of September 30, 2022, we owned 384 properties located in 44 states, the gross rentable square feet of which was 99.3% leased, including any month-to-month agreements, with a weighted average lease term remaining of 10.7 years. As of September 30, 2022, no single tenant accounted for greater than 10% of our 2022 annualized rental income. As of September 30, 2022, we had certain geographic and industry concentrations in our property holdings. In particular, we had properties located in Ohio, which accounted for 12% of our 2022 annualized rental income. In addition, we had tenants in the health and personal care stores, sporting goods, hobby and musical instrument stores, and grocery store industries, which accounted for 13%, 10% and 10%, respectively, of our 2022 annualized rental income. During the nine months ended September 30, 2022, we disposed of 130 properties and an outparcel of land, including the two properties previously
owned through the Consolidated Joint Venture, for an aggregate gross sales price of $1.71 billion. Additionally, during the nine months ended September 30, 2022, we sold condominium units for an aggregate gross sales price of $24.2 million.
The following table shows the property statistics of our real estate assets as of September 30, 2022 and 2021:
| | | | | | | | | | | | | | |
| | As of September 30, |
| | 2022 | | 2021 |
| Number of commercial properties | 384 | | 403 |
Rentable square feet (in thousands) (1) | 11,043 | | 17,623 |
| Percentage of rentable square feet leased | 99.3 | % | | 94.2 | % |
Percentage of investment-grade tenants (2) | 39.3 | % | | 36.9 | % |
____________________________________
(1) Includes square feet of buildings on land parcels subject to ground leases.
(2) Investment-grade tenants are those with a credit rating of BBB- or higher by Standard & Poor’s or a credit rating of Baa3 or higher by Moody’s Investor Service, Inc. (“Moody’s”). The ratings may reflect those assigned by Standard & Poor’s or Moody’s to the lease guarantor or the parent company, as applicable. The weighted average credit rating is weighted based on annualized rental income and is for only those tenants rated by Standard & Poor’s.
During the nine months ended September 30, 2022 and 2021, the Company did not acquire any properties.
Results of Operations
Overview
We are not aware of any material trends or uncertainties, other than those listed in the risk factors set forth in our Annual Report on Form 10-K for the year ended December 31, 2021 and this Quarterly Report on Form 10-Q, the effects of the COVID-19 pandemic, and national economic conditions affecting real estate in general that may reasonably be expected to have a material impact on our results from the acquisition, management and operation of properties. Currently, we are unable to predict the impact that the COVID-19 pandemic will have on our financial condition, results of operations and cash flows in future periods due to numerous uncertainties.
Same Store Analysis
Our results of operations are influenced by the timing of acquisitions and the operating performance of our real estate assets. We review our stabilized operating results, measured by net operating income, from properties that we owned for the entirety of both the current and prior year reporting periods, referred to as “same store” properties, and we believe that the presentation of operating results for same store properties provides useful information to stockholders. Net operating income is a supplemental non-GAAP financial measure of a real estate company’s operating performance. Net operating income is considered by management to be a helpful supplemental performance measure, as it enables management to evaluate the impact of occupancy, rents, leasing activity and other controllable property operating results at our real estate properties, and it provides a consistent method for the comparison of our properties. We define net operating income as operating revenues less operating expenses, which exclude (i) depreciation and amortization, (ii) interest expense and other non-property related revenue and expense items such as (a) general and administrative expenses, (b) expense reimbursements to related parties, (c) management fees, (d) transaction-related expenses, (e) real estate impairment, (f) increase in provision for credit losses, (g) gain on disposition of real estate and condominium developments, net, (h) merger-related expenses, net and (i) interest income. Our calculation of net operating income may not be comparable to that of other REITs and should not be considered to be more relevant or accurate in evaluating our operating performance than the current GAAP methodology used in calculating net income. In determining the same store property pool, we include all properties that were owned for the entirety of both the current and prior reporting periods, except for properties during the current or prior year that were under development or redevelopment.
Comparison of the Three Months Ended September 30, 2022 and 2021
The following table reconciles net income, calculated in accordance with GAAP, to net operating income (in thousands):
| | | | | | | | | | | | | | | | | |
| For the Three Months Ended September 30, |
| 2022 | | 2021 | | Change |
| Net income | $ | 15,539 | | | $ | 42,603 | | | $ | (27,064) | |
| Loss on extinguishment of debt | 3,344 | | | 3,251 | | | 93 | |
| Interest expense and other, net | 39,366 | | | 20,381 | | | 18,985 | |
| Unrealized loss on equity security | 9,030 | | | — | | | 9,030 | |
| Gain on investment in unconsolidated entities | (2,195) | | | — | | | (2,195) | |
| Operating income | 65,084 | | | 66,235 | | | (1,151) | |
| | | | | |
| | | | | |
| Merger-related expenses, net | — | | | 398 | | | (398) | |
| Gain on disposition of real estate and condominium developments, net | (4,454) | | | (34,033) | | | 29,579 | |
| Increase (decrease) in provision for credit losses | 5,664 | | | (1,792) | | | 7,456 | |
| Real estate impairment | 527 | | | 891 | | | (364) | |
| Depreciation and amortization | 16,948 | | | 22,801 | | | (5,853) | |
| Transaction-related expenses | 9 | | | 6 | | | 3 | |
| Management fees | 12,915 | | | 11,703 | | | 1,212 | |
| Expense reimbursements to related parties | 3,428 | | | 2,516 | | | 912 | |
| General and administrative expenses | 3,435 | | | 3,076 | | | 359 | |
| Interest income | (66,222) | | | (19,755) | | | (46,467) | |
| Net operating income | $ | 37,334 | | | $ | 52,046 | | | $ | (14,712) | |
Our operating segments include credit and real estate. Refer to Note 16 — Segment Reporting to our condensed consolidated financial statements in this Quarterly Report on Form 10-Q for further discussion of our operating segments.
