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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 September 30, 2019
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 November 4, 2019 was 31,880,594 shares.
EXANTAS CAPITAL CORP. AND SUBSIDIARIES
INDEX TO QUARTERLY REPORT
ON FORM 10-Q
|
|
|
PAGE |
|
|
3 |
|
|
Item 1: |
3 |
|
|
|
Consolidated Balance Sheets - September 30, 2019 (unaudited) and December 31, 2018 |
3 |
|
|
5 |
|
|
|
7 |
|
|
|
8 |
|
|
|
Consolidated Statements of Cash Flows (unaudited) Nine Months Ended September 30, 2019 and 2018 |
9 |
|
|
Notes to Consolidated Financial Statements - September 30, 2019 (unaudited) |
11 |
|
Item 2: |
Management's Discussion and Analysis of Financial Condition and Results of Operations |
43 |
|
Item 3: |
74 |
|
|
Item 4: |
75 |
|
|
|
76 |
|
|
Item 1: |
76 |
|
|
Item 1A: |
77 |
|
|
Item 6: |
77 |
|
|
80 |
||
EXANTAS CAPITAL CORP. AND SUBSIDIARIES
(in thousands, except share and per share data)
|
|
|
September 30, 2019 |
|
|
December 31, 2018 |
|
||
|
|
|
(unaudited) |
|
|
|
|
|
|
|
ASSETS (1) |
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
51,286 |
|
|
$ |
82,816 |
|
|
Restricted cash |
|
|
16,614 |
|
|
|
12,658 |
|
|
Accrued interest receivable |
|
|
8,647 |
|
|
|
8,198 |
|
|
CRE loans, net of allowances of $1,460 and $1,401 |
|
|
1,795,310 |
|
|
|
1,551,967 |
|
|
Investment securities available-for-sale |
|
|
471,848 |
|
|
|
418,998 |
|
|
Principal paydowns receivable |
|
|
105,464 |
|
|
|
32,083 |
|
|
Investments in unconsolidated entities |
|
|
1,548 |
|
|
|
1,548 |
|
|
Derivatives, at fair value |
|
|
— |
|
|
|
985 |
|
|
Other assets |
|
|
4,069 |
|
|
|
4,015 |
|
|
Assets held for sale (amounts include $17,141 and $17,000 of legacy CRE loans held for sale in continuing operations, see Note 20) |
|
|
17,407 |
|
|
|
17,645 |
|
|
Total assets |
|
$ |
2,472,193 |
|
|
$ |
2,130,913 |
|
|
LIABILITIES (2) |
|
|
|
|
|
|
|
|
|
Accounts payable and other liabilities |
|
$ |
3,229 |
|
|
$ |
7,550 |
|
|
Management fee payable |
|
|
1,142 |
|
|
|
938 |
|
|
Accrued interest payable |
|
|
2,523 |
|
|
|
4,224 |
|
|
Borrowings |
|
|
1,887,426 |
|
|
|
1,554,223 |
|
|
Distributions payable |
|
|
9,693 |
|
|
|
7,265 |
|
|
Derivatives, at fair value |
|
|
6,355 |
|
|
|
1,043 |
|
|
Accrued tax liability |
|
|
33 |
|
|
|
31 |
|
|
Liabilities held for sale (see Note 20) |
|
|
1,766 |
|
|
|
1,820 |
|
|
Total liabilities |
|
|
1,912,167 |
|
|
|
1,577,094 |
|
|
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; 31,870,902 and 31,657,499 shares issued and outstanding (including 424,164 and 422,671 of unvested restricted shares) |
|
|
32 |
|
|
|
32 |
|
|
Additional paid-in capital |
|
|
1,084,365 |
|
|
|
1,082,677 |
|
|
Accumulated other comprehensive income (loss) |
|
|
1,156 |
|
|
|
(3,057 |
) |
|
Distributions in excess of earnings |
|
|
(525,532 |
) |
|
|
(525,838 |
) |
|
Total stockholders' equity |
|
|
560,026 |
|
|
|
553,819 |
|
|
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY |
|
$ |
2,472,193 |
|
|
$ |
2,130,913 |
|
