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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

(Mark One)

☑

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2020

OR

☐

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _________ to __________

 

Commission File Number: 1-32733

EXANTAS CAPITAL CORP.

(Exact name of registrant as specified in its charter)

 

Maryland

 

20-2287134

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

717 Fifth Avenue, New York, New York 10022

(Address of principal executive offices) (Zip Code)

 

(212) 621-3210

(Registrant’s telephone number, including area code)

 

N/A

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:

 

Title of Each Class

 

Trading Symbol(s)

 

Name of Each Exchange on Which Registered

Common Stock, $0.001 par value

 

XAN

 

New York Stock Exchange

8.625% Fixed-to-Floating Series C Cumulative Redeemable Preferred Stock

 

XANPrC

 

New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑  No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑  No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

☐

 

Accelerated filer

☑

Non-accelerated filer

☐

 

Smaller reporting company

☐

 

 

 

Emerging growth company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  ☐ Yes ☑ No

The number of outstanding shares of the registrant’s common stock on May 7, 2020 was 32,042,061 shares.

 

 

 

 

 

(Back to Index)

EXANTAS CAPITAL CORP. AND SUBSIDIARIES

INDEX TO QUARTERLY REPORT

ON FORM 10-Q

 

 

 

 

PAGE

PART I

 

3

Item 1:

Financial Statements

3

 

Consolidated Balance Sheets - March 31, 2020 (unaudited) and December 31, 2019

3

 

Consolidated Statements of Operations (unaudited) Three Months Ended March 31, 2020 and 2019

5

 

Consolidated Statements of Comprehensive Income (Loss) (unaudited) Three Months Ended March 31, 2020 and 2019

7

 

Consolidated Statements of Changes in Stockholders’ Equity (unaudited) Three Months Ended March 31, 2020 and 2019

8

 

Consolidated Statements of Cash Flows (unaudited) Three Months Ended March 31, 2020 and 2019

9

 

Notes to Consolidated Financial Statements - March 31, 2020 (unaudited)

10

Item 2:

Management’s Discussion and Analysis of Financial Condition and Results of Operations

42

Item 3:

Quantitative and Qualitative Disclosures About Market Risk

69

Item 4:

Controls and Procedures

71

PART II

 

72

Item 1:

Legal Proceedings

72

Item 1A:

Risk Factors

72

Item 5:

Other Information

74

Item 6:

Exhibits

74

SIGNATURES

77

 

 

 

(Back to Index)

 

(Back to Index)

 

PART I

ITEM 1.

FINANCIAL STATEMENTS

EXANTAS CAPITAL CORP. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share data)

 

 

 

March 31, 2020

 

 

December 31, 2019

 

 

 

(unaudited)

 

 

 

 

 

ASSETS (1)

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

42,752

 

 

$

79,958

 

Restricted cash

 

 

65,351

 

 

 

14,476

 

Accrued interest receivable

 

 

7,309

 

 

 

8,042

 

CRE loans

 

 

1,892,486

 

 

 

1,791,445

 

Less: allowance for credit losses

 

 

(20,641

)

 

 

(1,460

)

CRE loans, net

 

 

1,871,845

 

 

 

1,789,985

 

Investment securities available-for-sale

 

 

77,244

 

 

 

520,714

 

Principal paydowns receivable

 

 

—

 

 

 

19,517

 

Investments in unconsolidated entities

 

 

1,548

 

 

 

1,548

 

Derivatives, at fair value

 

 

—

 

 

 

30

 

Other assets

 

 

9,603

 

 

 

3,290

 

Assets held for sale (see Note 20)

 

 

13,466

 

 

 

16,766

 

Total assets

 

$

2,089,118

 

 

$

2,454,326

 

LIABILITIES (2)

 

 

 

 

 

 

 

 

Accounts payable and other liabilities

 

$

4,348

 

 

$

3,408

 

Management fee payable

 

 

692

 

 

 

701

 

Accrued interest payable

 

 

2,270

 

 

 

4,408

 

Borrowings

 

 

1,724,932

 

 

 

1,872,577

 

Distributions payable

 

 

1,725

 

 

 

10,492

 

Derivatives, at fair value

 

 

11,326

 

 

 

4,558

 

Accrued tax liability

 

 

33

 

 

 

38

 

Liabilities held for sale (see Note 20)

 

 

1,735

 

 

 

1,746

 

Total liabilities

 

 

1,747,061

 

 

 

1,897,928

 

STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Preferred stock, par value $0.001:  10,000,000 shares authorized 8.625% Fixed-to-Floating Series C Cumulative Redeemable Preferred Stock, liquidation preference $25.00 per share; 4,800,000 and 4,800,000 shares issued and outstanding

 

 

5

 

 

 

5

 

Common stock, par value $0.001:  125,000,000 shares authorized; 32,042,061 and 31,880,594 shares issued and outstanding (including 351,325 and 420,962 of unvested restricted shares)

 

 

32

 

 

 

32

 

Additional paid-in capital

 

 

1,085,539

 

 

 

1,085,041

 

Accumulated other comprehensive (loss) income

 

 

(10,877

)

 

 

1,821

 

Distributions in excess of earnings

 

 

(732,642

)

 

 

(530,501

)

Total stockholders’ equity

 

 

342,057

 

 

 

556,398

 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

 

$

2,089,118

 

 

$

2,454,326

 

 

 

 

The accompanying notes are an integral part of these statements

(Back to Index)

3

(Back to Index)

EXANTAS CAPITAL CORP. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS - (Continued)

(in thousands, except share and per share data)

 

 

 

 

March 31, 2020

 

 

December 31, 2019

 

 

 

(unaudited)

 

 

 

 

 

(1) Assets of consolidated variable interest entities (“VIEs”) included in total assets above:

 

 

 

 

 

 

 

 

Restricted cash

 

$

3,083

 

 

$

532

 

Accrued interest receivable

 

 

4,904

 

 

 

3,780

 

CRE loans, pledged as collateral

 

 

1,434,694

 

 

 

957,045

 

Principal paydowns receivable

 

 

—

 

 

 

19,239

 

Other assets

 

 

18

 

 

 

25

 

Total assets of consolidated VIEs

 

$

1,442,699

 

 

$

980,621

 

(2) Liabilities of consolidated VIEs included in total liabilities above:

 

 

 

 

 

 

 

 

Accounts payable and other liabilities

 

$

117

 

 

$

175

 

Accrued interest payable

 

 

1,124

 

 

 

897

 

Borrowings

 

 

1,086,923

 

 

 

746,439

 

Total liabilities of consolidated VIEs

 

$

1,088,164

 

 

$

747,511

 

 

 

 

The accompanying notes are an integral part of these statements

(Back to Index)

4

(Back to Index)

EXANTAS CAPITAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except share and per share data)

(unaudited)

 

 

 

 

For the Three Months Ended

 

 

 

March 31,

 

 

 

2020

 

 

2019

 

REVENUES

 

 

 

 

 

 

 

 

Interest income:

 

 

 

 

 

 

 

 

CRE loans

 

$

27,041

 

 

$

27,343

 

Securities

 

 

6,149

 

 

 

6,375

 

Other

 

 

100

 

 

 

214

 

Total interest income

 

 

33,290

 

 

 

33,932

 

Interest expense

 

 

18,394

 

 

 

19,395

 

Net interest income

 

 

14,896

 

 

 

14,537

 

Other revenue

 

 

23

 

 

 

26

 

Total revenues

 

 

14,919

 

 

 

14,563

 

OPERATING EXPENSES

 

 

 

 

 

 

 

 

Management fees

 

 

2,117

 

 

 

2,083

 

Equity compensation

 

 

498

 

 

 

683

 

General and administrative

 

 

3,382

 

 

 

2,577

 

Depreciation and amortization

 

 

15

 

 

 

24

 

Provision for credit losses, net

 

 

16,149

 

 

 

1,025

 

Total operating expenses

 

 

22,161

 

 

 

6,392

 

 

 

 

 

 

 

 

 

 

 

 

 

(7,242

)

 

 

8,171

 

OTHER INCOME (EXPENSE)

 

 

 

 

 

 

 

 

Net realized and unrealized loss on investment securities available-for-sale and loans and derivatives

 

 

(185,357

)

 

 

—

 

Fair value adjustments on financial assets held for sale

 

 

(3,791

)

 

 

(102

)

Other (expense) income

 

 

(86

)

 

 

101

 

Total other expense

 

 

(189,234

)

 

 

(1

)

 

 

 

 

 

 

 

 

 

(LOSS) INCOME FROM CONTINUING OPERATIONS BEFORE TAXES

 

 

(196,476

)

 

 

8,170

 

Income tax benefit

 

 

—

 

 

 

—

 

NET (LOSS) INCOME FROM CONTINUING OPERATIONS

 

 

(196,476

)

 

 

8,170

 

NET LOSS FROM DISCONTINUED OPERATIONS, NET OF TAX

 

 

(45

)

 

 

(37

)

NET (LOSS) INCOME

 

 

(196,521

)

 

 

8,133

 

Net income allocated to preferred shares

 

 

(2,588

)

 

 

(2,588

)

NET (LOSS) INCOME ALLOCABLE TO COMMON SHARES

 

$

(199,109

)

 

$

5,545

 

 

 

 

The accompanying notes are an integral part of these statements

(Back to Index)

5

(Back to Index)

EXANTAS CAPITAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS - (Continued)

(in thousands, except share and per share data)

(unaudited)

 

 

 

 

For the Three Months Ended

 

 

 

March 31,

 

 

 

2020

 

 

2019

 

NET INCOME (LOSS) PER COMMON SHARE - BASIC:

 

 

 

 

 

 

 

 

CONTINUING OPERATIONS

 

$

(6.30

)

 

$

0.18

 

DISCONTINUED OPERATIONS

 

 

—

 

 

 

—

 

TOTAL NET INCOME (LOSS) PER COMMON SHARE - BASIC

 

$

(6.30

)

 

$

0.18

 

NET INCOME (LOSS) PER COMMON SHARE - DILUTED:

 

 

 

 

 

 

 

 

CONTINUING OPERATIONS

 

$

(6.30

)

 

$

0.18

 

DISCONTINUED OPERATIONS

 

 

—

 

 

 

—

 

TOTAL NET INCOME (LOSS) PER COMMON SHARE - DILUTED

 

$

(6.30

)

 

$

0.18

 

WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING - BASIC

 

 

31,626,204

 

 

 

31,379,253

 

WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING - DILUTED

 

 

31,626,204

 

 

 

31,531,286

 

 

 

 

 

The accompanying notes are an integral part of these statements

(Back to Index)

6

(Back to Index)

EXANTAS CAPITAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(in thousands)

(unaudited)

 

 

 

 

For the Three Months Ended

 

 

 

March 31,

 

 

 

2020

 

 

2019

 

Net (loss) income

 

$

(196,521

)

 

$

8,133

 

Other comprehensive (loss) income:

 

 

 

 

 

 

 

 

Reclassification adjustments for realized losses on investment securities available-for-sale included in net loss

 

 

185,357

 

 

 

—

 

Unrealized (losses) gains on investment securities available-for-sale, net

 

 

(191,283

)

 

 

5,865

 

Reclassification adjustments associated with unrealized gains from interest rate hedges included in net income

 

 

(23

)

 

 

(23

)

Unrealized losses on derivatives, net

 

 

(6,749

)

 

 

(1,693

)

Total other comprehensive (loss) income

 

 

(12,698

)

 

 

4,149

 

Comprehensive (loss) income before allocation to preferred shares

 

 

(209,219

)

 

 

12,282

 

Net income allocated to preferred shares

 

 

(2,588

)

 

 

(2,588

)

Comprehensive (loss) income allocable to common shares

 

$

(211,807

)

 

$

9,694

 

 

 

 

The accompanying notes are an integral part of these statements

(Back to Index)

7

(Back to Index)

EXANTAS CAPITAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

FOR THE THREE MONTHS ENDED MARCH 31, 2020 AND 2019

(in thousands, except share data)

(unaudited)

 

 

 

 

Common Stock

 

 

Series C Preferred

 

 

Additional Paid-In

 

 

Accumulated Other Comprehensive

 

 

Retained Earnings (Distributions in Excess

 

 

Total Stockholders'

 

 

 

Shares

 

 

Amount

 

 

Stock

 

 

Capital

 

 

(Loss) Income

 

 

of Earnings)

 

 

Equity

 

Balance, January 1, 2019

 

 

31,657,499

 

 

$

32

 

 

$

5

 

 

$

1,082,677

 

 

$

(3,057

)

 

$

(525,838

)

 

$

553,819

 

Stock-based compensation

 

 

213,614

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

Amortization of stock-based compensation

 

 

—

 

 

 

—

 

 

 

—

 

 

 

683

 

 

 

—

 

 

 

—

 

 

 

683

 

Forfeiture of unvested stock

 

 

(4,007

)

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

Net income

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

8,133

 

 

 

8,133

 

Distributions on preferred stock

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(2,588

)

 

 

(2,588

)

Securities available-for-sale, fair value adjustment, net

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

5,865

 

 

 

—

 

 

 

5,865

 

Designated derivatives, fair value adjustment

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(1,716

)

 

 

—

 

 

 

(1,716

)

Distributions on common stock

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(6,373

)

 

 

(6,373

)

Balance, March 31, 2019

 

 

31,867,106

 

 

$

32

 

 

$

5

 

 

$

1,083,360

 

 

$

1,092

 

 

$

(526,666

)

 

$

557,823

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2019

 

 

31,880,594

 

 

$

32

 

 

$

5

 

 

$

1,085,041

 

 

$

1,821

 

 

$

(530,501

)

 

$

556,398

 

Cumulative effect of accounting change for adoption of credit loss guidance

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(3,032

)

 

 

(3,032

)

Balance, January 1, 2020

 

 

31,880,594

 

 

$

32

 

 

$

5

 

 

$

1,085,041

 

 

$

1,821

 

 

$

(533,533

)

 

$

553,366

 

Stock-based compensation

 

 

191,455

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

Amortization of stock-based compensation

 

 

—

 

 

 

—

 

 

 

—

 

 

 

498

 

 

 

—

 

 

 

—

 

 

 

498

 

Forfeiture of unvested stock

 

 

(29,988

)

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

Net loss

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(196,521

)

 

 

(196,521

)

Distributions and accrual of cumulative preferred stock dividends

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(2,588

)

 

 

(2,588

)

Securities available-for-sale without an allowance for credit losses, fair value adjustment, net

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(5,926

)

 

 

—

 

 

 

(5,926

)

Designated derivatives, fair value adjustment

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(6,772

)

 

 

—

 

 

 

(6,772

)

Balance, March 31, 2020

 

 

32,042,061

 

 

$

32

 

 

$

5

 

 

$

1,085,539

 

 

$

(10,877

)

 

$

(732,642

)

 

$

342,057

 

 

 

 

The accompanying notes are an integral part of these statements

(Back to Index)

8

(Back to Index)

EXANTAS CAPITAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

 

 

 

 

For the Three Months Ended

 

 

 

March 31,

 

 

 

2020

 

 

2019

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

 

Net (loss) income

 

$

(196,521

)

 

$

8,133

 

Net loss from discontinued operations, net of tax

 

 

45

 

 

 

37

 

Net (loss) income from continuing operations

 

 

(196,476

)

 

 

8,170

 

Adjustments to reconcile net income from continuing operations to net cash provided by continuing operating activities:

 

 

 

 

 

 

 

 

Provision for credit losses, net

 

 

16,149

 

 

 

1,025

 

Depreciation, amortization and accretion

 

 

747

 

 

 

446

 

Amortization of stock-based compensation

 

 

498

 

 

 

683

 

Net realized and unrealized loss on investment securities available-for-sale and loans and derivatives

 

 

185,357

 

 

 

—

 

Fair value adjustments on financial assets held for sale

 

 

3,791

 

 

 

102

 

Changes in operating assets and liabilities

 

 

(7,686

)

 

 

(6,287

)

Net cash provided by continuing operating activities

 

 

2,380

 

 

 

4,139

 

Net cash used in discontinued operating activities

 

 

(42

)

 

 

(144

)

Net cash provided by operating activities

 

 

2,338

 

 

 

3,995

 

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

Origination and purchase of loans

 

 

(190,318

)

 

 

(176,279

)

Principal payments received on loans

 

 

109,697

 

 

 

99,533

 

Purchase of investment securities available-for-sale

 

 

(24,610

)

 

 

(27,396

)

Principal payments on investment securities available-for-sale

 

 

4,733

 

 

 

12,095

 

Proceeds from sale of investment securities available-for-sale

 

 

37,764

 

 

 

—

 

Net cash used in continuing investing activities

 

 

(62,734

)

 

 

(92,047

)

Net cash provided by discontinued investing activities

 

 

—

 

 

 

135

 

Net cash used in investing activities

 

 

(62,734

)

 

 

(91,912

)

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

Proceeds from borrowings:

 

 

 

 

 

 

 

 

Warehouse financing facilities and repurchase agreements

 

 

271,872

 

 

 

156,174

 

Securitizations

 

 

393,280

 

 

 

—

 

Payments on borrowings:

 

 

 

 

 

 

 

 

Warehouse financing facilities and repurchase agreements

 

 

(494,474

)

 

 

(42,125

)

Securitizations

 

 

(58,434

)

 

 

(50,333

)

Convertible senior notes

 

 

(21,182

)

 

 

 

 

Payment of debt issuance costs

 

 

(5,642

)

 

 

—

 

Distributions paid on preferred stock

 

 

(2,588

)

 

 

(2,588

)

Distributions paid on common stock

 

 

(8,767

)

 

 

(5,540

)

Net cash provided by continuing financing activities

 

 

74,065

 

 

 

55,588

 

Net cash provided by discontinued financing activities

 

 

—

 

 

 

—

 

Net cash provided by financing activities

 

$

74,065

 

 

$

55,588

 

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS AND RESTRICTED CASH

 

$

13,669

 

 

$

(32,329

)

CASH AND CASH EQUIVALENTS AND RESTRICTED CASH AT BEGINNING OF PERIOD

 

 

94,434

 

 

 

95,474

 

CASH AND CASH EQUIVALENTS AND RESTRICTED CASH AT END OF PERIOD

 

$

108,103

 

 

$

63,145

 

SUPPLEMENTAL DISCLOSURE:

 

 

 

 

 

 

 

 

Interest expense paid in cash

 

$

20,842

 

 

$

19,636

 

 

 

 

The accompanying notes are an integral part of these statements

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9

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EXANTAS CAPITAL CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2020

(unaudited)

NOTE 1 - ORGANIZATION

Exantas Capital Corp., a Maryland corporation, along with its subsidiaries (collectively, the “Company”), is a real estate investment trust (“REIT”) that is primarily focused on originating, holding and managing commercial real estate (“CRE”) mortgage loans and other commercial real estate-related debt investments. The Company is externally managed by Exantas Capital Manager Inc. (the “Manager”), which is an indirect wholly-owned subsidiary of C-III Capital Partners LLC (“C-III”), a leading commercial real estate investment management and services company engaged in a broad range of activities. C-III is the beneficial owner of approximately 2.4% of the Company’s outstanding common stock at March 31, 2020.

The Company has qualified, and expects to qualify in the current fiscal year, as a REIT.

In November 2016, the Company’s Board of Directors (the “Board”) approved the strategic plan (the “Plan”) to focus its strategy on CRE debt investments. The Plan contemplated disposing of certain loans underwritten prior to 2010 (“legacy CRE loans”), exiting underperforming non-core asset classes and businesses and maintaining a dividend policy based on sustainable earnings. The Company’s residential mortgage and middle market lending segments’ assets and liabilities were classified as held for sale and its operations were reported as discontinued operations and have been excluded from continuing operations. The Company has substantially completed the execution of the Plan. See Note 20 for further discussion.

The Company conducts its operations through the use of subsidiaries that it consolidates into its financial statements. The Company’s core assets are consolidated through its investment in RCC Real Estate, Inc. (“RCC RE”), a wholly-owned subsidiary that holds CRE loans, CRE-related securities and investments in CRE securitizations, which are consolidated as VIEs, as discussed in Note 3.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”) and the accounting policies set forth in Note 2 included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019. The consolidated financial statements include the accounts of the Company, majority-owned or controlled subsidiaries and VIEs for which the Company is considered the primary beneficiary. All inter-company transactions and balances have been eliminated in consolidation.

Basis of Presentation

All adjustments necessary to present fairly the Company’s financial position, results of operations and cash flows have been made.

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 financial statements and within the period of financial results. Actual results could differ from those estimates. Estimates affecting the accompanying consolidated financial statements include but are not limited to the net realizable and fair values of the Company’s investments and derivatives, the estimated life used on investments to calculate amortization and accretion of premiums and discounts, respectively, provisions for credit losses and the disclosure of contingent liabilities.

In December 2019, a novel strain of coronavirus (“COVID-19”) was identified. The resulting global proliferation of the virus led the World Health Organization to designate COVID-19 as a pandemic and numerous countries, including the United States, to declare national emergencies. Many countries have responded to the outbreak by instituting quarantines and restrictions on travel, which have resulted in the closure or remote operation of non-essential businesses. Such actions have produced material and previously unforeseeable shocks to global markets, disruptions to global supply chains and adversity to many industries and economies as whole. The rapid development of the pandemic and the resulting economic effects have created uncertainty surrounding the ultimate impact on the global economy generally, and the commercial real estate business in particular, that make estimates and assumptions as of March 31, 2020 inherently less certain than they would be absent the current and potential impacts of COVID-19. As a result, actual losses could differ from estimated amounts. The Company believes the estimates and assumptions underlying the consolidated financial statements are reasonable and supportable based on the information available at March 31, 2020. Actual results may ultimately differ from those estimates.

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10

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EXANTAS CAPITAL CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

MARCH 31, 2020

(unaudited)

 

Cash and Cash Equivalents

Cash and cash equivalents include cash on hand and all highly liquid investments with original maturities of three months or less at the time of purchase. At March 31, 2020 and December 31, 2019, approximately $40.1 million and $77.6 million, respectively, of the reported cash balances exceeded the Federal Deposit Insurance Corporation and Securities Investor Protection Corporation deposit insurance limits of $250,000 per respective depository or brokerage institution. However, all of the Company’s cash deposits are held at multiple, established financial institutions, in multiple accounts associated with its parent and respective consolidated subsidiaries, to minimize credit risk exposure.

Restricted cash includes required account balance minimums primarily for the Company’s CRE debt securitizations, repurchase agreements and derivative instruments as well as cash held in the syndicated corporate loan collateralized debt obligations (“CDOs”).

In April 2020, $4.9 million and $46.9 million classified as cash and cash equivalents and restricted cash, respectively, at March 31, 2020, were used to pay down the Company’s outstanding CMBS - short-term repurchase agreements as described in Note 9.

The following table provides a reconciliation of cash, cash equivalents and restricted cash on the consolidated balance sheets to the total amount shown on the consolidated statements of cash flows (in thousands):

 

 

 

March 31,

 

 

 

2020

 

 

2019

 

Cash and cash equivalents

 

$

42,752

 

 

$

55,660

 

Restricted cash

 

 

65,351

 

 

 

7,485

 

Total cash, cash equivalents and restricted cash shown on the Company’s consolidated statements of cash flows

 

$

108,103

 

 

$

63,145

 

Investment Securities

The Company classifies its investment portfolio as available-for-sale. The Company, from time to time, may sell any of its investments due to changes in market conditions or in accordance with its investment strategy.

The Company reports its investment securities available-for-sale at fair value. To determine fair value, the Company uses an independent third-party valuation firm utilizing data available in the market as well as appropriate prepayment, default and recovery rates. The Company evaluates the reasonableness of the valuation it receives by using a dealer quote, bid, or internal model. If there is a material difference between the value indicated by the third-party valuation firm and the dealer quote, bid or internal model, the Company will evaluate the difference, which could result in an updated valuation from the third-party or a revised dealer quote. Based on a prioritization of inputs used in the valuation of each position, the Company categorizes these investments as either Level 2 or Level 3 in the fair value hierarchy. Any changes in fair value to the Company’s investment securities available-for-sale are recorded on the Company’s consolidated balance sheets as a component of accumulated other comprehensive (loss) income in stockholders’ equity.

On a quarterly basis, the Company evaluates impaired available-for-sale securities to determine the estimate of expected credit losses. An available-for-sale security is impaired when its fair value has declined below its amortized cost basis. Evidence of the need for an allowance for credit losses will be based on consideration of several factors, including (i) if the Company intends to sell the security, (ii) if it is more likely than not that the Company will be required to sell the security before recovering its cost, or (iii) whether a portion of the unrealized loss is a result of credit losses or other market factors. A credit loss will have occurred if the present value of cash flows expected to be collected from the debt security is less than the amortized cost basis. If the Company intends to sell an impaired debt security or it is more likely than not that it will be required to sell the security before recovery of its amortized cost basis less any current period credit loss, the impairment is recognized in earnings through a charge to the amortized cost of the security and equal to the entire difference between fair value and amortized cost. If a credit loss exists, but the Company does not intend nor is it more likely than not that it will be required to sell before recovery, the impairment will be separated into (i) the estimated amount relating to the credit loss and (ii) the amount relating to all other factors. Only the estimated credit loss amount is recognized in earnings through an increase to the allowance for credit losses, with the remainder of the loss recognized in other comprehensive income. If the Company uses a discounted cash flow approach to estimate expected credit losses, changes in the present value attributable to the passage of time are recorded in the provision for credit losses. Estimating cash flows and determining whether there are credit losses require management to exercise judgment and make significant assumptions, including, but not limited to, assumptions regarding estimated prepayments, loss assumptions and assumptions regarding changes in interest rates. As a result, actual losses, and the timing of income recognized on these securities, could differ from reported amounts.

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11

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EXANTAS CAPITAL CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

MARCH 31, 2020

(unaudited)

 

Investment security transactions are recorded on the trade date. Realized gains and losses on investment securities are determined on the specific identification method.

Investment Security Interest Income Recognition

Interest income on the Company’s mortgage-backed securities (“MBS”) is accrued using the effective yield method based on the actual coupon rate and the outstanding principal amount of the underlying mortgages or other assets. Premiums and discounts are amortized or accreted into interest income over the expected lives of the securities also using the effective yield method, adjusted for the effects of estimated prepayments. For an investment purchased at par, the effective yield is the contractual interest rate on the investment. If the investment is purchased at a discount or at a premium, the effective yield is computed based on the contractual interest rate increased for the accretion of a purchase discount or decreased for the amortization of a purchase premium. The effective yield method requires the Company to make estimates of future prepayment rates for its investments that can be contractually prepaid before their contractual maturity date so that the purchase discount can be accreted, or the purchase premium can be amortized, over the estimated remaining life of the investment. The prepayment estimates that the Company uses directly impact the estimated remaining lives of its investments. Actual prepayment estimates are reviewed at each quarter end or more frequently if the Company becomes aware of any material information that would lead it to believe that an adjustment is necessary. For MBS that are not of high credit quality or can be prepaid in such a way that the Company would not recover substantially all of its initial investment, changes in the original or most recent cash flow projections may result in a prospective change in interest income recognized. For MBS that are of high credit quality, changes in the original or most recent cash flow projections may result in an immediate cumulative adjustment in interest income recognized.

The Company records interest receivable on its available-for-sale debt securities in accrued interest receivable on its consolidated balance sheets. The Company analyzes the interest receivable balances on a timely basis, or at least quarterly, to determine if they are uncollectible. If an interest receivable balance is deemed uncollectible, then the Company writes off the balance of the interest receivable through a reversal of interest income.

CRE Loans

The Company acquires loans through direct origination or through the acquisition of participations in CRE loans. Loans are held for investment; therefore, the Company initially records them at their acquisition price, and subsequently, accounts for them based on their outstanding principal plus or minus unamortized premiums or discounts. The Company may sell a loan held for investment where the credit fundamentals underlying a particular loan have changed in such a manner that the Company’s expected return on investment may decrease. Once the determination has been made by the Company that it no longer will hold the loan for investment, the Company identifies these loans as loans held for sale. Any credit-related impairment considerations prior to the transfer to loans held for sale are accounted for through the allowance for credit losses on the Company’s consolidated balance sheets. The remaining legacy CRE loan, which was foreclosed upon, remains held for sale at March 31, 2020 and December 31, 2019. See Note 20 for further discussion.

The Company reports its loans held for sale at the lower of amortized cost or fair value. To determine fair value, the Company primarily uses appraisals obtained from third-parties as a practical expedient. Key assumptions used in those appraisals are reviewed by the Company. If there is a material difference between the value provided by the appraiser and information used by the Company to validate the appraisal, the Company will evaluate the difference with the appraiser, which could result in an updated appraisal. The Company may also use the present value of estimated cash flows, market price, if available, or other determinants of the fair value of the collateral less estimated disposition costs. Any determined changes in the fair value of loans held for sale are recorded in fair value adjustments on financial assets held for sale on the Company’s consolidated statements of operations. Based on a prioritization of inputs used in the valuation of each position, the Company categorizes these investments as either Level 2 or Level 3 in the fair value hierarchy.

CRE Loan Interest Income Recognition

Interest income on loans includes interest at stated rates adjusted for amortization or accretion of premiums and discounts based on the contractual payment terms of the loan. Premiums and discounts are amortized or accreted into income using the effective yield method. If a loan with a premium or discount is prepaid, the Company immediately recognizes the unamortized portion as a decrease or increase to interest income. In addition, the Company defers loan origination and extension fees and loan origination or acquisition costs and recognizes them over the life of the related loan against interest income using the straight line method, which approximates the effective yield method. Income recognition is suspended for loans at the earlier of the date at which payments become 90 days past due or when, in the opinion of management, a full recovery of principal and income becomes doubtful. When the ultimate collectability of the principal is in doubt, all payments received are applied to principal under the cost recovery method. On the other hand, when the ultimate collectability of the principal is not in doubt, contractual interest is recorded as interest income when received, under the cash method, until an accrual is resumed when the loan becomes contractually current and performance is demonstrated to be resumed.

(Back to Index)

12

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EXANTAS CAPITAL CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

MARCH 31, 2020

(unaudited)

 

The Company records interest receivable on its loans in accrued interest receivable on its consolidated balance sheets. The Company analyzes the interest receivable balances on a timely basis, or at least quarterly, to determine if they are uncollectible. If an interest receivable balance is deemed uncollectible, then the Company writes off the balance of the interest receivable through a reversal of interest income.

Allowance for Credit Losses

The Company maintains an allowance for credit loss on its loans held for investment. CRE loans that are held for investment are carried at cost, net of unamortized acquisition premiums or discounts, loan fees and origination costs as applicable. Effective January 1, 2020, the Company determines its allowance for credit losses, consistent with GAAP, by measuring the current expected credit losses (“CECL”) on the loan portfolio on a quarterly basis. The Company utilizes a probability of default and loss given default methodology over a reasonable and supportable forecast period after which it reverts to its historical mean loss ratio, utilizing a blended approach sourced from its own historical losses and the market losses from an engaged third party’s database, to be applied for the remaining estimable period. The CECL model requires the Company to make significant judgements, including: (i) the selection of a reasonable and supportable forecast period, (ii) projections for the amounts and timing of future fundings of committed balances and prepayments on CRE investments, (iii) the determination of the risk characteristics in which to pool financial assets, and (iv) the appropriate historical loss data to utilize in the model. Unfunded commitments are not considered in the CECL reserve if they are unconditionally cancellable by the Company.

In order to effectively measure the loan portfolio’s credit losses based on similar risk characteristics under CECL, the Company pools loans without evidence of credit quality deterioration based on the loan’s collateral property type. The Company regularly evaluates the risk characteristics of its loan portfolio to determine whether a different pooling methodology is more accurate. A loan that exhibits evidence of credit quality deterioration is removed from its respective pool and an allowance for credit losses is determined based on that loan’s individual risk characteristics in the CECL model. Further, if the Company determines that foreclosure of a loan’s collateral is probable or repayment of the loan is expected through sale or operation of the collateral and the borrower is experiencing financial difficulty, expected credit losses are measured as the difference between the current fair value of the collateral and the amortized cost of the loan. Fair value may be determined based on (i) the present value of estimated cash flows; (ii) the market price, if available; or (iii) the fair value of the collateral less estimated disposition costs.

While a loan exhibiting credit quality deterioration may remain on accrual status, the loan is placed on non-accrual status at such time as (i) management believes that scheduled debt service payments will not be met within the coming 12 months; (ii) the loan becomes 90 days past due; (iii) management determines the borrower is incapable of, or has ceased efforts toward, curing the cause of the credit deterioration; or (iv) the net realizable value of the loan’s underlying collateral approximates the Company’s carrying value for such loan. While on non-accrual status, the Company recognizes interest income only when an actual payment is received if a credit analysis supports the borrower’s principal repayment capacity. When a loan is placed on non-accrual, previously accrued interest is reversed from interest income.

The Company utilizes the contractual life of its loans to estimate the period over which it measures expected credit losses. Estimates for prepayments and extensions are incorporated into the inputs for the Company’s CECL model. Modifications to loan terms, such as a modification in connection with a troubled debt restructuring (“TDR”), where a concession is granted to a borrower experiencing financial difficulty, may result in the extension of the loan’s life and an increase in the allowance for credit losses. The measurement of the impact of TDRs on the expected credit losses occurs when a TDR is reasonably expected. If the concession granted on a TDR can only be captured through a discounted cash flow analysis, then the Company will individually assess the loan for expected credit losses using the discounted cash flow method.

In order to calculate the historical mean loss ratio applied to the loan portfolio at the end of the forecast period, the Company utilizes historical losses from its full underwriting history, along with the market loss history of a selected population of loans from a third party’s database that are similar to the Company’s loan types, loan sizes, durations, interest rate structure and general loan-to-collateral value (“LTV”) profiles. The Company may make adjustments to the historical loss history for qualitative or environmental factors if it believes there is evidence that the estimate for expected credit losses should be increased.

The Company records write-offs against the allowance for credit losses if it deems that all or a portion of a loan’s balance is uncollectible. If the Company receives cash in excess of some or all of the amounts it previously wrote off, it records a recovery to increase the allowance for credit losses.

(Back to Index)

13

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EXANTAS CAPITAL CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

MARCH 31, 2020

(unaudited)

 

As part of the evaluation of the loan portfolio, the Company assesses the performance of each loan and assigns a risk rating based on the collective evaluation of several factors, including but not limited to: collateral performance relative to underwritten plan, time since origination, current implied and/or re-underwritten LTV ratios, risk inherent in the loan structure and exit plan. Loans are rated “1” through “5,” from less risk to greatest risk, in connection with this review.

Prior to the implementation of CECL, the Company calculated its allowance for credit losses through the calculation of general and specific reserves. The general reserve, established for loans not determined to be impaired individually, was based on the Company’s loan risk ratings. The Company recorded a general reserve equal to 1.5% of the aggregate face values of loans with a risk rating of “3,” plus 5.0% of the aggregate face values of loans with a risk rating of “4.” Loans with a risk rating of “5” were individually measured for impairment to be included in a specific reserve on a quarterly basis.

The Company considered a loan to be impaired if at least one of two conditions exists. The first condition was if, based on the Company’s evaluation as part of the loan risk rating process, management believed that a loss event had occurred that made it probable that the Company would be unable to collect all amounts due according to the contractual terms of the loan agreement. The second condition was that the loan was deemed to be a TDR. These TDRs may not have had an associated specific credit loss allowance if the principal and interest amount was considered recoverable based on market conditions, appraisals of the underlying collateral, expected collateral performance and/or guarantees made by the borrowers.

When a loan was impaired under either of these two conditions, the allowance for credit losses was increased by the amount of the excess of the amortized cost basis of the loan over its fair value. When a loan, or a portion thereof, was considered uncollectible and pursuit of collection was not warranted, the Company recorded a charge-off or write-down of the loan against the allowance for credit losses.

Discontinued Operations

The results of operations of a component or a group of components of the Company that either has been disposed of or is classified as held for sale is reported in discontinued operations if the disposal represents a strategic shift that has or will have a major effect on the Company’s operations and financial results.

Income Taxes

The Company recorded a full valuation allowance against its net deferred tax assets of $32.9 million (tax effected expense of $9.9 million) at March 31, 2020 and December 31, 2019 as the Company believes it is more likely than not that the deferred tax assets will not be realized. This assessment was based on the Company’s cumulative historical losses and uncertainties as to the amount of taxable income that would be generated in future years by the Company’s taxable REIT subsidiaries.

Recent Accounting Standards

Accounting Standards Adopted in 2020

In August 2018, the Financial Accounting Standards Board (“FASB”) issued guidance to modify the fair value measurement disclosure requirements, including: disclosures on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, the policy for timing of transfers between levels and the narrative description of measurement uncertainty. Adoption did not have a material impact on the Company’s consolidated financial statements.