Credit Segment
Interest Income
The increase in interest income of $46.5 million for the three months ended September 30, 2022, as compared to the same period in 2021, was due to an increase in the overall size of our investment portfolio. As of September 30, 2022, we held $4.5 billion in credit investments compared to $1.6 billion in credit investments as of September 30, 2021.
Increase (Decrease) in Provision for Credit Losses
The increase in provision for credit losses of $7.5 million during the three months ended September 30, 2022, as compared to the same period in 2021, was primarily due to the increased number of loan investments entered into during the three months ended September 30, 2022, as compared to the same period in 2021.
Real Estate Segment
A total of 302 properties were acquired before July 1, 2021 and represent our “same store” properties during the three months ended September 30, 2022 and 2021. “Non-same store” properties, for purposes of the table below, includes properties acquired or disposed of on or after July 1, 2021.
The following table details the components of net operating income broken out between same store and non-same store properties (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total | | Same Store | | Non-Same Store |
| For the Three Months Ended September 30, | | For the Three Months Ended September 30, | | For the Three Months Ended September 30, |
| 2022 | | 2021 | | Change | | 2022 | | 2021 | | Change | | 2022 | | 2021 | | Change |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Rental and other property income | $ | 43,559 | | | $ | 70,794 | | | $ | (27,235) | | | $ | 29,354 | | | $ | 29,822 | | | $ | (468) | | | $ | 14,205 | | | $ | 40,972 | | | $ | (26,767) | |
| | | | | | | | | | | | | | | | | |
| Property operating expenses | 4,432 | | | 11,157 | | | (6,725) | | | 739 | | | 872 | | | (133) | | | 3,693 | | | 10,285 | | | (6,592) | |
| Real estate tax expenses | 1,793 | | | 7,591 | | | (5,798) | | | 900 | | | 1,001 | | | (101) | | | 893 | | | 6,590 | | | (5,697) | |
| Total property operating expenses | 6,225 | | | 18,748 | | | (12,523) | | | 1,639 | | | 1,873 | | | (234) | | | 4,586 | | | 16,875 | | | (12,289) | |
| | | | | | | | | | | | | | | | | |
| Net operating income | $ | 37,334 | | | $ | 52,046 | | | $ | (14,712) | | | $ | 27,715 | | | $ | 27,949 | | | $ | (234) | | | $ | 9,619 | | | $ | 24,097 | | | $ | (14,478) | |
Loss on Extinguishment of Debt
The increase in loss on extinguishment of debt of $93,000 for the three months ended September 30, 2022, as compared to the same period in 2021, was primarily due to the increase in terminations of certain mortgage notes in connection with the disposition of the underlying properties during the three months ended September 30, 2022, as compared to the same period in 2021.
Gain on Investment in Unconsolidated Entities
The increase in gain on investment in unconsolidated entities of $2.2 million for the three months ended September 30, 2022, as compared to the same period in 2021, was due to the Company’s investment in NP JV Holdings, which was not invested in by the Company during the three months ended September 30, 2021.
Interest Expense and Other, Net
Interest expense and other, net also includes amortization of deferred financing costs.
The increase in interest expense and other, net, of $19.0 million for the three months ended September 30, 2022, as compared to the same period in 2021, was primarily due to an increase in the three-month average aggregate amount of debt outstanding from $2.8 billion as of September 30, 2021 to $4.3 billion as of September 30, 2022, primarily as a result of entering into and upsizing additional repurchase agreements subsequent to September 30, 2021, coupled with an increase in the Company’s weighted average interest rate from 2.8% as of September 30, 2021 to 4.5% as of September 30, 2022.
Merger-Related Expenses, Net
The decrease in merger-related expenses, net of $398,000 for the three months ended September 30, 2022, as compared to the same period in 2021, was due to expenses incurred related to the CIM Income NAV Merger during the three months ended September 30, 2021. No such expenses were incurred during the three months ended September 30, 2022.
Gain on Disposition of Real Estate and Condominium Developments, Net
The decrease in gain on disposition of real estate and condominium developments, net, of $29.6 million during the three months ended September 30, 2022, as compared to the same period in 2021, was due to the disposition of 18 properties, an outparcel of land and condominium units for a gain of $4.5 million during the three months ended September 30, 2022, compared to the disposition of 66 properties, an outparcel of land and condominium units for a gain of $34.0 million during the three months ended September 30, 2021.
Real Estate Impairment
The decrease in real estate impairments of $364,000 during the three months ended September 30, 2022, as compared to the same period in 2021, was due to one property that was deemed to be impaired, resulting in impairment charges of $527,000 during the three months ended September 30, 2022, compared to six properties that were deemed to be impaired, resulting in impairment charges of $891,000 during the three months ended September 30, 2021.
Depreciation and Amortization
The decrease in depreciation and amortization of $5.9 million during the three months ended September 30, 2022, as compared to the same period in 2021, was primarily due to the disposition of 134 properties subsequent to September 30, 2021, partially offset by the acquisition of 115 properties through the CIM Income NAV Merger that closed in December 2021.