The accompanying notes are an integral part of these statements
3
EXANTAS CAPITAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - (Continued)
(in thousands, except share and per share data)
|
|
|
September 30, 2019 |
|
|
December 31, 2018 |
|
||
|
|
|
(unaudited) |
|
|
|
|
|
|
|
(1) Assets of consolidated variable interest entities ("VIEs") included in total assets above: |
|
|
|
|
|
|
|
|
|
Restricted cash |
|
$ |
5,808 |
|
|
$ |
6,189 |
|
|
Accrued interest receivable |
|
|
4,308 |
|
|
|
3,548 |
|
|
CRE loans, pledged as collateral and net of allowances of $895 and $763 |
|
|
1,080,532 |
|
|
|
700,223 |
|
|
Principal paydowns receivable |
|
|
26,308 |
|
|
|
31,914 |
|
|
Other assets |
|
|
95 |
|
|
|
157 |
|
|
Total assets of consolidated VIEs |
|
$ |
1,117,051 |
|
|
$ |
742,031 |
|
|
(2) Liabilities of consolidated VIEs included in total liabilities above: |
|
|
|
|
|
|
|
|
|
Accounts payable and other liabilities |
|
$ |
137 |
|
|
$ |
75 |
|
|
Accrued interest payable |
|
|
1,053 |
|
|
|
709 |
|
|
Borrowings |
|
|
882,510 |
|
|
|
501,045 |
|
|
Total liabilities of consolidated VIEs |
|
$ |
883,700 |
|
|
$ |
501,829 |
|
The accompanying notes are an integral part of these statements
4
EXANTAS CAPITAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)
(unaudited)
|
|
|
For the Three Months Ended |
|
|
For the Nine Months Ended |
|
||||||||||
|
|
|
September 30, |
|
|
September 30, |
|
||||||||||
|
|
|
2019 |
|
|
2018 |
|
|
2019 |
|
|
2018 |
|
||||
|
REVENUES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CRE loans |
|
$ |
32,558 |
|
|
$ |
26,496 |
|
|
$ |
90,289 |
|
|
$ |
74,314 |
|
|
Securities |
|
|
6,596 |
|
|
|
5,217 |
|
|
|
19,562 |
|
|
|
12,878 |
|
|
Other |
|
|
138 |
|
|
|
123 |
|
|
|
511 |
|
|
|
261 |
|
|
Total interest income |
|
|
39,292 |
|
|
|
31,836 |
|
|
|
110,362 |
|
|
|
87,453 |
|
|
Interest expense |
|
|
22,712 |
|
|
|
17,322 |
|
|
|
63,688 |
|
|
|
47,865 |
|
|
Net interest income |
|
|
16,580 |
|
|
|
14,514 |
|
|
|
46,674 |
|
|
|
39,588 |
|
|
Other revenue |
|
|
25 |
|
|
|
25 |
|
|
|
77 |
|
|
|
82 |
|
|
Total revenues |
|
|
16,605 |
|
|
|
14,539 |
|
|
|
46,751 |
|
|
|
39,670 |
|
|
OPERATING EXPENSES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Management fees |
|
|
2,528 |
|
|
|
2,813 |
|
|
|
6,862 |
|
|
|
8,438 |
|
|
Equity compensation |
|
|
552 |
|
|
|
757 |
|
|
|
1,647 |
|
|
|
2,383 |
|
|
General and administrative |
|
|
2,086 |
|
|
|
2,336 |
|
|
|
7,158 |
|
|
|
7,943 |
|
|
Depreciation and amortization |
|
|
8 |
|
|
|
36 |
|
|
|
39 |
|
|
|
68 |
|
|
(Recovery of) provision for loan losses, net |
|
|
(1,137 |
) |
|
|
(461 |
) |
|
|
58 |
|
|
|
(1,260 |
) |
|
Total operating expenses |
|
|
4,037 |
|
|
|
5,481 |
|
|
|
15,764 |
|
|
|
17,572 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,568 |
|
|
|
9,058 |
|
|
|
30,987 |
|
|
|
22,098 |
|
|
OTHER INCOME (EXPENSE) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in earnings of unconsolidated entities |
|
|
— |
|
|
|
454 |
|
|
|
— |
|
|
|
231 |
|
|
Net realized and unrealized gain on investment securities available-for-sale and loans and derivatives |