In June 2016, the FASB issued guidance that changes how credit losses for most financial assets and certain other instruments that are measured at fair value through net income are determined. The new guidance replaced the incurred loss approach with a CECL model for instruments measured at amortized cost. For available-for-sale debt securities, the guidance requires recording allowances rather than reducing the carrying amount, as the Company is currently under the other-than-temporary impairment model. It also simplifies the accounting model for credit-impaired debt securities and loans.

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14

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EXANTAS CAPITAL CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

MARCH 31, 2020

(unaudited)

 

On January 1, 2020, the Company adopted the above-mentioned accounting guidance and recorded an initial CECL allowance of approximately $4.5 million, of which $3.0 million, or $0.10 per share, was recorded as a charge to retained earnings on such date. The estimated CECL reserve represented 0.25% of the aggregate outstanding principal balance of the Company’s $1.8 billion commercial loan portfolio at December 31, 2019. At March 31, 2020, the Company recorded an additional CECL reserve of $16.1 million for a total CECL reserve of $20.6 million, or 1.09% of the aggregate outstanding principal balance of the Company’s $1.9 billion commercial loan portfolio at March 31, 2020. The additional CECL reserve of $16.1 million was recognized on the Company’s consolidated statement of operations as provision for credit losses, net, and the increase in reserves is primarily attributable to the significant impact on the assumed expected losses caused by the COVID-19 global pandemic used in the Company’s CECL computations. The Company’s updated accounting policies in connection with this guidance are referenced above in the “Investment Securities,” “Investment Security Interest Income Recognition,” “Loans,” “Loan Interest Income Recognition,” and “Allowance for Credit Losses” sections. See Note 6 for additional disclosures in connection with the updated guidance.

Accounting Standards to be Adopted in Future Periods

In March 2020, the FASB issued guidance that provides optional expedients and exceptions to GAAP requirements for modifications on debt instruments, leases, derivatives and other contracts, related to the expected market transition from the London Interbank Offered Rate (“LIBOR”), and certain other floating-rate benchmark indices to alternative reference rates. The guidance generally considers contract modifications related to reference rate reform to be an event that does not require contract remeasurement at the modification date nor a reassessment of a previous accounting determination. The guidance is optional and may be elected over time, through December 31, 2022, as reference rate reform activities occur. The Company is in the process of evaluating the impact of this new guidance.

NOTE 3 - VARIABLE INTEREST ENTITIES

The Company has evaluated its securities, loans, investments in unconsolidated entities, liabilities to subsidiary trusts issuing preferred securities (consisting of unsecured junior subordinated notes), securitizations, guarantees and other financial contracts in order to determine if they are variable interests in VIEs. The Company regularly monitors these legal interests and contracts and, to the extent it has determined that it has a variable interest, analyzes the related entity for potential consolidation.

Consolidated VIEs (the Company is the primary beneficiary)

Based on management’s analysis, the Company was the primary beneficiary of six VIEs at March 31, 2020 and five VIEs at December 31, 2019 (collectively, the “Consolidated VIEs”).

The Consolidated VIEs are CRE securitizations, CDOs and collateralized loan obligations that were formed on behalf of the Company to invest in real estate-related securities, commercial mortgage-backed securities (“CMBS”), syndicated corporate loans, corporate bonds and asset-backed securities and were financed by the issuance of debt securities. The Manager, historically with the help of C-III Asset Management LLC (“C3AM”), a former subsidiary of C-III that was sold in December 2019 (see Note 15), manages the CRE-related entities. By financing these assets with long-term borrowings through the issuance of debt securities, the Company seeks to generate attractive risk-adjusted equity returns and to match the term of its assets and liabilities. The primary beneficiary determination for each of these VIEs was made at each VIE’s inception and is continually assessed.

The Company has exposure to losses on its securitizations to the extent of its investments in the subordinated debt and preferred equity of each securitization. The Company is entitled to receive payments of principal and interest on the debt securities it holds and, to the extent revenues exceed debt service requirements and other expenses of the securitizations, distributions with respect to its preferred equity interests. As a result of consolidation, the debt and equity interests the Company holds in these securitizations have been eliminated, and the Company’s consolidated balance sheets reflect the assets held, debt issued by the securitizations to third parties and any accrued payables to third parties. The Company’s operating results and cash flows include the gross amounts related to the securitizations’ assets and liabilities as opposed to the Company’s net economic interests in the securitizations. Assets and liabilities related to the securitizations are disclosed, in the aggregate, on the Company’s consolidated balance sheets. For a discussion of the debt issued through the securitizations see Note 9.

Creditors of the Company’s Consolidated VIEs have no recourse to the general credit of the Company, nor to each other. During the three months ended March 31, 2020 and 2019, the Company did not provide any financial support to any of its VIEs nor does it have any requirement to do so, although it may choose to do so in the future to maximize future cash flows on such investments by the Company. There are no explicit arrangements that obligate the Company to provide financial support to any of its Consolidated VIEs.

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15

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EXANTAS CAPITAL CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

MARCH 31, 2020

(unaudited)

 

The following table shows the classification and carrying values of assets and liabilities of the Company’s Consolidated VIEs at March 31, 2020 (in thousands):

 

 

 

CRE

Securitizations

 

 

Other

 

 

Total

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

Restricted cash

 

$

2,552

 

 

$

531

 

 

$

3,083

 

Accrued interest receivable

 

 

4,904

 

 

 

—

 

 

 

4,904

 

CRE loans, pledged as collateral (1)

 

 

1,434,694

 

 

 

—

 

 

 

1,434,694

 

Other assets

 

 

18

 

 

 

—

 

 

 

18

 

Total assets (2)

 

$

1,442,168

 

 

$

531

 

 

$

1,442,699

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES

 

 

 

 

 

 

 

 

 

 

 

 

Accounts payable and other liabilities

 

$

117

 

 

$

—

 

 

$

117

 

Accrued interest payable

 

 

1,124

 

 

 

—

 

 

 

1,124

 

Borrowings

 

 

1,086,923

 

 

 

—

 

 

 

1,086,923

 

Total liabilities

 

$

1,088,164

 

 

$

—

 

 

$

1,088,164

 

 

(1)

Excludes the allowance for credit losses.

(2)

Assets of each of the Consolidated VIEs may only be used to settle the obligations of each respective VIE.

Unconsolidated VIEs (the Company is not the primary beneficiary, but has a variable interest)

Based on management’s analysis, the Company is not the primary beneficiary of the VIEs discussed below since it does not have both (i) the power to direct the activities that most significantly impact the VIE’s economic performance and (ii) the obligation to absorb the losses of the VIE or the right to receive the benefits from the VIE, which could be significant to the VIE. Accordingly, the following VIEs are not consolidated in the Company’s financial statements at March 31, 2020. The Company continuously reassesses whether it is deemed to be the primary beneficiary of its unconsolidated VIEs. The Company’s maximum exposure to risk for each of these unconsolidated VIEs is set forth in the “Maximum Exposure to Loss” column in the table below.

Unsecured Junior Subordinated Debentures

The Company has a 100% interest in the common shares of Resource Capital Trust I (“RCT I”) and RCC Trust II (“RCT II”), respectively, with a value of $1.5 million in the aggregate, or 3.0% of each trust, at March 31, 2020. RCT I and RCT II were formed for the purposes of providing debt financing to the Company. The Company completed a qualitative analysis to determine whether or not it is the primary beneficiary of each of the trusts and determined that it was not the primary beneficiary of either trust because it does not have the power to direct the activities most significant to the trusts, which include the collection of principal and interest through servicing rights. Accordingly, neither trust is consolidated into the Company’s consolidated financial statements.

The Company records its investments in RCT I and RCT II’s common shares of $774,000 each as investments in unconsolidated entities using the cost method, recording dividend income when declared by RCT I and RCT II. The trusts each hold subordinated debentures for which the Company is the obligor in the amount of $25.8 million for each of RCT I and RCT II. The debentures were funded by the issuance of trust preferred securities of RCT I and RCT II.

Wells Fargo Commercial Mortgage Trust 2017-C40

In October 2017, the Company purchased 95% of the Class E, F, G, H and J certificates of Wells Fargo Commercial Mortgage Trust 2017-C40 (“C40”), a B-piece investment in a Wells Fargo Commercial Mortgage Securities, Inc., private-label, $705.4 million securitization. C3AM, a former related party, is the special servicer of C40. As of March 31, 2020, the Company continued to hold investments in the H and J certificates of C40. The Company determined that although its investment in C40 represented a variable interest, its investment did not provide the Company with a controlling financial interest. The Company accounts for its various investments in C40 as investment securities available-for-sale on its consolidated financial statements.

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16

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EXANTAS CAPITAL CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

MARCH 31, 2020

(unaudited)

 

Prospect Hackensack JV LLC

In March 2018, the Company invested $19.2 million in the preferred equity of Prospect Hackensack JV LLC (“Prospect Hackensack”), a joint venture between the Company and an unrelated third party (“Managing Member”). Prospect Hackensack was formed for the purpose of acquiring and operating a multifamily CRE property. The Managing Member manages the daily operations of the property. The Company determined that although its investment in Prospect Hackensack represented a variable interest, its investment did not provide the Company with a controlling financial interest. The Company accounts for its investment in Prospect Hackensack’s preferred equity as a CRE loan on its consolidated financial statements.

WC Newhall MM, LLC

In June 2019, the Company invested $5.5 million in the preferred equity of WC Newhall MM, LLC (“Santa Clarita”), a joint venture between the Company and two unrelated third parties (“Sponsor Members”). Santa Clarita was formed for the purpose of refinancing a self-storage CRE property. The Sponsor Members manage the daily operations of the property. The Company determined that although its investment in Santa Clarita represented a variable interest, its investment did not provide the Company with a controlling financial interest. The Company accounts for its investment in Santa Clarita’s preferred equity as a CRE loan on its consolidated financial statements.

The following table shows the classification, carrying value and maximum exposure to loss with respect to the Company’s unconsolidated VIEs at March 31, 2020 (in thousands):

 

 

 

Unsecured Junior Subordinated Debentures

 

 

C40

 

 

Prospect Hackensack

 

 

Santa Clarita

 

 

Total

 

 

Maximum Exposure to Loss

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accrued interest receivable

 

$

182

 

 

$

94

 

 

$

—

 

 

$

—

 

 

$

276

 

 

$

—

 

CRE loans

 

 

—

 

 

 

—

 

 

 

20,615

 

 

 

5,910

 

 

 

26,525

 

 

$

26,525

 

Investment securities available-for-sale (1)

 

 

—

 

 

 

3,162

 

 

 

—

 

 

 

—

 

 

 

3,162

 

 

$

8,204

 

Investments in unconsolidated entities

 

 

1,548

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

1,548

 

 

$

1,548

 

Total assets

 

 

1,730

 

 

 

3,256

 

 

 

20,615

 

 

 

5,910

 

 

 

31,511

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accrued interest payable

 

 

254

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

254

 

 

N/A

 

Borrowings

 

 

51,548

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

51,548

 

 

N/A

 

Total liabilities

 

 

51,802

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

51,802

 

 

N/A

 

Net (liability) asset

 

$

(50,072

)

 

$

3,256

 

 

$

20,615

 

 

$

5,910

 

 

$

(20,291

)

 

N/A

 

 

(1)

The Company’s investment in C40 is carried at fair value and its maximum exposure to loss is the amortized cost of the investment.

At March 31, 2020, there were no explicit arrangements or implicit variable interests that could require the Company to provide financial support to any of its unconsolidated VIEs.

NOTE 4 - SUPPLEMENTAL CASH FLOW INFORMATION

The following table summarizes the Company’s supplemental disclosure of cash flow information (in thousands):

 

 

 

For the Three Months Ended

 

 

 

March 31,

 

 

 

2020

 

 

2019

 

Non-cash continuing investing activities include the following:

 

 

 

 

 

 

 

 

Proceeds from the relinquishment of investment securities available-for-sale

 

$

245,828

 

 

$

—

 

Non-cash continuing financing activities include the following:

 

 

 

 

 

 

 

 

Repayment of repurchase agreements

 

$

(245,828

)

 

$

—

 

Distributions on common stock accrued but not paid

 

$

—

 

 

$

6,373

 

Distributions on preferred stock accrued but not paid

 

$

1,725

 

 

$

1,725

 

 

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17

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EXANTAS CAPITAL CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

MARCH 31, 2020

(unaudited)

 

NOTE 5 - LOANS

The following is a summary of the Company’s loans (dollars in thousands, except amounts in footnotes):

 

Description

 

Quantity

 

 

Principal

 

 

Unamortized (Discount) Premium, net (1)

 

 

Amortized Cost

 

 

Allowance for Credit Losses

 

 

Carrying Value

 

 

Contractual Interest

Rates (2)

 

 

Maturity Dates (3)(4)

At March 31, 2020:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CRE loans held for investment:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Whole loans, floating-rate (5)(6)

 

 

119

 

 

$

1,869,800

 

 

$

(8,540

)

 

$

1,861,260

 

 

$

(17,257

)

 

$

1,844,003

 

 

1M LIBOR

plus 2.70% to 1M LIBOR

plus 6.25%

 

 

April 2020 to October 2023

Mezzanine loan

 

 

1

 

 

 

4,700

 

 

 

—

 

 

 

4,700

 

 

 

(192

)

 

 

4,508

 

 

10.00%

 

 

June 2028

Preferred equity investments (see Note

3) (6)(7)(8)

 

 

2

 

 

 

26,579

 

 

 

(53

)

 

 

26,526

 

 

 

(3,192

)

 

 

23,334

 

 

11.00% to 11.50%

 

 

June 2022 to April 2023

Total CRE loans held for investment

 

 

 

 

 

$

1,901,079

 

 

$

(8,593

)

 

$

1,892,486

 

 

$

(20,641

)

 

$

1,871,845

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At December 31, 2019:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CRE loans held for investment:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Whole loans, floating-rate (5)(6)

 

 

112

 

 

$

1,768,322

 

 

$

(7,725

)

 

$

1,760,597

 

 

$

(1,460

)

 

$

1,759,137

 

 

1M LIBOR

plus 2.70% to 1M LIBOR

plus 6.25%

 

 

January 2020 to October 2023

Mezzanine loan

 

 

1

 

 

 

4,700

 

 

 

—

 

 

 

4,700

 

 

 

—

 

 

 

4,700

 

 

10.00%

 

 

June 2028

Preferred equity investment (see Note

3) (6)(7)(8)

 

 

2

 

 

 

26,237

 

 

 

(89

)

 

 

26,148

 

 

 

—

 

 

 

26,148

 

 

11.00% to 11.50%

 

 

June 2022 to April 2023

Total CRE loans held for investment

 

 

 

 

 

$

1,799,259

 

 

$

(7,814

)

 

$

1,791,445

 

 

$

(1,460

)

 

$

1,789,985

 

 

 

 

 

 

 

 

(1)

Amounts include unamortized loan origination fees of $9.6 million and $9.1 million and deferred amendment fees of $23,000 and $72,000 at March 31, 2020 and December 31, 2019, respectively. Additionally, the amounts include unamortized loan acquisition costs of $1.0 million and $1.3 million at March 31, 2020 and December 31, 2019, respectively.

(2)

LIBOR refers to the London Interbank Offered Rate.

(3)

Maturity dates exclude contractual extension options, subject to the satisfaction of certain terms, that may be available to the borrowers.

(4)

Maturity dates exclude one whole loan, with an amortized cost of $11.5 million, in maturity default and performing with respect to debt service due in accordance with a forbearance agreement at March 31, 2020 and December 31, 2019.

(5)

Substantially all loans are pledged as collateral under various borrowings at March 31, 2020 and December 31, 2019.

(6)

Floating-rate CRE whole loans had $113.9 million and $98.0 million in unfunded loan commitments at March 31, 2020 and December 31, 2019, respectively. Preferred equity investments had $2.9 million and $3.0 million in unfunded commitments at March 31, 2020 and December 31, 2019. These unfunded loan commitments are advanced as the borrowers formally request additional funding and meet certain benchmarks, as permitted under the loan agreement, and any necessary approvals have been obtained.

(7)

The interest rate on the Company’s preferred equity investments each pay at 8.00%. The remaining interest is deferred until maturity.

(8)

Beginning in April 2023, the Company has the right to unilaterally force the sale of Prospect Hackensack’s underlying property. Beginning in June 2022, the Company has the right to unilaterally force the sale of Santa Clarita’s underlying property.

(Back to Index)

18

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EXANTAS CAPITAL CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

MARCH 31, 2020

(unaudited)

 

The following is a summary of the contractual maturities of the Company’s CRE loans held for investment, at amortized cost (in thousands, except amounts in the footnotes):

 

Description

 

2020

 

 

2021

 

 

2022 and

Thereafter

 

 

Total

 

At March 31, 2020:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Whole loans, floating-rate (1)

 

$

278,356

 

 

$

695,620

 

 

$

875,773

 

 

$

1,849,749

 

Mezzanine loan

 

 

—

 

 

 

—

 

 

 

4,700

 

 

 

4,700

 

Preferred equity investments

 

 

—

 

 

 

—

 

 

 

26,526

 

 

 

26,526

 

Total CRE loans (2)

 

$

278,356

 

 

$

695,620

 

 

$

906,999

 

 

$

1,880,975

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Description

 

2020

 

 

2021

 

 

2022 and

Thereafter

 

 

Total

 

At December 31, 2019:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Whole loans, floating-rate (1)

 

$

319,868

 

 

$

737,478

 

 

$

691,747

 

 

$

1,749,093

 

Mezzanine loan

 

 

—

 

 

 

—

 

 

 

4,700

 

 

 

4,700

 

Preferred equity investment

 

 

—

 

 

 

—

 

 

 

26,148

 

 

 

26,148

 

Total CRE loans (2)

 

$

319,868

 

 

$

737,478

 

 

$

722,595

 

 

$

1,779,941

 

 

(1)

Excludes one whole loan, with an amortized cost of $11.5 million, in maturity default and performing with respect to debt service due in accordance with a forbearance agreement at March 31, 2020 and December 31, 2019.

(2)

At March 31, 2020, the amortized costs of the floating-rate CRE whole loans, summarized by contractual maturity assuming full exercise of the extension options, were $81.1 million, $65.0 million and $1.7 billion in 2020, 2021 and 2022 and thereafter, respectively. At December 31, 2019, the amortized costs of the floating-rate CRE whole loans, summarized by contractual maturity assuming full exercise of the extension options, were $105.5 million, $68.0 million and $1.6 billion in 2020, 2021 and 2022 and thereafter, respectively.

At March 31, 2020, approximately 20.1%, 19.0% and 17.7% of the Company’s CRE loan portfolio was concentrated in the Mountain, Southwest and Southeast regions, respectively, based on carrying value, as defined by the National Council of Real Estate Investment Fiduciaries. At December 31, 2019, approximately 19.5%, 19.4% and 17.6% of the Company’s CRE loan portfolio was concentrated in the Mountain, Southwest and Southeast regions, respectively, based on carrying value.

Principal Paydowns Receivable

Principal paydowns receivable represents loan principal payments that have been received by the Company’s servicers and trustees but have not been remitted to the Company. At March 31, 2020, the Company did not have any loan principal paydowns receivable. At December 31, 2019, the Company had $19.5 million of loan principal paydowns receivable, all of which was received in cash by the Company in January 2020.

NOTE 6 - FINANCING RECEIVABLES

The following table shows the activity in the allowance for credit losses for the three months ended March 31, 2020 and year ended December 31, 2019 (in thousands, except amount in the footnotes):

 

 

 

Three Months Ended March 31, 2020

 

 

Year Ended December 31, 2019

 

 

 

CRE Loans

 

 

CRE Loans (1)

 

Allowance for credit losses:

 

 

 

 

 

 

 

 

Allowance for credit losses at beginning of period

 

$

1,460

 

 

$

1,401

 

Adoption of the new accounting guidance

 

 

3,032

 

 

 

—

 

Provision for credit losses (2)

 

 

16,149

 

 

 

59

 

Allowance for credit losses at end of period

 

$

20,641

 

 

$

1,460

 

 

(1)

The Company’s mezzanine loan and preferred equity investments were evaluated individually for impairment during the year ended December 31, 2019 and were determined to have no evidence of impairment.

(2)

Excludes the recovery of credit losses on one bank loan with no amortized cost or carrying value at March 31, 2020 and December 31, 2019 that received a payment of approximately $1,000 during the year ended December 31, 2019.

(Back to Index)

19

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EXANTAS CAPITAL CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

MARCH 31, 2020

(unaudited)

 

During the three months ended March 31, 2020, the Company recorded a $16.1 million increase in its CECL credit loss reserve against its CRE loan portfolio. The COVID-19 pandemic had a significant impact on the expected losses assumed in the Company’s CECL computations at March 31, 2020. Expected losses in the portfolio were negatively impacted by higher expected unemployment and increased volatility in CRE asset pricing and liquidity.

Credit quality indicators

Commercial Real Estate Loans

CRE loans are collateralized by a diversified mix of real estate properties and are assessed for credit quality based on the collective evaluation of several factors, including but not limited to: collateral performance relative to underwritten plan, time since origination, current implied and/or reunderwritten LTV ratios, loan structure and exit plan. Depending on the loan’s performance against these various factors, loans are rated on a scale from 1 to 5, with loans rated 1 representing loans with the highest credit quality and loans rated 5 representing loans with the lowest credit quality. The factors evaluated provide general criteria to monitor credit migration in the Company’s loan portfolio; as such, a loan’s rating may improve or worsen, depending on new information received.

The criteria set forth below should be used as general guidelines and, therefore, not every loan will have all of the characteristics described in each category below.

 

 

 

 

 

Risk Rating

 

Risk Characteristics

 

 

 

1

 

• Property performance has surpassed underwritten expectations.

 

 

• Occupancy is stabilized, the property has had a history of consistently high occupancy, and the property has a diverse and high quality tenant mix.

 

 

 

2

 

• Property performance is consistent with underwritten expectations and covenants and performance criteria are being met or exceeded.

 

 

• Occupancy is stabilized, near stabilized or is on track with underwriting.

 

 

 

3

 

• Property performance lags behind underwritten expectations.

 

 

• Occupancy is not stabilized and the property has some tenancy rollover.

 

 

 

4

 

• Property performance significantly lags behind underwritten expectations. Performance criteria and loan covenants have required occasional waivers.

 

 

• Occupancy is not stabilized and the property has a large amount of tenancy rollover.

 

 

 

5

 

• Property performance is significantly worse than underwritten expectations. The loan is not in compliance with loan covenants and performance criteria and may be in default. Expected sale proceeds would not be sufficient to pay off the loan at maturity.

 

 

• The property has a material vacancy rate and significant rollover of remaining tenants.

 

 

• An updated appraisal is required upon designation and updated on an as-needed basis.

 

All CRE loans are evaluated for any credit deterioration by debt asset management and certain finance personnel on at least a quarterly basis. Mezzanine loans and preferred equity investments may experience greater credit risks due to their nature as subordinated investments.

For the purpose of calculating the quarterly provision for credit losses under CECL, the Company pools CRE loans based on the underlying collateral property type and utilizes a probability of default and loss given default methodology for approximately one year after which it immediately reverts to a historical mean loss ratio.  

(Back to Index)

20

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EXANTAS CAPITAL CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

MARCH 31, 2020

(unaudited)

 

Credit risk profiles of CRE loans at amortized cost were as follows (in thousands, except amounts in footnotes):

 

 

 

Rating 1

 

 

Rating 2

 

 

Rating 3

 

 

Rating 4

 

 

Rating 5

 

 

Total (1)

 

At March 31, 2020:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Whole loans, floating-rate

 

$

2,427

 

 

$

1,188,767

 

 

$

531,754

 

 

$

138,312

 

 

$

—

 

 

$

1,861,260

 

Mezzanine loan

 

 

—

 

 

 

4,700

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

4,700

 

Preferred equity investments

 

 

—

 

 

 

5,910

 

 

 

20,616

 

 

 

—

 

 

 

—

 

 

 

26,526

 

Total

 

$

2,427

 

 

$

1,199,377

 

 

$

552,370

 

 

$

138,312

 

 

$

—

 

 

$

1,892,486

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At December 31, 2019:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Whole loans, floating-rate

 

$

—

 

 

$

1,660,274

 

 

$

96,475

 

 

$

3,848

 

 

$

—

 

 

$

1,760,597

 

Mezzanine loan (2)

 

 

—

 

 

 

4,700

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

4,700

 

Preferred equity investments (2)

 

 

—

 

 

 

26,148

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

26,148

 

Total

 

$

—

 

 

$

1,691,122

 

 

$

96,475

 

 

$

3,848

 

 

$

—

 

 

$

1,791,445

 

 

(1)

The total amortized cost of CRE loans excluded accrued interest receivable of $6.9 million and $6.7 million at March 31, 2020 and December 31, 2019, respectively.

(2)

The Company’s mezzanine loan and preferred equity investments were evaluated individually for impairment at December 31, 2019.

(Back to Index)

21

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EXANTAS CAPITAL CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

MARCH 31, 2020

(unaudited)

 

Credit risk profiles of CRE loans by origination year at amortized cost were as follows (in thousands, except amounts in footnotes):

 

 

 

2020

 

 

2019

 

 

2018

 

 

2017

 

 

2016

 

 

Prior

 

 

Total (1)

 

At March 31, 2020:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Whole loans, floating-rate: (2)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rating 1

 

$

—

 

 

$

2,427

 

 

$

—

 

 

$

—

 

 

$

—

 

 

$

—

 

 

$

2,427

 

Rating 2

 

 

178,514

 

 

 

526,390

 

 

 

412,521

 

 

 

71,342

 

 

 

—

 

 

 

—

 

 

 

1,188,767

 

Rating 3

 

 

—

 

 

 

160,006

 

 

 

250,569

 

 

 

94,471

 

 

 

—

 

 

 

26,708

 

 

 

531,754

 

Rating 4

 

 

—

 

 

 

8,393

 

 

 

70,867

 

 

 

56,756

 

 

 

—

 

 

 

2,296

 

 

 

138,312

 

Total whole loans, floating-rate

 

 

178,514

 

 

 

697,216

 

 

 

733,957

 

 

 

222,569

 

 

 

—

 

 

 

29,004

 

 

 

1,861,260

 

Mezzanine loan (rating 2)

 

 

—

 

 

 

—

 

 

 

4,700

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

4,700

 

Preferred equity investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rating 2

 

 

—

 

 

 

5,910

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

5,910

 

Rating 3

 

 

—

 

 

 

—

 

 

 

20,616

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

20,616

 

Total preferred equity investments

 

 

—

 

 

 

5,910

 

 

 

20,616

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

26,526

 

Total

 

$

178,514

 

 

$

703,126

 

 

$

759,273

 

 

$

222,569

 

 

$

—

 

 

$

29,004

 

 

$

1,892,486

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2019

 

 

2018

 

 

2017

 

 

2016

 

 

2015

 

 

Prior

 

 

Total (1)

 

At December 31, 2019:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Whole loans, floating-rate: (2)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rating 2

 

$

669,947

 

 

$

776,078

 

 

$

202,577

 

 

$

—

 

 

$

—

 

 

$

11,672

 

 

$

1,660,274

 

Rating 3

 

 

21,593

 

 

 

—

 

 

 

37,008

 

 

 

—

 

 

 

17,471

 

 

 

20,403

 

 

 

96,475

 

Rating 4

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

3,848

 

 

 

—

 

 

 

3,848

 

Total whole loans, floating-rate

 

 

691,540

 

 

 

776,078

 

 

 

239,585

 

 

 

—

 

 

 

21,319

 

 

 

32,075

 

 

 

1,760,597

 

Mezzanine loan (rating 2)

 

 

—

 

 

 

4,700

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

4,700

 

Preferred equity investments (rating 2)

 

 

5,741

 

 

 

20,407

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

26,148

 

Total

 

$

697,281

 

 

$

801,185

 

 

$

239,585

 

 

$

—

 

 

$

21,319

 

 

$

32,075

 

 

$

1,791,445

 

 

(1)

The total amortized cost of CRE loans excluded accrued interest receivable of $6.9 million and $6.7 million at March 31, 2020 and December 31, 2019, respectively.

(2)

Acquired CRE whole loans are grouped within each loan’s year of issuance.

(Back to Index)

22

(Back to Index)

 

EXANTAS CAPITAL CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

MARCH 31, 2020

(unaudited)

 

Loan Portfolios Aging Analysis

The following table presents the CRE loan portfolio aging analysis as of the dates indicated for CRE loans at amortized cost (in thousands, except amounts in footnotes):

 

 

 

30-59 Days

 

 

60-89 Days

 

 

Greater than 90 Days (1)

 

 

Total Past Due

 

 

Current

 

 

Total Loans Receivable (2)

 

 

Total Loans > 90 Days and Accruing (1)

 

At March 31, 2020:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Whole loans, floating-rate

 

$

—

 

 

$

—

 

 

$

11,511

 

 

$

11,511

 

 

$

1,849,749

 

 

$

1,861,260

 

 

$

11,511

 

Mezzanine loan

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

4,700

 

 

 

4,700

 

 

 

—

 

Preferred equity investments

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

26,526

 

 

 

26,526

 

 

 

—

 

Total

 

$

—

 

 

$

—

 

 

$

11,511

 

 

$

11,511

 

 

$

1,880,975

 

 

$

1,892,486

 

 

$

11,511

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At December 31, 2019:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Whole loans, floating-rate

 

$

—

 

 

$

—

 

 

$

11,503

 

 

$

11,503

 

 

$

1,749,094

 

 

$

1,760,597

 

 

$

11,503

 

Mezzanine loan

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

4,700

 

 

 

4,700

 

 

 

—

 

Preferred equity investment

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

26,148

 

 

 

26,148

 

 

 

—

 

Total

 

$

—

 

 

$

—

 

 

$

11,503

 

 

$

11,503

 

 

$

1,779,942

 

 

$

1,791,445

 

 

$

11,503

 

 

 

(1)

Includes one whole loan, with an amortized cost of $11.5 million, which was in maturity default at March 31, 2020 and December 31, 2019. The loan is performing with respect to debt service due in accordance with a forbearance agreement at March 31, 2020 and December 31, 2019. During the three months ended March 31, 2020 and 2019, the Company recognized interest income of $159,000 and $165,000, respectively, on this whole loan.

(2)

The total amortized cost of CRE loans excluded accrued interest receivable of $6.9 million and $6.7 million at March 31, 2020 and December 31, 2019, respectively.

Troubled-Debt Restructurings

There were no TDRs for the three months ended March 31, 2020 and 2019.

NOTE 7 - INVESTMENT SECURITIES AVAILABLE-FOR-SALE

The following table summarizes the Company’s investment securities available-for-sale, carried at fair value, including those pledged as collateral (in thousands, except amounts in footnotes):

 

 

 

Amortized Cost  (1)

 

 

Unrealized Gains

 

 

Unrealized Losses

 

 

Fair Value (2)

 

At March 31, 2020:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CMBS, fixed-rate

 

$

36,152

 

 

$

—

 

 

$

(106

)

 

$

36,046

 

CMBS, floating-rate

 

 

41,198

 

 

 

—

 

 

 

—

 

 

 

41,198

 

Total

 

$

77,350

 

 

$

—

 

 

$

(106

)

 

$

77,244

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortized Cost  (1)

 

 

Unrealized Gains

 

 

Unrealized Losses

 

 

Fair Value (2)

 

At December 31, 2019:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CMBS, fixed-rate

 

$

132,235

 

 

$

6,596

 

 

$

(792

)

 

$

138,039

 

CMBS, floating-rate

 

 

382,659

 

 

 

995

 

 

 

(979

)

 

 

382,675

 

Total

 

$

514,894

 

 

$

7,591

 

 

$

(1,771

)

 

$

520,714

 

 

(1)

The amortized cost of CMBS excluded accrued interest receivable of $412,000 and $1.1 million at March 31, 2020 and December 31, 2019, respectively.

(2)

At March 31, 2020 and December 31, 2019, investment securities available-for-sale with fair values of $74.1 million and $466.9 million, respectively, were pledged as collateral under related financings.

Beginning in the first quarter of 2020, the COVID-19 pandemic produced material and previously unforeseeable liquidity shocks to credit markets. This resulted in significant declines in the pricing of the Company’s investment securities available-for-sale, which triggered substantial margin calls by its counterparties and, in certain cases, formal notices of events of default, all of which have been withdrawn or rescinded as of April 19, 2020 (see Note 9). As a result of these circumstances and the uncertainty caused by the COVID-19 pandemic, substantially all of the Company’s remaining CMBS available-for-sale were sold as of April 2020.

(Back to Index)

23

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EXANTAS CAPITAL CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

MARCH 31, 2020

(unaudited)

 

During the three months ended March 31, 2020, the Company realized losses related to trades that were executed in March 2020 and settled in April 2020 of $118.8 million in connection with the sale of 49 CMBS, with total amortized cost of $401.3 million.

At March 31, 2020, the Company determined that its remaining 20 CMBS were impaired and the securities would be sold before they could recover their values. As a result, during the three months ended March 31, 2020, the Company recorded unrealized losses of $66.6 million on the consolidated statement of operations with an offsetting charge directly to the amortized cost bases of the securities.

Historically, the Company measured its investment securities available-for-sale for other-than-temporary impairment. The Company recognized no other-than-temporary impairments on the investment securities available-for-sale during the three months ended March 31, 2019.

NOTE 8 - INVESTMENTS IN UNCONSOLIDATED ENTITIES

The Company’s investments in unconsolidated entities at March 31, 2020 and December 31, 2019 comprised a 100% interest in the common shares of RCT I and RCT II, respectively, with a value of $1.5 million in the aggregate, or 3.0% of each trust. The Company records its investments in RCT I and RCT II’s common shares as investments in unconsolidated entities using the cost method, recording dividend income when declared by RCT I and RCT II. During the three months ended March 31, 2020 and 2019, the Company recorded dividends from the investments in RCT I and RCT II’s common shares, reported in other revenue on the consolidated statement of operations, of $23,000 and $26,000, respectively.

(Back to Index)

24

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EXANTAS CAPITAL CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

MARCH 31, 2020

(unaudited)

 

NOTE 9 - BORROWINGS

The Company historically has financed the acquisition of its investments, including investment securities and loans, through the use of secured and unsecured borrowings in the form of securitized notes, repurchase agreements, secured term warehouse financing facilities, convertible senior notes and trust preferred securities issuances. Certain information with respect to the Company’s borrowings is summarized in the following table (dollars in thousands, except amounts in footnotes):

 

 

 

Principal Outstanding

 

 

Unamortized Issuance Costs and Discounts

 

 

Outstanding Borrowings

 

 

Weighted Average Borrowing Rate

 

 

Weighted Average Remaining Maturity

 

Value of Collateral

 

At March 31, 2020:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

XAN 2018-RSO6 Senior Notes

 

$

123,849

 

 

$

697

 

 

$

123,152

 

 

 

2.49

%

 

15.2 years

 

$

240,622

 

XAN 2019-RSO7 Senior Notes

 

 

580,514

 

 

 

4,471

 

 

 

576,043

 

 

 

2.12

%

 

16.1 years

 

 

681,871

 

XAN 2020-RSO8 Senior Notes

 

 

393,280

 

 

 

5,552

 

 

 

387,728

 

 

 

2.11

%

 

14.9 years

 

 

522,631

 

Unsecured junior subordinated debentures

 

 

51,548

 

 

 

—

 

 

 

51,548

 

 

 

5.52

%

 

16.4 years

 

 

—

 

4.50% Convertible Senior Notes

 

 

143,750

 

 

 

9,258

 

 

 

134,492

 

 

 

4.50

%

 

2.4 years

 

 

—

 

CRE - term warehouse financing facilities (1)(2)

 

 

278,226

 

 

 

2,118

 

 

 

276,108

 

 

 

2.84

%

 

253 days

 

 

382,377

 

CMBS - short term repurchase agreements (3)(4)

 

 

175,861

 

 

 

—

 

 

 

175,861

 

 

 

—

%

 

18 days

 

 

175,861

 

Total

 

$

1,747,028

 

 

$

22,096

 

 

$

1,724,932

 

 

 

2.60

%

 

10.6 years

 

$

2,003,362

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Principal Outstanding

 

 

Unamortized Issuance Costs and Discounts

 

 

Outstanding Borrowings

 

 

Weighted Average Borrowing Rate

 

 

Weighted Average Remaining Maturity

 

Value of Collateral

 

At December 31, 2019:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

XAN 2018-RSO6 Senior Notes

 

$

177,118

 

 

$

1,352

 

 

$

175,766

 

 

 

3.17

%

 

15.5 years

 

$

293,890

 

XAN 2019-RSO7 Senior Notes

 

 

575,679

 

 

 

5,007

 

 

 

570,672

 

 

 

3.03

%

 

16.3 years

 

 

687,037

 

Unsecured junior subordinated debentures

 

 

51,548

 

 

 

—

 

 

 

51,548

 

 

 

5.90

%

 

16.7 years

 

 

—

 

4.50% Convertible Senior Notes

 

 

143,750

 

 

 

10,137

 

 

 

133,613

 

 

 

4.50

%

 

2.6. years

 

 

—

 

8.00% Convertible Senior Notes

 

 

21,182

 

 

 

9

 

 

 

21,173

 

 

 

8.00

%

 

15 days

 

 

—

 

CRE - term warehouse financing facilities (1)

 

 

547,619

 

 

 

2,714

 

 

 

544,905

 

 

 

3.71

%

 

1.2 years

 

 

705,221

 

CMBS - short term repurchase agreements (3)

 

 

374,900

 

 

 

—

 

 

 

374,900

 

 

 

2.87

%

 

21 days

 

 

484,398

 

Total

 

$

1,891,796

 

 

$

19,219

 

 

$

1,872,577

 

 

 

3.45

%

 

7.4 years

 

$

2,170,546

 

 

(1)

Principal outstanding includes accrued interest payable of $308,000 and $810,000 at March 31, 2020 and December 31, 2019, respectively.