Transaction-Related Expenses
Transaction-related expenses remained generally consistent during the three months ended September 30, 2022, as compared to the same period in 2021.
Management Fees
We pay CMFT Management a management fee pursuant to the Management Agreement, payable quarterly in arrears, equal to the greater of (a) $250,000 per annum ($62,500 per quarter) and (b) 1.50% per annum (0.375% per quarter) of the Company’s Equity (as defined in the Management Agreement). Furthermore, as discussed in Note 12 — Related-Party Transactions and Arrangements to our condensed consolidated financial statements in this Quarterly Report on Form 10-Q, pursuant to the Investment Advisory and Management Agreement, for management of investments in the Managed Assets (as defined in the Investment Advisory and Management Agreement), CMFT Securities pays the Investment Advisor the Investment Advisory Fee, payable quarterly in arrears, equal to 1.50% per annum (0.375% per quarter) of CMFT Securities’ Equity (as defined in the Investment Advisory and Management Agreement). Because the Managed Assets are excluded from the calculation of management fees payable by the Company to CMFT Management pursuant to the Management Agreement, the total management and advisory fees payable by the Company to its external advisors are not increased as a result of the Investment Advisory and Management Agreement. In addition, pursuant to the Sub-Advisory Agreement, in connection with providing investment management services with respect to the corporate credit-related securities held by CMFT Securities, on a quarterly basis, the Investment Advisor designates 50% of the sum of the Investment Advisory Fee payable to the Investment Advisor as sub-advisory fees.
The increase in management fees of $1.2 million during the three months ended September 30, 2022, as compared to the same period in 2021, was primarily due to increased equity from the issuance of common stock in connection with the CIM Income NAV Merger that closed in December 2021.
Expense Reimbursements to Related Parties
Pursuant to the Investment Advisory and Management Agreement, CMFT Securities reimburses the Investment Advisor for costs and expenses incurred by the Investment Advisor on its behalf. Additionally, we may be required to reimburse certain expenses incurred by CMFT Management in providing management services, subject to limitations as set forth in the Management Agreement (as discussed in Note 12 — Related-Party Transactions and Arrangements to our condensed consolidated financial statements in this Quarterly Report on Form 10-Q).
The increase in expense reimbursements to related parties of $912,000 during the three months ended September 30, 2022, as compared to the same period in 2021, was primarily due to increased operating expense reimbursements due to CMFT Management, primarily as a result of increased allocated payroll resulting from increased portfolio activity.
General and Administrative Expenses
The primary general and administrative expense items are legal and accounting fees, banking fees and transfer agency and board of directors costs.
General and administrative expenses remained generally consistent during the three months ended September 30, 2022, as compared to the same period in 2021.
Net Operating Income
Same store property net operating income remained relatively consistent during the three months ended September 30, 2022, as compared to the same period in 2021.
Non-same store property net operating income decreased $14.5 million during the three months ended September 30, 2022, as compared to the same period in 2021. The decrease was primarily due to the disposition of 134 properties subsequent to September 30, 2021, partially offset by an increase in net operating income due to the acquisition of 115 properties in connection with the CIM Income NAV Merger that closed in December 2021.
Comparison of the Nine Months Ended September 30, 2022 and 2021
The following table reconciles net income, calculated in accordance with GAAP, to net operating income (in thousands):
| | | | | | | | | | | | | | | | | |
| For the Nine Months Ended September 30, |
| 2022 | | 2021 | | Change |
| Net income | $ | 128,253 | | | $ | 97,637 | | | $ | 30,616 | |
| Loss on extinguishment of debt | 19,584 | | | 4,729 | | | 14,855 | |
| Interest expense and other, net | 98,453 | | | 56,863 | | | 41,590 | |
| Unrealized loss on equity security | 15,440 | | | — | | | 15,440 | |
| Gain on investment in unconsolidated entities | (8,858) | | | — | | | (8,858) | |
| Operating income | 252,872 | | | 159,229 | | | 93,643 | |
| | | | | |
| Merger-related expenses, net | — | | | 398 | | | (398) | |
| Gain on disposition of real estate and condominium developments, net | (118,135) | | | (80,502) | | | (37,633) | |
| Increase (decrease) in provision for credit losses | 15,315 | | | (1,101) | | | 16,416 | |
| Real estate impairment | 19,814 | | | 5,268 | | | 14,546 | |
| Depreciation and amortization | 54,104 | | | 73,186 | | | (19,082) | |
| Transaction-related expenses | 462 | | | 37 | | | 425 | |
| Management fees | 39,613 | | | 35,035 | | | 4,578 | |
| Expense reimbursements to related parties | 10,899 | | | 8,387 | | | 2,512 | |
| General and administrative expenses | 10,590 | | | 11,109 | | | (519) | |
| Interest income | (142,669) | | | (48,168) | | | (94,501) | |
| Net operating income | $ | 142,865 | | | $ | 162,878 | | | $ | (20,013) | |
Credit Segment
Interest Income
The increase in interest income of $94.5 million for the nine months ended September 30, 2022, as compared to the same period in 2021, was due to an increase in the overall size of our investment portfolio. As of September 30, 2022, we held $4.5 billion in credit investments compared to $1.6 billion in credit investments as of September 30, 2021.