|
|
— |
|
|
|
279 |
|
|
|
4 |
|
|
|
569 |
|
|
Net realized and unrealized gain on investment securities, trading |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
53 |
|
|
Fair value adjustments on financial assets held for sale |
|
|
(55 |
) |
|
|
(1,588 |
) |
|
|
(1,457 |
) |
|
|
(6,244 |
) |
|
Other income |
|
|
107 |
|
|
|
57 |
|
|
|
259 |
|
|
|
574 |
|
|
Total other income (expense) |
|
|
52 |
|
|
|
(798 |
) |
|
|
(1,194 |
) |
|
|
(4,817 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME FROM CONTINUING OPERATIONS BEFORE TAXES |
|
|
12,620 |
|
|
|
8,260 |
|
|
|
29,793 |
|
|
|
17,281 |
|
|
Income tax benefit |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
31 |
|
|
NET INCOME FROM CONTINUING OPERATIONS |
|
|
12,620 |
|
|
|
8,260 |
|
|
|
29,793 |
|
|
|
17,312 |
|
|
NET (LOSS) INCOME FROM DISCONTINUED OPERATIONS, NET OF TAX |
|
|
(63 |
) |
|
|
364 |
|
|
|
(212 |
) |
|
|
161 |
|
|
NET INCOME |
|
|
12,557 |
|
|
|
8,624 |
|
|
|
29,581 |
|
|
|
17,473 |
|
|
Net income allocated to preferred shares |
|
|
(2,588 |
) |
|
|
(2,588 |
) |
|
|
(7,763 |
) |
|
|
(10,385 |
) |
|
Consideration paid in excess of carrying value of preferred shares |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(7,482 |
) |
|
NET INCOME (LOSS) ALLOCABLE TO COMMON SHARES |
|
$ |
9,969 |
|
|
$ |
6,036 |
|
|
$ |
21,818 |
|
|
$ |
(394 |
) |
The accompanying notes are an integral part of these statements
5
EXANTAS CAPITAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS - (Continued)
(in thousands, except share and per share data)
(unaudited)
|
|
|
For the Three Months Ended |
|
|
For the Nine Months Ended |
|
||||||||||
|
|
|
September 30, |
|
|
September 30, |
|
||||||||||
|
|
|
2019 |
|
|
2018 |
|
|
2019 |
|
|
2018 |
|
||||
|
NET INCOME (LOSS) PER COMMON SHARE - BASIC: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONTINUING OPERATIONS |
|
$ |
0.32 |
|
|
$ |
0.18 |
|
|
$ |
0.70 |
|
|
$ |
(0.02 |
) |
|
DISCONTINUED OPERATIONS |
|
|
— |
|
|
|
0.01 |
|
|
|
(0.01 |
) |
|
|
0.01 |
|
|
TOTAL NET INCOME (LOSS) PER COMMON SHARE - BASIC |
|
$ |
0.32 |
|
|
$ |
0.19 |
|
|
$ |
0.69 |
|
|
$ |
(0.01 |
) |
|
NET INCOME (LOSS) PER COMMON SHARE - DILUTED: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONTINUING OPERATIONS |
|
$ |
0.31 |
|
|
$ |
0.18 |
|
|
$ |
0.70 |
|
|
$ |
(0.02 |
) |
|
DISCONTINUED OPERATIONS |
|
|
— |
|
|
|
0.01 |
|
|
|
(0.01 |
) |
|
|
0.01 |
|
|
TOTAL NET INCOME (LOSS) PER COMMON SHARE - DILUTED |
|
$ |
0.31 |
|
|
$ |
0.19 |
|
|
$ |
0.69 |
|
|
$ |
(0.01 |
) |
|
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING - BASIC |
|
|
31,445,492 |
|
|
|
31,229,969 |
|
|
|
31,421,294 |
|
|
|
31,186,057 |
|
|
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING - DILUTED |
|
|
31,714,755 |
|
|
|
31,477,398 |
|
|
|
31,634,371 |
|
|
|
31,186,057 |
|
The accompanying notes are an integral part of these statements
6
EXANTAS CAPITAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
(unaudited)
|
|
|
For the Three Months Ended |
|
|
For the Nine Months Ended |
|
||||||||||
|
|
|
September 30, |
|
|