(2)

Between April 2020 and May 2020, CRE - term warehouse financing facilities paid down by $40.2 million.

(3)

Principal outstanding includes accrued interest payable of $470,000 at December 31, 2019. There was no accrued interest payable at March 31, 2020.

(4)

Value of the collateral includes unrestricted cash of $4.9 million at March 31, 2020. CMBS - short-term repurchase agreements were repaid in full in April 2020.

Securitizations

The following table sets forth certain information with respect to the Company’s consolidated securitizations at March 31, 2020 (in thousands):

 

 

 

Closing Date

 

Maturity Date

 

End of Designated Principal Reinvestment

Period (1)

 

Total Note Paydowns Received from Closing Date through March 31, 2020

 

XAN 2018-RSO6

 

June 2018

 

June 2035

 

December 2020

 

$

273,603

 

XAN 2019-RSO7

 

April 2019

 

April 2036

 

April 2022

 

$

5,298

 

XAN 2020-RSO8

 

March 2020

 

March 2035

 

March 2023

 

$

—

 

 

(1)

The designated principal reinvestment period is the period in which principal repayments can be utilized to purchase loans held outside of the respective securitization that represent the funded commitments of existing collateral in the respective securitization that were not funded as of the date the respective securitization was closed.

The investments held by the Company’s securitizations collateralize the securitizations’ borrowings and, as a result, are not available to the Company, its creditors, or stockholders. All senior notes of the securitizations held by the Company at March 31, 2020 and December 31, 2019 were eliminated in consolidation.

(Back to Index)

25

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EXANTAS CAPITAL CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

MARCH 31, 2020

(unaudited)

 

XAN 2020-RSO8

In March 2020, the Company closed Exantas Capital Corp. 2020-RSO8, Ltd. (“XAN 2020-RSO8”), a $522.6 million CRE debt securitization transaction that provided financing for CRE loans. XAN 2020-RSO8 issued a total of $435.7 million of non-recourse, floating-rate notes at par, of which RCC RE purchased 100% of the Class D and Class E notes. The Company’s investments in the Class D and Class E notes were financed by CMBS short-term repurchase agreements and were sold in conjunction with the disposition of the Company’s CMBS portfolio in April 2020 (See Note 7). Additionally, RCC RE purchased 100% of the Class F and Class G notes and a subsidiary of RCC RE purchased 100% of the outstanding preference shares. The notes purchased by RCC RE are subordinated in right of payment to all other senior notes issued by XAN 2020-RSO8, but are senior in right of payment to the preference shares. The preference shares are subordinated in right of payment to all other securities issued by XAN 2020-RSO8.

At closing, the senior notes issued to investors consisted of the following classes: (i) $295.3 million of Class A notes bearing interest at one-month LIBOR plus 1.15%, increasing to 1.40% in November 2024; (ii) $39.2 million of Class A-S notes bearing interest at one-month LIBOR plus 1.45%, increasing to 1.70% in December 2024; (iii) $26.1 million of Class B notes bearing interest at one-month LIBOR plus 1.75%, increasing to 2.25% in January 2025; (iv) $32.7 million of Class C notes bearing interest at one-month LIBOR plus 2.15%, increasing to 2.65% in January 2025; (v) $26.1 million of Class D notes bearing interest at one-month LIBOR plus 2.50%, increasing to 3.00% in February 2025; and (vi) $16.3 million of Class E notes bearing interest at one-month LIBOR plus 2.80%, increasing to 3.30% in February 2025.

All of the notes issued mature in March 2035, although the Company has the right to call the notes anytime after March 2022. Principal repayments received, after closing and ending in March 2023, may be used to purchase funding participations with respect to existing collateral held outside of the securitization.

Corporate Debt

4.50% Convertible Senior Notes and 8.00% Convertible Senior Notes

The Company issued $100.0 million aggregate principal of its 8.00% convertible senior notes due 2020 (“8.00% Convertible Senior Notes”) and $143.8 million aggregate principal of its 4.50% convertible senior notes due 2022 (“4.50% Convertible Senior Notes”) in January 2015 and August 2017, respectively. In conjunction with the issuance of the 4.50% Convertible Senior Notes, the Company extinguished $78.8 million of aggregate principal of its 8.00% Convertible Senior Notes. In January 2020, the remaining 8.00% Convertible Senior notes were paid off upon maturity.

The following table summarizes the 4.50% Convertible Senior Notes at March 31, 2020 (dollars in thousands, except the conversion prices and amounts in the footnotes):

 

 

 

Principal Outstanding

 

 

Borrowing Rate

 

 

Effective Rate (1)

 

 

Conversion

Rate (2)(3)

 

Conversion

Price (3)

 

 

Maturity Date

4.50% Convertible Senior Notes

 

$

143,750

 

 

 

4.50

%

 

 

7.43

%

 

83.1676

 

$

12.02

 

 

August 15, 2022

 

(1)

Includes the amortization of the market discounts and deferred debt issuance costs, if any, for the 4.50% Convertible Senior Notes recorded in interest expense on the consolidated statements of operations.

(2)

Represents the number of shares of common stock per $1,000 principal amount of the 4.50% Convertible Senior Notes’ principal outstanding, subject to adjustment as provided in the Third Supplemental Indenture (the “4.50% Convertible Senior Notes Indenture”).

(3)

The conversion rate and conversion price of the 4.50% Convertible Senior Notes at March 31, 2020 are adjusted to reflect quarterly cash distributions in excess of a $0.10 distribution threshold, as defined in the 4.50% Convertible Senior Notes Indenture.

The 4.50% Convertible Senior Notes are convertible at the option of the holder at any time up until one business day before the respective maturity date and may be settled in cash, the Company’s common stock or a combination of cash and the Company’s common stock, at the Company’s election. The Company may not redeem the 4.50% Convertible Senior Notes prior to maturity. The closing price of the Company’s common stock was $2.76 on March 31, 2020, which did not exceed the conversion price of its 4.50% Convertible Senior Notes at March 31, 2020.

(Back to Index)

26

(Back to Index)

 

EXANTAS CAPITAL CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

MARCH 31, 2020

(unaudited)

 

Term Warehouse Financing Facilities and Repurchase Agreements

Borrowings under the Company’s term warehouse facilities and repurchase agreements are guaranteed by the Company or one of its subsidiaries. The following table sets forth certain information with respect to the Company’s term warehouse financing facilities and repurchase agreements (dollars in thousands, except amounts in footnotes):

 

 

 

March 31, 2020

 

 

December 31, 2019

 

 

 

Outstanding Borrowings (1)

 

 

Value of Collateral

 

 

Number of Positions as Collateral

 

 

Weighted Average Interest Rate

 

 

Outstanding Borrowings (1)

 

 

Value of Collateral

 

 

Number of Positions as Collateral

 

 

Weighted Average Interest Rate

 

CRE - Term Warehouse Financing Facilities (2)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Wells Fargo Bank, N.A. (3)

 

$

145,547

 

 

$

191,046

 

 

 

24

 

 

 

2.73

%

 

$

225,217

 

 

$

291,903

 

 

 

28

 

 

 

3.70

%

Barclays Bank PLC (4)

 

 

109,421

 

 

 

159,108

 

 

 

14

 

 

 

3.02

%

 

 

111,881

 

 

 

145,035

 

 

 

14

 

 

 

3.99

%

JPMorgan Chase Bank, N.A. (5)

 

 

21,140

 

 

 

32,223

 

 

 

3

 

 

 

2.65

%

 

 

207,807

 

 

 

268,283

 

 

 

17

 

 

 

3.56

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CMBS - Short-Term Repurchase Agreements (6)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deutsche Bank Securities Inc.

 

 

8,181

 

 

 

8,181

 

 

 

—

 

 

 

—

%

 

 

37,141

 

 

 

57,331

 

 

 

6

 

 

 

3.13

%

JP Morgan Securities LLC

 

 

42,510

 

 

 

42,510

 

 

 

10

 

 

 

—

%

 

 

33,703

 

 

 

42,075

 

 

 

13

 

 

 

2.87

%

Barclays Capital Inc.

 

 

101,219

 

 

 

101,219

 

 

 

10

 

 

 

—

%

 

 

87,643

 

 

 

112,939

 

 

 

7

 

 

 

2.82

%

RBC Capital Markets, LLC

 

 

13,366

 

 

 

13,366

 

 

 

—

 

 

 

—

%

 

 

34,829

 

 

 

47,081

 

 

 

5

 

 

 

2.96

%

RBC (Barbados) Trading Bank Corporation

 

 

10,585

 

 

 

10,585

 

 

 

—

 

 

 

—

%

 

 

181,584

 

 

 

224,972

 

 

 

30

 

 

 

2.82

%

Total

 

$

451,969

 

 

$

558,238

 

 

 

 

 

 

 

 

 

 

$

919,805

 

 

$

1,189,619

 

 

 

 

 

 

 

 

 

 

(1)

Outstanding borrowings include accrued interest payable.

(2)

Between April 2020 and May 2020, CRE - term warehouse financing facilities paid down by $40.2 million.

(3)

Includes $347,000 and $607,000 of deferred debt issuance costs at March 31, 2020 and December 31, 2019, respectively.

(4)

Includes $657,000 and $817,000 of deferred debt issuance costs at March 31, 2020 and December 31, 2019, respectively.

(5)

Includes $1.1 million and $1.3 million of deferred debt issuance costs at March 31, 2020 and December 31, 2019, respectively.

(6)

Value of the collateral includes unrestricted cash of $4.9 million at March 31, 2020. CMBS - short-term agreements were repaid in full in April 2020.

The following table shows information about the amount at risk under the repurchase facilities at March 31, 2020 (dollars in thousands):

 

 

 

Amount at Risk (1)

 

 

Weighted Average Remaining Maturity

 

 

Weighted Average Interest Rate

 

At March 31, 2020:

 

 

 

 

 

 

 

 

 

 

 

 

CRE - Term Warehouse Financing Facilities

 

 

 

 

 

 

 

 

 

 

 

 

Wells Fargo Bank, N.A.

 

$

45,779

 

 

112 days

 

 

 

2.73

%

Barclays Bank PLC

 

$

49,522

 

 

1.0 years

 

 

 

3.02

%

JPMorgan Chase Bank, N.A.

 

$

10,069

 

 

1.6 years

 

 

 

2.65

%

CMBS - Short-Term Repurchase Agreements

 

 

 

 

 

 

 

 

 

 

 

 

Deutsche Bank Securities Inc.

 

$

—

 

 

 

—

 

 

 

—

%

JP Morgan Securities LLC

 

$

143

 

 

21 days

 

 

 

—

%

Barclays Capital Inc.

 

$

32

 

 

17 days

 

 

 

—

%

RBC (Barbados) Trading Bank Corporation

 

$

—

 

 

 

—

 

 

 

—

%

RBC Capital Markets, LLC

 

$

—

 

 

 

—

 

 

 

—

%

 

(1)

Equal to the total of the estimated fair value of securities or loans sold and accrued interest receivable, minus the total of the repurchase agreement liabilities and accrued interest payable.

CRE - Term Warehouse Financing Facilities

In May 2020, Wells Fargo Bank, N.A. revised the minimum equity financial covenant required of the Company as of March 31, 2020 and provided a framework to avoid credit-based markdowns for approximately four months.

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27

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EXANTAS CAPITAL CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

MARCH 31, 2020

(unaudited)

 

In April 2018, a wholly-owned subsidiary of the Company entered into a master repurchase agreement (the “Barclays Facility”) with Barclays Bank PLC (“Barclays”) to finance the origination of CRE loans. In connection with the Barclays Facility, the Company entered into a guaranty agreement (the “Barclays Guaranty”) pursuant to which the Company fully guaranteed all payments and performance under the Barclays Facility. In May 2020, the Company entered into an amendment to the Barclays Guaranty that revised its minimum equity financial covenant as of March 1, 2020. Barclays also provided a framework to avoid credit-based markdowns for approximately four months.

In October 2018, an indirect wholly-owned subsidiary of the Company entered into a master repurchase agreement (the “JPMorgan Chase Facility”) with JPMorgan Chase Bank, N.A. (“JPMorgan Chase”) to finance the origination of CRE loans. In connection with the JPMorgan Chase Facility, the Company entered into a guaranty agreement (the “JPMorgan Chase Guaranty”) pursuant to which the Company fully guaranteed all payments and performance under the JPMorgan Chase Facility. In May 2020, the Company entered into an amendment to the JPMorgan Chase Guarantee that revised its minimum equity financial covenant as of February 29, 2020.

The Company would not have been in compliance with its previous minimum equity covenants on its CRE term warehouse financing facilities at March 31, 2020, primarily as a result of the loss on the disposition of its financed CMBS portfolio (See Note 7). However, the Company subsequently sought and received agreements with all of its lenders that retroactively reduced its minimal equity requirements under its agreements, allowing the Company to comply with its minimum equity requirements at March 31, 2020.

The Company was in compliance with all of its covenants at March 31, 2020.

CMBS - Short-Term Repurchase Agreements

The COVID-19 pandemic produced material and previously unforeseeable liquidity shocks in credit markets causing significant declines in the pricing of the Company’s investment securities available-for-sale that were collateral for the Company’s CMBS short-term repurchase facilities (See Note 7). As a result, in March 2020, the Company received written notices from RBC Capital Markets, LLC, RBC (Barbados) Trading Bank Corporation and Deutsche Bank Securities Inc. alleging that events of default had occurred under the Company’s associated repurchase agreements as a result of not meeting certain margin calls. These notices were subsequently either withdrawn or rescinded. The Company had no outstanding balances on its CMBS - short-term repurchase agreements in April 2020.

Contractual maturity dates of the Company’s borrowings’ principal outstanding by category and year are presented in the table below (in thousands):

 

 

 

Total

 

 

2020

 

 

2021

 

 

2022

 

 

2023

 

 

2024 and Thereafter

 

At March 31, 2020:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CRE securitizations

 

$

1,097,643

 

 

$

—

 

 

$

—

 

 

$

—

 

 

$

—

 

 

$

1,097,643

 

Unsecured junior subordinated debentures

 

 

51,548

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

51,548

 

4.50% Convertible Senior Notes

 

 

143,750

 

 

 

—

 

 

 

—

 

 

 

143,750

 

 

 

—

 

 

 

—

 

Term warehouse financing facilities and repurchase agreements (1)

 

 

454,087

 

 

 

321,755

 

 

 

132,332

 

 

 

—

 

 

 

—

 

 

 

—

 

Total

 

$

1,747,028

 

 

$

321,755

 

 

$

132,332

 

 

$

143,750

 

 

$

—

 

 

$

1,149,191

 

 

(1)

Includes accrued interest payable in the balances of principal outstanding.

NOTE 10 - SHARE ISSUANCE AND REPURCHASE

On or after July 30, 2024, the Company may, at its option, redeem its 8.625% Fixed-to-Floating Series C Cumulative Redeemable Preferred Stock (“Series C Preferred Stock”), in whole or in part, at any time and from time to time, for cash at $25.00 per share, plus accrued and unpaid distributions, if any, to the redemption date. Effective July 30, 2024 and thereafter, the Company will pay cumulative distributions on the Series C Preferred Stock at a floating rate equal to three-month LIBOR plus 5.927% per annum based on the $25.00 liquidation preference, provided that such floating rate shall not be less than the initial rate of 8.625% at any date of determination.

At March 31, 2020, the Company had 4.8 million shares of Series C Preferred Stock outstanding, with a weighted average issuance price, excluding offering costs, of $25.00.

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28

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EXANTAS CAPITAL CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

MARCH 31, 2020

(unaudited)

 

In March 2016, the Board approved a securities repurchase program for up to $50.0 million of its outstanding securities. During the three months ended March 31, 2020 and 2019, the Company did not repurchase any shares of its common or preferred stock through this program. At March 31, 2020, $44.9 million remains available under this repurchase plan.

NOTE 11 - SHARE-BASED COMPENSATION

In June 2019, the Company’s shareholders approved the Exantas Capital Corp. Second Amended and Restated Omnibus Equity Compensation Plan (the “June 2019 Plan”), which amended the May 2014 plan. The June 2019 Plan (i) increased the number of shares authorized for issuance from 3,275,000 shares to 4,775,000 shares; (ii) extended the expiration date from May 2024 to June 2029; and (iii) made other clarifying and updating amendments.

The following table summarizes the Company’s restricted common stock transactions:

 

 

 

Non-Employee Directors

 

 

Non-

Employees (1)

 

 

Total

 

Unvested shares at January 1, 2020

 

 

24,558

 

 

 

396,404

 

 

 

420,962

 

Issued

 

 

13,689

 

 

 

177,766

 

 

 

191,455

 

Vested

 

 

(17,416

)

 

 

(213,688

)

 

 

(231,104

)

Forfeited

 

 

—

 

 

 

(29,988

)

 

 

(29,988

)

Unvested shares at March 31, 2020

 

 

20,831

 

 

 

330,494

 

 

 

351,325

 

 

(1)

Non-employees are employees of C-III or Resource America, Inc. (“Resource America”).

The fair values at grant date of the shares of restricted common stock granted to non-employees during the three months ended March 31, 2020 and 2019 was $2.1 million and $2.0 million, respectively. The fair values at grant date of shares of restricted common stock issued to the Company’s seven and eight non-employee directors that served at any time during the three months ended March 31, 2020 and 2019, respectively, were $145,000 and $185,000, respectively.

At March 31, 2020, the total unrecognized restricted common stock expense for non-employees was $2.4 million, with a weighted average amortization period remaining of 2.5 years. At December 31, 2019, the total unrecognized restricted common stock expense for non-employees was $1.1 million, with a weighted average amortization period remaining of 1.8 years.

The following table summarizes restricted common stock grants during the three months ended March 31, 2020:

 

Grant Date (1)

 

Shares (1)

 

 

Vesting per Year (1)

 

 

Vesting Date(s) (1)

January 21, 2020

 

 

177,766

 

 

33%

 

 

January 21, 2021, January 21, 2022 and January 22, 2023

February 3, 2020

 

 

2,843

 

 

100%

 

 

February 3, 2021

March 9, 2020

 

 

10,846

 

 

100%

 

 

March 9, 2021

 

The following table summarizes the status of the Company’s vested stock options at March 31, 2020:

 

Vested Options

 

Number of Options

 

 

Weighted Average Exercise Price

 

 

Weighted Average Remaining Contractual Term (in years)

 

 

Aggregate Intrinsic Value (in thousands)

 

Vested at January 1, 2020

 

 

10,000

 

 

$

25.60

 

 

 

 

 

 

 

 

 

Vested

 

 

—

 

 

 

—

 

 

 

 

 

 

 

 

 

Exercised

 

 

—

 

 

 

—

 

 

 

 

 

 

 

 

 

Forfeited

 

 

—

 

 

 

—

 

 

 

 

 

 

 

 

 

Expired

 

 

—

 

 

 

—

 

 

 

 

 

 

 

 

 

Vested at March 31, 2020

 

 

10,000

 

 

$

25.60

 

 

 

1.13

 

 

$

—

 

 

There were no options granted during the three months ended March 31, 2020 or 2019. The outstanding stock options have contractual terms of ten years and will expire in 2021.

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29

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EXANTAS CAPITAL CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

MARCH 31, 2020

(unaudited)

 

The components of equity compensation expense for the periods presented are as follows (in thousands):

 

 

 

For the Three Months Ended

 

 

 

March 31,

 

 

 

2020

 

 

2019

 

Restricted shares granted to non-employees (1)

 

$

435

 

 

$

611

 

Restricted shares granted to non-employee directors

 

 

63

 

 

 

72

 

Total

 

$

498

 

 

$

683

 

 

(1)

Non-employees are employees of C-III or Resource America.

Under the Company’s Third Amended and Restated Management Agreement, as amended (“Management Agreement”), incentive compensation is paid quarterly. Up to 75% of the incentive compensation is paid in cash and at least 25% is paid in the form of an award of common stock, recorded in management fees on the consolidated statements of operations. The Manager received no incentive compensation for the three months ended March 31, 2020 or 2019.

All equity awards, apart from incentive compensation under the Management Agreement, are discretionary in nature and subject to approval by the compensation committee of the Board.

NOTE 12 - EARNINGS PER SHARE

The following table presents a reconciliation of basic and diluted earnings (losses) per common share for the periods presented as follows (dollars in thousands, except per share amounts):

 

 

 

For the Three Months Ended

 

 

 

March 31,

 

 

 

2020

 

 

2019

 

Net (loss) income from continuing operations

 

$

(196,476

)

 

$

8,170

 

Net income allocated to preferred shares

 

 

(2,588

)

 

 

(2,588

)

Net (loss) income from continuing operations allocable to common shares

 

 

(199,064

)

 

 

5,582

 

Net loss from discontinued operations, net of tax

 

 

(45

)

 

 

(37

)

Net (loss) income allocable to common shares

 

$

(199,109

)

 

$

5,545

 

 

 

 

 

 

 

 

 

 

Weighted average number of common shares outstanding:

 

 

 

 

 

 

 

 

Weighted average number of common shares outstanding - basic

 

 

31,626,204

 

 

 

31,379,253

 

Effect of dilutive securities - unvested restricted stock

 

 

—

 

 

 

152,033

 

Weighted average number of common shares outstanding - diluted

 

 

31,626,204

 

 

 

31,531,286

 

 

 

 

 

 

 

 

 

 

Net (loss) income per common share - basic:

 

 

 

 

 

 

 

 

Continuing operations

 

$

(6.30

)

 

$

0.18

 

Discontinued operations

 

 

—

 

 

 

—

 

Net (loss) income per common share - basic

 

$

(6.30

)

 

$

0.18

 

Net  (loss) income per common share - diluted:

 

 

 

 

 

 

 

 

Continuing operations

 

$

(6.30

)

 

$

0.18

 

Discontinued operations

 

 

—

 

 

 

—

 

Net (loss) income per common share - diluted

 

$

(6.30

)

 

$

0.18

 

 

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30

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EXANTAS CAPITAL CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

MARCH 31, 2020

(unaudited)

 

For the 4.50% Convertible Senior Notes, the Company has the intent and ability to settle the principal amount in cash and intends to settle the conversion feature for the amount above the conversion price, or the conversion spread, if any, in common stock. The Company uses the treasury stock method for calculating any potential dilutive effect of the conversion spread on diluted earnings per share, if applicable. The conversion spread will have a dilutive impact on diluted earnings per share when the average market price of the Company’s common stock for a given period exceeds the conversion price of the 4.50% Convertible Senior Notes. For the three months ended March 31, 2020, the average market price of the Company’s common stock did not exceed the conversion price of the 4.50% Convertible Senior Notes and for the three months ended March 31, 2019 the average market price of the Company’s common stock did not exceed the conversion price of the 4.50% Convertible Senior Notes and 8.00% Convertible Senior Notes and as such the convertible senior notes have been excluded from the computation of diluted earnings per share. The conversion rate and conversion price for the 4.50% Convertible Senior Notes are described further in Note 9.

NOTE 13 - DISTRIBUTIONS

In order to qualify as a REIT, the Company must currently distribute at least 90% of its taxable income. In addition, the Company must distribute 100% of its taxable income in order to not be subject to corporate federal income taxes on retained income. The Company anticipates it will distribute substantially all of its taxable income to its stockholders. Because taxable income differs from cash flow from operations due to non-cash revenues or expenses (such as provisions for credit losses and depreciation), in certain circumstances the Company may generate operating cash flow in excess of its distributions or, alternatively, may be required to borrow funds to make sufficient distribution payments.

The Company’s 2020 distributions are, and will be, determined by the Board, which will also consider the composition of any distributions declared, including the option of paying a portion in cash and the balance in additional shares of common stock.

For the quarter ended March 31, 2020, the Company declared, but subsequently rescinded and did not pay any common share distributions. For the quarter ended March 31, 2019, the Company declared and subsequently paid distributions of $0.20 per common share.

For the quarter ended March 31, 2020, the Company declared, but subsequently rescinded and did not pay any preferred stock distributions. For the quarter ended March 31, 2019, the Company declared and subsequently paid distributions of $0.54 per share of its Series C Preferred Stock.

The following tables present distributions declared (on a per share basis) for the year ended December 31, 2019:

 

 

 

Common Stock

 

 

 

Date Paid

 

Total

Distributions

Paid

 

 

Distributions

Per Share

 

 

 

 

 

(in thousands)

 

 

 

 

 

2019

 

 

 

 

 

 

 

 

 

 

December 31

 

January 28, 2020

 

$

8,767

 

 

$

0.275

 

September 30

 

October 25

 

$

7,967

 

 

$

0.25

 

June 30

 

July 26

 

$

7,172

 

 

$

0.225

 

March 31

 

April 26

 

$

6,373

 

 

$

0.20

 

 

 

 

Series C Preferred Stock

 

 

 

Date Paid

 

Total

Distributions

Paid

 

 

Distributions

Per Share

 

 

 

(in thousands)

 

2019

 

 

 

 

 

 

 

 

 

 

December 31

 

January 30, 2020

 

$

2,587

 

 

$

0.539063

 

September 30

 

October 30

 

$

2,588

 

 

$

0.539063

 

June 30

 

July 30

 

$

2,587

 

 

$

0.539063

 

March 31

 

April 30

 

$

2,588

 

 

$

0.539063

 

 

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31

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EXANTAS CAPITAL CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

MARCH 31, 2020

(unaudited)

 

NOTE 14 - ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

The following table presents the changes in each component of accumulated other comprehensive (loss) income for the three months ended March 31, 2020 (in thousands):

 

 

 

Net Unrealized Gain (Loss) on Derivatives

 

 

Net Unrealized (Loss) Gain on Investment Securities Available-for-Sale without an Allowance for Credit Losses

 

 

Accumulated Other Comprehensive (Loss) Income

 

Balance at January 1, 2020

 

$

(3,999

)

 

$

5,820

 

 

$

1,821

 

Other comprehensive (loss) income before reclassifications

 

 

(6,749

)

 

 

(191,283

)

 

 

(198,032

)

Amounts reclassified from accumulated other comprehensive income (1)

 

 

(23

)

 

 

185,357

 

 

 

185,334

 

Balance at March 31, 2020

 

$

(10,771

)

 

$

(106

)

 

$

(10,877

)

 

(1)

Amounts reclassified from accumulated other comprehensive income are reclassified to interest expense and net realized and unrealized gain on investment securities available-for-sale and loans and derivatives on the Company’s consolidated statements of operations.

NOTE 15 - RELATED PARTY TRANSACTIONS

Relationship with C-III and Certain of its Subsidiaries. The Manager is a wholly-owned subsidiary of Resource America, which is a wholly-owned subsidiary of C-III, a leading CRE investment management and services company engaged in a broad range of activities, including loan servicing, fund management, CDO management, principal investment, zoning due diligence and investment sales. C-III is indirectly controlled and partially owned by Island Capital Group LLC (“Island Capital”), of which Andrew L. Farkas, the Company’s Chairman, is the managing member. Mr. Farkas is also chairman and chief executive officer of C-III. In addition, Robert C. Lieber, the Company’s Chief Executive Officer, and Matthew J. Stern, the Company’s President, are executive managing directors of both C-III and Island Capital. Jeffrey P. Cohen, who is a member of the Company’s Board, is president of both C-III and Island Capital. Those officers and the Company’s other executive officers are also officers of the Company’s Manager, Resource America, C-III and/or affiliates of those companies. At March 31, 2020, C-III indirectly beneficially owned 780,025, or 2.4%, of the Company’s outstanding common stock.

The Company has a Management Agreement with the Manager, amended and restated on December 14, 2017 and further amended on February 20, 2020, pursuant to which the Manager provides the day-to-day management of the Company’s operations and receives substantial fees. For each of the three months ended March 31, 2020 and 2019, the Manager earned base management fees of approximately $2.1 million. No incentive compensation was earned for the three months ended March 31, 2020 and 2019. At March 31, 2020 and December 31, 2019, $692,000 and $701,000, respectively, of base management fees were payable by the Company to the Manager. There was no incentive compensation payable at March 31, 2020 and December 31, 2019. The Manager and its affiliates provide the Company with a Chief Financial Officer and a sufficient number of additional accounting, finance, tax and investor relations professionals. The Company reimburses the Manager’s and its affiliates’ expenses for (a) the wages, salaries and benefits of the Chief Financial Officer, (b) a portion of the wages, salaries and benefits of accounting, finance, tax and investor relations professionals, in proportion to such personnel’s percentage of time allocated to the Company’s operations, and (c) personnel principally devoted to the Company’s ancillary operating subsidiaries. The Company reimburses out-of-pocket expenses and certain other costs incurred by the Manager and its affiliates that relate directly to the Company’s operations. For the three months ended March 31, 2020 and 2019, the Company reimbursed the Manager $1.9 million and $1.0 million, respectively, for all such compensation and costs. At March 31, 2020 and December 31, 2019, the Company had payables to Resource America and its subsidiaries pursuant to the Management Agreement totaling approximately $464,000 and $1.1 million, respectively. The Company’s base management fee payable and expense reimbursements payable are recorded in management fee payable and accounts payable and other liabilities on the consolidated balance sheets, respectively.

At March 31, 2020, the Company retained equity in six securitization entities that were structured for the Company by the Manager, although three of the securitization entities had been substantially liquidated as of March 31, 2020. Under the Management Agreement, the Manager was not separately compensated by the Company for executing these transactions and is not separately compensated for managing the securitization entities and their assets.

(Back to Index)

32

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EXANTAS CAPITAL CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

MARCH 31, 2020

(unaudited)

 

Relationship with Resource Real Estate, LLC. Resource Real Estate, LLC (“Resource Real Estate”), an indirect wholly-owned subsidiary of Resource America and C-III, originates, finances and manages the Company’s CRE loan portfolio. The Company reimburses Resource Real Estate for loan origination costs associated with all loans originated. At March 31, 2020 and December 31, 2019, the Company had receivables from Resource Real Estate for loan deposits of $15,000 and $101,000, respectively.

Resource Real Estate served as special servicer for the following liquidated real estate securitization transactions, which provided financing for CRE loans: (i) Resource Capital Corp. 2014-CRE2, Ltd., a $353.9 million securitization that closed in July 2014 and liquidated in August 2017; (ii) Resource Capital Corp. 2015-CRE3, Ltd., a $346.2 million securitization that closed in February 2015 and liquidated in August 2018; (iii) Resource Capital Corp. 2015-CRE4, Ltd., a $312.9 million securitization that closed in August 2015 and liquidated in July 2018; and (iv) Resource Capital Corp. 2017-CRE5, Ltd. (“RCC 2017-CRE5”), a $376.7 million securitization that closed in July 2017 and liquidated in July 2019. Resource Real Estate serves as special servicer for XAN 2020-RSO8, a $522.6 million securitization that closed in March 2020. Resource Real Estate did not earn any special servicing fees during the three months ended March 31, 2020 and 2019.

Relationship with C-III Commercial Mortgage and C3AM. In May 2019, RCC RE entered into a Mortgage Loan Sale and Purchase Agreement (the “May 2019 Loan Acquisition Agreement”) with C-III Commercial Mortgage LLC (“C-III Commercial Mortgage”), a wholly-owned subsidiary of C-III, that provided for the acquisition by RCC RE of certain CRE loans on a servicing-released basis at par, plus accrued and unpaid interest on each loan for an aggregate purchase price of $197.6 million. In accordance with the terms of the May 2019 Loan Acquisition Agreement, C-III Commercial Mortgage retains its title to all exit fees in excess of 0.50% of the outstanding principal balance. During the three months ended March 31, 2020, C-III Commercial Mortgage earned exit fees of $3,000. The Company had no outstanding payables to C-III Commercial Mortgage at March 31, 2020 and December 31, 2019.

C3AM served as the primary servicer for the CRE loans acquired in the May 2019 Loan Acquisition Agreement and for the CRE loans collateralizing RCC 2017-CRE5, Exantas Capital Corp. 2018-RSO6, Ltd. (“XAN 2018-RSO6”), a $514.2 million securitization that closed in June 2018, and Exantas Capital Corp. 2019-RSO7, Ltd. (“XAN 2019-RSO7”), a $687.2 million securitization that closed in April 2019. C3AM served as special servicer for C40, XAN 2018-RSO6 and XAN 2019-RSO7, under which it received a base special servicing fee. During the three months ended March 31, 2019, C3AM earned approximately $91,000 in servicing fees. C3AM did not earn any special servicing fees during the three months March 31, 2019. The Company had payables to C3AM of approximately $37,000 at December 31, 2019.

On December 31, 2019, C3AM was sold by C-III to an unaffiliated third party. As such, C3AM is no longer a related party under common control effective January 1, 2020.

NOTE 16 - FAIR VALUE OF FINANCIAL INSTRUMENTS

The following table presents the Company’s financial instruments carried at fair value on a recurring basis based upon the fair value hierarchy (in thousands):

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

At March 31, 2020:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment securities available-for-sale

 

$

—

 

 

$

—

 

 

$

77,244

 

 

$

77,244

 

Total assets at fair value

 

$

—

 

 

$

—

 

 

$

77,244

 

 

$

77,244

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives

 

$

—

 

 

$

11,326

 

 

$

—

 

 

$

11,326

 

Total liabilities at fair value

 

$

—

 

 

$

11,326

 

 

$

—

 

 

$

11,326

 

At December 31, 2019:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment securities available-for-sale

 

$

—

 

 

$

—

 

 

$

520,714

 

 

$

520,714

 

Derivatives

 

 

—

 

 

 

30

 

 

 

—

 

 

 

30

 

Total assets at fair value

 

$

—

 

 

$

30

 

 

$

520,714

 

 

$

520,744

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives

 

$

—

 

 

$

4,558

 

 

$

—

 

 

$

4,558

 

Total liabilities at fair value

 

$

—

 

 

$

4,558

 

 

$

—

 

 

$

4,558

 

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33

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EXANTAS CAPITAL CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

MARCH 31, 2020

(unaudited)

 

 

In accordance with guidance on fair value measurements and disclosures, the Company is not required to disclose quantitative information with respect to unobservable inputs contained in fair value measurements that are not developed by the Company. As a consequence, the Company has not disclosed such information associated with fair values obtained for investment securities available-for-sale and derivatives from third-party pricing sources.

The following table presents additional information about the Company’s assets that are measured at fair value on a recurring basis for which the Company has utilized Level 3 inputs (in thousands):

 

 

 

CMBS

 

Balance, January 1, 2020

 

$

520,714

 

Included in earnings

 

 

(184,741

)

Purchases

 

 

24,600

 

Sales

 

 

(37,764

)

Paydowns

 

 

(4,733

)

Relinquishments

 

 

(234,906

)

Included in other comprehensive income

 

 

(5,926

)

Balance, March 31, 2020

 

$

77,244

 

 

To measure the fair value of an asset held for sale, the Company primarily uses appraisals obtained from third-parties as a practical expedient. The Company may also use the present value of estimated cash flows, market price, if available, or other determinants of the fair value of the collateral less estimated disposition costs.

In November 2019, the Company foreclosed on its remaining legacy CRE loan held for sale, and obtained ownership of the underlying property, which remains classified as an asset held for sale on the consolidated balance sheets, recorded at the lower of cost or fair market value. In March 2020 the Company received a $13.5 million offer on the property. During the three months ended March 31, 2020 and 2019, the Company recorded losses of $3.8 million and $102,000, respectively, on the remaining CRE asset held for sale, which included protective advances to cover borrower operating losses of $491,000 and $102,000, respectively. The loss during the three months ended March 31, 2020 primarily included a $3.3 million fair value charge in connection with the offer received on the property adjusted for the estimated costs to sell. The loan had a fair value equal to $13.2 million and $16.5 million at March 31, 2020 and December 31, 2019, respectively.