Increase (Decrease) in Provision for Credit Losses
The increase in provision for credit losses of $16.4 million during the nine months ended September 30, 2022, as compared to the same period in 2021, was primarily due to the increased number of loan investments entered into during the nine months ended September 30, 2022, as compared to the same period in 2021.
Real Estate Segment
A total of 302 properties were acquired before January 1, 2021 and represent our “same store” properties during the nine months ended September 30, 2022 and 2021. “Non-same store” properties, for purposes of the table below, includes properties acquired or disposed of on or after January 1, 2021.
The following table details the components of net operating income broken out between same store and non-same store properties (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total | | Same Store | | Non-Same Store |
| For the Nine Months Ended September 30, | | For the Nine Months Ended September 30, | | For the Nine Months Ended September 30, |
| 2022 | | 2021 | | Change | | 2022 | | 2021 | | Change | | 2022 | | 2021 | | Change |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Rental and other property income | $ | 170,803 | | | $ | 223,026 | | | $ | (52,223) | | | $ | 88,639 | | | $ | 88,066 | | | $ | 573 | | | $ | 82,164 | | | $ | 134,960 | | | $ | (52,796) | |
| | | | | | | | | | | | | | | | | |
| Property operating expenses | 17,408 | | | 32,632 | | | (15,224) | | | 2,269 | | | 2,485 | | | (216) | | | 15,139 | | | 30,147 | | | (15,008) | |
| Real estate tax expenses | 10,530 | | | 27,516 | | | (16,986) | | | 2,969 | | | 3,211 | | | (242) | | | 7,561 | | | 24,305 | | | (16,744) | |
| Total property operating expenses | 27,938 | | | 60,148 | | | (32,210) | | | 5,238 | | | 5,696 | | | (458) | | | 22,700 | | | 54,452 | | | (31,752) | |
| | | | | | | | | | | | | | | | | |
| Net operating income | $ | 142,865 | | | $ | 162,878 | | | $ | (20,013) | | | $ | 83,401 | | | $ | 82,370 | | | $ | 1,031 | | | $ | 59,464 | | | $ | 80,508 | | | $ | (21,044) | |
Loss on Extinguishment of Debt
The increase in loss on extinguishment of debt of $14.9 million for the nine months ended September 30, 2022, as compared to the same period in 2021, was primarily due to the increased terminations of certain mortgage notes in connection with the disposition of the underlying properties during the nine months ended September 30, 2022, as compared to the same period in 2021.
Gain on Investment in Unconsolidated Entities
The increase in gain on investment in unconsolidated entities of $8.9 million for the nine months ended September 30, 2022, as compared to the same period in 2021, was due to the Company’s investment in CIM UII Onshore and NP JV Holdings, neither of which were invested in by the Company during the nine months ended September 30, 2021.
Interest Expense and Other, Net
The increase in interest expense and other, net, of $41.6 million for the nine months ended September 30, 2022, as compared to the same period in 2021, was primarily due to an increase in the nine-month average aggregate amount of debt outstanding from $2.5 billion as of September 30, 2021 to $4.2 billion as of September 30, 2022 as a result of entering into and upsizing additional repurchase agreements and assuming the CIM Income NAV Credit Facility as part of the CIM Income NAV Merger subsequent to September 30, 2021, coupled with an increase in the Company’s weighted average interest rate from 2.8% as of September 30, 2021 to 4.5% as of September 30, 2022.
Merger-Related Expenses, Net
The decrease in merger-related expenses, net of $398,000 for the nine months ended September 30, 2022, as compared to the same period in 2021, was due to expenses incurred related to the CIM Income NAV Merger during the nine months ended September 30, 2021. No such expenses were incurred during the nine months ended September 30, 2022.
Gain on Disposition of Real Estate and Condominium Developments, Net
The increase in gain on disposition of real estate and condominium developments, net, of $37.6 million during the nine months ended September 30, 2022, as compared to the same period in 2021, was primarily due to the disposition of 130 properties and one outparcel of land, including the two properties previously owned through the Consolidated Joint Venture, for a gain of $115.0 million and the disposition of condominium units for a gain of $3.1 million during the nine months ended September 30, 2022, compared to the disposition of 113 properties and an outparcel of land for a gain of $75.6 million and the disposition of condominium units for a gain of $4.9 million during the nine months ended September 30, 2021.
Real Estate Impairment
The increase in impairments of $14.5 million during the nine months ended September 30, 2022, as compared to the same period in 2021, was due to 19 properties and certain condominium units that were deemed to be impaired, resulting in impairment charges of $19.8 million during the nine months ended September 30, 2022, compared to 11 properties that were deemed to be impaired, resulting in impairment charges of $5.3 million during the nine months ended September 30, 2021.
Depreciation and Amortization
The decrease in depreciation and amortization of $19.1 million during the nine months ended September 30, 2022, as compared to the same period in 2021, was primarily due to the disposition of 134 properties subsequent to September 30, 2021, partially offset by the acquisition of 115 properties through the CIM Income NAV Merger that closed in December 2021.
Transaction-Related Expenses
The increase in transaction-related expenses of $425,000 during the nine months ended September 30, 2022, as compared to the same period in 2021, was primarily due to escrow holdbacks that were deemed uncollectible as of September 30, 2022 and were therefore written off. No such write-offs occurred during the same period in 2021.
Management Fees
The increase in management fees of $4.6 million during the nine months ended September 30, 2022, as compared to the same period in 2021, was primarily due to increased equity from the issuance of common stock in connection with the CIM Income NAV Merger that closed in December 2021.