September 30, |
|
||||||||||
|
|
|
2019 |
|
|
2018 |
|
|
2019 |
|
|
2018 |
|
||||
|
Net income |
|
$ |
12,557 |
|
|
$ |
8,624 |
|
|
$ |
29,581 |
|
|
$ |
17,473 |
|
|
Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification adjustments for realized gains on investment securities available-for-sale included in net income |
|
|
— |
|
|
|
(282 |
) |
|
|
(4 |
) |
|
|
(65 |
) |
|
Unrealized gains on investment securities available-for-sale, net |
|
|
1,387 |
|
|
|
1,871 |
|
|
|
10,583 |
|
|
|
1,969 |
|
|
Reclassification adjustments associated with unrealized gains from interest rate hedges included in net income |
|
|
(22 |
) |
|
|
— |
|
|
|
(68 |
) |
|
|
— |
|
|
Unrealized (losses) gains on derivatives, net |
|
|
(1,886 |
) |
|
|
824 |
|
|
|
(6,298 |
) |
|
|
2,428 |
|
|
Total other comprehensive (loss) income |
|
|
(521 |
) |
|
|
2,413 |
|
|
|
4,213 |
|
|
|
4,332 |
|
|
Comprehensive income before allocation to preferred shares |
|
|
12,036 |
|
|
|
11,037 |
|
|
|
33,794 |
|
|
|
21,805 |
|
|
Net income allocated to preferred shares |
|
|
(2,588 |
) |
|
|
(2,588 |
) |
|
|
(7,763 |
) |
|
|
(10,385 |
) |
|
Consideration paid in excess of carrying value of preferred shares |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(7,482 |
) |
|
Comprehensive income allocable to common shares |
|
$ |
9,448 |
|
|
$ |
8,449 |
|
|
$ |
26,031 |
|
|
$ |
3,938 |
|
The accompanying notes are an integral part of these statements
7
EXANTAS CAPITAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018
(in thousands, except share data)
(unaudited)
|
|
|
Common Stock |
|
|
Series B Preferred |
|
|
Series C Preferred |
|
|
Additional Paid-In |
|
|
Accumulated Other Comprehensive |
|
|
Retained |
|
|
Distributions in Excess |
|
|
Total Stockholders' |
|
||||||||||||
|
|
|
Shares |
|
|
Amount |
|
|
Stock |
|
|
Stock |
|
|
Capital |
|
|
Income (Loss) |
|
|
Earnings |
|
|
of Earnings |
|
|
Equity |
|
|||||||||
|
Balance, January 1, 2018 |
|
|
31,429,892 |
|
|
$ |
31 |
|
|
$ |
5 |
|
|
$ |
5 |
|
|
$ |
1,187,911 |
|
|
$ |
1,297 |
|
|
$ |
— |
|
|
$ |
(517,773 |
) |
|
$ |
671,476 |
|
|
Stock-based compensation |
|
|
236,387 |
|
|
|
1 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1 |
|
|
Amortization of stock-based compensation |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
2,383 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
2,383 |
|
|
Retirement of common stock |
|
|
(7,134 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(69 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(69 |
) |
|
Forfeiture of unvested stock |
|
|
(1,725 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Net income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
17,473 |
|
|
|
— |
|
|
|
17,473 |
|
|
Distributions on preferred stock |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(10,385 |
) |
|
|
— |
|
|
|
(10,385 |
) |
|
Preferred stock redemption |
|
|
— |
|
|
|
— |
|
|
|
(5 |
) |
|
|
— |
|
|
|
(107,881 |
) |
|
|
— |
|
|
|
(7,482 |
) |
|
|
— |
|
|
|
(115,368 |
) |
|