The Company is required to disclose the fair value of financial instruments for which it is practicable to estimate that value. The fair values of the Company’s short-term financial instruments such as cash and cash equivalents, restricted cash, accrued interest receivable, principal paydowns receivable, accrued interest payable and distributions payable approximate their carrying values on the consolidated balance sheets. The fair values of the Company’s investment securities available-for-sale are reported in Note 7. The fair values of the Company’s derivative instruments are reported in Note 17.

The fair values of the Company’s loans held for investment are measured by discounting the expected future cash flows using the current interest rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. Par values of loans with variable interest rates are expected to approximate fair value. Fair values of loans with fixed rates are calculated using the net present values of future cash flows, discounted at market rates. The Company’s floating-rate CRE loans had interest rates from 4.25% to 7.63% and 4.45% to 7.96% at March 31, 2020 and December 31, 2019, respectively.

The fair value of the Company’s mezzanine loan is measured by discounting the expected cash flows using the future expected coupon rate. The Company’s mezzanine loan is discounted at a rate of 10.00%.

The fair value of the Company’s preferred equity investments are measured by discounting the expected cash flows using the future expected coupon rates. The Company’s preferred equity investments are discounted at rates of 12.08% and 11.54%.

Senior notes in CRE securitizations are valued using third-party pricing sources.

The fair values of the junior subordinated notes RCT I and RCT II are estimated by using a discounted cash flow model with discount rates of 8.99%.

The fair value of the convertible notes is determined using a discounted cash flow model that discounts the expected future cash flows using current interest rates on similar debts that do not have a conversion option. The 4.50% Convertible Senior Notes are discounted at a rate of 7.43%.

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34

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EXANTAS CAPITAL CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

MARCH 31, 2020

(unaudited)

 

Repurchase agreements are variable rate debt instruments indexed to LIBOR that reset periodically and, as a result, their carrying value approximates their fair value, excluding deferred debt issuance costs.

The fair values of the Company’s remaining financial instruments that are not reported at fair value on the consolidated balance sheets are reported in the following table (in thousands):

 

 

 

 

 

 

 

Fair Value Measurements

 

 

 

Carrying Value

 

 

Fair Value

 

 

Quoted Prices

in Active

Markets for

Identical

Assets of

Liabilities

(Level 1)

 

 

Significant

Other

Observable

Inputs

(Level 2)

 

 

Significant

Unobservable

Inputs

(Level 3)

 

At March 31, 2020:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CRE whole loans held for investment

 

$

1,844,003

 

 

$

1,869,800

 

 

$

—

 

 

$

—

 

 

$

1,869,800

 

CRE mezzanine loan

 

$

4,508

 

 

$

4,700

 

 

$

—

 

 

$

—

 

 

$

4,700

 

CRE preferred equity investments

 

$

23,334

 

 

$

26,579

 

 

$

—

 

 

$

—

 

 

$

26,579

 

Asset held for sale

 

$

13,200

 

 

$

13,200

 

 

$

—

 

 

$

—

 

 

$

13,200

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Senior notes in CRE securitizations

 

$

1,086,923

 

 

$

933,239

 

 

$

—

 

 

$

—

 

 

$

933,239

 

Junior subordinated notes

 

$

51,548

 

 

$

21,248

 

 

$

—

 

 

$

—

 

 

$

21,248

 

Convertible notes

 

$

134,492

 

 

$

143,750

 

 

$

—

 

 

$

—

 

 

$

143,750

 

Warehouse financing facilities and repurchase agreements

 

$

451,969

 

 

$

454,087

 

 

$

—

 

 

$

—

 

 

$

454,087

 

At December 31, 2019:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CRE whole loans held for investment

 

$

1,759,137

 

 

$

1,768,322

 

 

$

—

 

 

$

—

 

 

$

1,768,322

 

CRE mezzanine loan

 

$

4,700

 

 

$

4,700

 

 

$

—

 

 

$

—

 

 

$

4,700

 

CRE preferred equity investment

 

$

26,148

 

 

$

26,237

 

 

$

—

 

 

$

—

 

 

$

26,237

 

Asset held for sale

 

$

16,500

 

 

$

16,500

 

 

$

—

 

 

$

—

 

 

$

16,500

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Senior notes in CRE securitizations

 

$

746,438

 

 

$

754,023

 

 

$

—

 

 

$

—

 

 

$

754,023

 

Junior subordinated notes

 

$

51,548

 

 

$

25,831

 

 

$

—

 

 

$

—

 

 

$

25,831

 

Convertible notes

 

$

154,786

 

 

$

164,932

 

 

$

—

 

 

$

—

 

 

$

164,932

 

Warehouse financing facilities and repurchase agreements

 

$

919,805

 

 

$

922,519

 

 

$

—

 

 

$

—

 

 

$

922,519

 

 

NOTE 17 - MARKET RISK AND DERIVATIVE INSTRUMENTS

The Company is affected by changes in certain market conditions. These changes in market conditions may adversely impact the Company’s financial performance and are referred to as “market risks.” When deemed appropriate, the Company uses derivatives as a risk management tool to mitigate the potential impact of certain market risks. The primary market risks managed by the Company through the use of derivative instruments are interest rate risk and market price risk.

The Company may hold various derivatives in the ordinary course of business, including interest rate swaps. Interest rate swaps are contracts between two parties to exchange cash flows based on specified underlying notional amounts, assets and/or indices.

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35

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EXANTAS CAPITAL CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

MARCH 31, 2020

(unaudited)

 

A significant market risk to the Company is interest rate risk. Interest rates are highly sensitive to many factors, including governmental monetary and tax policies, domestic and international economic and political considerations and other factors beyond the Company’s control. Changes in the general level of interest rates can affect net interest income, which is the difference between the interest income earned on interest-earning assets and the interest expense incurred in connection with interest-bearing liabilities. Changes in the level of interest rates also can affect the value of the Company’s interest-earning assets and the Company’s ability to realize gains from the sale of these assets. A decline in the value of the Company’s interest-earning assets pledged as collateral for borrowings could result in the counterparties demanding additional collateral pledges or liquidation of some of the existing collateral to reduce borrowing levels.

The Company seeks to manage the extent to which net income changes as a function of changes in interest rates by matching adjustable-rate assets with variable-rate borrowings. The Company seeks to mitigate the potential impact on net income (loss) of adverse fluctuations in interest rates incurred on its borrowings by entering into hedging agreements.

The Company classifies its interest rate risk hedges as cash flow hedges, which are hedges that eliminate the risk of changes in the cash flows of a financial asset or liability. The Company records changes in fair value of derivatives designated and effective as cash flow hedges in accumulated other comprehensive (loss) income, and records changes in fair value of derivatives designated and ineffective as cash flow hedges in earnings.

At March 31, 2020 and December 31, 2019, the Company had 20 and 19, respectively, interest rate swap contracts outstanding whereby the Company paid a weighted average fixed rate of 2.43% and 2.47%, respectively, and received a variable rate equal to one-month LIBOR. The aggregate notional amount of these contracts was $92.5 million and $90.2 million at March 31, 2020 and December 31, 2019, respectively. The counterparty for the Company’s designated interest rate hedge contracts at March 31, 2020 and December 31, 2019 was Wells Fargo.

There were no interest rate swaps in an asset position at March 31, 2020. At December 31, 2019, the estimated fair value of the Company’s interest rate swaps in an asset position was $30,000. At March 31, 2020 and December 31, 2019, the estimated fair value of the Company’s interest rate swaps in a liability position was $11.3 million and $4.6 million, respectively. The Company had aggregate unrealized losses of $10.8 million and $4.0 million on its interest rate swaps at March 31, 2020 and December 31, 2019, respectively, which are recorded in accumulated other comprehensive (loss) income on the consolidated balance sheets.

The Company terminated all of its interest rate swap positions associated with its financed CMBS portfolio in April 2020. At termination, the Company realized a loss of $11.8 million, of which $11.3 million was recognized in the Company’s consolidated balance sheets as an unrealized loss in accumulated other comprehensive (loss) income at March 31, 2020. The realized loss of $11.8 million will be amortized out of accumulated other comprehensive (loss) income and into earnings over the remaining life of the debt.

At March 31, 2020 and December 31, 2019, the Company had an unrealized gain of $507,000 and $530,000, respectively, attributable to two terminated interest rate swaps, in accumulated other comprehensive (loss) income on the consolidated balance sheets, to be accreted into earnings over the remaining life of the debt. The Company recorded accretion income, reported in interest expense on the consolidated statements of operations, of  $23,000 during the three months ended March 31, 2020 and 2019 to accrete the accumulated other comprehensive income on the terminated swap agreements.

The Company had a master netting agreement with Wells Fargo at March 31, 2020. Regulations promulgated under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 mandate that the Company clear certain new interest rate swap transactions through a central counterparty. Transactions that are centrally cleared result in the Company facing a clearing house, rather than a swap dealer, as counterparty. Central clearing requires the Company to post collateral in the form of initial and variation margin to satisfy potential future obligations. The Company had no centrally cleared interest rate swaps with fair values in an asset position at March 31, 2020. At December 31, 2019, the Company had centrally cleared interest rate swaps with fair values in an asset position of $30,000. At March 31, 2020 and December 31, 2019, the Company had centrally cleared interest rate swaps with a fair value in a liability position of $11.3 million and $4.6 million, respectively.

The Company’s origination of fixed-rate CRE whole loans exposes it to market pricing risk in connection with the fluctuations of market interest rates. As market interest rates increase or decrease, the fair value of the fixed-rate CRE whole loans will decrease or increase accordingly. In order to mitigate this market price risk, the Company may enter into interest rate swap contracts in which it pays a fixed rate of interest in exchange for a variable rate of interest, usually three-month LIBOR. Unrealized gains and losses on the value of these swap contracts are recorded in other expense on the consolidated statements of operations.

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36

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EXANTAS CAPITAL CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

MARCH 31, 2020

(unaudited)

 

The following tables present the fair value of the Company’s derivative financial instruments at March 31, 2020 and December 31, 2019 on the Company’s consolidated balance sheets and the related effect of the derivative instruments on the consolidated statements of operations for the three months ended March 31, 2020 and 2019:

Fair Value of Derivative Instruments (in thousands)

 

 

 

Liability Derivatives

 

At March 31, 2020

 

Notional Amount

 

 

Consolidated Balance Sheets Location

 

Fair Value

 

Interest rate swap contracts

 

$

4,030

 

 

Derivatives, at fair value

 

$

48

 

Interest rate swap contracts, hedging (1)

 

$

92,541

 

 

Derivatives, at fair value

 

$

11,278

 

Interest rate swap contracts, hedging

 

$

92,541

 

 

Accumulated other comprehensive (loss) income

 

$

(10,771

)

 

 

 

Asset Derivatives

 

At December 31, 2019

 

Notional Amount

 

 

Consolidated Balance Sheets Location

 

Fair Value

 

Interest rate swap contracts, hedging (1)

 

$

2,630

 

 

Derivatives, at fair value

 

$

30

 

 

 

 

Liability Derivatives

 

 

 

Notional Amount

 

 

Consolidated Balance Sheets Location

 

Fair Value

 

Interest rate swap contracts, hedging (1)

 

$

87,551

 

 

Derivatives, at fair value

 

$

4,558

 

Interest rate swap contracts, hedging

 

$

90,181

 

 

Accumulated other comprehensive (loss) income

 

$

(3,999

)

 

(1)

Interest rate swap contracts are accounted for as cash flow hedges.

The Effect of Derivative Instruments on the Consolidated Statements of Operations (in thousands)

 

 

 

Derivatives

 

Three Months Ended March 31, 2020

 

Consolidated Statements of Operations Location

 

Realized and Unrealized

Gain (Loss) (1)

 

Interest rate swap contracts

 

Other (expense) income

 

$

(48

)

Interest rate swap contracts, hedging

 

Interest expense

 

$

(196

)

 

 

 

Derivatives

 

Three Months Ended March 31, 2019

 

Consolidated Statements of Operations Location

 

Realized and Unrealized

Gain (Loss)

 

Interest rate swap contracts, hedging

 

Interest expense

 

$

13

 

 

(1)

Negative values indicate a decrease to the associated consolidated statement of operations line items.

 

NOTE 18 - OFFSETTING OF FINANCIAL ASSETS AND LIABILITIES

The following table presents a summary of the Company’s offsetting of derivative assets (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(iv)

Gross Amounts Not Offset on

the Consolidated Balance Sheets

 

 

 

 

 

 

 

(i)

Gross

Amounts of

Recognized

Assets

 

 

(ii)

Gross

Amounts

Offset on the

Consolidated

Balance

Sheets

 

 

(iii) = (i) - (ii)

Net

Amounts

of Assets

Included on

the

Consolidated

Balance

Sheets

 

 

Financial

Instruments

 

 

Cash

Collateral

Pledged

 

 

(v) = (iii) -

(iv)

Net Amount

 

At December 31, 2019:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives, at fair value

 

$

30

 

 

$

—

 

 

$

30

 

 

$

—

 

 

$

—

 

 

$

30

 

There were no derivatives with a fair value in an asset position at March 31, 2020.

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37

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EXANTAS CAPITAL CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

MARCH 31, 2020

(unaudited)

 

The following table presents a summary of the Company’s offsetting of financial liabilities and derivative liabilities (in thousands, except amounts in footnotes):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(iv)

Gross Amounts Not Offset on

the Consolidated Balance Sheets

 

 

 

 

 

 

 

(i)

Gross

Amounts

of

Recognized

Liabilities

 

 

(ii)

Gross

Amounts

Offset on the

Consolidated

Balance

Sheets

 

 

(iii) = (i) - (ii)

Net

Amounts

of

Liabilities

Included on

the

Consolidated

Balance

Sheets

 

 

Financial

Instruments (1)

 

 

Cash

Collateral

Pledged

 

 

(v) = (iii) - (iv)

Net Amount

 

At March 31, 2020:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives, at fair value (2)

 

$

11,326

 

 

$

—

 

 

$

11,326

 

 

$

—

 

 

$

11,326

 

 

$

—

 

Repurchase agreements and warehouse financing facilities (3)

 

 

451,969

 

 

 

—

 

 

 

451,969

 

 

 

402,377

 

 

 

49,592

 

 

 

—

 

Total

 

$

463,295

 

 

$

—

 

 

$

463,295

 

 

$

402,377

 

 

$

60,918

 

 

$

—

 

At December 31, 2019:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives, at fair value (2)

 

$

4,558

 

 

$

—

 

 

$

4,558

 

 

$

—

 

 

$

4,558

 

 

$

—

 

Repurchase agreements and warehouse financing facilities (3)

 

 

919,805

 

 

 

—

 

 

 

919,805

 

 

 

915,041

 

 

 

4,764

 

 

 

—

 

Total

 

$

924,363

 

 

$

—

 

 

$

924,363

 

 

$

915,041

 

 

$

9,322

 

 

$

—

 

 

(1)

Amounts represent financial instruments pledged that are available to be offset against liability balances associated with term warehouse financing facilities, repurchase agreements and derivatives.

(2)

The Company posted excess cash collateral of $4.0 million and $4.6 million related to interest rate swap contracts outstanding at March 31, 2020 and December 31, 2019, respectively.

(3)

The combined fair value of securities and loans pledged against the Company’s various repurchase agreements and term warehouse financing facilities was $558.2 million and $1.2 billion at March 31, 2020 and December 31, 2019, respectively.

All balances associated with repurchase agreements and derivatives are presented on a gross basis on the Company’s consolidated balance sheets.

Certain of the Company’s repurchase agreements and derivative transactions are governed by underlying agreements that generally provide for a right of offset in the event of default or in the event of a bankruptcy of either party to the transaction.

NOTE 19 - COMMITMENTS AND CONTINGENCIES

The Company may become involved in litigation on various matters due to the nature of the Company’s business activities. The resolution of these matters may result in adverse judgments, fines, penalties, injunctions and other relief against the Company as well as monetary payments or other agreements and obligations. In addition, the Company may enter into settlements on certain matters in order to avoid the additional costs of engaging in litigation. Except as discussed below, the Company is unaware of any contingencies arising from such litigation that would require accrual or disclosure in the consolidated financial statements at March 31, 2020.

Primary Capital Mortgage, LLC (“PCM”) is subject to potential litigation related to claims for repurchases or indemnifications on loans that PCM has sold to third parties. At March 31, 2020 and December 31, 2019, no such litigation demand was outstanding. Reserves for such litigation demands are included in the reserve for mortgage repurchases and indemnifications that totaled $1.7 million at March 31, 2020 and December 31, 2019. The reserves for mortgage repurchases and indemnifications are included in liabilities held for sale on the consolidated balance sheets.

Settled and Dismissed Litigation Matters

The Company did not have any pending litigation matters or general litigation reserve at March 31, 2020 or December 31, 2019.

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EXANTAS CAPITAL CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

MARCH 31, 2020

(unaudited)

 

The Company previously disclosed two consolidated shareholder derivative actions filed in the Court that purported to assert claims on behalf of the Company similar to the claims in the New York State Actions (defined below) (collectively, the “Federal Actions”): (a) by shareholders who declined to make a demand on the Board prior to filing suit (the “Federal Demand Futile Actions”), which comprised a suit filed in January 2017 (the “Greenberg Action”), and another suit filed in January 2017 (the “DeCaro Action”) and (b) by shareholders who served demands on the Board to bring litigation and alleged that their demands were wrongfully refused (the “Federal Demand Refused Actions”), which comprised a suit filed in February 2017 (the “McKinney Action”), a suit filed in March 2017 (the “Sherek/Speigel Action”) and a suit filed in April 2017 (the “Sebenoler Action”). In January 2019, the parties to the Federal Actions executed a stipulation and agreement of settlement (the “Federal Actions Settlement Agreement”), which received final approval from the Court on May 17, 2019. Under the Federal Actions Settlement Agreement, the Company agreed to implement certain corporate governance changes and paid $550,000 in plaintiffs’ attorneys’ fees, funded by the Company’s insurers. In exchange for the settlement consideration, the defendants were released from liability for certain claims, including all claims asserted in the Federal Actions. Among other terms and conditions, the Federal Actions Settlement Agreement provided that the defendants deny any and all allegations of wrongdoing and maintained that they have acted lawfully and in accordance with their fiduciary duties at all times.

The Company previously disclosed six separate, additional shareholder derivative suits filed in the Supreme Court of New York purporting to assert claims on behalf of the Company (the “New York State Actions”) that were filed on the following dates: December 2015 (the “Reaves Action”); February 2017 (the “Caito Action”); March 2017 (the “Simpson Action”); March 2017 (the “Heckel Action”); May 2017 (the “Schwartz Action”); and August 2017 (the “Greff Action”). Plaintiffs in the Schwartz Action and Greff Action made demands on the Company’s Board before filing suit, but plaintiffs in the Reaves Action, Caito Action, Simpson Action and Heckel Action did not. All of the shareholder derivative suits were substantially similar and alleged that certain of the Company’s current and former officers and directors breached their fiduciary duties, wasted corporate assets and/or were unjustly enriched. Certain complaints asserted additional claims against the Manager and Resource America for unjust enrichment based on allegations that the Manager received excessive management fees from the Company. In June 2019 and July 2019, the Schwartz Action and Greff Action, respectively, were dismissed. In October 2019, the four remaining New York State Actions were dismissed.

The Company previously disclosed another shareholder derivative action filed in the United States District Court for the District of Maryland against certain of the Company’s former officers and directors and the Manager (the “Hafkey Action”). The complaint asserted a breach of fiduciary duty claim that was substantially similar to the claims at issue in the Federal Actions. In May 2019, the plaintiff in the Hafkey Action voluntarily dismissed his suit in light of the settlement and dismissal of the Federal Actions.

The Company previously disclosed another shareholder derivative action filed in the Maryland Circuit Court against certain of the Company’s current and former officers and directors, as well as the Manager and Resource America (the “Canoles Action”). The complaint (as amended) in the Canoles Action asserted a variety of claims, including claims for breach of fiduciary duty, unjust enrichment and corporate waste, which were based on allegations substantially similar to those at issue in the Federal Demand Futile Actions. In July 2019, the plaintiff in the Canoles Action voluntarily dismissed his suit in light of the settlement and dismissal of the Federal Actions.

Impact of COVID-19

As discussed in Note 2, the impact of the COVID-19 pandemic in the United States and globally has, and will continue to, adversely impact the Company, its borrowers and their tenants, the properties securing its investments and the economy as a whole. The magnitude and duration of the COVID-19 pandemic could be significant and will depend on future developments, which are uncertain and cannot be predicted, including new information that may emerge about the severity of the pandemic, the extension of quarantines and restrictions on travel, the discovery of successful treatments and the ensuing reactions by consumers, companies, governmental entities and global markets. The Company recorded no contingent liabilities at March 31, 2020 in connection with the COVID-19 pandemic, however the prolonged duration and impact of the COVID-19 pandemic has had, and may continue to have, a long-term and material impact on its results of operations, financial condition and cash flows.

Other Contingencies

As part of the May 2017 sale of its equity interest in Pearlmark Mezzanine Realty Partners IV, L.P., the Company entered into an indemnification agreement pursuant to which the Company agreed to indemnify the purchaser against realized losses of up to $4.3 million on one mezzanine loan until its final maturity date in 2020. As a result of the indemnified party’s partial sale of the mezzanine loan, the maximum exposure was reduced to $536,000 in 2019. At March 31, 2020 and December 31, 2019, the Company had a contingent liability, reported in accounts payable and other liabilities on its consolidated balance sheets, of $56,000 outstanding as a reserve for probable indemnification losses. The Company did not record any additional reserve for probable losses during the three months ended March 31, 2020 and 2019.

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EXANTAS CAPITAL CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

MARCH 31, 2020

(unaudited)

 

PCM is subject to additional claims for repurchases or indemnifications on loans that PCM has sold to investors. At both March 31, 2020 and December 31, 2019, outstanding demands for indemnification, repurchase or make whole payments totaled $3.3 million. The Company’s estimated exposure for such outstanding claims, as well as unasserted claims, is included in its reserve for mortgage repurchases and indemnifications.

Unfunded Commitments

Unfunded commitments on the Company’s originated CRE loans generally fall into two categories: (1) pre-approved capital improvement projects; and (2) new or additional construction costs subject, in each case, to the borrower meeting specified criteria. Upon completion of the improvements or construction, the Company would receive additional interest income on the advanced amount. Whole loans had $113.9 million and $98.0 million in unfunded loan commitments at March 31, 2020 and December 31, 2019, respectively. Preferred equity investments had $2.9 million and $3.0 million in unfunded investment commitments at March 31, 2020 and December 31, 2019, respectively.

NOTE 20 - DISCONTINUED OPERATIONS AND ASSETS AND LIABILITIES HELD FOR SALE

In November 2016, the Company’s Board approved the Plan to focus its strategy on CRE debt investments. The Plan contemplated disposing of certain legacy CRE loans and exiting underperforming non-core asset classes and businesses, including the residential mortgage and middle market lending segments as well as the Company’s life settlement contract portfolio. The Company’s residential mortgage and middle market lending segments’ operations were classified as discontinued operations and excluded from continuing operations for all periods presented. Certain of the Company’s legacy CRE loans were classified as held for sale. As of March 31, 2020, the Company has substantially completed the execution of the Plan.

The following table summarizes the operating results of the residential mortgage and middle market lending segments’ discontinued operations as reported separately as net (loss) income from discontinued operations, net of tax for the three months ended March 31, 2020 and 2019 (in thousands):

 

 

 

For the Three Months Ended

 

 

 

March 31,

 

 

 

2020

 

 

2019

 

OPERATING EXPENSES

 

 

 

 

 

 

 

 

General and administrative

 

 

45

 

 

 

172

 

Total operating expenses

 

 

45

 

 

 

172

 

 

 

 

(45

)

 

 

(172

)

OTHER INCOME (EXPENSE)

 

 

 

 

 

 

 

 

Net realized and unrealized gain on investment securities available-for-sale and loans and derivatives

 

 

—

 

 

 

135

 

Total other income

 

 

—

 

 

 

135

 

 

 

 

 

 

 

 

 

 

(LOSS) INCOME FROM DISCONTINUED OPERATIONS BEFORE TAXES

 

 

(45

)

 

 

(37

)

Income tax expense

 

 

—

 

 

 

—

 

TOTAL (LOSS) INCOME FROM DISCONTINUED OPERATIONS

 

$

(45

)

 

$

(37

)

 

The assets and liabilities of business segments classified as discontinued operations and other assets and liabilities classified as held for sale are reported separately in the accompanying consolidated financial statements and are summarized as follows at March 31, 2020 and December 31, 2019 (in thousands):

 

 

 

March 31, 2020

 

 

December 31, 2019

 

ASSETS

 

 

 

 

 

 

 

 

Property and other assets held for sale

 

$

13,466

 

 

$

16,766

 

Total assets held for sale

 

$

13,466

 

 

$

16,766

 

LIABILITIES

 

 

 

 

 

 

 

 

Accounts payable and other liabilities

 

$

1,735

 

 

$

1,746

 

Total liabilities held for sale

 

$

1,735

 

 

$

1,746

 

 

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EXANTAS CAPITAL CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

MARCH 31, 2020

(unaudited)

 

In November 2019, the Company foreclosed on the non-performing legacy CRE loan held for sale. At March 31, 2020 and December 31, 2019, the property had a fair value of $13.2 million and $16.5 million, respectively. The property’s operating activity is included in the fair value adjustments on assets held for sale on the consolidated statements of operations and the property is currently being marketed for sale. The Company has one mezzanine loan held for sale with a par value of $38.1 million and a fair value of zero at March 31, 2020 and December 31, 2019. The mezzanine loan comprises two tranches, maturing in November 2018 and September 2021.

NOTE 21 - SUBSEQUENT EVENTS

The Company has evaluated subsequent events through the filing of this report and determined that, except as disclosed in Note 7, Note 9 and Note 17, there have not been any events that have occurred that would require adjustments to or disclosures in the consolidated financial statements.

 

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ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

The following discussion should be read in conjunction with our consolidated financial statements and accompanying notes appearing elsewhere in this report. This discussion contains forward-looking statements. Actual results could differ materially from those expressed in or implied by those forward-looking statements. Additionally, please see the sections “Forward-Looking Statements” and “Risk Factors” for a discussion of risks, uncertainties and assumptions associated with those statements included in our Annual Report on Form 10-K for the year ended December 31, 2019 as well as Part II, Item 1A. “Risk Factors” in this Form 10-Q.

We are a Maryland corporation and a real estate investment trust (“REIT”) that is primarily focused on originating, holding and managing commercial real estate (“CRE”) mortgage loans and other commercial real estate-related debt investments. We are externally managed by Exantas Capital Manager Inc. (our “Manager”), which is an indirect wholly-owned subsidiary of C-III Capital Partners LLC (“C-III”), a leading commercial real estate investment management and services company engaged in a broad range of activities. C-III is the beneficial owner of 2.4% of our outstanding shares of common stock at March 31, 2020. Our Manager draws upon the management teams of C-III and its subsidiaries and its collective investment experience to provide its services. Our objective is to provide our stockholders with total returns over time, including quarterly distributions and capital appreciation, while seeking to manage the risks associated with our investment strategies as well as to maximize long-term stockholder value by maintaining stability through our available liquidity and diversified CRE loan portfolio.

In December 2019, a novel strain of coronavirus (“COVID-19”) was identified. The resulting spread of COVID-19 throughout the globe led the World Health Organization to designate COVID-19 as a pandemic and numerous countries, including the United States, to declare national emergencies. Many countries have responded to the outbreak by instituting quarantines and restrictions on travel and limiting operations of non-essential offices and retail centers, which has resulted in the closure or remote operation of non-essential businesses and increased rates of unemployment. As a result of this unforeseen impact of COVID-19 on real estate credit markets and the larger global economy, our Manager’s employees continue to work remotely in compliance with statutory guidelines, and we continue to actively and responsibly manage corporate liquidity and operations in light of the market disruptions caused by COVID-19. Additionally, nationwide restrictions placed on most businesses in response to COVID-19 are expected to cause significant cash flow disruptions across the economy that will likely impact our borrowers and their ability to stay current with their debt obligations in the near term. We expect to use a variety of legal and structural options to manage that risk effectively, including through possible forbearance and extension provision or agreements. It is inherently difficult to accurately assess the impact of COVID-19 on our revenues, profitability and financial position due to uncertainty of the severity and duration of the pandemic. In response, in the near-term, we are focused on prudently retaining and managing sufficient excess liquidity. We, therefore, did not pay a first quarter distribution on our common and preferred shares. We continuously monitor the effects of COVID-19 on our operations and financial position to ensure that we remain responsive and adaptable to the dynamic environment that has been created by the pandemic. For additional discussion with respect to the potential impact of COVID-19 on our liquidity and capital resources, see “Liquidity and Capital Resources.”

Historically, we have maintained a portfolio of commercial mortgage-backed securities (“CMBS”), including senior and subordinated investment grade CMBS, below investment grade CMBS and unrated CMBS, that we primarily financed using short-term repurchase agreements. However, the COVID-19 pandemic produced material and previously unforeseeable liquidity shocks to the real estate credit markets. This resulted in significant changes in the liquidity and pricing of CMBS. The impact of these changes resulted in substantial margin calls from our repurchase agreement counterparties; we did not meet all of our margin calls and received written notices of default from RBC Capital Markets, LLC (“RBC”), RBC (Barbados) Trading Bank Corporation (“RBC Barbados”) and Deutsche Bank Securities Inc. (“Deutsche Bank Securities”). As a result of these circumstances, as well as the macroeconomic outlook and uncertainty caused by the COVID-19 pandemic, between March 2020 and April 2020, our portfolio of CMBS was substantially sold and settlements were reached on all of our remaining CMBS-related obligations, which were paid in full in April 2020. We recognized all losses associated with the disposition of our financed CMBS portfolio, totaling $180.3 million, at March 30, 2020. The repayment of all of our CMBS repurchase agreements in April 2020 signifies that we have no further exposure to financings related to CMBS and that no further losses will be recognized associated with the settlement of our financed CMBS portfolio.

At March 31, 2020, we retained two unencumbered CMBS securities with a collective fair value of $3.2 million for which we recognized unrealized losses of $5.1 million in our statement of operations for the three months ended March 31, 2020.

Primarily as a result of the loss on the disposition of our financed CMBS portfolio previously discussed, we would not have been in compliance with our previous minimum equity covenants on our CRE loan warehouse financing facilities at March 31, 2020. We subsequently sought and received agreements with all of our lenders that retroactively reduced our minimal equity requirements under the agreements, allowing us to comply with our minimum equity requirements at March 31, 2020. We were in compliance with all of our covenants at March 31, 2020.

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Our CRE loan portfolio, which had a $1.9 billion and $1.8 billion carrying value at March 31, 2020 and December 31, 2019, comprised:

 

•

First mortgage loans, which we refer to as whole loans. These loans are typically secured by first liens on CRE property, including the following property types: office, multifamily, self-storage, retail, hotel, healthcare, student housing, manufactured housing, industrial and mixed-use. At March 31, 2020 and December 31, 2019, our whole loans had a carrying value of $1.8 billion and $1.8 billion, respectively, or 98.6% and 98.3%, respectively of the CRE loan portfolio.

 

•

Mezzanine debt that is senior to borrower’s equity but is subordinated to other third-party debt. These loans are subordinated CRE loans, usually secured by a pledge of the borrower’s equity ownership in the entity that owns the property or by a second lien mortgage on the property. At March 31, 2020 and December 31, 2019, our mezzanine loans had a carrying value of $4.5 million and $4.7 million, respectively, or 0.2% and 0.3%, respectively of the CRE loan portfolio.

 

•

Preferred equity investments that are subordinate to first mortgage loans and mezzanine debt. These investments may be subject to more credit risk than subordinated debt but provide the potential for higher returns upon a liquidation of the underlying property and are typically structured to provide some credit enhancement differentiating it from the common equity in such investments. At March 31, 2020 and December 31, 2019, our preferred equity investments had a carrying value of $23.3 million and $26.1 million, respectively, or 1.2% and 1.4%, respectively of the CRE loan portfolio.

Our portfolio comprised loans with a diverse array of collateral types and locations. At March 31, 2020 and December 31, 2019, 83.5% and 81.6%, respectively, of our CRE loans were collateralized by multifamily, office, self-storage, manufactured housing and industrial properties, with the remaining 16.5% and 18.4%, respectively, collateralized by hotel and retail properties. These properties are located throughout the United States, with no individual National Council of Real Estate Investment Fiduciaries (“NCREIF”) region making up more than 20% of the total CRE loan portfolio at March 31, 2020 nor December 31, 2019.

We generate our income primarily from the spread between the revenues we receive from our assets and the cost to finance our ownership of those assets, including corporate debt and from hedging interest rate risks. While the CRE whole loans included in the CRE loan portfolio are entirely composed of floating-rate loans benchmarked to the London Interbank Offered Rate (“LIBOR”), asset yields are protected through the use of LIBOR floors.

Our CRE floating-rate loans have LIBOR floors and minimum interest periods that typically range from 12 to 18 months at the time of a loan’s origination. In a lower interest rate environment, our LIBOR floors provide asset yield protection when LIBOR falls below an in-place LIBOR floor. In addition, our net investment returns are enhanced by a decline in the cost of our floating-rate liabilities that do not have LIBOR floors. At March 31, 2020, our $1.9 billion floating-rate CRE loan portfolio, at par, has a weighted average LIBOR floor of 1.91% and weighted average spread over LIBOR of 3.41%.

Our CRE mezzanine loan and preferred equity investments earn interest at fixed rates.

We use leverage to enhance our returns. The cost of borrowings to finance our investments is a significant part of our expenses. Our net income net income depends on our ability to control these expenses relative to our revenue. Our CRE loans may initially be financed with term facilities, such as CRE loan warehouse financing facilities, in anticipation of their ultimate securitization. We ultimately seek to finance our CRE loans through the use of non-recourse long-term, match-funded CRE debt securitizations.

At March 31, 2020 and December 31, 2019, we had outstanding balances of $276.1 million and $544.9 million, respectively, on our CRE loan warehouse financing facilities, representing 16.0% and 29.1% of total outstanding borrowings. In April 2020, we reduced our CRE loan warehouse financing facilities’ leverage and in exchange received written confirmation from lenders representing over 90% of the outstanding balance of our CRE loan warehouse financing facilities that provides a framework for avoiding credit-based markdowns for approximately four months.

At March 31, 2020 and December 31, 2019, we had outstanding balances of $1.1 billion and $746.4 million, respectively, on CRE debt securitizations, or 63.0% and 39.9%, respectively, of total outstanding borrowings. In March 2020, we closed a CRE debt securitization that financed CRE loans of $522.6 million at a weighted average cost of LIBOR plus 1.43%.

In January 2020, we adopted updated accounting guidance that replaced the incurred loss approach with the current expected credit losses (“CECL”) model for the determination of our allowance for loan losses and impairments on our investment securities available-for-sale. Upon adoption on January 1, 2020, we recorded an initial CECL allowance of approximately $4.5 million, of which $3.0 million, or $0.10 per share, was recorded as a charge to retained earnings. The estimated CECL reserve represented 0.25% of the aggregate outstanding principal balance of our $1.8 billion commercial loan portfolio at December 31, 2019. At March 31, 2020, we reevaluated our CECL reserve, incorporating, among other inputs, updated assumptions in connection with the COVID-19 pandemic, which resulted in a $16.1 million charge to our consolidated statement of operations and a total allowance of $20.6 million at March 31, 2020.

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We use derivative financial instruments to hedge a portion of the interest rate risk associated with our borrowings. We generally seek to minimize interest rate risk with a strategy that is expected to result in the least amount of volatility under accounting principles generally accepted in the United States of America (“GAAP”) while still meeting our strategic economic objectives and maintaining adequate liquidity and flexibility. These hedging transactions may include interest rate swaps, collars, caps or floors, puts, calls and options.

In April 2020 we terminated interest rate hedges that had unrealized losses recognized in equity of $11.3 million at March 31, 2020, in conjunction with the disposition of our financed CMBS portfolio. At termination, we recognized an additional unrealized loss in equity of $475,000 that will be reflected in equity at June 30, 2020. The total realized loss of $11.8 million as of April 2020, will be amortized into interest expense over a weighted-average of six years on a straight-line basis.  