Expense Reimbursements to Related Parties
The increase in expense reimbursements to related parties of $2.5 million during the nine months ended September 30, 2022, as compared to the same period in 2021, was primarily due to increased operating expense reimbursements due to CMFT Management, primarily as a result of increased allocated payroll resulting from increased portfolio activity.
General and Administrative Expenses
The decrease in general and administrative expenses of $519,000 for the nine months ended September 30, 2022, compared to the same period in 2021, was primarily due to increased legal expenses incurred during the nine months ended September 30, 2021 related to the foreclosure completed in January 2021 to take control of the assets which previously secured the Company’s mezzanine loans, as discussed in Note 8 — Loans Held-For-Investment to our condensed consolidated financial statements in this Quarterly Report on Form 10-Q. The overall decrease was partially offset by increased expenses related to the assumption of the CIM Income NAV Credit Facility in connection with the CIM Income NAV Merger completed in December 2021.
Net Operating Income
Same store property net operating income increased $1.0 million during the nine months ended September 30, 2022, as compared to the same period in 2021. The increase was partially due to amended lease agreements, coupled with an increase in same store occupancy to 98.9% as of September 30, 2022 from 98.8% as of September 30, 2021.
Non-same store property net operating income decreased $21.0 million during the nine months ended September 30, 2022, as compared to the same period in 2021. The decrease was primarily due to the disposition of 134 properties subsequent to September 30, 2021, partially offset by an increase in net operating income due to the acquisition of 115 properties in connection with the CIM Income NAV Merger that closed in December 2021.
Distributions
Prior to April 1, 2020, on a quarterly basis, our Board authorized a daily distribution for the succeeding quarter. Our Board authorized the following daily distribution amounts per share for the periods indicated below:
| | | | | | | | | | | | | | |
| Period Commencing | | Period Ending | | Daily Distribution Amount |
| April 14, 2012 | | December 31, 2012 | | $0.001707848 |
| January 1, 2013 | | December 31, 2015 | | $0.001712523 |
| January 1, 2016 | | December 31, 2016 | | $0.001706776 |
| January 1, 2017 | | December 31, 2019 | | $0.001711452 |
| January 1, 2020 | | March 31, 2020 | | $0.001706776 |
On April 20, 2020, our Board decided to make a determination as to the amount and timing of distributions on a monthly, instead of a quarterly, basis until such time that we had greater visibility into the impact that the COVID-19 pandemic would have on our tenants’ ability to continue to pay rent on their leases on a timely basis or at all, the degree to which federal, state or local governmental authorities grant rent relief or other relief or amnesty programs applicable to our tenants, our ability to access the capital markets, and on the United States and worldwide financial markets and economy. On March 25, 2021, the Board resumed declaring distributions on a quarterly basis, which are paid out on a monthly basis.
Since April 2020, our Board authorized the following monthly distribution amounts per share, payable to stockholders as of the record date for the applicable month, for the periods indicated below:
| | | | | | | | | | | | | | |
| Period Commencing | | Period Ending | | Monthly Distribution Amount |
| April 2020 | | May 2020 | | $0.0130 |
| June 2020 | | June 2020 | | $0.0161 |
| July 2020 | | July 2020 | | $0.0304 |
| August 2020 | | December 2021 | | $0.0303 |
| January 2022 | | September 2022 | | $0.0305 |
| October 2022 | | December 2022 | | $0.0339 |
| January 2023 | | March 2023 | | $0.0350 |
As of September 30, 2022, we had distributions payable of $13.3 million.
The following table presents distributions and source of distributions for the periods indicated below (dollar amounts in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, |
| 2022 | | 2021 |
| Amount | | Percent | | Amount | | Percent |
| Distributions paid in cash | $ | 91,297 | | | 76 | % | | $ | 82,541 | | | 84 | % |
| Distributions reinvested | 28,664 | | | 24 | % | | 16,264 | | | 16 | % |
| Total distributions | $ | 119,961 | | | 100 | % | | $ | 98,805 | | | 100 | % |
| Sources of distributions: | | | | | | | |
Net cash provided by operating activities (1) | $ | 119,961 | | | 100 | % | | $ | 97,518 | | | 99 | % |
Proceeds from the issuance of debt (2) | — | | | — | % | | 1,287 | | | 1 | % |
| | | | | | | |
| Total sources | $ | 119,961 | | | 100 | % | | $ | 98,805 | | | 100 | % |
____________________________________
(1)Net cash provided by operating activities for the nine months ended September 30, 2022 and 2021 was $125.4 million and $97.5 million, respectively.
(2)Net proceeds on the repurchase facilities, credit facilities and notes payable for the nine months ended September 30, 2021 was $584.1 million.