Securities available-for-sale, fair value adjustment, net |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,904 |
|
|
|
— |
|
|
|
— |
|
|
|
1,904 |
|
|
Designated derivatives, fair value adjustment |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
2,428 |
|
|
|
— |
|
|
|
— |
|
|
|
2,428 |
|
|
Distributions on common stock |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
394 |
|
|
|
(9,892 |
) |
|
|
(9,498 |
) |
|
Balance, September 30, 2018 |
|
|
31,657,420 |
|
|
$ |
32 |
|
|
$ |
— |
|
|
$ |
5 |
|
|
$ |
1,082,344 |
|
|
$ |
5,629 |
|
|
$ |
— |
|
|
$ |
(527,665 |
) |
|
$ |
560,345 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, January 1, 2019 |
|
|
31,657,499 |
|
|
$ |
32 |
|
|
$ |
— |
|
|
$ |
5 |
|
|
$ |
1,082,677 |
|
|
$ |
(3,057 |
) |
|
$ |
— |
|
|
$ |
(525,838 |
) |
|
$ |
553,819 |
|
|
Stock-based compensation |
|
|
227,541 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
41 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
41 |
|
|
Amortization of stock-based compensation |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,647 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,647 |
|
|
Forfeiture of unvested stock |
|
|
(14,138 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Net income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
29,581 |
|
|
|
— |
|
|
|
29,581 |
|
|
Distributions on preferred stock |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(7,763 |
) |
|
|
— |
|
|
|
(7,763 |
) |
|
Securities available-for-sale, fair value adjustment, net |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
10,579 |
|
|
|
— |
|
|
|
— |
|
|
|
10,579 |
|
|
Designated derivatives, fair value adjustment |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(6,366 |
) |
|
|
— |
|
|
|
— |
|
|
|
(6,366 |
) |
|
Distributions on common stock |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(21,818 |
) |
|
|
306 |
|
|
|
(21,512 |
) |
|
Balance, September 30, 2019 |
|
|
31,870,902 |
|
|
$ |
32 |
|
|
$ |
— |
|
|
$ |
5 |
|
|
$ |
1,084,365 |
|
|
$ |
1,156 |
|
|
$ |
— |
|
|
$ |
(525,532 |
) |
|
$ |
560,026 |
|
The accompanying notes are an integral part of these statements
8
EXANTAS CAPITAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
|
|
|
For the Nine Months Ended |
|
|||||
|
|
|
September 30, |
|
|||||
|
|
|
2019 |
|
|
2018 |
|
||
|
CASH FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
29,581 |
|
|
$ |
17,473 |
|
|
Net loss (income) from discontinued operations, net of tax |
|
|
212 |
|
|
|
(161 |
) |
|
Net income from continuing operations |
|
|
29,793 |
|
|
|
17,312 |
|
|
Adjustments to reconcile net income from continuing operations to net cash provided by continuing operating activities: |
|
|
|
|
|
|
|
|
|
Provision for (recovery of) loan losses, net |
|
|
58 |
|
|
|
(1,260 |
) |
|
Depreciation, amortization and accretion |
|
|
1,884 |
|
|
|
1,919 |
|
|
Amortization of stock-based compensation |
|
|
1,647 |
|
|
|
2,383 |
|
|
Principal payments on syndicated corporate loans held for sale |
|
|
— |
|
|
|
69 |
|
|
Principal payments on investment securities, trading |
|
|
— |
|
|
|
241 |
|
|