In February 2020, we announced the expansion of our CRE debt platform to include fixed-rate CRE whole loans through the integration of C-III Commercial Mortgage personnel with our Manager. In March 2020, we originated two fixed-rate CRE whole loans with total par of $4.8 million through a wholly-owned taxable REIT subsidiary. We use interest rate swaps to exchange the fixed-rate interest income received on these loans to variable rate interest in order to offset any declines in fair value attributable to the fixed rates of interest. Our fixed-rate CRE whole loans were classified as other assets on our consolidated balance sheet at March 31, 2020.

We typically targeted transitional floating-rate CRE loans between $5.0 million and $20.0 million but have temporarily curtailed our loan originations due to market uncertainties caused by the COVID-19 pandemic, making it difficult to accurately underwrite projects and project levered returns. Prior to the COVID-19 outbreak, we originated 14 floating-rate CRE whole loans with total commitments of $204.1 million for the three months ended March 31, 2020.

Common stock book value was $7.13 per share at March 31, 2020, a $6.87 per share decrease from December 31, 2019. We began reporting economic book value, a non-GAAP measure, at December 31, 2018 in an effort to improve transparency for our shareholders and the analyst community. Two adjustments are made to common stock book value to arrive at economic book value.

 

•

Our common stock book value includes the remaining aggregate value of the equity conversion options on our convertible senior notes of $7.4 million, or $(0.23) per share, at March 31, 2020. The liability balance of our convertible senior notes increases and our common stock book value is reduced as the option discounts are amortized to interest expense.

 

•

The carrying amount of our 8.625% Fixed-to-Floating Series C Cumulative Redeemable Preferred Stock (“Series C Preferred Stock”) of $116.0 million does not reflect the full obligation of $120.0 million, which is the balance on which we pay preferred distributions and would be the amount due should we choose to redeem the Series C Preferred Stock. Adjusting for this $4.0 million difference, common stock book value would be reduced by $(0.13) per share at March 31, 2020.

Adjusting for these two items yields economic book value of $6.77 per share at March 31, 2020.

Impact of COVID-19

As discussed in the “Overview” above, the impact of the COVID-19 pandemic in the United States and globally has, and will continue to, adversely impact us, our borrowers and their tenants, the properties securing our investments and the economy as a whole. The magnitude and duration of the COVID-19 pandemic could be significant and will depend on future developments, which are uncertain and cannot be predicted, including new information that may emerge about the severity of the pandemic, the extension of quarantines and restrictions on travel, the discovery of successful treatments and the ensuing reactions by consumers, companies, governmental entities and global markets. The impact of the pandemic has had, and we expect will continue to have, a long-term and material impact on our results of operations, financial condition and our liquidity and capital resources in the first quarter of 2020 and in future quarters. Further discussion of the potential impacts on our business from the COVID-19 pandemic is provided below in the section entitled “Risk Factors” in Part II, Item 1A of this Quarterly Report on Form 10-Q.

Results of Operations

Our net loss allocable to common shares for the three months ended March 31, 2020 was $199.1 million, or $(6.30) per share-basic ($(6.30) per share-diluted) as compared to net income allocable to common shares for the three months ended March 31, 2019 of $5.5 million, or $0.18 per share-basic ($0.18 per share-diluted).

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Net Interest Income

The following tables analyze the change in interest income and interest expense for the comparative three months ended March 31, 2020 and 2019 by changes in volume and changes in rates. The changes attributable to the combined changes in volume and rate have been allocated proportionately, based on absolute values, to the changes due to volume and changes due to rates (dollars in thousands, except amounts in footnotes):

 

 

 

Three Months Ended March 31, 2020 Compared to Three Months Ended March 31, 2019

 

 

 

 

 

 

 

 

 

 

 

Due to Changes in

 

 

 

Net Change

 

 

Percent Change (1)

 

 

Volume

 

 

Rate

 

Increase (decrease) in interest income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CRE whole loans, floating-rate (2)

 

$

(444

)

 

 

(2

)%

 

$

3,465

 

 

$

(3,909

)

Legacy CRE loans (2)(3)

 

 

(74

)

 

 

(32

)%

 

 

(61

)

 

 

(13

)

CRE mezzanine loan

 

 

1

 

 

 

1

%

 

 

1

 

 

 

—

 

CRE preferred equity investments (2)

 

 

215

 

 

 

38

%

 

 

221

 

 

 

(6

)

Securities (4)

 

 

(226

)

 

 

(4

)%

 

 

435

 

 

 

(661

)

Other

 

 

(114

)

 

 

(53

)%

 

 

(114

)

 

 

—

 

Total decrease in interest income

 

 

(642

)

 

 

(2

)%

 

 

3,947

 

 

 

(4,589

)

Increase (decrease) in interest expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securitized borrowings: (5)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

RCC 2017-CRE5 Senior Notes

 

 

(1,368

)

 

 

(100

)%

 

 

(1,363

)

 

 

(5

)

XAN 2018-RSO6 Senior Notes

 

 

(2,145

)

 

 

(53

)%

 

 

(1,694

)

 

 

(451

)

XAN 2019-RSO7 Senior Notes

 

 

4,663

 

 

 

100

%

 

 

4,663

 

 

 

—

 

XAN 2020-RSO8 Senior Notes

 

 

528

 

 

 

100

%

 

 

528

 

 

 

—

 

Unsecured junior subordinated debentures

 

 

(101

)

 

 

(12

)%

 

 

—

 

 

 

(101

)

Convertible senior notes: (5)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4.50% Convertible Senior Notes

 

 

73

 

 

 

3

%

 

 

73

 

 

 

—

 

8.00% Convertible Senior Notes

 

 

(400

)

 

 

(83

)%

 

 

(400

)

 

 

—

 

CRE - term warehouse financing facilities (5)

 

 

(1,451

)

 

 

(21

)%

 

 

(375

)

 

 

(1,076

)

Trust certificates - term repurchase facilities (5)

 

 

(801

)

 

 

(100

)%

 

 

(801

)

 

 

—

 

CMBS - short term repurchase agreements

 

 

(208

)

 

 

(8

)%

 

 

501

 

 

 

(709

)

Hedging

 

 

209

 

 

 

(1608

)%

 

 

209

 

 

 

—

 

Total decrease in interest expense

 

 

(1,001

)

 

 

(5

)%

 

 

1,341

 

 

 

(2,342

)

Net increase (decrease) in net interest income

 

$

359

 

 

 

 

 

 

$

2,606

 

 

$

(2,247

)

 

(1)

Percent change is calculated as the net change divided by the respective interest income or interest expense for the three months ended March 31, 2019.

(2)

Includes decreases in fee income of approximately $320,000 and $61,000 recognized on our floating-rate CRE whole loans and our legacy CRE loans, respectively, and an increase of $26,000 on our CRE preferred equity investments that were due to changes in volume.

(3)

Includes the change in interest income recognized on one legacy CRE loan with an amortized cost of $11.5 million at March 31, 2020 and December 31, 2019 classified as a CRE loan on the consolidated balance sheets.

(4)

Includes a decrease of net accretion income of approximately $113,000 that was due to changes in volume.

(5)

Includes increases of net amortization expense of approximately $285,000 and $26,000 on our securitized borrowings and our convertible senior notes, respectively, and decreases of approximately $8,000 and $39,000 on our CRE - term warehouse financing facilities and trust certificates - term repurchase facilities, respectively, that were due to changes in volume.

Net Change in Interest Income for the Comparative Three Months Ended March 31, 2020 and 2019:

Aggregate interest income decreased by $642,000 for the comparative three months ended March 31, 2020 and 2019. We attribute the changes to the following:

CRE whole loans, floating-rate. The decrease of $444,000 for the comparative three months ended March 31, 2020 and 2019 was primarily attributable to decreases in the yields on floating-rate CRE whole loans, attributable to declines in the spreads on the originated CRE whole loans over the comparative periods and to a decrease in one-month LIBOR, the benchmark interest rate for our floating-rate CRE whole loans, over the comparative periods. The effect of the decrease in LIBOR over the comparative periods is mitigated by our LIBOR floors, which provide asset yield protection. At March 31, 2020, our floating-rate CRE whole loan portfolio had a weighted average LIBOR floor of 1.91%. The rate decreases were partially offset by an increase in the outstanding balance of CRE whole loans in connection with loan originations and acquisitions net of loan repayments over the 12 months ended March 31, 2020.

CRE preferred equity investments. The increase of $215,000 for the comparative three months ended March 31, 2020 and 2019 was attributable to the closing of our June 2019 investment in a preferred equity interest with an outstanding principal balance of $6.0 million and an 11.00% interest rate at March 31, 2020.

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Securities. The decrease of $226,000 for the comparative three months ended March 31, 2020 and 2019 was primarily attributable to declines in the coupon interest rates on the floating-rate CMBS over the comparative periods. The rate decreases were offset by an increase in the average outstanding balance of CMBS over the comparative periods as we continued to invest in this portfolio prior to the impact of the COVID-19 pandemic on real estate securities markets in March 2020. In April 2020, we completed the disposition of our CMBS portfolio financed by short-term repurchase agreements and retained a residual balance of unencumbered CMBS with fair values of $3.2 million at March 31, 2020.

Net Change in Interest Expense for the Comparative Three Months Ended March 31, 2020 and 2019:

Aggregate interest expense decreased by $1.0 million for the comparative three months ended March 31, 2020 and 2019. We attribute the changes to the following:

Securitized borrowings. The net increase of $1.7 million for the comparative three months ended March 31, 2020 and 2019 was primarily attributable to the issuances of Exantas Capital Corp. 2019-RSO7, Ltd. (“XAN 2019-RSO7”) and Exantas Capital Corp. 2020-RSO8, Ltd. (“XAN 2020-RSO8”), which closed in April 2019 and March 2020, respectively. The increases were offset by the liquidation of Resource Capital Corp. 2017-CRE5, Ltd. (“RCC 2017-CRE5”) in July 2019 and paydowns on Exantas Capital Corp. 2018-RSO6, Ltd. (“XAN 2018-RSO6”) during the 12 months ended March 31, 2020.

Convertible senior notes. The net decrease of $327,000 for the comparative three months ended March 31, 2020 and 2019 was primarily attributable to the payoff of our 8.00% convertible senior notes upon maturity in January 2020.

CRE - term warehouse financing facilities. The net decrease of $1.5 million for the comparative three months ended March 31, 2020 and 2019 was primarily attributable to a decrease in the weighted average one-month LIBOR over the comparative periods and paydowns on our CRE term warehouse financing facilities in connection with the close of XAN 2020-RSO8.

Trust certificates - term repurchase facilities. The decrease of $801,000 for the comparative three months ended March 31, 2020 and 2019 was primarily attributable to the repayment of the RSO Repo SPE Trust 2017 facility in July 2019.

CMBS - short term repurchase agreements. The decrease of $208,000 for the comparative three months ended March 31, 2020 and 2019 was primarily attributable to the decrease in one-month LIBOR, the benchmark rate on our CMBS - short term repurchase facilities, over the comparative periods. The rate decrease was offset by an increase in average outstanding borrowings over the comparative periods as we continued to finance CMBS utilizing our CMBS - short-term repurchase agreements prior to the impact of the COVID-19 pandemic on real estate securities markets in March 2020. In April 2020, we paid off our remaining CMBS - short-term repurchase agreements. See the “Repurchase and Credit Facilities” section for additional information.

Hedging. The increase of $209,000 was primarily attributable to the increase in the number of contracts from 16 at March 31, 2019 to 20 at March 31, 2020 and the increased spread between the variable rate received, which was benchmarked to one-month LIBOR and decreased over the comparative periods, and the fixed rate paid over the comparative periods. In April 2020, in conjunction with the disposition of our CMBS portfolio financed with short-term repurchase agreements, we terminated all interest rate swap contracts hedging that portfolio.

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Average Net Yield and Average Cost of Funds:

The following tables present the average net yield and average cost of funds for the three months ended March 31, 2020 and 2019 (dollars in thousands, except amounts in footnotes):

 

 

 

For the Three Months Ended March 31, 2020

 

 

For the Three Months Ended March 31, 2019

 

 

 

Average Balance

 

 

Interest Income (Expense)

 

 

Average Net Yield (Cost of Funds) (1)

 

 

Average Balance

 

 

Interest Income (Expense)

 

 

Average Net Yield (Cost of Funds) (1)

 

Interest-earning assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CRE whole loans, floating-rate (2)

 

$

1,780,115

 

 

$

25,979

 

 

 

5.85

%

 

$

1,531,364

 

 

$

26,423

 

 

 

7.00

%

Legacy CRE loans (2)

 

 

11,516

 

 

 

159

 

 

 

5.54

%

 

 

38,726

 

 

 

233

 

 

 

2.44

%

CRE mezzanine loan

 

 

4,700

 

 

 

118

 

 

 

9.97

%

 

 

4,700

 

 

 

117

 

 

 

9.97

%

CRE preferred equity investments (2)

 

 

26,294

 

 

 

785

 

 

 

11.98

%

 

 

19,618

 

 

 

570

 

 

 

11.79

%

Securities (3)

 

 

476,089

 

 

 

6,149

 

 

 

5.19

%

 

 

429,106

 

 

 

6,375

 

 

 

6.02

%

Other

 

 

6,787

 

 

 

100

 

 

 

5.85

%

 

 

18,602

 

 

 

214

 

 

 

4.59

%

Total interest income/average net yield

 

 

2,305,501

 

 

 

33,290

 

 

 

5.79

%

 

 

2,042,116

 

 

 

33,932

 

 

 

6.74

%

Interest-bearing liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Collateralized by:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CRE whole loans (4)

 

 

1,314,362

 

 

 

(12,369

)

 

 

(3.77

)%

 

 

1,004,725

 

 

 

(12,142

)

 

 

(4.90

)%

CMBS

 

 

354,853

 

 

 

(2,491

)

 

 

(2.82

)%

 

 

294,444

 

 

 

(2,699

)

 

 

(3.72

)%

General corporate debt:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unsecured junior subordinated debentures

 

 

51,548

 

 

 

(761

)

 

 

(5.84

)%

 

 

51,548

 

 

 

(862

)

 

 

(6.69

)%

4.50% Convertible Senior Notes (5)

 

 

134,056

 

 

 

(2,497

)

 

 

(7.37

)%

 

 

130,653

 

 

 

(2,424

)

 

 

(7.42

)%

8.00% Convertible Senior Notes (5)

 

 

3,491

 

 

 

(80

)

 

 

(9.07

)%

 

 

20,973

 

 

 

(480

)

 

 

(9.16

)%

Trust certificates - term repurchase facilities (6)

 

 

—

 

 

 

—

 

 

 

—

%

 

 

47,333

 

 

 

(801

)

 

 

(6.86

)%

Hedging (7)

 

 

90,181

 

 

 

(196

)

 

 

(0.87

)%

 

 

81,051

 

 

 

13

 

 

 

0.06

%

Total interest expense/average cost of funds

 

$

1,948,491

 

 

 

(18,394

)

 

 

(3.77

)%

 

$

1,630,727

 

 

 

(19,395

)

 

 

(4.81

)%

Total net interest income

 

 

 

 

 

$

14,896

 

 

 

 

 

 

 

 

 

 

$

14,537

 

 

 

 

 

 

(1)

Average net yield includes net amortization/accretion and fee income.

(2)

Includes fee income of approximately $1.4 million, $7,000 and $35,000 recognized on our floating-rate CRE whole loans, legacy CRE loan and our CRE preferred equity investments, respectively, for the three months ended March 31, 2020 and approximately $1.8 million, $69,000 and $10,000 on our CRE whole loans, legacy CRE loans and our CRE preferred equity investment, respectively, for the three months ended March 31, 2019.

(3)

Includes net accretion income of approximately $616,000 and $729,000 for the three months ended March 31, 2020 and 2019, respectively, on our CMBS securities.

(4)

Includes amortization expense of approximately $1.9 million and $1.6 million for the three months ended March 31, 2020 and 2019, respectively, on our interest-bearing liabilities collateralized by CRE whole loans.

(5)

Includes aggregated amortization expense of approximately $889,000 and $863,000 for the three months ended March 31, 2020 and 2019, respectively, on our convertible senior notes.

(6)

Includes amortization expense of approximately $39,000 for the three months ended March 31, 2019 on our trust certificates - term repurchase facilities.

(7)

Includes accretion income of approximately $23,000 for the three months ended March 31, 2020 and 2019 on two terminated interest rate swap agreements that were in a gain position at the time of termination. The remaining gains, reported in accumulated other comprehensive (loss) income on the consolidated balance sheets, will be accreted over the remaining life of the debt.

Operating Expenses

Three Months Ended March 31, 2020 as compared to Three Months Ended March 31, 2019

The following tables set forth information relating to our operating expenses for the periods presented (dollars in thousands):

 

 

 

For the Three Months Ended

 

 

 

 

 

 

 

 

 

 

 

March 31,

 

 

 

 

 

 

 

 

 

 

 

2020

 

 

2019

 

 

Dollar Change

 

 

Percent Change

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Management fees

 

$

2,117

 

 

$

2,083

 

 

$

34

 

 

 

2

%

Equity compensation

 

 

498

 

 

 

683

 

 

 

(185

)

 

 

(27

)%

General and administrative

 

 

3,382

 

 

 

2,577

 

 

 

805

 

 

 

31

%

Depreciation and amortization

 

 

15

 

 

 

24

 

 

 

(9

)

 

 

(38

)%

Provision for credit losses

 

 

16,149

 

 

 

1,025

 

 

 

15,124

 

 

 

1476

%

Total

 

$

22,161

 

 

$

6,392

 

 

$

15,769

 

 

 

247

%

 

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Aggregate operating expenses increased by $15.8 million for the comparative three months ended March 31, 2020 and 2019, respectively. We attribute the changes to the following:

General and administrative. General and administrative expenses increased by $805,000 for the comparative three months ended March 31, 2020 and 2019. The following table summarizes the information relating to our general and administrative expenses for the periods presented (dollars in thousands):

 

 

 

For the Three Months Ended

 

 

 

 

 

 

 

 

 

 

 

March 31,

 

 

 

 

 

 

 

 

 

 

 

2020

 

 

2019

 

 

Dollar Change

 

 

Percent Change

 

General and administrative:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Professional services

 

$

1,270

 

 

$

835

 

 

$

435

 

 

 

52

%

Wages and benefits

 

 

715

 

 

 

724

 

 

 

(9

)

 

 

(1

)%

Operating expenses

 

 

377

 

 

 

257

 

 

 

120

 

 

 

47

%

D&O insurance

 

 

284

 

 

 

281

 

 

 

3

 

 

 

1

%

Rent and utilities

 

 

230

 

 

 

93

 

 

 

137

 

 

 

147

%

Dues and subscriptions

 

 

215

 

 

 

120

 

 

 

95

 

 

 

79

%

Director fees

 

 

141

 

 

 

164

 

 

 

(23

)

 

 

(14

)%

Travel

 

 

124

 

 

 

70

 

 

 

54

 

 

 

77

%

Tax penalties, interest and franchise tax

 

 

26

 

 

 

33

 

 

 

(7

)

 

 

(21

)%

Total

 

$

3,382

 

 

$

2,577

 

 

$

805

 

 

 

31

%

 

The increase in general and administrative expenses for the comparative three months ended March 31, 2020 and 2019 was primarily attributable to an increase in professional services in connection with legal fees incurred in March 2020, an increase in rent and utilities and dues and subscriptions in connection with an increase in the allocation of expenses related to our fixed-rate lending business from our Manager and an increase in operating expenses in connection with an increase in bank fees over the comparative periods.

Provision for credit losses. The increase of $15.1 million in provision of credit losses for the comparative three months ended March 31, 2020 and 2019 was primarily attributable to the adoption of the CECL model as of January 1, 2020, which projected increased expected credit losses in connection with the adverse market conditions caused by the COVID-19 pandemic during the three months ended March 31, 2020.

Other Income (Expense)

Three Months Ended March 31, 2020 as compared to Three Months Ended March 31, 2019

The following tables set forth information relating to our other income (expense) incurred for the periods presented (dollars in thousands):

 

 

 

For the Three Months Ended

 

 

 

 

 

 

 

 

 

 

 

March 31,

 

 

 

 

 

 

 

 

 

 

 

2020

 

 

2019

 

 

Dollar Change

 

 

Percent Change

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net realized and unrealized loss on investment securities available-for-sale and loans and derivatives

 

 

(185,357

)

 

 

—

 

 

 

(185,357

)

 

 

100

%

Fair value adjustments on financial assets held for sale

 

 

(3,791

)

 

 

(102

)

 

 

(3,689

)

 

 

(3617

)%

Other (expense) income

 

 

(86

)

 

 

101

 

 

 

(187

)

 

 

(185

)%

Total

 

$

(189,234

)

 

$

(1

)

 

$

(189,233

)

 

 

(18923300

)%

 

Aggregate other expense decreased $189.2 million for the comparative three months ended March 31, 2020 and 2019. We attribute the changes to the following:

Net realized and unrealized loss on investment securities available-for-sale and loans and derivatives. The increase in losses of $185.4 million for the comparative three months ended March 31, 2020 and 2019 was primarily attributable to a loss of $180.3 million on the disposition of our CMBS portfolio that was financed with our CMBS - short-term repurchase facilities during the three months ended March 31, 2020. Additionally, the increase was attributable to a loss of $5.1 million recorded to mark our two remaining investment securities available-for-sale to fair value during the three months ended March 31, 2020.

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Fair value adjustments on financial assets held for sale. The change of $3.7 million during the three months ended March 31, 2020 and 2019 was primarily attributable to charges of $3.8 million, which included protective advances to cover operating losses of $491,000, recorded during the three months ended March 31, 2020. The loss included a $3.3 million fair value charge in connection with the receipt of a $13.5 million offer in April 2020 for the sale of the remaining asset held for sale, which was valued at $13.2 million after deducting estimated costs to sell of $300,000 at March 31, 2020.

Net (Loss) Income From Discontinued Operations, Net of Tax

In November 2016, our Board approved the Plan to focus our strategy on making CRE debt investments. The Plan contemplated disposing of certain underperforming legacy CRE loans, exiting underperforming non-core asset classes and businesses and maintaining a dividend policy based on sustainable earnings. We met all of the criteria to classify the operating results of the residential mortgage and middle market lending segments as discontinued operations and exclude them from continuing operations for all periods presented. In addition, we classified certain legacy CRE loans as held for sale. As of March 31, 2020, we have substantially completed the execution of the Plan.

The following table summarizes the operating results of the residential mortgage and middle market lending segments’ discontinued operations as reported separately as net (loss) income from discontinued operations, net of tax for the three months ended March 31, 2020 and 2019 (in thousands):

 

 

 

For the Three Months Ended

 

 

 

March 31,

 

 

 

2020

 

 

2019

 

OPERATING EXPENSES

 

 

 

 

 

 

 

 

General and administrative

 

 

45

 

 

 

172

 

Total operating expenses

 

 

45

 

 

 

172

 

 

 

 

(45

)

 

 

(172

)

OTHER INCOME (EXPENSE)

 

 

 

 

 

 

 

 

Net realized and unrealized gain on investment securities available-for-sale and loans and derivatives

 

 

—

 

 

 

135

 

Total other income

 

 

—

 

 

 

135

 

 

 

 

 

 

 

 

 

 

(LOSS) INCOME FROM DISCONTINUED OPERATIONS BEFORE TAXES

 

 

(45

)

 

 

(37

)

Income tax expense

 

 

—

 

 

 

—

 

TOTAL (LOSS) INCOME FROM DISCONTINUED OPERATIONS

 

$

(45

)

 

$

(37

)

 

Financial Condition

Summary

Our total assets were $2.1 billion at March 31, 2020 as compared to $2.5 billion at December 31, 2019. The decrease was primarily attributable to the disposition of our financed CMBS portfolio that was initiated in March 2020 in connection with the receipt of default notices from certain CMBS - short-term repurchase agreement counterparties (see “Repurchase and Credit Facilities”) and the macroeconomic outlook and uncertainty caused by the COVID-19 pandemic.

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Investment Portfolio

The tables below summarize the amortized cost and net carrying amount of our investment portfolio, classified by asset type, at March 31, 2020 and December 31, 2019 as follows (dollars in thousands, except amounts in footnotes):

 

At March 31, 2020

 

Amortized Cost

 

 

Net Carrying Amount

 

 

Percent of Portfolio

 

 

Weighted Average Coupon

 

Loans held for investment:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CRE whole loans, floating-rate (1)

 

$

1,861,260

 

 

$

1,844,003

 

 

 

94.31

%

 

5.37%

 

CRE mezzanine loan (1)

 

 

4,700

 

 

 

4,508

 

 

 

0.23

%

 

10.00%

 

CRE preferred equity investments (1)

 

 

26,526

 

 

 

23,334

 

 

 

1.19

%

 

11.39%

 

 

 

 

1,892,486

 

 

 

1,871,845

 

 

 

95.73

%

 

 

 

 

Investment securities available-for-sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CMBS, floating-rate

 

 

36,152

 

 

 

36,046

 

 

 

1.84

%

 

3.94%

 

CMBS, fixed-rate

 

 

41,198

 

 

 

41,198

 

 

 

2.11

%

 

3.85%

 

 

 

 

77,350

 

 

 

77,244

 

 

 

3.95

%

 

 

 

 

Other investments: (2)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investments in unconsolidated entities

 

 

1,548

 

 

 

1,548

 

 

 

0.08

%

 

N/A (4)

 

CRE whole loans, fixed-rate (3)

 

 

4,838

 

 

 

4,730

 

 

 

0.24

%

 

4.44%

 

 

 

 

6,386

 

 

 

6,278

 

 

 

0.32

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total investment portfolio

 

$

1,976,222

 

 

$

1,955,367

 

 

 

100.00

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At December 31, 2019

 

Amortized Cost

 

 

Net Carrying Amount

 

 

Percent of Portfolio

 

 

Weighted Average Coupon

 

Loans held for investment:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CRE whole loans, floating-rate (1)

 

$

1,760,597

 

 

$

1,759,137

 

 

 

76.08

%

 

5.52%

 

CRE mezzanine loan

 

 

4,700

 

 

 

4,700

 

 

 

0.20

%

 

10.00%

 

CRE preferred equity investment

 

 

26,148

 

 

 

26,148

 

 

 

1.13

%

 

11.39%

 

 

 

 

1,791,445

 

 

 

1,789,985

 

 

 

77.41

%

 

 

 

 

Investment securities available-for-sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CMBS, floating-rate

 

 

382,659

 

 

 

382,675

 

 

 

16.55

%

 

4.39%

 

CMBS, fixed-rate

 

 

132,235

 

 

 

138,039

 

 

 

5.97

%

 

4.10%

 

 

 

 

514,894

 

 

 

520,714

 

 

 

22.52

%

 

 

 

 

Other investments: (2)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investments in unconsolidated entities

 

 

1,548

 

 

 

1,548

 

 

 

0.07

%

 

N/A (4)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total investment portfolio

 

$

2,307,887

 

 

$

2,312,247

 

 

 

100.00

%

 

 

 

 

 

(1)

Net carrying amount includes an allowance for credit losses of $20.6 million and $1.5 million at March 31, 2020 and December 31, 2019, respectively.

(2)

Excludes one asset held for sale at March 31, 2020 and December 31, 2019.

(3)

Classified as other assets on the consolidated balance sheet.

(4)

There are no stated rates associated with these investments.

CRE loans. During the three months ended March 31, 2020, we originated $204.1 million of floating-rate CRE whole loan commitments (of which $23.7 million was unfunded loan commitments), funded $11.4 million of previously unfunded loan commitments and received $90.2 million of payoffs and paydowns.

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The following is a summary of our loans (dollars in thousands, except amounts in footnotes):

 

Description

 

Quantity

 

 

Principal

 

 

Unamortized (Discount) Premium, net (1)

 

 

Amortized Cost

 

 

Allowance for Credit Losses

 

 

Carrying Value

 

 

Contractual Interest

Rates

 

 

Maturity Dates (2)(3)

At March 31, 2020:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CRE loans held for investment:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Whole loans, floating-rate (4)(5)

 

 

119

 

 

$

1,869,800

 

 

$

(8,540

)

 

$

1,861,260

 

 

$

(17,257

)

 

$

1,844,003

 

 

1M LIBOR

plus 2.70% to 1M LIBOR

plus 6.25%

 

 

April 2020 to October 2023

Mezzanine loan

 

 

1

 

 

 

4,700

 

 

 

—

 

 

 

4,700

 

 

 

(192

)

 

 

4,508

 

 

10.00%

 

 

June 2028

Preferred equity investments (see Note

3) (5)(6)(7)

 

 

2

 

 

 

26,579

 

 

 

(53

)

 

 

26,526

 

 

 

(3,192

)

 

 

23,334

 

 

11.00% to 11.50%

 

 

June 2022 to April 2023

Total CRE loans held for investment

 

 

 

 

 

$

1,901,079

 

 

$

(8,593

)

 

$

1,892,486

 

 

$

(20,641

)

 

$

1,871,845

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At December 31, 2019:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CRE loans held for investment:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Whole loans, floating-rate (4)(5)

 

 

112

 

 

$

1,768,322

 

 

$

(7,725

)

 

$

1,760,597

 

 

$

(1,460

)

 

$

1,759,137

 

 

1M LIBOR

plus 2.70% to 1M LIBOR

plus 6.25%

 

 

January 2020 to October 2023

Mezzanine loan

 

 

1

 

 

 

4,700

 

 

 

—

 

 

 

4,700

 

 

 

—

 

 

 

4,700

 

 

10.00%

 

 

June 2028

Preferred equity investment (see Note

3) (5)(6)(7)

 

 

2

 

 

 

26,237

 

 

 

(89

)

 

 

26,148

 

 

 

—

 

 

 

26,148

 

 

11.00% to 11.50%

 

 

June 2022 to April 2023

Total CRE loans held for investment

 

 

 

 

 

$

1,799,259

 

 

$

(7,814

)

 

$

1,791,445

 

 

$

(1,460

)

 

$

1,789,985

 

 

 

 

 

 

 

 

 

(1)

Amounts include unamortized loan origination fees of $9.6 million and $9.1 million and deferred amendment fees of $23,000 and $72,000 at March 31, 2020 and December 31, 2019, respectively. Additionally, the amounts include unamortized loan acquisition costs of $1.0 million and $1.3 million at March 31, 2020 and December 31, 2019.

(2)

Maturity dates exclude contractual extension options, subject to the satisfaction of certain terms that may be available to the borrowers.

(3)

Maturity dates exclude one whole loan, with an amortized cost of $11.5 million, in maturity default and performing with respect to debt service due in accordance with a forbearance agreement at March 31, 2020 and December 31, 2019.

(4)

Substantially all loans are pledged as collateral under various borrowings at March 31, 2020 and December 31, 2019.

(5)

Floating-rate CRE whole loans had $113.9 million and $98.0 million in unfunded loan commitments at March 31, 2020 and December 31, 2019, respectively. Preferred equity investments had $2.9 million and $3.0 million in unfunded commitments at March 31, 2020 and December 31, 2019. These unfunded loan commitments are advanced as the borrowers formally request additional funding and meet certain benchmarks, as permitted under the loan agreement, and any necessary approvals have been obtained.

(6)

The interest rate on our preferred equity investments pay currently at 8.00%. The remaining interest is deferred until maturity.

(7)

Beginning in April 2023, we have the right to unilaterally force the sale of Prospect Hackensack JV LLC’s underlying property. Beginning in June 2022, we have the right to unilaterally force the sale of WC Newhall MM, LLC’s underlying property.

At March 31, 2020, approximately 20.1%, 19.0% and 17.7% of our CRE loan portfolio was concentrated in the Mountain, Southwest and Southeast regions, respectively, based on carrying value, as defined by the NCREIF. At December 31, 2019, approximately 19.5%, 19.4% and 17.6% of our CRE loan portfolio was concentrated in the Mountain, Southwest and Southeast regions, respectively, based on carrying value.

CMBS. Beginning in the first quarter of 2020, the COVID-19 pandemic produced material and previously unforeseeable liquidity shocks to credit markets. As a result of the receipt of default notices with respect to some of our CMBS (see “Repurchase and Credit Facilities”) and the uncertainty caused by the COVID-19 pandemic, we disposed of our entire CMBS portfolio, except for two CMBS securities with an amortized cost and fair value of $3.2 million, as of April 20, 2020.

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The following table summarizes our CMBS investments earning coupon interest at fixed-rates or floating-rates at March 31, 2020 and December 31, 2019 (dollars in thousands, except amounts in the footnote):

 

 

 

Face Value

 

 

Amortized Cost

 

 

Fair Value

 

 

Coupon Rates

At March 31, 2020:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CMBS, fixed-rate (1)

 

$

113,278

 

 

$

36,152

 

 

$

36,046

 

 

3.00% - 4.50%

CMBS, floating-rate

 

 

80,659

 

 

 

41,198

 

 

 

41,198

 

 

3.39% - 4.49%

Total

 

$

193,937

 

 

$

77,350

 

 

$

77,244

 

 

 

At December 31, 2019:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CMBS, fixed-rate (1)

 

$

199,701

 

 

$

132,235

 

 

$

138,039

 

 

2.88% - 8.48%

CMBS, floating-rate

 

 

382,439

 

 

 

382,659

 

 

 

382,675

 

 

3.60% - 5.70%

Total

 

$

582,140

 

 

$

514,894

 

 

$

520,714

 

 

 

 

(1)

Face value includes $25.9 million, with a total cost basis of $106,000, of CMBS that have been subject to other-than-temporarily-impairment charges at March 31, 2020 and December 31, 2019.

Investment in unconsolidated entities. Our investments in unconsolidated entities at March 31, 2020 and December 31, 2019 comprised a 100% interest in the common shares of Resource Capital Trust I (“RCT I”) and RCC Trust II (“RCT II”), respectively, with a value of $1.5 million in the aggregate, or 3.0% of each trust. We record our investments in RCT I and RCT II’s common shares as investments in unconsolidated entities using the cost method, recording dividend income when declared by RCT I and RCT II. During the three months ended March 31, 2020 and 2019, we recorded dividends from the investments in RCT I and RCT II’s common shares, reported in other revenue on the consolidated statement of operations, of $23,000 and $26,000, respectively.

Financing Receivables

The following tables show the activity in the allowance for credit losses for the three months ended March 31, 2020 and year ended December 31, 2019 (in thousands, except amount in the footnotes):

 

 

 

Three Months Ended March 31, 2020

 

 

Year Ended December 31, 2019

 

 

 

CRE Loans

 

 

CRE Loans (1)

 

Allowance for credit losses:

 

 

 

 

 

 

 

 

Allowance for credit losses at beginning of period

 

$

1,460

 

 

$

1,401

 

Adoption of the new accounting guidance

 

 

3,032

 

 

 

—

 

Provision for credit losses (2)

 

 

16,149

 

 

 

59

 

Allowance for credit losses at end of period

 

$

20,641

 

 

$

1,460

 

 

(1)

The Company’s mezzanine loan and preferred equity investments were evaluated individually for impairment during the year ended December 31, 2019 and were determined to have no evidence of impairment.

(2)

Excludes the recovery of credit losses on one bank loan with no amortized cost or carrying value at March 31, 2020 and December 31, 2019 that received a payment of approximately $1,000 during the year ended December 31, 2019.

The COVID-19 pandemic had a significant impact on the losses assumed in our CECL computations at March 31, 2020. CECL losses in the CRE loan portfolio were negatively impacted by higher expected unemployment and increased volatility in CRE asset pricing and liquidity.

Credit quality indicators

Commercial Real Estate Loans

CRE loans are collateralized by a diversified mix of real estate properties and are assessed for credit quality based on the collective evaluation of several factors, including but not limited to: collateral performance relative to underwritten plan, time since origination, current implied and/or reunderwritten LTV ratios, loan structure and exit plan. Depending on the loan’s performance against these various factors, loans are rated on a scale from 1 to 5, with loans rated 1 representing loans with the highest credit quality and loans rated 5 representing loans with the lowest credit quality. The factors evaluated provide general criteria to monitor credit migration in our loan portfolio; as such, a loan’s rating may improve or worsen, depending on new information received.

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The criteria set forth below should be used as general guidelines and, therefore, not every loan will have all of the characteristics described in each category below.

 

Risk Rating

 

Risk Characteristics

 

 

 

1

 

• Property performance has surpassed underwritten expectations.

 

 

• Occupancy is stabilized, the property has had a history of consistently high occupancy, and the property has a diverse and high quality tenant mix.

 

 

 

2

 

• Property performance is consistent with underwritten expectations and covenants and performance criteria are being met or exceeded.

 

 

• Occupancy is stabilized, near stabilized or is on track with underwriting.

 

 

 

3

 

• Property performance lags behind underwritten expectations.