Share Redemptions
Our share redemption program permits our stockholders to sell their shares of common stock back to us, subject to certain conditions and limitations. We will limit the number of shares redeemed pursuant to our share redemption program as follows: (1) we will not redeem in excess of 5% of the weighted average number of shares outstanding during the trailing 12 months prior to the end of the fiscal quarter for which the redemptions are being paid; and (2) funding for the redemption of shares will be limited, among other things, to the net proceeds we receive from the sale of shares under our DRIP, net of shares redeemed to date. In an effort to accommodate redemption requests throughout the calendar year, we will generally limit quarterly redemptions to approximately 1.25% of the weighted average number of shares outstanding during the trailing 12-month period ending on the last day of the fiscal quarter for which the redemptions are being paid, and to the net proceeds we receive from the sale of shares in the respective quarter under the Secondary DRIP Offering. Any of the foregoing limits might prevent us from accommodating all redemption requests made in any fiscal quarter or in any 12-month period. We will determine whether we have sufficient funds and/or shares available as soon as practicable after the end of each fiscal quarter, but in any event prior to the applicable payment date. If we cannot purchase all shares presented for redemption in any fiscal quarter, based upon insufficient cash available from the sale of shares under our DRIP and/or the limit on the number of shares we may redeem during any quarter or year, we will give priority to the redemption of deceased stockholders’ shares. While deceased
stockholders’ shares will be included in calculating the maximum number of shares that may be redeemed in any annual or quarterly period, they will not be subject to the annual or quarterly percentage caps; therefore, if the volume of requests to redeem deceased stockholders’ shares in a particular quarter were large enough to cause the annual or quarterly percentage caps to be exceeded, even if no other redemption requests were processed, the redemptions of deceased stockholders’ shares would be completed in full, assuming sufficient proceeds from the sale of shares under our DRIP, net of shares redeemed to date, were available. If sufficient proceeds from the sale of shares under our DRIP, net of shares redeemed to date, were not available to pay all such redemptions in full, the requests to redeem deceased stockholders’ shares would be honored on a pro rata basis. We next will give priority to requests for full redemption of accounts with a balance of 250 shares or less at the time we receive the request, in order to reduce the expense of maintaining small accounts. Thereafter, we will honor the remaining redemption requests on a pro rata basis. Following such quarterly redemption period, if a stockholder would like to resubmit the unsatisfied portion of the prior request for redemption, such stockholder must submit a new request for redemption of such shares prior to the last day of the new quarter. Unfulfilled requests for redemption will not be carried over automatically to subsequent redemption periods. In addition, our management reserves the right, in its sole discretion at any time, and from time to time, to reject any request for redemption for any reason. Our Board may choose to amend the terms of, suspend or terminate our share redemption program at any time in its sole discretion if it believes that such action is in the best interest of us and our stockholders. Any material modifications or suspension of the share redemption program will be disclosed to our stockholders as promptly as practicable in our reports filed with the SEC and via our website. During the nine months ended September 30, 2022, we received valid redemption requests under our share redemption program totaling approximately 74.8 million shares, of which we redeemed approximately 2.8 million shares as of September 30, 2022 for $19.9 million (at an average redemption price of $7.20 per share) and approximately 1.3 million shares subsequent to September 30, 2022 for $9.6 million (at a redemption price of $7.20 per share). The remaining redemption requests relating to approximately 70.8 million shares went unfulfilled. A valid redemption request is one that complies with the applicable requirements and guidelines of the share redemption program then in effect. The share redemptions were funded with proceeds from the Secondary DRIP Offering and available borrowings.
Liquidity and Capital Resources
General
We expect to utilize proceeds from real estate dispositions, sales proceeds and principal payments received on credit investments, cash flows from operations and future proceeds from secured or unsecured financing to complete future acquisitions and loan originations, repayment of certain indebtedness and for general corporate uses. The sources of our operating cash flows will primarily be provided by interest income from our portfolio of credit investments and the rental and other property income received from current and future leased properties.
Sources of Liquidity
Our primary sources of liquidity include cash and cash equivalents and available borrowings under our debt facilities, which are set forth in the following table:
| | | | | | | | | | | |
| September 30, 2022 | | December 31, 2021 |
| Cash and cash equivalents | $ | 124,836 | | | $ | 107,381 | |
Unused borrowing capacity (1) | 575,907 | | | 549,811 | |
| $ | 700,743 | | | $ | 657,192 | |
____________________________________
(1)Subject to borrowing availability.
See Note 10 — Repurchase Facilities, Credit Facilities and Notes Payable to our condensed consolidated financial statements in this Quarterly Report on Form 10-Q for additional details regarding our repurchase facilities, notes payable and credit facilities. The following table details our outstanding financing arrangements and borrowing capacity as of September 30, 2022 (in thousands):
| | | | | | | | | | | | | | | | | |
| | Portfolio Financing Outstanding Principal Balance | | Maximum Capacity (1) | |
| Notes payable – fixed rate debt | | $ | 36,647 | | | $ | 36,647 | | |
| Notes payable – variable rate debt | | 470,860 | | | 470,860 | | |
| First lien mortgage loan | | 134,007 | | | 134,007 | | |
| ABS mortgage notes | | 764,970 | | | 764,970 | | |
| Credit facilities | | 691,500 | | | 850,000 | | |
| Repurchase facilities | | 2,282,593 | | | 2,700,000 | | (2) |
| Total portfolio financing | | $ | 4,380,577 | | | $ | 4,956,484 | | |
____________________________________
(1)Subject to borrowing availability.
(2)Facilities under the Master Repurchase Agreement with J.P. Morgan carry no maximum facility size.
Liquidity and Capital Resources
Our principal demands for funds will be for the acquisition or origination of credit investments and real estate, and the payment of tenant improvements, acquisition-related expenses, operating expenses, distributions, redemptions and interest and principal on current and any future debt financings, including principal repayments of $336.4 million within the next 12 months, $195.5 million of which has a rolling term that resets monthly, as further discussed in Note 17 — Subsequent Events to our condensed consolidated financial statements in this Quarterly Report on Form 10-Q.