 

 

• Occupancy is not stabilized and the property has some tenancy rollover.

 

 

 

4

 

• Property performance significantly lags behind underwritten expectations. Performance criteria and loan covenants have required occasional waivers.

 

 

• Occupancy is not stabilized and the property has a large amount of tenancy rollover.

 

 

 

5

 

• Property performance is significantly worse than underwritten expectations. The loan is not in compliance with loan covenants and performance criteria and may be in default. Expected sale proceeds would not be sufficient to pay off the loan at maturity.

 

 

• The property has a material vacancy rate and significant rollover of remaining tenants.

 

 

• An updated appraisal is required upon designation and updated on an as-needed basis.

All CRE loans are evaluated for any credit deterioration by debt asset management and certain finance personnel on at least a quarterly basis. Mezzanine loans and preferred equity investments may experience greater credit risks due to their nature as subordinated investments.

For the purpose of calculating the quarterly provision for credit losses under CECL, we pool CRE loans based on the underlying collateral property type and utilize a probability of default and loss given default methodology for approximately one year after which we immediately revert to a historical mean loss ratio. In order to calculate the historical mean loss ratio, we utilize our full, 13 year underwriting history in the determination of historical losses, along with the market loss history from a selected population from an engaged third-party provider’s database that were similar to our loan types, loan sizes, durations, interest rate structure and general LTV profiles.

Prior to the implementation of CECL, whole loans were first individually evaluated for impairment; and to the extent not deemed impaired, a general reserve was established. The allowance for credit loss was computed as (i) 1.5% of the aggregate face values of loans rated as a 3, plus (ii) 5.0% of the aggregate face values of loans rated as a 4, plus (iii) specific allowances measured and determined on loans individually evaluated, which were loans rated as a 5. While the overall risk rating was generally not the sole factor used in determining whether a loan was impaired, a loan with a higher overall risk rating would tend to have more adverse indicators of impairment, and therefore would be more likely to experience a credit loss.

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Credit risk profiles of CRE loans at amortized cost and legacy CRE loans held for sale at the lower of cost or fair value were as follows (in thousands, except amounts in footnotes):

 

 

 

Rating 1

 

 

Rating 2

 

 

Rating 3

 

 

Rating 4

 

 

Rating 5

 

 

Total (1)

 

At March 31, 2020:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Whole loans, floating-rate

 

$

2,427

 

 

$

1,188,767

 

 

$

531,754

 

 

$

138,312

 

 

$

—

 

 

$

1,861,260

 

Mezzanine loan

 

 

—

 

 

 

4,700

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

4,700

 

Preferred equity investments

 

 

—

 

 

 

5,910

 

 

 

20,616

 

 

 

—

 

 

 

—

 

 

 

26,526

 

Total

 

$

2,427

 

 

$

1,199,377

 

 

$

552,370

 

 

$

138,312

 

 

$

—

 

 

$

1,892,486

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At December 31, 2019:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Whole loans, floating-rate

 

$

—

 

 

$

1,660,274

 

 

$

96,475

 

 

$

3,848

 

 

$

—

 

 

$

1,760,597

 

Mezzanine loan (2)

 

 

—

 

 

 

4,700

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

4,700

 

Preferred equity investments (2)

 

 

—

 

 

 

26,148

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

26,148

 

Total

 

$

—

 

 

$

1,691,122

 

 

$

96,475

 

 

$

3,848

 

 

$

—

 

 

$

1,791,445

 

 

(1)

The total amortized cost of CRE loans excluded accrued interest receivable of $6.9 million and $6.7 million at March 31, 2020 and December 31, 2019, respectively.

(2)

Our mezzanine loan and preferred equity investments are evaluated individually for impairment at December 31, 2019.

Credit risk profiles of CRE loans by origination year at amortized cost were as follows (in thousands):

 

 

 

2020

 

 

2019

 

 

2018

 

 

2017

 

 

2016

 

 

Prior

 

 

Total (1)

 

At March 31, 2020:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Whole loans, floating-rate: (2)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rating 1

 

$

—

 

 

$

2,427

 

 

$

—

 

 

$

—

 

 

$

—

 

 

$

—

 

 

$

2,427

 

Rating 2

 

 

178,514

 

 

 

526,390

 

 

 

412,521

 

 

 

71,342

 

 

 

—

 

 

 

—

 

 

 

1,188,767

 

Rating 3

 

 

—

 

 

 

160,006

 

 

 

250,569

 

 

 

94,471

 

 

 

—

 

 

 

26,708

 

 

 

531,754

 

Rating 4

 

 

—

 

 

 

8,393

 

 

 

70,867

 

 

 

56,756

 

 

 

—

 

 

 

2,296

 

 

 

138,312

 

Total whole loans, floating-rate

 

 

178,514

 

 

 

697,216

 

 

 

733,957

 

 

 

222,569

 

 

 

—

 

 

 

29,004

 

 

 

1,861,260

 

Mezzanine loan (rating 2)

 

 

—

 

 

 

—

 

 

 

4,700

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

4,700

 

Preferred equity investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rating 2

 

 

—

 

 

 

5,910

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

5,910

 

Rating 3

 

 

—

 

 

 

—

 

 

 

20,616

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

20,616

 

Total preferred equity investments

 

 

—

 

 

 

5,910

 

 

 

20,616

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

26,526

 

Total

 

$

178,514

 

 

$

703,126

 

 

$

759,273

 

 

$

222,569

 

 

$

—

 

 

$

29,004

 

 

$

1,892,486

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2019

 

 

2018

 

 

2017

 

 

2016

 

 

2015

 

 

Prior

 

 

Total (1)

 

At December 31, 2019:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Whole loans, floating-rate: (2)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rating 2

 

$

669,947

 

 

$

776,078

 

 

$

202,577

 

 

$

—

 

 

$

—

 

 

$

11,672

 

 

$

1,660,274

 

Rating 3

 

 

21,593

 

 

 

—

 

 

 

37,008

 

 

 

—

 

 

 

17,471

 

 

 

20,403

 

 

 

96,475

 

Rating 4

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

3,848

 

 

 

—

 

 

 

3,848

 

Total whole loans, floating-rate

 

 

691,540

 

 

 

776,078

 

 

 

239,585

 

 

 

—

 

 

 

21,319

 

 

 

32,075

 

 

 

1,760,597

 

Mezzanine loan (rating 2)

 

 

—

 

 

 

4,700

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

4,700

 

Preferred equity investments (rating 2)

 

 

5,741

 

 

 

20,407

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

26,148

 

Total

 

$

697,281

 

 

$

801,185

 

 

$

239,585

 

 

$

—

 

 

$

21,319

 

 

$

32,075

 

 

$

1,791,445

 

 

(1)

The total amortized cost of CRE loans excluded accrued interest receivable of $6.9 million and $6.7 million at March 31, 2020 and December 31, 2019, respectively.

(2)

Acquired CRE whole loans are grouped within each loan’s year of issuance.

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In November 2019, we foreclosed on our remaining legacy CRE loan included in assets held for sale, and obtained ownership of the underlying property, which remains classified as an asset held for sale on the consolidated balance sheets, recorded at the lower of cost or fair market value. In April 2020, we received a $13.5 million offer for the sale of the asset held for sale. Net of approximately $300,000 of estimated costs to sell, the asset was valued at $13.2 million. An appraisal was received on the property in February 2020 and concluded its fair value, less estimated costs to sell, was $16.5 million, the effect of which was recorded as of December 31, 2019. At March 31, 2020 and December 31, 2019, the CRE asset held for sale had total carrying values of $13.2 million and $16.5 million, respectively.

During the three months ended March 31, 2020 and 2019, we incurred fair value adjustments on the remaining CRE asset held for sale to reduce the carrying value of $3.8 million and $102,000, respectively, which included protective advances to cover borrower operating losses of $491,000 and $102,000, respectively. The adjustments for the three months ended March 31, 2020 included a $3.3 million fair value charge in connection with the updated fair value.

At March 31, 2020 and December 31, 2019, we had one mezzanine loan included in assets held for sale that had no fair value.

During the three months ended March 31, 2020, we recorded a provision of $16.1 million, primarily attributable to the increase of expected credit losses, estimated using our CECL model, in connection with adverse market conditions caused by the COVID-19 pandemic. During the three months ended March 31, 2019, we recorded a general provision of $1.0 million using the previous incurred losses methodology, primarily attributable to four loans, which migrated from a rating of 2 to a rating of 3, in which performance lagged behind underwritten expectations.

Loan Portfolios Aging Analysis

The following table presents the CRE loan portfolio aging analysis as of the dates indicated for CRE loans at amortized cost (in thousands, except amounts in footnotes):

 

 

 

30-59 Days

 

 

60-89 Days

 

 

Greater than 90 Days (1)

 

 

Total Past Due

 

 

Current

 

 

Total Loans Receivable (2)

 

 

Total Loans > 90 Days and Accruing (1)

 

At March 31, 2020:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Whole loans, floating-rate

 

$

—

 

 

$

—

 

 

$

11,511

 

 

$

11,511

 

 

$

1,849,749

 

 

$

1,861,260

 

 

$

11,511

 

Mezzanine loan

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

4,700

 

 

 

4,700

 

 

 

—

 

Preferred equity investments

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

26,526

 

 

 

26,526

 

 

 

—

 

Total

 

$

—

 

 

$

—

 

 

$

11,511

 

 

$

11,511

 

 

$

1,880,975

 

 

$

1,892,486

 

 

$

11,511

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At December 31, 2019:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Whole loans, floating-rate

 

$

—

 

 

$

—

 

 

$

11,503

 

 

$

11,503

 

 

$

1,749,094

 

 

$

1,760,597

 

 

$

11,503

 

Mezzanine loan

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

4,700

 

 

 

4,700

 

 

 

—

 

Preferred equity investment

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

26,148

 

 

 

26,148

 

 

 

—

 

Total

 

$

—

 

 

$

—

 

 

$

11,503

 

 

$

11,503

 

 

$

1,779,942

 

 

$

1,791,445

 

 

$

11,503

 

 

 

(1)

Includes one whole loan, with an amortized cost of $11.5 million, which was in maturity default at March 31, 2020 and December 31, 2019. The loan is performing with respect to debt service due in accordance with a forbearance agreement at March 31, 2020 and December 31, 2019. During the three months ended March 31, 2020 and 2019, we recognized interest income of $159,000 and $165,000 and, respectively, on this whole loan.

(2)

The total amortized cost of CRE loans excluded accrued interest receivable of $6.9 million and $6.7 million at March 31, 2020 and December 31, 2019, respectively.

Troubled-Debt Restructurings (“TDRs”)

There were no TDRs for the three months ended March 31, 2020 and 2019.

Restricted Cash

At March 31, 2020, we had restricted cash of $65.4 million, which consisted of $62.3 million of restricted cash held as margin, $3.1 million held within four of our six consolidated securitization entities and $25,000 held in various reserve accounts. At December 31, 2019, we had restricted cash of $14.5 million, which consisted of $13.9 million of restricted cash held as margin, $532,000 held within three of our five consolidated securitizations and $22,000 held in various reserve accounts. The increase of $50.9 million was primarily attributable to an increase in margin requirements on our CMBS - short-term repurchase agreements in connection with the declines in the pricing caused by the impact of the COVID-19 pandemic on real estate securities markets, of our CMBS portfolio, the balance of which was used to settle all of our CMBS repurchase agreements in April 2020. Additionally, the increase was attributable to cash held at our CRE securitizations from principal repayments.

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In April 2020, we repaid all of our outstanding obligations related to our CMBS - short-term repurchase agreements as discussed in “Overview.” In conjunction with that repayment, we used $46.9 million of posted margin that was classified as restricted cash at March 31, 2020.

Accrued Interest Receivable

The following table summarizes our accrued interest receivable at March 31, 2020 and December 31, 2019 (in thousands):

 

 

March 31, 2020

 

 

December 31, 2019

 

 

Net Change

 

Accrued interest receivable from loans

 

$

6,850

 

 

$

6,746

 

 

$

104

 

Accrued interest receivable from securities

 

 

274

 

 

 

1,133

 

 

 

(859

)

Accrued interest receivable from escrow, sweep and reserve accounts

 

 

185

 

 

 

163

 

 

 

22

 

Total

 

$

7,309

 

 

$

8,042

 

 

$

(733

)

 

The decrease of $733,000 in accrued interest receivable was primarily attributable to the decrease of $859,000 in accrued interest receivable from securities, due to the disposition of CMBS securities during the three months ended March 31, 2020.

Other Assets

The following table summarizes our other assets at March 31, 2020 and December 31, 2019 (in thousands):

 

 

 

March 31, 2020

 

 

December 31, 2019

 

 

Net Change

 

CRE fixed-rate whole loans, held for sale

 

$

4,730

 

 

$

—

 

 

$

4,730

 

Other prepaid expenses

 

 

2,448

 

 

 

835

 

 

 

1,613

 

Tax receivables and prepaid taxes

 

 

2,230

 

 

 

2,250

 

 

 

(20

)

Other receivables

 

 

121

 

 

 

116

 

 

 

5

 

Fixed assets - non real estate

 

 

74

 

 

 

89

 

 

 

(15

)

Total

 

$

9,603

 

 

$

3,290

 

 

$

6,313

 

 

The increase of $6.3 million in other assets was primarily attributable to the origination of two fixed-rate CRE whole loans during the three months ended March 31, 2020 with a total carrying value of $4.7 million at March 31, 2020. The increase in other assets was also attributable to a $1.6 million increase in other prepaid expenses, resulting from the March 2020 payment of $1.2 million for D&O insurance for the ensuing year.

Core and Non-Core Asset Classes

Our investment strategy targets the following core asset class:

 

Core Asset Class

 

Principal Investments

Commercial real estate-related assets

 

• First mortgage loans, which we refer to as whole loans;

 

 

• First priority interests in first mortgage loans, which we refer to as A notes;

 

 

• Subordinated interests in first mortgage loans, which we refer to as B notes;

 

 

• Mezzanine debt related to CRE that is senior to the borrower’s equity position but subordinated to other third-party debt;

 

 

• Preferred equity investments related to CRE that are subordinate to first mortgage loans and are not collateralized by the property underlying the investment;

 

 

• CMBS; and

 

 

• CRE equity investments.

 

In November 2016, our Board approved the Plan to focus our strategy on CRE debt investments. The Plan contemplated disposing of certain legacy CRE debt investments, exiting underperforming non-core asset classes and businesses and maintaining a dividend policy based on sustainable earnings. Legacy CRE loans are loans underwritten prior to 2010. The non-core asset classes in which we have historically invested are described below:

 

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Non-Core Asset Classes

 

Principal Investments

Residential real estate-related assets

 

• Residential mortgage loans; and

 

 

• Residential mortgage-backed securities, which comprise our available-for-sale portfolio.

 

 

 

Commercial finance assets

 

• Middle market secured corporate loans and preferred equity investments;

 

 

• Asset-backed securities, backed by senior secured corporate loans;

 

 

• Debt tranches of collateralized debt obligations, which we refer to as CDOs, and collateralized loan obligations, respectively, and sometimes, collectively, as CDOs;

 

 

• Structured note investments, which comprise our trading securities portfolio;

 

 

• Syndicated corporate loans; and

 

 

• Preferred equity investment in a commercial leasing enterprise that originates and holds small- and middle-ticket commercial direct financing leases and notes.

 

Assets and Liabilities Held for Sale

The assets and liabilities of business segments classified as discontinued operations and other assets and liabilities classified as held for sale are reported separately in the accompanying consolidated financial statements and are summarized as follows at March 31, 2020 and December 31, 2019 (in thousands):

 

 

 

March 31, 2020

 

 

December 31, 2019

 

ASSETS

 

 

 

 

 

 

 

 

Property and other assets held for sale

 

$

13,466

 

 

$

16,766

 

Total assets held for sale

 

$

13,466

 

 

$

16,766

 

LIABILITIES

 

 

 

 

 

 

 

 

Accounts payable and other liabilities

 

$

1,735

 

 

$

1,746

 

Total liabilities held for sale

 

$

1,735

 

 

$

1,746

 

 

Derivative Instruments

A significant market risk to us is interest rate risk. Interest rates are highly sensitive to many factors, including governmental monetary and tax policies, domestic and international economic and political considerations and other factors beyond our control. Changes in the general level of interest rates can affect net interest income, which is the difference between the interest income earned on interest-earning assets and the interest expense incurred in connection with the interest-bearing liabilities, by affecting the spread between the interest-earning assets and interest-bearing liabilities. Changes in the level of interest rates also can affect the value of our interest-earning assets and our ability to realize gains from the sale of these assets. A decline in the value of our interest-earning assets pledged as collateral for borrowings could result in the counterparties demanding additional collateral pledges or liquidation of some of the existing collateral to reduce borrowing levels.

We seek to manage the extent to which net income changes as a fluctuation of changes in interest rates by matching adjustable-rate assets with variable-rate borrowings. We seek to mitigate the potential impact on net income (loss) of adverse fluctuations in interest rates incurred on our borrowings by entering into hedging agreements.

We classify our interest rate hedges as cash flow hedges, which are hedges that eliminate the risk of changes in the cash flows of a financial asset or liability. We record changes in fair value of derivatives designated and effective as cash flow hedges in accumulated other comprehensive (loss) income, and record changes in fair value of derivatives designated and ineffective as cash flow hedges in earnings.

We also are exposed to market pricing risks in connection with our fixed-rate CRE whole loans. The increase or decrease of market interest rates cause the fair value of the fixed-rate CRE whole loans to decrease or increase. In order to mitigate this market price risk, we may enter into interest rate swap contracts in which we pay a fixed rate of interest in exchange for a variable rate benchmark, usually three-month LIBOR. Unrealized gains and losses on the value of these swap contracts are recorded in other expenses on the consolidated statements of operations.

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The following tables present the fair value of our derivative financial instruments at March 31, 2020 and December 31, 2019 on our consolidated balance sheets and the related effect of derivative instruments on the consolidated statements of operations for the three months ended March 31, 2020 and 2019:

Fair Value of Derivative Instruments (in thousands)

 

 

 

Liability Derivatives

 

At March 31, 2020

 

Notional Amount

 

 

Consolidated Balance Sheets Location

 

Fair Value

 

Interest rate swap contracts

 

$

4,030

 

 

Derivatives, at fair value

 

$

48

 

Interest rate swap contracts, hedging (1)

 

$

92,541

 

 

Derivatives, at fair value

 

$

11,278

 

Interest rate swap contracts, hedging

 

$

92,541

 

 

Accumulated other comprehensive (loss) income

 

$

(10,771

)

 

 

 

Asset Derivatives

 

At December 31, 2019

 

Notional Amount

 

 

Consolidated Balance Sheets Location

 

Fair Value

 

Interest rate swap contracts, hedging (1)

 

$

2,630

 

 

Derivatives, at fair value

 

$

30

 

 

 

 

Liability Derivatives

 

 

 

Notional Amount

 

 

Consolidated Balance Sheets Location

 

Fair Value

 

Interest rate swap contracts, hedging (1)

 

$

87,551

 

 

Derivatives, at fair value

 

$

4,558

 

Interest rate swap contracts, hedging

 

$

90,181

 

 

Accumulated other comprehensive (loss) income

 

$

(3,999

)

 

(1)

Interest rate swap contracts are accounted for as cash flow hedges.

The Effect of Derivative Instruments on the Consolidated Statements of Operations (in thousands)

 

 

 

Derivatives

 

Three Months Ended March 31, 2020

 

Consolidated Statements of Operations Location

 

Realized and Unrealized

Gain (Loss) (1)

 

Interest rate swap contracts

 

Other (expense) income

 

$

(48

)

Interest rate swap contracts, hedging

 

Interest expense

 

$

(196

)

 

 

 

Derivatives

 

Three Months Ended March 31, 2019

 

Consolidated Statements of Operations Location

 

Realized and Unrealized

Gain (Loss)

 

Interest rate swap contracts, hedging

 

Interest expense

 

$

13

 

 

(1)

Negative values indicate a decrease to the associated consolidated statement of operations line items.

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At March 31, 2020, we had 20 swap contracts outstanding in order to hedge against adverse rate movements on our one-month LIBOR borrowings. Our interest rate hedges at March 31, 2020 were as follows (dollars in thousands):

 

 

 

Benchmark Rate

 

Notional Value

 

 

Strike Rate

 

 

Effective Date

 

Maturity Date

 

Fair Value

 

Interest rate hedge

 

One-month LIBOR

 

$

3,010

 

 

 

2.02

%

 

6/18/2017

 

1/18/2026

 

$

(278

)

Interest rate hedge

 

One-month LIBOR

 

 

3,640

 

 

 

2.15

%

 

8/18/2017

 

3/18/2027

 

 

(417

)

Interest rate hedge

 

One-month LIBOR

 

 

4,025

 

 

 

2.09

%

 

8/18/2017

 

10/18/2026

 

 

(426

)

Interest rate hedge

 

One-month LIBOR

 

 

13,550

 

 

 

2.09

%

 

10/18/2017

 

9/18/2027

 

 

(1,583

)

Interest rate hedge

 

One-month LIBOR

 

 

7,500

 

 

 

2.20

%

 

10/18/2017

 

9/18/2027

 

 

(936

)

Interest rate hedge

 

One-month LIBOR

 

 

2,820

 

 

 

2.77

%

 

3/18/2018

 

3/18/2028

 

 

(498

)

Interest rate hedge

 

One-month LIBOR

 

 

2,571

 

 

 

2.86

%

 

5/18/2018

 

3/18/2028

 

 

(473

)

Interest rate hedge

 

One-month LIBOR

 

 

3,720

 

 

 

2.86

%

 

5/18/2018

 

11/18/2025

 

 

(513

)

Interest rate hedge

 

One-month LIBOR

 

 

7,325

 

 

 

2.80

%

 

7/18/2018

 

1/18/2026

 

 

(1,006

)

Interest rate hedge

 

One-month LIBOR

 

 

4,300

 

 

 

2.80

%

 

7/18/2018

 

1/18/2026

 

 

(591

)

Interest rate hedge

 

One-month LIBOR

 

 

2,300

 

 

 

2.85

%

 

7/18/2018

 

2/18/2027

 

 

(373

)

Interest rate hedge

 

One-month LIBOR

 

 

4,020

 

 

 

2.76

%

 

7/18/2018

 

7/18/2026

 

 

(583

)

Interest rate hedge

 

One-month LIBOR

 

 

4,020

 

 

 

2.76

%

 

7/18/2018

 

7/18/2026

 

 

(583

)

Interest rate hedge

 

One-month LIBOR

 

 

4,420

 

 

 

2.89

%

 

8/18/2018

 

7/18/2028

 

 

(853

)

Interest rate hedge

 

One-month LIBOR

 

 

7,330

 

 

 

2.85

%

 

8/18/2018

 

12/18/2026

 

 

(1,166

)

Interest rate hedge

 

One-month LIBOR

 

 

6,500

 

 

 

2.72

%

 

9/18/2018

 

7/18/2022

 

 

(368

)

Interest rate hedge

 

One-month LIBOR

 

 

4,770

 

 

 

2.17

%

 

5/18/2019

 

7/18/2022

 

 

(209

)

Interest rate hedge

 

One-month LIBOR

 

 

1,730

 

 

 

1.87

%

 

7/18/2019

 

6/18/2029

 

 

(201

)

Interest rate hedge

 

One-month LIBOR

 

 

2,630

 

 

 

1.49

%

 

11/18/2019

 

11/18/2026

 

 

(175

)

Interest rate hedge

 

One-month LIBOR

 

 

2,360

 

 

 

0.82

%

 

3/18/2020

 

6/18/2029

 

 

(46

)

Total

 

 

 

$

92,541

 

 

 

 

 

 

 

 

 

 

$

(11,278

)

 

In April 2020, we terminated all of our interest rate hedges, which had unrealized losses of $11.8 million recorded in accumulated other comprehensive (loss) income at the time of termination. The losses will be amortized into earnings over the remaining lives of the underlying contracts.

At March 31, 2020, we had 4 swap contracts outstanding in order to mitigate the market price risk on our fixed-rate CRE whole loans. Our interest rate swaps at March 31, 2020 were as follows (dollars in thousands):

 

 

 

Benchmark Rate

 

Notional Value

 

 

Strike Rate

 

 

Effective Date

 

Maturity Date

 

Fair Value

 

Interest rate swap

 

Three-month LIBOR

 

$

260

 

 

 

0.64

%

 

3/16/2020

 

3/16/2025

 

$

(2

)

Interest rate swap

 

Three-month LIBOR

 

 

1,525

 

 

 

0.80

%

 

3/16/2020

 

3/16/2030

 

 

(15

)

Interest rate swap

 

Three-month LIBOR

 

 

520

 

 

 

0.68

%

 

3/16/2020

 

3/16/2025

 

 

(5

)

Interest rate swap

 

Three-month LIBOR

 

 

1,725

 

 

 

0.86

%

 

3/16/2020

 

3/16/2030

 

 

(26

)

Total

 

 

 

$

4,030

 

 

 

 

 

 

 

 

 

 

$

(48

)

 

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Repurchase and Credit Facilities

Borrowings under our term warehouse financing facilities and repurchase agreements are guaranteed by us or one of our subsidiaries. The following table sets forth certain information with respect to our term warehouse financing facilities and repurchase agreements (dollars in thousands, except amounts in footnotes):

 

 

 

March 31, 2020

 

 

December 31, 2019

 

 

 

Outstanding Borrowings (1)

 

 

Value of Collateral

 

 

Number of Positions as Collateral

 

 

Weighted Average Interest Rate

 

 

Outstanding Borrowings (1)

 

 

Value of Collateral

 

 

Number of Positions as Collateral

 

 

Weighted Average Interest Rate

 

CRE - Term Warehouse Financing Facilities (2)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Wells Fargo Bank, N.A. (3)

 

$

145,547

 

 

$

191,046

 

 

 

24

 

 

 

2.73

%

 

$

225,217

 

 

$

291,903

 

 

 

28

 

 

 

3.70

%

Barclays Bank PLC (4)

 

 

109,421

 

 

 

159,108

 

 

 

14

 

 

 

3.02

%

 

 

111,881

 

 

 

145,035

 

 

 

14

 

 

 

3.99

%

JPMorgan Chase Bank, N.A. (5)

 

 

21,140

 

 

 

32,223

 

 

 

3

 

 

 

2.65

%

 

 

207,807

 

 

 

268,283

 

 

 

17

 

 

 

3.56

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CMBS - Short-Term Repurchase Agreements (6)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deutsche Bank Securities Inc.

 

 

8,181

 

 

 

8,181

 

 

 

—

 

 

 

—

%

 

 

37,141

 

 

 

57,331

 

 

 

6

 

 

 

3.13

%

JP Morgan Securities LLC

 

 

42,510

 

 

 

42,510

 

 

 

10

 

 

 

—

%

 

 

33,703

 

 

 

42,075

 

 

 

13

 

 

 

2.87

%

Barclays Capital Inc.

 

 

101,219

 

 

 

101,219

 

 

 

10

 

 

 

—

%

 

 

87,643

 

 

 

112,939

 

 

 

7

 

 

 

2.82

%

RBC Capital Markets, LLC

 

 

13,366

 

 

 

13,366

 

 

 

—

 

 

 

—

%

 

 

34,829

 

 

 

47,081

 

 

 

5

 

 

 

2.96

%

RBC (Barbados) Trading Bank Corporation

 

 

10,585

 

 

 

10,585

 

 

 

—

 

 

 

—

%

 

 

181,584

 

 

 

224,972

 

 

 

30

 

 

 

2.82

%

Total

 

$

451,969

 

 

$

558,238

 

 

 

 

 

 

 

 

 

 

$

919,805

 

 

$

1,189,619

 

 

 

 

 

 

 

 

 

 

(1)

Outstanding borrowings include accrued interest payable.

(2)

Between April 2020 and May 2020, CRE - term warehouse financing facilities paid down by $40.2 million.

(3)

Includes $347,000 and $607,000 of deferred debt issuance costs at March 31, 2020 and December 31, 2019, respectively.

(4)

Includes $657,000 and $817,000 of deferred debt issuance costs at March 31, 2020 and December 31, 2019, respectively.

(5)

Includes $1.1 million and $1.3 million of deferred debt issuance costs at March 31, 2020 and December 31, 2019, respectively.

(6)

Value of the collateral includes unrestricted cash of $4.9 million at March 31, 2020. CMBS - short-term repurchase agreements were repaid in full in April 2020.

 

CRE - Term Warehouse Financing Facilities

In May 2020, Wells Fargo Bank, N.A. revised the minimum equity financial covenant required of us as of March 31, 2020 and provided a framework to avoid credit-based markdowns for approximately four months.

In April 2018, we entered into a master repurchase agreement (the “Barclays Facility”) with Barclays Bank PLC (“Barclays”) to finance the origination of CRE loans. In connection with the Barclays Facility, we entered into a guaranty agreement (the “Barclays Guaranty”) pursuant to which we fully guaranteed all payments and performance under the Barclays Facility. In May 2020, we entered into an amendment to the Barclays Guaranty that revised its minimum equity financial covenant as of March 1, 2020. Barclays also provided a framework to avoid credit-based markdowns for approximately four months.

In October 2018, we entered into a master repurchase agreement (the “JPMorgan Chase Facility”) with JPMorgan Chase Bank, N.A. (“JPMorgan Chase”) to finance the origination of CRE loans. In connection with the JPMorgan Chase Facility, we entered into a guaranty agreement (the “JPMorgan Chase Guaranty”) pursuant to which we fully guaranteed all payments and performance under the JPMorgan Chase Facility. In May 2020, we entered into an amendment to the JPMorgan Chase Guarantee that revised its minimum equity financial covenant as of February 29, 2020.

We would not have been in compliance with our previous minimum equity covenants on our CRE term warehouse financing facilities at March 31, 2020, primarily as a result of the loss on the disposition of our financed CMBS portfolio (See “Results of Operations - Other Income (Expense)”). However, we subsequently sought and received agreements with all of our lenders that retroactively reduced our minimal equity requirements under our agreements, allowing us to comply with our minimum equity requirements at March 31, 2020.

We were in compliance with all of our covenants at March 31, 2020.

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CMBS - Short-Term Repurchase Agreements

The COVID-19 pandemic produced material and previously unforeseeable liquidity shocks in credit markets causing significant declines in the pricing of our investment securities available-for-sale that were collateral for our CMBS short-term repurchase facilities. As a result, in March 2020, we received written notices from RBC, RBC Barbados and Deutsche Bank Securities alleging that events of default had occurred under our associated repurchase agreements as a result of not meeting certain margin calls. These notices were subsequently either withdrawn or rescinded. We had no outstanding balances on our CMBS - short-term repurchase agreements in April 2020.

Securitizations

At March 31, 2020, we retained equity in six of the securitization entities we have executed, of which three have been substantially liquidated.

XAN 2020-RSO8

In March 2020, we closed Exantas Capital Corp. 2020-RSO8, Ltd. (“XAN 2020-RSO8”), a $522.6 million CRE debt securitization transaction that provided financing for CRE loans. XAN 2020-RSO8 issued a total of $435.7 million of non-recourse, floating-rate notes at par, of which RCC Real Estate Inc. (“RCC RE”) purchased 100% of the Class D and Class E notes. Our investments in the Class D and Class E notes were financed by CMBS short-term repurchase agreements and were sold in conjunction with the disposition of our CMBS portfolio in April 2020. Additionally, RCC RE purchased 100% of the Class F and Class G notes and a subsidiary of RCC RE purchased 100% of the outstanding preference shares. The notes purchased by RCC RE are subordinated in right of payment to all other senior notes issued by XAN 2020-RSO8, but are senior in right of payment to the preference shares. The preference shares are subordinated in right of payment to all other securities issued by XAN 2020-RSO8.

At closing, the senior notes issued to investors consisted of the following classes: (i) $295.3 million of Class A notes bearing interest at one-month LIBOR plus 1.15% increasing to 1.40% in November 2024; (ii) $39.2 million of Class A-S notes bearing interest at one-month LIBOR plus 1.45%, increasing to 1.70% in December 2024; (iii) $26.1 million of Class B notes bearing interest at one-month LIBOR plus 1.75%, increasing to 2.25% in January 2025; (iv) $32.7 million of Class C notes bearing interest at one-month LIBOR plus 2.15%, increasing to 2.65% in January 2025; (v) $26.1 million of Class D notes bearing interest at one-month LIBOR plus 2.50%, increasing to 3.00% in February 2025; and (vi) $16.3 million of Class E notes bearing interest at one-month LIBOR plus 2.80%, increasing to 3.30% in February 2025.

All of the notes issued mature in March 2035, although we have the right to call the notes anytime after March 2022. Principal repayments received, after closing and ending in March 2023, may be used to purchase funding participations with respect to existing collateral held outside of the securitization.

Corporate Debt

4.50% Convertible Senior Notes and 8.00% Convertible Senior Notes

We issued $100.0 million aggregate principal of our 8.00% convertible senior notes due 2020 (“8.00% Convertible Senior Notes”) and $143.8 million aggregate principal of our 4.50% convertible senior notes due 2022 (“4.50% Convertible Senior Notes”) in January 2015 and August 2017, respectively. In conjunction with the issuance of the 4.50% Convertible Senior Notes, we extinguished $78.8 million of aggregate principal of our 8.00% Convertible Senior Notes. In January 2020, the remaining 8.00% Convertible Senior Notes were paid off upon maturity.

The following table summarizes the 4.50% Convertible Senior Notes at March 31, 2020 (dollars in thousands, except the conversion prices and amounts in the footnotes):

 

 

 

Principal Outstanding

 

 

Borrowing Rate

 

 

Effective Rate (1)

 

 

Conversion

Rate (2)(3)

 

Conversion

Price (3)

 

 

Maturity Date

4.50% Convertible Senior Notes

 

$

143,750

 

 

 

4.50

%

 

 

7.43

%

 

83.1676

 

$

12.02

 

 

August 15, 2022

 

(1)

Includes the amortization of the market discounts and deferred debt issuance costs, if any, for the 4.50% Convertible Senior Notes recorded in interest expense on the consolidated statements of operations.

(2)

Represents the number of shares of common stock per $1,000 principal amount of the 4.50% Convertible Senior Notes’ principal outstanding, subject to adjustment as provided in the Third Supplemental Indenture (the “4.50% Convertible Senior Notes Indenture”).

(3)

The conversion rate and conversion price of the 4.50% Convertible Senior Notes at March 31, 2020 are adjusted to reflect quarterly cash distributions in excess of a $0.10 distribution threshold, as defined in the 4.50% Convertible Senior Notes Indenture.

The 4.50% Convertible Senior Notes are convertible at the option of the holder at any time up until one business day before the respective maturity date and may be settled in cash, our common stock or a combination of cash and our common stock, at our election. We may not redeem the 4.50% Convertible Senior Notes prior to maturity. The closing price of our common stock was $2.76 on March 31, 2020, which did not exceed the conversion price of our 4.50% Convertible Senior Notes at March 31, 2020.

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Stockholders’ Equity

Total stockholders’ equity at March 31, 2020 was $342.1 million and gave effect to $10.8 million of net unrealized losses on our cash flow hedges and $106,000 of net unrealized losses on our available-for-sale portfolio, shown as a component of accumulated other comprehensive (loss) income. Stockholders’ equity at December 31, 2019 was $556.4 million and gave effect to $4.0 million of net unrealized losses on our cash flow hedges and $5.8 million of net unrealized gains on our available-for-sale portfolio, shown as a component of accumulated other comprehensive (loss) income. The decrease in stockholders’ equity during the three months ended March 31, 2020 was primarily attributable to a decrease in retained earnings in connection with an increase in net losses, primarily attributable to the losses incurred on the disposition of our financed CMBS portfolio.

Balance Sheet - Book Value Reconciliation

The following table rolls forward our common stock book value for the three months ended March 31, 2020 and reconciles our common stock book value to our economic book value, a non-GAAP measure, at March 31, 2020 (in thousands, except per share data and amounts in footnotes):

 

 

 

For the Three Months Ended March 31, 2020

 

 

 

Total

Amount

 

 

Per Share

Amount

 

Common stock book value at beginning of period (1)

 

$

440,442

 

 

$

14.00

 

Net loss allocable to common shares (2)

 

 

(199,109

)

 

 

(6.28

)

Change in other comprehensive income:

 

 

 

 

 

 

 

 

Available-for-sale securities

 

 

(5,926

)

 

 

(0.19

)

Derivatives

 

 

(6,772

)

 

 

(0.21

)

Adoption of new CECL accounting guidance on January 1, 2020

 

 

(3,032

)

 

 

(0.10

)

Impact to equity of share-based compensation

 

 

498

 

 

 

(0.09

)

Total net decrease

 

 

(214,341

)

 

 

(6.87

)

Common stock book value at end of period (1)(3)

 

 

226,101

 

 

 

7.13

 

 

 

 

 

 

 

 

 

 

Reconciling items in arriving at economic book value at March 31, 2020:

 

 

 

 

 

 

 

 

Non-cash 4.50% Convertible Senior Notes’ unamortized discounts

 

 

(7,427

)

 

 

(0.23

)

Series C Preferred Stock redemption value in excess of carrying value

 

 

(4,045

)

 

 

(0.13

)

Economic book value at March 31, 2020

 

$

214,629

 

 

$

6.77

 

 

(1)

Per share calculations exclude unvested restricted stock, as disclosed on our consolidated balance sheets, of 351,325 and 420,962 shares at March 31, 2020 and December 31, 2019, respectively. The denominator for the calculation is 31,690,736 and 31,459,632 shares at March 31, 2020 and December 31, 2019, respectively.

(2)

The per share amount is calculated with the denominator referenced in footnote (1) at March 31, 2020. Net loss per common share-diluted of $(6.30) is calculated using the weighted average diluted shares outstanding during the three months ended March 31, 2020.

(3)

Common stock book value is calculated as total stockholders’ equity of $342.1 million less preferred stock equity of $116.0 million at March 31, 2020.

Management Agreement Equity

Our base management fee, as defined in the Third Amended and Restated Management Agreement, as amended (“Management Agreement”), is equal to (i) 1/12 of the amount of our equity multiplied by (ii) 1.50% and is calculated and paid monthly in arrears.

The following table summarizes the calculation of equity, as defined in the Management Agreement (in thousands):

 

 

 

Amount

 

At March 31, 2020:

 

 

 

 

Proceeds from capital stock issuances, net (1)

 

$

1,219,936

 

Retained earnings, net (2)

 

 

(459,436

)

Payments for repurchases of capital stock, net

 

 

(207,011

)

Total

 

$

553,489

 

 

(1)

Deducts underwriting discounts and commissions and other expenses and costs relating to such issuances.

(2)

Excludes non-cash equity compensation expense incurred to date.

Core Earnings

Core Earnings is a non-GAAP financial measure that we use to evaluate our operating performance.

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Core Earnings exclude the effects of certain transactions and adjustments in accordance with GAAP that we believe are not necessarily indicative of our current CRE loan portfolio and other CRE-related investments and operations. Core Earnings exclude income (loss) from all non-core assets such as commercial finance, middle market lending, residential mortgage lending, certain legacy CRE loans and other non-CRE assets designated as assets held for sale at the initial measurement date of December 31, 2016.

Core Earnings, for reporting purposes, is defined as GAAP net income (loss) allocable to common shares, excluding (i) non-cash equity compensation expense, (ii) unrealized gains and losses, (iii) non-cash provisions for credit losses, (iv) non-cash impairments on securities, (v) non-cash amortization of discounts or premiums associated with borrowings, (vi) net income or loss from a limited partnership interest owned at the initial measurement date, (vii) net income or loss from non-core assets, (1)(2) (viii) real estate depreciation and amortization, (ix) foreign currency gains or losses and (x) income or loss from discontinued operations. Core Earnings may also be adjusted periodically to exclude certain one-time events pursuant to changes in GAAP and certain non-cash items.

Although pursuant to the Management Agreement we calculate incentive compensation using Core Earnings that exclude incentive compensation payable to our Manager, we include incentive compensation payable to our Manager in calculating Core Earnings for reporting purposes.

Core Earnings allocable to common shares, adjusted (“Core Earnings Adjusted”) is a non-GAAP financial measure used to evaluate our operating performance. Core Earnings Adjusted exclude certain non-recurring items and the results of certain transactions that are not indicative of our ongoing operating performance.

Core Earnings and Core Earnings Adjusted do not represent net income or cash generated from operating activities and should not be considered as alternatives to GAAP net income or as measures of liquidity under GAAP. Our methodology for calculating Core Earnings and Core Earnings Adjusted may differ from methodologies used by other companies to calculate similar supplemental performance measures, and, accordingly, our reported Core Earnings and Core Earnings Adjusted may not be comparable to similar performance measures used by other companies.

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The following table provides a reconciliation from GAAP net income (loss) allocable to common shares to Core Earnings allocable to common shares and Core Earnings allocable to common shares, adjusted for the periods presented (in thousands, except per share data and amount in the footnotes):

 

 

 

For the Three Months Ended

 

 

 

March 31,

 

 

 

2020

 

 

Per Share Data

 

 

2019

 

 

Per Share Data

 

Net (loss) income allocable to common shares - GAAP

 

$

(199,109

)

 

$

(6.30

)

 

$

5,545

 

 

$

0.18

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reconciling items from continuing operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-cash equity compensation expense

 

 

498

 

 

 

0.02

 

 

 

683

 

 

 

0.02

 

Non-cash provision for CRE credit losses

 

 

16,149

 

 

 

0.51

 

 

 

1,025

 

 

 

0.03

 

Unrealized loss on core activities (3)

 

 

5,197

 

 

 

0.16

 

 

 

—

 

 

 

—

 

Non-cash amortization of discounts or premiums associated with borrowings

 

 

711

 

 

 

0.02

 

 

 

683

 

 

 

0.02

 

Net realized gain on non-core assets (1)(2)

 

 

—

 

 

 

—

 

 

 

(8

)

 

 

—

 

Net income from non-core assets (2)

 

 

(27

)

 

 

—

 

 

 

(5

)

 

 

—

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reconciling items from discontinued operations and CRE loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income on legacy CRE loans

 

 

(161

)

 

 

—

 

 

 

(233

)

 

 

(0.01

)

Fair value adjustments on legacy CRE loans

 

 

3,791

 

 

 

0.12

 

 

 

102

 

 

 

0.01

 

Loss from discontinued operations, net of taxes

 

 

45

 

 

 

—

 

 

 

37

 

 

 

—

 

Core Earnings allocable to common shares

 

 

(172,906

)

 

 

(5.47

)

 

 

7,829

 

 

 

0.25

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reconciling items in arriving at Core Earnings allocable to common shares, adjusted:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss on disposition of CMBS

 

 

180,315

 

 

 

5.70

 

 

 

—

 

 

 

—

 

Core Earnings allocable to common shares, adjusted

 

$

7,409

 

 

$

0.23

 

 

$

7,829

 

 

$

0.25

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares - diluted on Core Earnings allocable to common shares

 

 

31,626

 

 

 

 

 

 

 

31,531

 

 

 

 

 

Weighted average common shares - diluted on Core Earnings allocable to common shares, adjusted

 

 

31,730

 

 

 

 

 

 

 

31,531

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Core Earnings per common share - diluted

 

$

(5.47

)

 

 

 

 

 

$

0.25

 

 

 

 

 

Core Earnings per common share, adjusted - diluted

 

$

0.23

 

 

 

 

 

 

$

0.25

 

 

 

 

 

 

(1)

Income tax expense (benefit) from non-core investments and net realized gain on non-core assets are components of net income or loss from non-core assets.

(2)

Non-core assets are investments and securities owned by us at the initial measurement date in (i) commercial finance, (ii) middle market lending, (iii) residential mortgage lending, (iv) legacy CRE loans designated as held for sale and (v) other non-CRE assets included in assets held for sale.

(3)

Substantially comprises unrealized losses on two unencumbered CMBS investments of $5.1 million at March 31, 2020.

Core Earnings in accordance with the Management Agreement, which excludes incentive compensation payable, was $(172.9) million, or $(5.40) per common share outstanding, for the three months ended March 31, 2020. There was no incentive compensation payable for the three months ended March 31, 2020.

Incentive Compensation Hurdle

In accordance with the Management Agreement, incentive compensation is earned by our Manager when our Core Earnings per common share (as defined in the Management Agreement) for such quarter exceeds an amount equal to: (1) the weighted average of (a) book value (as defined in the Management Agreement) as of the end of such quarter divided by 30,881,351 shares and (b) the price per share (including the conversion price, if applicable) paid for common shares in each offering (or issuance, upon the conversion of convertible securities) by us subsequent to September 30, 2017, in each case at the time of issuance, multiplied by (2) the greater of (a) 1.75% and (b) 0.4375% plus one-fourth of the ten year treasury rate, as defined in the Management Agreement, for such quarter (the “Incentive Compensation Hurdle”).

For the three months ended March 31, 2020, our Core Earnings, as defined in the Management Agreement, did not exceed the Incentive Compensation Hurdle.

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Liquidity and Capital Resources

Liquidity is a measurement of our ability to meet potential cash requirements, including ongoing commitments to pay dividends, fund investments, repay borrowings and provide for other general business needs, including payment of our base management fee and incentive compensation. Our ability to meet our on-going liquidity needs is subject to our ability to generate cash from operating activities and our ability to maintain and/or obtain additional debt financing and equity capital together with the funds referred to below.

During the three months ended March 31, 2020, our principal sources of liquidity were: (i) proceeds of $146.3 million from financing sourced from our CRE - term warehouse financing facilities, (ii) proceeds of $41.6 million from net repayments on our CRE loan portfolio, (iii) net proceeds of $10.3 million from the close of XAN 2020-RSO8 and (iv) proceeds of $2.4 million from our CRE securitizations that used principal paydowns to invest in CRE loan future funding commitments. These sources of liquidity, offset by our deployments in CRE debt investments, margin calls on our CMBS repurchase agreements, paydowns on our CRE term warehouse financing facilities, paydown upon maturity of our 8.00% convertible senior notes, and operating expenses, substantially resulted in the $42.8 million of unrestricted cash we held at March 31, 2020.

We utilize a variety of financing arrangements to finance certain assets. We generally utilize the following two types of financing arrangements:

 

 

1.

Term Warehouse Financing Facilities (CRE loans) and Short-Term Repurchase Agreements (CMBS): Term warehouse financing facilities and short-term repurchase agreements effectively allow us to borrow against loans and securities, respectively, that we own. Under these agreements, we transfer loans and securities to a counterparty and agree to purchase the same loans and securities from the counterparty at a price equal to the transfer price plus interest. The counterparty retains the sole discretion over both whether to purchase the loan or security from us and, subject to certain conditions, the collateral value of such loan or security for purposes of determining whether we are required to pay margin to the counterparty. Generally, if the lender determines (subject to certain conditions) that the value of the collateral in a repurchase transaction has decreased by more than a defined minimum amount, we would be required to repay any amounts borrowed in excess of the product of (i) the revised collateral or market value multiplied by (ii) the applicable advance rate. During the term of these agreements, we receive the principal and interest on the related loans and securities and pay interest to the counterparty.

As discussed in “Overview,” the impact of the COVID-19 pandemic produced material and previously unforeseeable liquidity shocks to global financial markets that resulted in substantial margin calls to us by our CMBS repurchase lenders and led to the ultimate disposition of our financed CMBS portfolio to satisfy our outstanding obligations with those lenders.  In April 2020, the outstanding CMBS short-term repurchase agreement liability of $175.9 million was repaid in full. As such, we have no further exposure to losses related to CMBS repurchase agreements.

Primarily as a result of the aforementioned loss on the disposition of our financed CMBS portfolio, we would not have been in compliance with our previous minimum equity covenants on our term warehouse financing facilities at March 31, 2020. However, we subsequently sought and received agreements with all of our lenders that retroactively reduced our minimal equity requirements under the agreements, allowing us to comply with our minimum equity requirements as of March 31, 2020. We were in compliance with all of our covenants at March 31, 2020.

As the COVID-19 crisis evolved, we met with our term warehouse financing lenders to mitigate the impact of further mark-to-market risk caused by outstanding borrowings. In April 2020, we reduced our term warehouse financing facility leverage and in exchange received written confirmation from lenders representing over 90% of the outstanding balance of our term warehouse financing facilities that provides a framework for avoiding credit-based markdowns for approximately four months.

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At March 31, 2020, we had term warehouse financing facilities and short-term repurchase agreements, as summarized below (in thousands, except amounts in footnotes):

 

 

 

Execution Date

 

Maturity Date (1)

 

Maximum Capacity

 

 

Repurchase Principal Outstanding(2)

 

 

Availability

 

CRE - Term Warehouse Financing Facilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Wells Fargo Bank, N.A.

 

February 2012

 

July 2020

 

$

400,000

 

 

$

145,717

 

 

$

254,283

 

Barclays Bank PLC

 

April 2018

 

April 2021

 

$

250,000

 

 

 

109,972

 

 

$

140,028

 

JPMorgan Chase Bank, N.A.

 

October 2018

 

October 2021

 

$

250,000

 

 

 

22,229

 

 

$

227,771

 

CMBS - Short-Term Repurchase Agreements (2)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deutsche Bank Securities Inc.

 

March 2005

 

April 2020

 

N/A

 

 

 

8,181

 

 

N/A

 

JP Morgan Securities LLC

 

November 2012

 

April 2020

 

N/A

 

 

 

42,510

 

 

N/A

 

Barclays Capital Inc.

 

February 2013

 

April 2020

 

N/A

 

 

 

101,219

 

 

N/A

 

RBC Capital Markets, LLC

 

August 2017

 

April 2020

 

N/A

 

 

 

13,366

 

 

N/A

 

RBC (Barbados) Trading Bank Corporation

 

October 2019

 

April 2020

 

N/A

 

 

 

10,585

 

 

N/A

 

Total

 

 

 

 

 

 

 

 

 

$

453,779

 

 

 

 

 

 

(1)

Excludes accrued interest payable of $308,000 and deferred debt issuance costs and discounts of $2.1 million at March 31, 2020.

(2)

All CMBS - short-term repurchase agreements were repaid in full in April 2020.

 

The following table summarizes the average principal outstanding on our term warehouse financing facilities and short-term repurchase agreements during the three months ended March 31, 2020 and December 31, 2019 and the principal outstanding on our term warehouse financing facilities and short-term repurchase agreements at March 31, 2020 and December 31, 2019 (in thousands, except amounts in footnotes):

 

 

 

Three Months

Ended

March 31, 2020

 

 

March 31, 2020

 

 

Three Months

Ended

December 31, 2019

 

 

December 31, 2019

 

 

 

Average Principal Outstanding

 

 

Principal Outstanding (1)(2)

 

 

Average Principal Outstanding

 

 

Principal Outstanding (1)(2)

 

Financing Arrangement

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Term warehouse financing facilities - CRE loans

 

$

512,367

 

 

$

277,918

 

 

$

472,099

 

 

$

546,809

 

Short-term repurchase agreements - CMBS

 

 

354,853

 

 

 

175,861

 

 

 

337,648

 

 

 

374,430

 

Total

 

$

867,220

 

 

$

453,779

 

 

$

809,747

 

 

$

921,239

 

 

(1)

Excludes accrued interest payable on repurchase agreements collateralized by CRE loans of $308,000 and $810,000 and deferred debt issuance costs and discounts of $2.1 million and $2.7 million at March 31, 2020 and December 31, 2019, respectively.

(2)

Excludes accrued interest payable on repurchase agreements collateralized by CMBS of $470,000 at December 31, 2019. There was no accrued interest payable at March 31, 2020.

The following table summarizes the maximum month-end principal outstanding on our term warehouse financing facilities and short-term repurchase agreements during the periods presented (in thousands):

 

 

 

Maximum Month-End Principal Outstanding During the

 

 

 

Three Months Ended

 

 

Years Ended December 31,

 

 

 

March 31, 2020

 

 

2019

 

 

2018

 

 

2017

 

Financing Arrangement (1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Term warehouse financing facilities - CRE loans

 

$

598,635

 

 

$

665,294

 

 

$

561,382

 

 

$

469,228

 

Short-term repurchase agreements - CMBS

 

$

365,886

 

 

$

374,430

 

 

$

295,048

 

 

$

122,574

 

 

(1)

Increases in the maximum month-end outstanding principal balances for the periods presented resulted from financing assets that were originated or acquired as a direct result of the redeployment of capital into our core asset classes pursuant to the Plan.

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2.

Securitizations: We seek non-recourse long-term financing from securitizations of our investments in CRE loans. The securitizations generally involve a senior portion of our loan, but may involve the entire loan. Securitization generally involves transferring notes to a special purpose vehicle (or the issuing entity), which then issues one or more classes of non-recourse notes pursuant to the terms of an indenture. The notes are secured by the pool of assets. In exchange for the transfer of assets to the issuing entity, we receive cash proceeds from the sale of non-recourse notes. Securitizations of our portfolio investments might magnify our exposure to losses on those portfolio investments because the retained subordinate interest in any particular overall loan would be subordinate to the loan components sold and we would, therefore, absorb all losses sustained with respect to the overall loan before the owners of the senior notes experience any losses with respect to the loan in question.

Historically, we have financed the acquisition of our investments through CDOs and securitizations that essentially match the maturity and repricing dates of these financing vehicles with the maturities and repricing dates of our investments. In the past, we have derived substantial operating cash from our equity investments in our CDOs and securitizations, which will cease if the CDOs and securitizations fail to meet certain tests. Through March 31, 2020, we did not experience difficulty in maintaining our existing CDO and securitization financing and passed all of the critical tests required by these financings.

The following table sets forth the distributions received by us and coverage test summaries for our active securitizations for the periods presented (in thousands, except amount in the footnotes):

 

 

Cash Distributions

 

 

Overcollateralization Cushion (1)

 

 

 

Name

 

For the Three Months Ended

March 31, 2020

 

 

For the Year Ended

December 31, 2019

 

 

At March 31, 2020

 

 

At the Initial Measurement Date

 

 

End of Designated Principal Reinvestment Period

XAN 2018-RSO6 (2)

 

$

2,656

 

 

$

17,959

 

 

$

82,175

 

 

$

25,731

 

 

December 2020

XAN 2019-RSO7 (2)

 

$

4,729

 

 

$

10,672

 

 

$

34,947

 

 

$

34,341

 

 

April 2022

XAN 2020-RSO8 (2)

 

$

—

 

 

$

—

 

 

$

26,146

 

 

$

26,146

 

 

March 2023

Apidos CDO I, Ltd. (3)

 

$

—

 

 

$

708

 

 

N/A

 

 

$

17,136

 

 

N/A

 

(1)

Overcollateralization cushion represents the amount by which the collateral held by the securitization issuer exceeds the minimum amount required.

(2)

The designated principal reinvestment period for XAN 2018-RSO6, XAN 2019-RSO7 and XAN 2020-RSO8 is the period in which principal repayments can be utilized to purchase loans held outside of the respective securitization that represent the funded commitments of existing collateral in the respective securitization that were not funded as of the date the respective securitization was closed. Additionally, the indenture for each securitization does not contain any interest coverage test provisions.

(3)

Apidos CDO I, Ltd. and Apidos CDO III, Ltd. were substantially liquidated in October 2014 and June 2015, respectively.

The following table sets forth the distributions received by us and liquidation details for our liquidated securitizations for the periods presented (in thousands):

 

 

 

Cash Distributions

 

 

Liquidation Details

 

Name

 

For the Three Months Ended

March 31, 2020

 

 

For the Year Ended

December 31, 2019

 

 

Liquidation Date

 

Remaining Assets at the Liquidation

Date (1)

 

RCC 2017-CRE5

 

$

—

 

 

$

12,551

 

 

July 2019

 

$

112,753

 

Whitney CLO I, Ltd. (2)

 

$

—

 

 

$

68

 

 

January 2019

 

$

—

 

 

(1)

The remaining assets at the liquidation date were distributed to us in exchange for our preference shares and equity notes in the respective securitization.

(2)

Whitney CLO I, Ltd. was substantially liquidated in September 2013.

At May 7, 2020, our liquidity consisted of $36.7 million of unrestricted cash and cash equivalents and $91.5 million of unencumbered assets.

 

 

 

Our leverage ratio, defined as the ratio of borrowings to stockholders’ equity, may vary as a result of the various funding strategies we use. At March 31, 2020 and December 31, 2019, our leverage ratio was 5.0 times and 3.4 times, respectively. The leverage ratio increase was primarily attributable to a net decrease in stockholder’s equity largely due to the disposition of our financed CMBS portfolio offset by a decrease in borrowings.

As of May 7, 2020, our leverage ratio reduced from 5.0 times at March 31, 2020 to 4.5 times. The reduction in the leverage ratio was primarily attributable to the payoff of our CMBS - short-term repurchase agreements in April 2020 and paydowns on our CRE term warehouse financing facilities between April 2020 and May 2020.

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Distributions

It is inherently difficult to assess accurately the impact of COVID-19 on our revenues, profitability and financial position due to uncertainty of the severity and duration of the pandemic. In response, in the near-term, we are focused on prudently retaining and managing sufficient excess liquidity. We, therefore, did not pay a first quarter distribution on our common and preferred shares. As the impact of COVID-19 on our short to mid-term operations and financial position becomes clearer, our Board will establish a plan for the prudent resumption of the payment of distributions.

U.S. federal income tax law generally requires that a REIT distribute at least 90% of its REIT taxable income annually, determined without regard to the deduction for dividends paid and excluding net capital gains, and that it pay tax at regular corporate rates to the extent that it annually distributes less than 100% of its taxable income. Before we pay any dividend, whether for U.S. federal income tax purposes or otherwise, we must first meet both our operating and debt service requirements on our repurchase agreements and other debt payable. If our cash available for distribution is less than our taxable income, we could be required to sell assets or borrow funds to make cash distributions, or we may make a portion of the required distribution in the form of a taxable stock distribution or distribution of debt securities.

Contractual Obligations and Commitments

 

 

 

Contractual Commitments

 

 

 

(dollars in thousands, except amounts in footnotes)

 

 

 

Payments due by Period

 

 

 

Total

 

 

Less than 1 Year

 

 

1 - 3 Years

 

 

3 - 5 Years

 

 

More than 5 Years

 

At March 31, 2020:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CRE securitizations

 

$

1,097,643

 

 

$

—

 

 

$

—

 

 

$

—

 

 

$

1,097,643

 

Unsecured junior subordinated debentures (1)

 

 

51,548

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

51,548

 

4.50% Convertible Senior Notes (2)

 

 

143,750

 

 

 

—

 

 

 

143,750

 

 

 

—

 

 

 

—

 

Warehouse financing facilities and repurchase agreements (3)

 

 

402,271

 

 

 

269,939

 

 

 

132,332

 

 

 

—

 

 

 

—

 

Unfunded commitments on CRE loans (4)

 

 

116,816

 

 

 

45,887

 

 

 

70,929

 

 

 

—

 

 

 

 

 

Base management fees (5)

 

 

5,270

 

 

 

5,270

 

 

 

—

 

 

 

—

 

 

 

—

 

Total

 

$

1,817,298

 

 

$

321,096

 

 

$

347,011

 

 

$

—

 

 

$

1,149,191

 

 

(1)

Contractual commitments exclude $20.2 million and $20.8 million of estimated interest expense payable through maturity, in June 2036 and October 2036, respectively, on our trust preferred securities.

(2)

Contractual commitments exclude $15.6 million of interest expense payable through maturity, in August 2022, on our 4.50% Convertible Senior Notes.

(3)

Contractual commitments include $308,000 of accrued interest payable at March 31, 2020 on our repurchase facilities.

(4)

Unfunded commitments on our originated CRE loans generally fall into two categories: (i) pre-approved capital improvement projects and (ii) new or additional construction costs subject, in each case, to the borrower meeting specified criteria. Upon completion of the improvements or construction, we would receive additional interest income on the advanced amount. At March 31, 2020, we had unfunded commitments on 77 CRE whole loans and one CRE preferred equity investment.

(5)

Base management fees presented are based on an estimate of base management fees payable to our Manager over the next 12 months. Our Management Agreement also provides for an incentive compensation arrangement that is based on operating performance. The incentive compensation is not a fixed and determinable amount, and therefore it is not included in this table.

Off-Balance Sheet Arrangements

General

At March 31, 2020, we did not maintain any relationships with unconsolidated entities or financial partnerships that were established for the purpose of facilitating off-balance sheet arrangements or contractually narrow or limited purposes, although we do have interests in unconsolidated entities not established for those purposes. Except as set forth below, at March 31, 2020, we had not guaranteed obligations of any unconsolidated entities or entered into any commitment or letter of intent to provide additional funding to any such entities.

Unfunded CRE Loan Commitments

In the ordinary course of business, we make commitments to borrowers whose loans are in our CRE loan portfolio to provide additional loan funding in the future. Disbursement of funds pursuant to these commitments is subject to the borrower meeting pre-specified criteria. These commitments are subject to the same underwriting requirements and ongoing portfolio maintenance as are the on-balance sheet financial investments that we hold. Since these commitments may expire without being drawn upon, the total commitment amount does not necessarily represent future cash requirements. Whole loans had $113.9 million and $98.0 million in unfunded loan commitments at March 31, 2020 and December 31, 2019, respectively. Preferred equity investments had $2.9 million and $3.0 million in unfunded investment commitments at March 31, 2020 and December 31, 2019, respectively. Unfunded commitments are not considered in the CECL reserve if they are unconditionally cancelable.

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Guarantees and Indemnifications

In the ordinary course of business, we may provide guarantees and indemnifications that contingently obligate us to make payments to the guaranteed or indemnified party based on changes in the value of an asset, liability or equity security of the guaranteed or indemnified party. As such, we may be obligated to make payments to a guaranteed party based on another entity’s failure to perform or achieve specified performance criteria, or we may have an indirect guarantee of the indebtedness of others.

As part of our May 2017 sale of our equity interest of Pearlmark Mezzanine Realty Partners IV, L.P., we entered into an indemnification agreement whereby we indemnified the purchaser against realized losses of up to $4.3 million on one mezzanine loan until its final maturity date in 2020. As a result of the indemnified party’s partial sale of the mezzanine loan, our maximum exposure was reduced to $536,000. At March 31, 2020 and December 31, 2019, we had a contingent liability, reported in accounts payable and other liabilities on our consolidated balance sheets, of $56,000 outstanding as a reserve for probable losses on the indemnification. We did not record any additional reserve for probable losses during the three months ended March 31, 2020 and 2019.

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

At March 31, 2020, the primary component of our market risk was credit risk, counterparty risk, financing risk, and interest rate risk, as described below. While we do not seek to avoid risk completely, we do seek to assume risk that can be quantified from historical experience, to actively manage that risk, to earn sufficient compensation to justify assuming that risk and to maintain capital levels consistent with the risk we undertake or to which we are exposed.

Credit Risks

Our loans and investments are subject to credit risk. The performance and value of our loans and investments depend upon the sponsors’ ability to operate the properties that serve as our collateral so that they produce cash flows adequate to pay interest and principal due to us. To monitor this risk, our Manager’s asset management team reviews our investment portfolios and in certain instances is in regular contact with our borrowers, monitoring performance of the collateral and enforcing our rights as necessary.

In addition, we are exposed to the risks generally associated with the commercial real estate (“CRE”) market, including variances in occupancy rates, capitalization rates, absorption rates, and other macroeconomic factors beyond our control. We seek to manage these risks through our underwriting and asset management processes.

The COVID-19 pandemic has significantly impacted the CRE markets, causing reduced occupancy, requests from tenants for rent deferral or abatement, and delays in construction and development projects currently planned or underway. Our portfolio includes loans collateralized by multifamily, hotel, retail and other property types that are particularly negatively impacted by the pandemic. Approximately 59.6% of our portfolio is in multifamily properties. Residents that experience deteriorating financial conditions as a result of the pandemic may be unwilling or unable to pay rent in full on a timely basis. Furthermore, numerous state, local and federal regulations have also imposed restrictions at present on the borrower’s ability to enforce residents’ contractual lease obligations, and this will affect their ability to collect rent or enforce remedies for the failure to pay rent. Approximately 10.1% of our portfolio is in hotel properties. Many of the hotels have complete suspension or significant reduction of operations resulting from government action and decline in group, business and leisure travel. Travelers may continue to be wary to travel once restrictions are lifted because of concerns of risk of contagion or curtailment of leisure travel due to the economic recession. Approximately 6.4% of our portfolio is in retail properties. Complete or partial closure of many retail properties have resulted from government or tenant action. The reduced economic activity severely impacts the tenants’ businesses, financials condition and liquidity and may result in the tenants being unwilling or unable to meet their obligations to the borrower in part or in full.

The COVID-19 pandemic has significantly impacted the CRE markets, causing reduced occupancy, requests from tenants for rent deferral or abatement, and delays in construction and development projects currently planned or underway. These negative conditions may persist into the future and impair our borrowers’ ability to comply with the terms under our loan agreements. We maintain a robust asset management relationship with our borrowers and have utilized these relationships to address the potential impacts of the COVID-19 pandemic on our loans secured by properties experiencing cash flow pressure. While we believe the principal amounts of our loans are generally adequately protected by underlying collateral value, there is a risk that we will not realize the entire principal value of certain investments. In order to mitigate that risk, we have proactively engaged with our borrowers, particularly with those with near-term maturities, in order to maximize recovery.

Counterparty Risk

The nature of our business requires us to hold our cash and cash equivalents, obtain financing from and enter into derivative contracts with various financial institutions. This exposes us to the risk that these financial institutions may not fulfill their obligations to us under these various contractual arrangements. We mitigate this exposure by depositing our cash and cash equivalents and entering into financing agreements and derivative contracts with high credit-quality institutions.

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Financing Risk

We finance our target assets using our CRE debt securitizations, warehouse financing facilities and short-term repurchase agreements. Over time, as market conditions change, we may use other forms of leverage in addition to these methods of financing. Weakness or volatility in the financial markets, the CRE and mortgage markets or the economy generally, such as through the impact of the COVID-19 pandemic, could adversely affect one or more of our lenders or potential lenders and could cause one or more of our lenders or potential lenders to be unwilling or unable to provide us with financing, or to decrease the amount of our available financing, or to increase the costs of that financing.

Interest Rate Risk

Effect on Fair Value

A component of interest rate risk is the effect that changes in interest rates will have on the fair value of our assets. We face the risk that the fair value of our assets will increase or decrease at different rates than that of our liabilities, including our hedging instruments and derivative instruments.

We primarily assess our interest rate risk by estimating the duration of our assets and the duration of our liabilities. Duration essentially measures the market price volatility of financial instruments as interest rates change. We generally calculate duration using various financial models and empirical data. Different models and methodologies can produce different duration numbers for the same securities.

The following sensitivity analysis table presents, at March 31, 2020, the estimated impact on the fair value of our interest rate-sensitive investments, instruments and liabilities of changes in interest rates, assuming rates instantaneously fall 100 basis points and rise 100 basis points (dollars in thousands):

 

 

 

March 31, 2020

 

 

 

Interest Rates

Fall 100

Basis Points

 

 

Unchanged

 

 

Interest Rates

Rise 100

Basis Points

 

Interest rate-sensitive investment securities:

 

 

 

 

 

 

 

 

 

 

 

 

Fair value

 

$

43,365

 

 

$

40,366

 

 

$

39,856

 

Change in fair value

 

$

2,999

 

 

$

—

 

 

$

(510

)

Change as a percent of fair value

 

 

7

%

 

 

—

%

 

 

(1

)%

Interest rate-sensitive hedging instruments:

 

 

 

 

 

 

 

 

 

 

 

 

Fair value

 

$

(17,693

)

 

$

(11,278

)

 

$

(5,311

)

Change in fair value

 

$

(6,415

)

 

$

—

 

 

$

5,967

 

Change as a percent of fair value

 

 

57

%

 

 

—

%

 

 

(53

)%

Interest rate-sensitive derivative instruments:

 

 

 

 

 

 

 

 

 

 

 

 

Fair value

 

$

(417

)

 

$

(48

)

 

$

285

 

Change in fair value

 

$

(369

)

 

$

—

 

 

$

333

 

Change as a percent of fair value

 

 

769

%

 

 

—

%

 

 

(694

)%

For purposes of the table, we have excluded our investments and liabilities with variable interest rates that are indexed to the London Interbank Offered Rate. The variable rates on these instruments are short-term in nature, therefore we are not subject to material exposure from movements in fair value as a result of changes in interest rates.

It is important to note that the impact of changing interest rates on fair value can change significantly when interest rates change beyond 100 basis points from current levels. Therefore, the volatility in the fair value of our assets could increase significantly when interest rates change beyond 100 basis points from current levels. In addition, other factors impact the fair value of our interest rate-sensitive investment securities, hedging instruments and derivative instruments, such as the shape of the yield curve, market expectations as to future interest rate changes and other market conditions. Accordingly, in the event of changes in actual interest rates, the change in the fair value of our assets would likely differ from that shown above and such difference might be material and adverse to our stockholders.

Risk Management

To the extent consistent with maintaining our status as a real estate investment trust, we seek to manage our interest rate risk exposure to protect our variable rate debt against the effects of major interest rate changes. We generally seek to manage our interest rate risk by:

 

•

monitoring and adjusting, if necessary, the reset index and interest rate related to our borrowings;

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•

attempting to structure our borrowing agreements for our commercial mortgage-backed securities to have a range of different maturities, terms, amortizations and interest rate adjustment periods; and

 

•

using derivatives to adjust the interest rate sensitivity of our variable-rate borrowings, which we discuss in “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Financial Condition - Derivative Instruments.”

ITEM 4.

CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Securities Exchange Act of 1934 reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

Under the supervision of our Chief Executive Officer and Chief Financial Officer, we have carried out an evaluation of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective at the reasonable assurance level.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting during the quarter ended March 31, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II

ITEM 1.

We may become involved in litigation on various matters due to the nature of our business activities. The resolution of these matters may result in adverse judgments, fines, penalties, injunctions and other relief against us as well as monetary payments or other agreements and obligations. In addition, we may enter into settlements on certain matters in order to avoid the additional costs of engaging in litigation. Except as discussed below, we are unaware of any contingencies arising from such litigation that would require accrual or disclosure in the consolidated financial statements at March 31, 2020.

Primary Capital Mortgage, LLC (“PCM”) is subject to potential litigation related to claims for repurchases or indemnifications on loans that PCM has sold to third parties. At March 31, 2020 and December 31, 2019, no such litigation demand was outstanding. Reserves for such litigation demands are included in the reserve for mortgage repurchases and indemnifications that totaled $1.7 million at March 31, 2020 and December 31, 2019. The reserves for mortgage repurchases and indemnifications are included in liabilities held for sale on the consolidated balance sheets. As of March 31, 2020, we have substantially completed disposing of PCM’s business.

Litigation Matters

We did not have any pending litigation matters or general litigation reserve at March 31, 2020 or December 31, 2019.

ITEM 1A.

RISK FACTORS

For information regarding factors that could affect our results of operations, financial condition and liquidity, see the risk factors discussed in Part I, Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2019 (the “Annual Report”).

In light of developments relating to the COVID-19 pandemic occurring subsequent to the filing of our Annual Report, we are supplementing the risk factors discussed in our Annual Report with the following risk factor, which should be read in conjunction with the risk factors contained in our Annual Report.

The outbreak of widespread contagious disease, such as the novel coronavirus, COVID-19, has caused, and may continue to cause, shocks to the United States and global economy and to our business, which has had, and may continue to have, an adverse impact on our financial condition, our results of operations and our liquidity and capital resources.

In December 2019, a novel strain of coronavirus, COVID-19, was identified in Wuhan, China. The resulting global proliferation of the virus led the World Health Organization to designate COVID-19 as a pandemic and numerous countries, including the United States, to declare national emergencies. Many countries have responded to the outbreak by instituting quarantines and restrictions on travel, which has resulted in the closure or remote operation of non-essential businesses. Such actions have produced material and previously unforeseeable shocks to global markets, disruptions to global supply chains, increasing rates of unemployment and adversity to many industries and economies as whole.

The COVID-19 pandemic has had, and may continue to have, a material adverse impact on our financial condition, liquidity and results of operations and the market price of our common stock and preferred stock. We expect that these impacts are likely to continue to some extent as the pandemic persists. Although many or all facets of our business have been or could be impacted by the COVID-19 pandemic, we currently believe the following impacts to be among the most material to us:

 

•

COVID-19 could have a significant long-term impact on the broader economy and the commercial real estate (“CRE”) market generally, which would negatively impact the value of the properties collateralizing our loans. Our portfolio includes loans collateralized by hotel, retail, multifamily and other property types that are particularly negatively impacted by the pandemic. While we believe the principal amount of our loans are generally adequately protected by underlying value, there can be no assurance that we will realize the entire principal value of certain investments.

 

•

We are actively engaged in discussions with our borrowers, some of whom we expect may face challenges in complying with the terms of their loans. We therefore anticipate more frequent modifications of our loans and potentially instances of default or foreclosure on assets underlying our loans, which will adversely affect the credit profile of our assets and our results of operations and financial condition.