Generally, we expect to meet our liquidity requirements through cash proceeds from real estate asset dispositions, net cash provided by operations and proceeds from the Secondary DRIP Offering, as well as secured or unsecured borrowings from banks and other lenders to finance our future acquisitions and loan originations. We expect that substantially all net cash flows from operations will be used to pay distributions to our stockholders after certain capital expenditures, including tenant improvements and leasing commissions, are paid; however, we have used, and may continue to use, other sources to fund distributions, as necessary, including borrowings on our unencumbered assets. To the extent that cash flows from operations are lower, distributions paid to our stockholders may be lower. Operating cash flows are expected to increase as we complete future acquisitions. We expect that substantially all net cash flows from the Secondary DRIP Offering or debt financings will be used to fund acquisitions, loan originations, certain capital expenditures, repayments of outstanding debt or distributions and redemptions to our stockholders. We believe that the resources stated above will be sufficient to satisfy our operating requirements for the foreseeable future, and we do not anticipate a need to raise funds from sources other than those described above within the next 12 months. Management intends to use the proceeds from the disposition of properties to, among other things, acquire additional high-quality net-lease properties and credit investments in furtherance of our investment objectives and for other general corporate purposes.
Contractual Obligations
As of September 30, 2022, we had debt outstanding with a carrying value of $4.4 billion and a weighted average interest rate of 4.5%. See Note 10 — Repurchase Facilities, Credit Facilities and Notes Payable to our condensed consolidated financial statements in this Quarterly Report on Form 10-Q for certain terms of our debt outstanding.
Our contractual obligations as of September 30, 2022 were as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Payments due by period (1) |
| Total | | Less Than 1
Year | | 1-3 Years | | 3-5 Years | | More Than
5 Years |
| Principal payments — fixed rate debt | $ | 36,647 | | | $ | 443 | | | $ | 36,204 | | | $ | — | | | $ | — | |
| Interest payments — fixed rate debt | 3,537 | | | 1,591 | | | 1,946 | | | — | | | — | |
| Principal payments — variable rate debt | 470,860 | | | — | | | 49,366 | | | 175,710 | | | 245,784 | |
Interest payments — variable rate debt (2) | 113,857 | | | 24,972 | | | 46,267 | | | 41,289 | | | 1,329 | |
| Principal payments — first lien mortgage loan | 134,007 | | | 134,007 | | | — | | | — | | | — | |
Interest payments — first lien mortgage loan (2) | 8,630 | | | 8,630 | | | — | | | — | | | — | |
| Principal payments — ABS mortgage notes | 764,970 | | | 6,450 | | | — | | | — | | | 758,520 | |
Interest payments — ABS mortgage notes (2) | 163,355 | | | 21,179 | | | 42,227 | | | 42,227 | | | 57,722 | |
| Principal payments — credit facilities | 691,500 | | | — | | | 691,500 | | | — | | | — | |
Interest payments — credit facilities (2) | 81,735 | | | 34,655 | | | 47,080 | | | — | | | — | |
| Principal payments — repurchase facilities | 2,282,593 | | | 195,473 | | | 2,087,120 | | | — | | | — | |
Interest payments — repurchase facilities (2) | 209,479 | | | 95,751 | | | 113,728 | | | — | | | — | |
| Total | $ | 4,961,170 | | | $ | 523,151 | | | $ | 3,115,438 | | | $ | 259,226 | | | $ | 1,063,355 | |
| | | | | | | | | |
____________________________________
(1)The table does not include amounts due to CMFT Management or its affiliates pursuant to our Management Agreement because such amounts are not fixed and determinable. The table also does not include $344.7 million of unfunded commitments related to our existing CRE loans held-for-investment, corporate senior loans held-for-investment and liquid senior loans and $79.5 million of unfunded commitments related to the NewPoint JV, which are subject to the satisfaction of borrower milestones. In addition, the table does not include $6.3 million of unsettled liquid senior loan acquisitions, which is included in cash and cash equivalents in the accompanying condensed consolidated balance sheet.
(2)Interest payments on the variable rate debt, first lien mortgage loan, ABS mortgage notes, credit facilities and repurchase facilities have been calculated based on outstanding balances as of September 30, 2022 through their respective maturity dates. This is only an estimate as actual amounts borrowed and interest rates could vary over time.
We expect to incur additional borrowings in the future to acquire additional properties and credit investments. There is no limitation on the amount we may borrow against any single improved property. As of September 30, 2022, our ratio of debt to total gross assets net of gross intangible lease liabilities was 61.0% and our ratio of debt to the fair market value of our gross assets net of gross intangible lease liabilities was 61.1%. Fair market value of our first mortgage loans is based on the estimated market value as of September 30, 2022. Fair market value of the remaining credit investments is based on the market value as of September 30, 2022. Fair market value of our real estate assets is based on the estimated market value as of March 31, 2021 that was used to determine our estimated per share NAV, and for those assets acquired from April 1, 2021 through September 30, 2022 is based on the purchase price.
Cash Flow Analysis
Operating Activities. Net cash provided by operating activities increased by $27.9 million for the nine months ended September 30, 2022, as compared to the same period in 2021. The increase was primarily due to net increases in credit investments of $2.8 billion driving higher interest income and the acquisition of 115 properties in connection with the CIM Income NAV Merger, partially offset by the disposition of 134 properties subsequent to September 30, 2021. See “— Results of Operations” for a more complete discussion of the factors impacting our operating performance.