 

•

The shocks to global markets, particularly the real estate credit markets, adversely impacted the market pricing of our CRE securities. Depending on the magnitude and duration of the pandemic’s impact, the assets underlying these securities may default on their terms, requiring that we incur credit losses on our portfolio.

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•

We have warehouse facilities and repurchase agreements with numerous lenders and continuously engage in discussions around the value of pledged assets as defined in our agreements with such lenders, potential deleveraging, the application of certain provisions of such agreements to these circumstances and other structural elements under the agreements. If we do not have the funds available to make required payments, it would likely result in defaults and could result in defaults under other debt instruments as well as potential loss of our assets to the lenders unless we are able to raise the funds from alternative sources, including by selling or financing assets or raising capital, each of which we may be required to do under adverse market conditions or at an inopportune time or on unfavorable terms, or may be unable to do at all. The COVID-19 pandemic has made it very difficult for businesses generally, including us, to access liquidity sources at terms commensurate with those prior to this pandemic, or at all. Pledging additional collateral or otherwise paying down facilities to satisfy our lenders and avoid potential margin calls and loan defaults would reduce our cash available to meet subsequent margin calls and/or future funding requests as well as make other, higher yielding investments, thereby decreasing our liquidity, return on equity, available cash, net income and ability to implement our investment strategy. If we cannot meet lender requirements related to margin calls or other terms of our credit agreements, the lender or counterparty could accelerate our indebtedness, increase the interest rate on advanced funds and terminate our ability to borrow additional funds, which would materially and adversely affect our financial condition and ability to implement our investment strategy.

 

•

The COVID-19 pandemic has reduced, and likely will continue to reduce, the availability of liquidity sources, but our requirements for liquidity, including future funding commitments and margin calls, likely will not be commensurately reduced. If we do not have funds available to meet our obligations, we would have to raise funds from alternative sources, which may be at unfavorable terms or may not be available to us due to the impacts of COVID-19. We expect that the adverse impact of the COVID-19 pandemic will likely adversely affect our liquidity position and could limit our ability to grow our business and fully execute our business strategy. We expect to preserve and build our liquidity to best position us to weather near-term market uncertainty, satisfy our loan future funding requests and to potentially make new investments, which will cause us to take some or all of the following actions: borrow additional capital, sell assets and /or change our dividend distributions, which were suspended in the first quarter of 2020.

 

•

Interest rates and credit spreads have been significantly impacted since the outbreak of COVID-19. This can result in volatile changes to the fair value of our floating rate loans, fixed-rate loans and CRE securities and also the interest obligations on our floating-rate borrowings, which could result in an increase to our interest expense.

We have also experienced and may experience other negative impacts to our business as a result of the pandemic that could exacerbate other risks, including:

 

•

lack of liquidity in certain of our assets;

 

•

greater risk of loss on our mezzanine loans and preferred equity investments;

 

•

risk associated with loans that are in transition;

 

•

the concentration of our loans and investments in certain geographies, property types or relationships;

 

•

risks associated with our securitizations that we use to finance our loans;

 

•

downgrades in credit ratings assigned to our investments;

 

•

investments in interest rate derivative contracts and risks associated with our hedging and derivatives;

 

•

the difficulty of estimating provisions for credit losses;

 

•

borrower and counterparty risks;

 

•

operational impacts on ourselves and our third-party advisors, service providers, vendors and counterparties;

 

•

limitations on our ability to ensure business continuity in the event our, or our third-party advisors’ and service providers’, continuity of operations plan is not effective or improperly implemented or deployed during a disruption;

 

•

an inability to review potential investments in affected areas as a result of quarantines, restrictions on travel, “shelter in place” rules, restrictions on types of businesses that may continue to operate and restrictions on types of construction projects that may continue;

 

•

an extended period of remote working by our Manager’s and/or its affiliate’s employees could strain our technology resources and introduce operational risks, including heightened cybersecurity risk. Remote working environments may be less secure and more susceptible to hacking attacks, including phishing and social engineering attempts that seek to exploit the COVID-19 pandemic; and

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•

other risks described in our Annual Report as they may be amended by our periodic filings with the Securities and Exchange Commission.

The rapid development of the pandemic and the resulting economic effects have created uncertainty surrounding the ultimate impact of the COVID-19 pandemic on the global economy generally, and the CRE business in particular. As a result, we cannot project the ultimate adverse impact of the COVID-19 pandemic on the global economy or our business, including our financial condition and performance. The extent of the impact of COVID-19 will depend on future developments, including new information that may emerge about the severity of the pandemic, the extension of quarantines and restrictions on travel, the discovery of successful treatments and the ensuing reactions by consumers, companies, governmental entities and global markets.

ITEM 5.

OTHER INFORMATION

On April 10, 2018, we entered into a Guaranty with Barclays Bank PLC (“Barclays”) in connection with our subsidiary, RCC Real Estate SPE 7, LLC’s, Master Repurchase Agreement with Barclays. On May 7, 2020, we executed the first amendment to the Guaranty, which is filed as Exhibit 99.3(c) to this Quarterly Report on Form 10-Q and is incorporated herein by reference, that revised its minimum equity financial covenant, effective March 1, 2020.

On October 26, 2018, we entered into a Guarantee with JPMorgan Chase Bank, National Association (“JPMorgan Chase Bank”) in connection with our subsidiary RCC Real Estate SPE 8, LLC’s Master Repurchase Agreement with JPMorgan Chase Bank. On May 6, 2020, we executed the first amendment of the Guarantee, which is filed as Exhibit 99.4(c) to this Quarterly Report on Form 10-Q and is incorporated herein by reference, that revised its minimum equity and total indebtedness to equity ratio financial covenants, effective February 29, 2020 and for the calendar quarter beginning January 1, 2020, respectively.

 

ITEM 6.

EXHIBITS

 

Exhibit No.

 

Description

2.1

 

Asset Purchase Agreement, dated June 6, 2017, by and among Stearns Lending, LLC, Primary Capital Mortgage, LLC, and Resource Capital Corp. (32)

2.1(b)

 

Mortgage Loan Sale and Purchase Agreement, dated May 29, 2019, by and between RCC Real Estate, Inc. and C-III Commercial Mortgage LLC. (44)

3.1(a)

 

Restated Certificate of Incorporation of Resource Capital Corp. (1)

3.1(b)

 

Articles of Amendment to Restated Certificate of Incorporation of Resource Capital Corp. (27)

3.1(c)

 

Articles Supplementary 8.50% Series A Cumulative Redeemable Preferred Stock. (15)

3.1(d)

 

Articles Supplementary 8.50% Series A Cumulative Redeemable Preferred Stock. (16)

3.1(e)

 

Articles Supplementary 8.25% Series B Cumulative Redeemable Preferred Stock. (17)

3.1(f)

 

Articles Supplementary 8.50% Series A Cumulative Redeemable Preferred Stock. (21)

3.1(g)

 

Articles Supplementary 8.625% Fixed-to-Floating Series C Cumulative Redeemable Preferred Stock. (8)

3.1(h)

 

Articles of Amendment, effective May 25, 2018. (39)

3.2

 

Third Amended and Restated Bylaws of Exantas Capital Corp. (49)

3.3

 

Marked Third Amended and Restated Bylaws of Exantas Capital Corp. (49)

4.1(a)

 

Form of Certificate for Common Stock for Resource Capital Corp. (1)

4.1(b)

 

Form of Certificate for 8.50% Series A Cumulative Redeemable Preferred Stock. (12)

4.1(c)

 

Form of Certificate for 8.25% Series B Cumulative Redeemable Preferred Stock. (17)

4.1(d)

 

Form of Certificate for 8.625% Fixed-to-Floating Series C Cumulative Redeemable Preferred Stock. (8)

4.2(a)

 

Junior Subordinated Indenture between Resource Capital Corp. and Wells Fargo Bank, N.A., dated May 25, 2006. (2)

4.2(b)

 

Amendment to Junior Subordinated Indenture and Junior Subordinated Note due 2036 between Resource Capital Corp. and Wells Fargo Bank, N.A., dated October 26, 2009 and effective September 30, 2009. (6)

4.3(a)

 

Amended and Restated Trust Agreement among Resource Capital Corp., Wells Fargo Bank, N.A., Wells Fargo Delaware Trust Company and the Administrative Trustees named therein, dated May 25, 2006. (2)

4.3(b)

 

Amendment to Amended and Restated Trust Agreement and Preferred Securities Certificate among Resource Capital Corp., Wells Fargo Bank, N.A. and the Administrative Trustees named therein, dated October 26, 2009 and effective September 30, 2009. (6)

4.4

 

Junior Subordinated Note due 2036 in the principal amount of $25,774,000, dated October 26, 2009. (6)

4.5(a)

 

Junior Subordinated Indenture between Resource Capital Corp. and Wells Fargo Bank, N.A., dated September 29, 2006. (3)

4.5(b)

 

Amendment to Junior Subordinated Indenture and Junior Subordinated Note due 2036 between Resource Capital Corp. and Wells Fargo Bank, N.A., dated October 26, 2009 and effective September 30, 2009. (6)

4.6(a)

 

Amended and Restated Trust Agreement among Resource Capital Corp., Wells Fargo Bank, N.A., Wells Fargo Delaware Trust Company and the Administrative Trustees named therein, dated September 29, 2006. (3)

4.6(b)

 

Amendment to Amended and Restated Trust Agreement and Preferred Securities Certificate among Resource Capital Corp., Wells Fargo Bank, N.A. and the Administrative Trustees named therein, dated October 26, 2009 and effective September 30, 2009. (6)

4.7

 

Junior Subordinated Note due 2036 in the principal amount of $25,774,000, dated October 26, 2009. (6)

4.8(a)

 

Second Supplemental Indenture, dated January 13, 2015, between Resource Capital Corp. and Wells Fargo Bank, National Association, as Trustee (including the form of 8.00% Convertible Senior Note due 2020). (19)

4.8(b)

 

Form of 8.00% Convertible Senior Note due 2020 (included in Exhibit 4.8(a)).

4.8(c)

 

Third Supplemental Indenture, dated August 16, 2017, between Resource Capital Corp. and Wells Fargo Bank, National Association, as Trustee (including the form of 4.50% Convertible Senior Note due 2022). (34)

4.8(d)

 

Form of 4.50% Convertible Senior Note due 2022 (included in Exhibit 4.8(c)).

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4.9

 

Description of Registrant’s Securities Registered Pursuant to Section 12 of the Securities Exchange Act of 1934. (49)

10.1(a)

 

Third Amended and Restated Management Agreement between Resource Capital Corp., Resource Capital Manager, Inc. and Resource America, Inc. dated as of December 4, 2017. (36)

10.1(b)

 

Amendment No. 1 to Third Amended and Restated Management Agreement between Exantas Capital Corp. (formerly known as Resource Capital Corp.), Exantas Capital Manager Inc. (formerly known as Resource Capital Manger, Inc.) and Resource America, Inc. dated as of February 20, 2020. (48)

10.2(a)

 

2005 Stock Incentive Plan. (1)

10.2(b)

 

Form of Stock Award Agreement. (7)

10.2(c)

 

Form of Stock Option Agreement. (7)

10.3(a)

 

Second Amended and Restated Omnibus Equity Compensation Plan. (45)

10.3(b)

 

Form of Stock Award Agreement. (25)

10.3(c)

 

Form of Stock Award Agreement (for employees with Resource America, Inc. employment agreements). (25)

10.4

 

Services Agreement between Resource Capital Asset Management, LLC and Apidos Capital Management, LLC, dated February 24, 2011. (10)

10.5

 

Membership Interest Purchase Agreement, dated as of August 1, 2016, by and among CVC Credit Partners U.S. Lending I, L.P., Coller International Partners VII, L.P., Coller International Partners VII Parallel Fund, L.P. and Coller International Partners VII Luxembourg, SLP (solely with respect to Section 6.7 thereof), NEW NP, LLC, and Resource Capital Corp. (solely with respect to Section 6.8 thereof)).(30)

10.6

 

Form of Indemnification Agreement. (33)

10.7

 

Exchange Agreement, dated August 10, 2017, by and between Resource Capital Corp., Oaktree Real Estate Debt Holdings Ltd., INVESTIN PRO RED HOLDINGS, LLC, and Oaktree TSE-16 Real Estate Debt, LLC. (34)

31.1

 

Rule 13a-14(a)/Rule 15d-14(a) Certification of Chief Executive Officer.

31.2

 

Rule 13a-14(a)/Rule 15d-14(a) Certification of Chief Financial Officer.

32.1

 

Certification Pursuant to 18 U.S.C. Section 1350.

32.2

 

Certification Pursuant to 18 U.S.C. Section 1350.

99.1(a)

 

Amended and Restated Master Repurchase and Securities Contract by and between RCC Real Estate SPE 4, LLC, as Seller, and Wells Fargo Bank, National Association, as Buyer, dated as of July 19, 2018. (11)

99.1(b)

 

First Amendment to Amended and Restated Master Repurchase and Securities Contract by and between RCC Real Estate SPE 4, LLC, as Seller, and Wells Fargo Bank, National Association, as Buyer, dated as of May 29, 2019. (46)

99.1(c)

 

Amended and Restated Guaranty Agreement made by Exantas Capital Corp., as guarantor, and Wells Fargo Bank, National Association, dated as of July 19, 2018. (11)

99.2(a)

 

Master Repurchase and Securities Contract Agreement between RCC Real Estate 6, LLC and Morgan Stanley Bank, NA, dated as of September 10, 2015. (28)

99.2(b)

 

Second Amendment to Master Repurchase and Securities Contract Agreement between RCC Real Estate 6, LLC and Morgan Stanley Bank, N.A. dated as of September 10, 2018. (41)

99.2(c)

 

Third Amendment to Master Repurchase and Securities Contract Agreement between RCC Real Estate 6, LLC and Morgan Stanley Bank, N.A. dated as of September 10, 2019. (47)

99.2(d)

 

Guaranty dated as of September 10, 2015, made by Resource Capital Corp., as guarantor, in favor of Morgan Stanley Bank, N.A. (28)

99.3(a)

 

Master Repurchase Agreement between RCC Real Estate SPE 7, LLC and Barclays Bank PLC, dated as of April 10, 2018. (38)

99.3(b)

 

Guaranty dated as of April 10, 2018, made by Resource Capital Corp., as guarantor, in favor of Barclays Bank PLC. (38)

99.3(c)

 

First Amendment to Guaranty dated as of May 7, 2020, made by Exantas Capital Corp., f/k/a Resource Capital Corp., as guarantor, in favor of Barclays Bank PLC.

99.4(a)

 

Master Repurchase Agreement for $250,000,000 between RCC Real Estate SPE 8, LLC, as Seller, and JPMorgan Chase Bank, National Association, as Buyer, dated October 26, 2018. (40)

99.4(b)

 

Guarantee made by Exantas Capital Corp., as guarantor, in favor of JPMorgan Chase Bank, National Association, dated October 26, 2018. (40)

99.4(c)

 

First Amendment to Guarantee Agreement, dated May 6, 2020, between Exantas Capital Corp. and JPMorgan Chase Bank, National Association.

99.5(a)

 

Notice of Proposed Settlement of Shareholder Derivative Litigation. (43)

99.5(b)

 

Stipulation and Agreement of Settlement. (43)

99.6

 

Federal Income Tax Consequences of our Qualification as a REIT. (49)

101.INS

 

Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.

101.SCH

 

Inline XBRL Taxonomy Extension Schema Document.

101.CAL

 

Inline XBRL Taxonomy Extension Calculation Linkbase Document.

101.DEF

 

Inline XBRL Taxonomy Extension Definition Linkbase Document.

101.LAB

 

Inline XBRL Taxonomy Extension Label Linkbase Document.

101.PRE

 

Inline XBRL Taxonomy Extension Presentation Linkbase Document.

104

 

Cover Page Interactive Data File.

 

(1)

 

Filed previously as an exhibit to the Company’s registration statement on Form S-11, Registration No. 333-126517.

(2)

 

Filed previously as an exhibit to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2006.

(3)

 

Filed previously as an exhibit to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2006.

(4)

 

Filed previously as an exhibit to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2013.

(5)

 

Filed previously as an exhibit to the Company’s Current Report on Form 8-K filed on June 26, 2014.

(6)

 

Filed previously as an exhibit to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2009.

(7)

 

Filed previously as an exhibit to the Company’s Registration Statement on Form S-11 (File No. 333-132836).

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75

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(8)

 

Filed previously as an exhibit to the Company’s Registration Statement on Form 8-A filed on June 9, 2014.

(9)

 

Filed previously as an exhibit to the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.

(10)

 

Filed previously as an exhibit to the Company’s Current Report on Form 8-K filed on March 2, 2011.

(11)

 

Filed previously as an exhibit to the Company’s Current Report on Form 8-K filed on July 25, 2018.

(12)

 

Filed previously as an exhibit to the Company’s Annual Report on Form 10-K for the year ended December 31, 2012 filed on March 18, 2013.

(13)

 

Filed previously as an exhibit to the Company’s Current Report on Form 8-K filed on March 2, 2012.

(14)

 

Filed previously as an exhibit to the Company’s Current Report on Form 8-K filed on June 13, 2012.

(15)

 

Filed previously as an exhibit to the Company’s registration statement on Form 8-A filed on June 8, 2012.

(16)

 

Filed previously as an exhibit to the Company’s Current Report on Form 8-K filed on June 29, 2012.

(17)

 

Filed previously as an exhibit to the Company’s Registration Statement on Form 8-A filed on September 28, 2012.

(18)

 

Filed previously as an exhibit to the Company’s Current Report on Form 8-K filed on September 23, 2014.

(19)

 

Filed previously as an exhibit to the Company’s Current Report on Form 8-K filed on January 13, 2015.

(20)

 

Filed previously as an exhibit to the Company’s Current Report on Form 8-K filed on October 1, 2012.

(21)

 

Filed previously as an exhibit to the Company Current Report on Form 8-K filed on November 20, 2012.

(22)

 

Filed previously as an exhibit to the Company’s Current Report on Form 8-K filed on April 8, 2013.

(23)

 

Filed previously as an exhibit to the Company’s Current Report on Form 8-K filed on July 25, 2013.

(24)

 

Filed previously as an exhibit to the Company’s Current Report on Form 8-K filed on October 21, 2013.

(25)

 

Filed previously as an exhibit to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2014.

(26)

 

Filed previously as an exhibit to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2015.

(27)

 

Filed previously as an exhibit to the Company’s Current Report on Form 8-K filed on September 1, 2015.

(28)

 

Filed previously as an exhibit to the Company’s Current Report on Form 8-K filed on September 16, 2015.

(29)

 

Filed previously as an exhibit to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2016.

(30)

 

Filed previously as an exhibit to the Company’s Current Report on Form 8-K filed on August 5, 2016.

(31)

 

Filed previously as an exhibit to the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.

(32)

 

Filed previously as an exhibit to the Company’s Current Report on Form 8-K filed on June 8, 2017.

(33)

 

Filed previously as an exhibit to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2017.

(34)

 

Filed previously as an exhibit to the Company’s Current Report on Form 8-K filed on August 16, 2017.

(35)

 

Filed previously as an exhibit to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2016.

(36)

 

Filed previously as an exhibit to the Company’s Current Report on Form 8-K filed on December 18, 2017.

(37)

 

Filed previously as an exhibit to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2017.

(38)

 

Filed previously as an exhibit to the Company’s Current Report on Form 8-K filed on April 12, 2018.

(39)

 

Filed previously as an exhibit to the Company’s Current Report on Form 8-K filed on May 25, 2018.

(40)

 

Filed previously as an exhibit to the Company’s Current Report on Form 8-K filed on October 30, 2018.

(41)

 

Filed previously as an exhibit to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2018.

(42)

 

Filed previously as an exhibit to the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.

(43)

 

Filed previously as an exhibit to the Company’s Current Report on Form 8-K filed on March 27, 2019.

(44)

 

Filed previously as an exhibit to the Company’s Current Report on Form 8-K filed on May 30, 2019.

(45)

 

Filed previously as an exhibit to the Company’s Proxy Statement filed on April 18, 2019.

(46)

 

Filed previously as an exhibit to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2019.

(47)

 

Filed previously as an exhibit to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2019.

(48)

 

Filed previously as an exhibit to the Company’s Current Report on Form 8-K filed on February 24, 2020.

(49)

 

Filed previously as an exhibit to the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.

 

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76

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

 

EXANTAS CAPITAL CORP.

 

 

 

(Registrant)

 

 

 

 

May 11, 2020

 

By:

/s/ Robert C. Lieber

 

 

 

Robert C. Lieber

 

 

 

Chief Executive Officer

 

 

 

 

May 11, 2020

 

By:

/s/ David J. Bryant

 

 

 

David J. Bryant

 

 

 

Senior Vice President

 

 

 

Chief Financial Officer and Treasurer

 

 

 

 

May 11, 2020

 

By:

/s/ Eldron C. Blackwell

 

 

 

Eldron C. Blackwell

 

 

 

Vice President

 

 

 

Chief Accounting Officer

 

 

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77

Exhibit 31.1

CERTIFICATION

I, Robert C. Lieber, certify that:

 

1.

I have reviewed this report on Form 10-Q for the quarter ended March 31, 2020 of Exantas Capital Corp.;

 

2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4.

The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

a.

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

b.

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

c.

Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

d.

Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5.

The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

a.

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

b.

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

May 11, 2020

/s/ Robert C. Lieber

 

Robert C. Lieber

 

Chief Executive Officer

 

Exhibit 31.2

CERTIFICATION

I, David J. Bryant, certify that:

 

1.

I have reviewed this report on Form 10-Q for the quarter ended March 31, 2020 of Exantas Capital Corp.;

 

2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4.

The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

a.

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

b.

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

c.

Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

d.

Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5.

The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

a.

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

b.

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

May 11, 2020

/s/ David J. Bryant

 

David J. Bryant

 

Chief Financial Officer

 

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Exantas Capital Corp. (the “Company”) on Form 10-Q for the quarter ended March 31, 2020 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Robert C. Lieber, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

 

(1)

The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, and

(2)

The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

May 11, 2020

/s/ Robert C. Lieber

 

Robert C. Lieber

 

Chief Executive Officer

 

Exhibit 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Exantas Capital Corp. (the “Company”) on Form 10-Q for the quarter ended March 31, 2020 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, David J. Bryant, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

 

(1)

The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, and

(2)

The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

May 11, 2020

/s/ David J. Bryant

 

David J. Bryant

 

Chief Financial Officer

 

Exhibit 99.3

First AMENDMENT TO
GUARANTY

FIRST AMENDMENT TO GUARANTY, dated as of May 7, 2020 (this “Amendment”), made by Exantas Capital Corp., f/k/a Resource Capital Corp., a corporation organized under the laws of the State of Maryland (“Guarantor”), for the benefit of Barclays Bank PLC, a public limited company organized under the laws of England and Wales (including any successor thereto, “Purchaser”).  Capitalized terms used and not otherwise defined herein shall have the meanings given to such terms in the Guaranty (as defined below).

RECITALS

WHEREAS, Purchaser and RCC Real Estate SPE 7, LLC (“Seller”), are parties to that certain Master Repurchase Agreement, dated as of April 10, 2018, between Purchaser and Seller (as amended, restated, supplemented or otherwise modified and in effect from time to time, the “Repurchase Agreement”), and the other Transaction Documents (as defined therein);

WHEREAS, Guarantor indirectly owns one hundred percent (100%) of the Capital Stock of Seller;

WHEREAS, in connection with the Repurchase Agreement, Guarantor made that certain Guaranty, dated as of April 10, 2018, for the benefit of Purchaser (the “Existing Guaranty” and, as amended by this Amendment, the “Guaranty”); and

WHEREAS, Guarantor and Purchaser desire to make certain modifications to the Existing Guaranty.

NOW THEREFORE, in consideration of the foregoing recitals, and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto, intending to be legally bound, agree as follows:

ARTICLE I.

Amendment

(a)Resource Capital Corp. has changed its name to Exantas Capital Corp.  All references to Resource Capital Corp. in the Existing Guaranty and in each other Transaction Document shall instead refer to Exantas Capital Corp.

(b)Exhibit A of the Existing Guaranty is hereby amended by replacing the definition of “Required Capital Amount” with the following:

“Required Capital Amount shall mean (i) from April 10, 2018 through and including February 29, 2020, $425,000,000 plus seventy-five percent (75%) of the aggregate Net Proceeds of Equity Issuance received by Guarantor or any of its Affiliates from any equity capital raised following April 10, 2018 through and including February 29, 2020 and (ii) from and after March 1, 2020,

 

 

$275,000,000 plus seventy-five percent (75%) of the aggregate Net Proceeds of Equity Issuance received by Guarantor or any of its Affiliates from any equity capital raised following March 1, 2020.

ARTICLE II.

Representations

Guarantor represents and warrants to Purchaser, as of the date of this Amendment, as follows:

(i)all representations and warranties made by it in the Transaction Documents to which it is a party are true, correct, complete and accurate in all respects as of the date hereof with the same force and effect as if made on and as of such date (or, if any such representation or warranty is expressly stated to have been made as of a specific date, as of such specific date);

(ii)it is duly authorized to execute and deliver this Amendment and has taken all necessary action to authorize such execution, delivery and performance;

(iii)the person signing this Amendment on its behalf is duly authorized to do so on its behalf;

(iv)the execution, delivery and performance of this Amendment will not violate any Requirement of Law applicable to it or its organizational documents or any agreement by which it is bound or by which any of its assets are affected; and

(v)this Amendment has been duly executed and delivered by it.

ARTICLE III.

FEES AND EXPENSES

Guarantor shall pay on demand all of Purchaser’s out-of-pocket costs and expenses, including reasonable fees and expenses of accountants, attorneys and advisors, incurred in connection with the preparation, negotiation, execution and consummation of this Amendment and other costs and expenses due and payable as of the date hereof pursuant to Article 27(b) of the Repurchase Agreement.

ARTICLE IV.

Governing Law

THIS AMENDMENT SHALL BE CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, AND THE OBLIGATIONS, RIGHTS, AND REMEDIES OF THE PARTIES HEREUNDER SHALL BE DETERMINED IN ACCORDANCE WITH SUCH LAWS WITHOUT REGARD TO THE CONFLICT OF LAWS DOCTRINE

2

 

APPLIED IN SUCH STATE (OTHER THAN SECTION 5-1401 OF THE GENERAL OBLIGATIONS LAW OF THE STATE OF NEW YORK).

ARTICLE V.

Miscellaneous

(a)Except as expressly amended or modified hereby, the Existing Guaranty and the other Transaction Documents shall each be and shall remain in full force and effect in accordance with their terms.

(b)This Amendment may be executed in counterparts, each of which so executed shall be deemed to be an original, but all of such counterparts shall together constitute but one and the same instrument.  Delivery of an executed counterpart of a signature page of this Amendment in electronic format shall be as effective as delivery of a manually executed original counterpart of this Amendment.

(c)The headings in this Amendment are for convenience of reference only and shall not affect the interpretation or construction of this Amendment.

(d)This Amendment may not be amended or otherwise modified, waived or supplemented except as provided in the Guaranty.

(e)This Amendment contains a final and complete integration of all prior expressions by the parties with respect to the subject matter hereof and shall constitute the entire agreement among the parties with respect to such subject matter, superseding all prior oral or written understandings.

(f)The Existing Guaranty, as amended by this Amendment, is a Transaction Document.

[SIGNATURES FOLLOW]

3

 

IN WITNESS WHEREOF, the parties have caused this Amendment to be duly executed as of the date first above written.

GUARANTOR:

 

 

 

 

 

EXANTAS CAPITAL CORP., a Maryland

 

corporation

 

 

 

 

 

 

 

 

 

 

By:

/s/ Michael A. Pierro

 

Name:

Michael A. Pierro

 

Title:

Vice President

 

ACCEPTED AND AGREED BY:

 

 

 

 

 

PURCHASER:

 

 

 

 

 

BARCLAYS BANK PLC, a public limited

 

company organized under the laws of England and Wales

 

 

 

 

 

 

 

By:

/s/ Francis X. Gilhool

 

Name:

Francis X. Gilhool

 

Title:

MD

 

Barclays-Exantas

Signature Page to First Amendment to Guaranty

Exhibit 99.4

AMENDMENT NO. 1 TO GUARANTEE AGREEMENT

AMENDMENT NO. 1 TO GUARANTEE AGREEMENT, dated as of May 6, 2020 (this “Amendment”), between EXANTAS CAPITAL CORP., a Maryland corporation (“Guarantor”), and JPMORGAN CHASE BANK, NATIONAL ASSOCIATION, a national banking association (“Buyer”).  Capitalized terms used but not otherwise defined herein shall have the meanings given to them in the Repurchase Agreement (as defined below).

RECITALS

WHEREAS, RCC REAL ESTATE SPE 8, LLC (“Seller”) and Buyer are parties to that certain Uncommitted Master Repurchase Agreement, dated as of October 26, 2018 (the “Repurchase Agreement”);

WHEREAS, in connection with the Repurchase Agreement, Guarantor entered into that certain Guarantee Agreement, dated as of October 26, 2018 (as amended hereby, and as further amended, restated, supplemented or otherwise modified and in effect from time to time, the “Guarantee Agreement”); and

WHEREAS, Guarantor and Buyer have agreed to amend certain provisions of the Guarantee Agreement in the manner set forth herein.

NOW THEREFORE, in consideration of the premises and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Guarantor and Buyer agree as follows:

Section 1.Amendments to Guarantee Agreement.  

(a)Section 1 of the Guarantee Agreement is hereby amended by adding the following definition in applicable alphabetical order:

“Guarantee First Amendment Effective Date” shall mean May 6, 2020.

(b)Section 9(a)(ii) of the Guarantee Agreement is hereby amended by amending and restated to read in its entirety to read as follows:

“(ii)At all times, Guarantor shall have a minimum Tangible Net Worth of not less than the sum of (1) (A) from the Closing Date through but excluding February 29, 2020, $425,000,000”, and (B) from and after February 29, 2020, “$275,000,000”, plus, in each case, (2) seventy-five percent (75%) of the aggregate net proceeds received by Guarantor or any of its Affiliates from any equity capital raised following the date hereof.”

(c)Section 9(a)(iv) of the Guarantee Agreement is hereby amended and restated to read in its entirety as follows:

 

 

“(iv)Guarantor shall not permit, for any Test Period, the ratio of its Adjusted Total Indebtedness to its Total Equity to be greater than (1) from the Closing Date through the Test Period Ending December 31, 2019, 3.00 to 1.00, and (2) from and including the Test Period Ending March 31, 2020, 2.50 to 1.00”.

Section 2.Conditions Precedent.  This Amendment shall become effective on the date on which this Amendment is executed and delivered by a duly authorized officer of each of Buyer and Guarantor.

Section 3.Guarantor’s Representations and Warranties.  On and as of the Guarantee First Amendment Effective Date, and after giving effect to the matters contained in this Amendment, Guarantor hereby represents and warrants to Buyer that (a) it is in compliance with all the terms and provisions set forth in the Guarantee Agreement on its part to be observed or performed, (b) with respect to Guarantor’s covenants in Section 9(a)(ii) and 9(a)(iv) of the Guarantee, after giving effect to this Amendment and, with respect to all other requirements of the Transaction Documents, both prior to and after giving effect to this Amendment, no Default or Event of Default under the Repurchase Agreement has occurred and is continuing, and (c) it has no, and hereby waives all, defenses, rights of setoff, claims, counterclaims or causes of action of any kind or description against Buyer arising under or in respect of the Guarantee Agreement or any other Transaction Document (other than a defense of payment or performance).  Guarantor hereby confirms and reaffirms the representations and warranties contained in the Guarantee Agreement and all of the other Transaction Documents.

Section 4.Acknowledgments of Guarantor.  Guarantor hereby acknowledges and agrees that (a) it continues to be bound by the Guarantee Agreement to the extent of the Obligations (as defined therein), and (b) as of the date hereof, Buyer is in compliance with its undertakings and obligations under the Repurchase Agreement, the Guarantee Agreement and each of the other Transaction Documents.

Section 5.Limited Effect.  The Guarantee Agreement (except as the foregoing is expressly amended and modified by this Amendment), and each of the other Transaction Documents remain, in full force and effect in accordance with their respective terms; provided, however, that on the Guarantee First Amendment Effective Date, (a) all references in the Repurchase Agreement to the “Transaction Documents” shall be deemed to include, in any event, this Amendment, and (b) each reference to the “Guarantee” or “Guarantee Agreement” in any of the Transaction Documents shall be deemed to be a reference to the Guarantee Agreement, as amended hereby.

Section 6.Counterparts.  This Amendment may be executed in counterparts, each of which when so executed shall be deemed to be an original and all of which when taken together shall constitute one and the same instrument, and the words “executed,” signed,” “signature,” and words of like import as used above and elsewhere in this Amendment or in any other certificate, agreement or document related to this transaction shall include, in addition to manually executed signatures, images of manually executed signatures transmitted by facsimile or other electronic format (including, without limitation, “pdf”, “tif” or “jpg”) and other electronic signatures (including, without limitation, any electronic sound, symbol, or process, attached to or

-2-

 

logically associated with a contract or other record and executed or adopted by a person with the intent to sign the record).  The use of electronic signatures and electronic records (including, without limitation, any contract or other record created, generated, sent, communicated, received, or stored by electronic means) shall be of the same legal effect, validity and enforceability as a manually executed signature or use of a paper-based record-keeping system to the fullest extent permitted by applicable law, including the Federal Electronic Signatures in Global and National Commerce Act, the New York State Electronic Signatures and Records Act and any other applicable law, including, without limitation, any state law based on the Uniform Electronic Transactions Act or the Uniform Commercial Code.

Section 7.Costs and Expenses.  Guarantor shall pay Buyer’s reasonable actual out of pocket costs and expenses, including reasonable fees and expenses of attorneys, incurred in connection with the preparation, negotiation, execution and consummation of this Amendment.

Section 8.No Novation, Effect of Agreement.  Guarantor and Buyer have entered into this Amendment solely to amend the terms of the Guarantee Agreement and do not intend this Amendment or the transactions contemplated hereby to be, and this Amendment and the transactions contemplated hereby shall not be construed to be, a novation of any of the obligations of Guarantor under or in connection with the Guarantee Agreement.  

Section 9.Submission to Jurisdiction.  Each party hereto irrevocably and unconditionally (i) submits to the exclusive jurisdiction of any United States Federal or New York State court sitting in Manhattan, and any appellate court from any such court, solely for the purpose of any suit, action or proceeding brought to enforce its obligations under this Amendment or relating in any way to this Amendment and (ii) waives, to the fullest extent it may effectively do so, any defense of an inconvenient forum to the maintenance of such action or proceeding in any such court and any right of jurisdiction on account of its place of residence or domicile.

The parties hereto hereby irrevocably consent to the service of any summons and complaint and any other process by the mailing of copies of such process to them at their respective address specified in the Guarantee Agreement.  The parties hereto hereby agree that a final judgment in any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law.  Nothing in this Section 9 shall affect the right of Buyer to serve legal process in any other manner permitted by law or affect the right of Buyer to bring any action or proceeding against Guarantor or its property in the courts of other jurisdictions.

Section 10.WAIVER OF JURY TRIAL.  EACH OF THE PARTIES HERETO HEREBY IRREVOCABLY WAIVES ALL RIGHT TO A TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM ARISING OUT OF OR RELATING TO THIS AMENDMENT.

Section 11. GOVERNING LAW.  THIS AMENDMENT AND ANY CLAIM, CONTROVERSY OR DISPUTE ARISING UNDER OR RELATED TO THIS AMENDMENT, THE RELATIONSHIP OF THE PARTIES TO THIS AMENDMENT, AND/OR THE INTERPRETATION AND ENFORCEMENT OF THE RIGHTS AND

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DUTIES OF THE PARTIES TO THIS AMENDMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS AND DECISIONS OF THE STATE OF NEW YORK, WITHOUT REGARD TO THE CHOICE OF LAW RULES THEREOF. THE PARTIES HERETO INTEND THAT THE PROVISIONS OF SECTION 5-1401 OF THE NEW YORK GENERAL OBLIGATIONS LAW SHALL APPLY TO THIS AMENDMENT.

[SIGNATURE PAGES FOLLOW]

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IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed and delivered as of the day and year first above written and effective as of the First Amendment Effective Date.

 

 

EXANTAS CAPITAL CORP., a Maryland corporation

 

 

 

 

 

 

By:

/s/ Michael A. Pierro

 

Name:

Michael A. Pierro

 

Title:

Vice President


 

 

JPMORGAN CHASE BANK, NATIONAL

 

ASSOCIATION, a national banking association

 

 

 

 

 

 

 

 

 

 

 

 

By:

/s/ Thomas N. Cassino

 

Name:

Thomas N. Cassino

 

Title:

Executive Director