Investing Activities. Net cash used in investing activities increased $147.5 million for the nine months ended September 30, 2022, as compared to the same period in 2021. The change was primarily due to an increase in the net investment in loans held-for-investment of $682.9 million and an increase in the net investment of real estate-related securities of $272.7 million, partially offset by an increase in proceeds from disposition of real estate assets of $818.9 million.
Financing Activities. Net cash provided by financing activities decreased $35.0 million for the nine months ended September 30, 2022, as compared to the same period in 2021. The change was primarily due to an increase in net repayments on the repurchase facilities, notes payable and credit facilities of $29.9 million, coupled with an increase in redemptions of common stock of $17.3 million due to the reinstatement of the share redemption program on April 1, 2021. The change was
partially offset by decreased deferred financing costs paid as a result of a reduced amount of debt agreements entered into compared to the same period in 2021.
Election as a REIT
We elected to be taxed, and operate our business to qualify, as a REIT for federal income tax purposes commencing with our taxable year ended December 31, 2012. To maintain our qualification as a REIT, we must continue to meet certain requirements relating to our organization, sources of income, nature of assets, distributions of income to our stockholders and recordkeeping. As a REIT, we generally are not subject to federal income tax on taxable income that we distribute to our stockholders so long as we distribute at least 90% of our annual taxable income (computed without regard to the dividends paid deduction and excluding net capital gains).
If we fail to maintain our qualification as a REIT for any reason in a taxable year and applicable relief provisions do not apply, we will be subject to tax on our taxable income at regular corporate rates. We will not be able to deduct distributions paid to our stockholders in any year in which we fail to maintain our qualification as a REIT. We also will be disqualified for the four taxable years following the year during which qualification was lost, unless we are entitled to relief under specific statutory provisions. Such an event could materially adversely affect our net income and net cash available for distribution to stockholders. However, we believe that we are organized and operate in such a manner as to maintain our qualification as a REIT for federal income tax purposes. No provision for federal income taxes has been made in our accompanying condensed consolidated financial statements. We are subject to certain state and local taxes related to the operations of properties in certain locations, which have been provided for in our accompanying condensed consolidated financial statements.
Critical Accounting Policies and Significant Accounting Estimates
Our accounting policies have been established to conform with GAAP. The preparation of financial statements in conformity with GAAP requires us to use judgment in the application of accounting policies, including making estimates and assumptions. These judgments affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Management believes that we have made these estimates and assumptions in an appropriate manner and in a way that accurately reflects our financial condition. We continually test and evaluate these estimates and assumptions using our historical knowledge of the business, as well as other factors, to ensure that they are reasonable for reporting purposes. However, actual results may differ from these estimates and assumptions. If our judgment or interpretation of the facts and circumstances relating to various transactions had been different, it is possible that different accounting policies would have been applied, thus resulting in a different presentation of the financial statements. Additionally, other companies may utilize different estimates that may impact comparability of our results of operations to those of companies in similar businesses. We believe the following critical accounting policies govern the significant judgments and estimates used in the preparation of our financial statements, which should be read in conjunction with the more complete discussion of our accounting policies and procedures included in Note 2 — Summary of Significant Accounting Policies to our audited consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2021. We consider our critical accounting policies to be the following:
•Recoverability of Real Estate Assets;
•Allocation of Purchase Price of Real Estate Assets; and
•Current Expected Credit Losses.
A complete description of such policies and our considerations is contained in our Annual Report on Form 10-K for the year ended December 31, 2021. The information included in this Quarterly Report on Form 10-Q should be read in conjunction with our audited consolidated financial statements as of and for the year ended December 31, 2021 and related notes thereto.
Related-Party Transactions and Agreements
We have entered into agreements with CMFT Management and our Investment Advisor whereby we agree to pay certain fees to, or reimburse certain expenses of, CMFT Management, the Investment Advisor or their affiliates. In addition, we have invested in, and may continue to invest in, certain co-investments with funds that are advised by an affiliate of CMFT Management. We may also originate loans to third parties that use the proceeds to finance the acquisition of real estate from funds that are advised by an affiliate of CMFT Management. See Note 12 — Related-Party Transactions and Arrangements to our condensed consolidated financial statements in this Quarterly Report on Form 10-Q for a discussion of the various related-party transactions, agreements and fees.
Conflicts of Interest
Richard S. Ressler, the chairman of our Board, chief executive officer and president, who is also a founder and principal of CIM and is an officer/director of certain of its affiliates, is the vice president of our manager. One of our directors, Avraham Shemesh, who is also a founder and principal of CIM and is an officer/director of certain of its affiliates, is the president and treasurer of our manager. Additionally, two of our directors, Jason Schreiber and Emily Vande Krol, are employees of CIM. Nathan D. DeBacker, our chief financial officer and treasurer, is a vice president of our manager and is an officer of certain of its affiliates. As such, there may be conflicts of interest where CMFT Management or its affiliates, while serving in the capacity as sponsor, general partner, officer, director, key personnel and/or advisor for CIM or another program sponsored or operated by affiliates of our manager, may be in conflict with us in connection with providing services to other real estate-related programs related to property acquisitions, property dispositions, and property management, among others. The compensation arrangements between affiliates of CMFT Management and these other real estate programs sponsored or operated by affiliates of our manager could influence the advice provided to us. See Part I, Item 1. Business — Conflicts of Interest in our Annual Report on Form 10-K for the year ended December 31, 2021.