Net realized and unrealized gain on investment securities, trading |
|
|
— |
|
|
|
(53 |
) |
|
Net realized and unrealized gain on investment securities available-for-sale and loans and derivatives |
|
|
(4 |
) |
|
|
(569 |
) |
|
Fair value adjustments on financial assets held for sale |
|
|
1,457 |
|
|
|
6,244 |
|
|
Equity in earnings of unconsolidated entities |
|
|
— |
|
|
|
(231 |
) |
|
Return on investment from investments in unconsolidated entities |
|
|
— |
|
|
|
411 |
|
|
Changes in operating assets and liabilities |
|
|
(6,398 |
) |
|
|
4,443 |
|
|
Net cash provided by continuing operating activities |
|
|
28,437 |
|
|
|
30,909 |
|
|
Net cash provided by discontinued operating activities |
|
|
6 |
|
|
|
329 |
|
|
Net cash provided by operating activities |
|
|
28,443 |
|
|
|
31,238 |
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
Origination and purchase of loans |
|
|
(718,081 |
) |
|
|
(570,036 |
) |
|
Principal payments received on loans |
|
|
404,658 |
|
|
|
399,472 |
|
|
Proceeds from sale of loans |
|
|
— |
|
|
|
16,709 |
|
|
Purchase of investment securities available-for-sale |
|
|
(74,266 |
) |
|
|
(149,100 |
) |
|
Principal payments on investment securities available-for-sale |
|
|
33,416 |
|
|
|
14,325 |
|
|
Proceeds from sale of investment securities available-for-sale |
|
|
638 |
|
|
|
48 |
|
|
Return of capital from investments in unconsolidated entities |
|
|
— |
|
|
|
10,369 |
|
|
Settlement of derivative instruments |
|
|
— |
|
|
|
(46 |
) |
|
Net cash used in continuing investing activities |
|
|
(353,635 |
) |
|
|
(278,259 |
) |
|
Net cash provided by discontinued investing activities |
|
|
135 |
|
|
|
29,712 |
|
|
Net cash used in investing activities |
|
|
(353,500 |
) |
|
|
(248,547 |
) |
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
Retirement of common stock |
|
|
— |
|
|
|
(69 |
) |
|
Repurchase of preferred stock |
|
|
— |
|
|
|
(165,340 |
) |
|
Proceeds from borrowings: |
|
|
|
|
|
|
|
|
|
Repurchase agreements |
|
|
669,228 |
|
|
|
603,295 |
|
|
Securitizations |
|
|
575,811 |
|
|
|
397,452 |
|
|
Payments on borrowings: |
|
|
|
|
|
|
|
|
|
Repurchase agreements |
|
|
(722,387 |
) |
|
|
(476,555 |
) |
|
Securitizations |
|
|
(191,793 |
) |
|
|
(262,576 |
) |
|
Payment of debt issuance costs |
|
|
(6,529 |
) |
|
|
(9,640 |
) |
|
Distributions paid on preferred stock |
|
|
(7,763 |
) |
|
|
(12,670 |
) |
|
Distributions paid on common stock |
|
|
(19,084 |
) |
|
|
(6,319 |
) |
|
Net cash provided by continuing financing activities |
|
|
297,483 |
|
|
|
67,578 |
|
|
Net cash provided by discontinued financing activities |
|
|
— |
|
|
|
— |
|
|
Net cash provided by financing activities |
|
$ |
297,483 |
|
|
$ |
67,578 |
|
The accompanying notes are an integral part of these statements
9
EXANTAS CAPITAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued)
(in thousands)
(unaudited)
|
|
|
For the Nine Months Ended |
|
|||||
|
|
|
September 30, |
|
|||||
|
|
|
2019 |
|
|
2018 |
|
||
|
NET DECREASE IN CASH AND CASH EQUIVALENTS AND RESTRICTED CASH |
|
$ |
(27,574 |
) |
|
$ |
(149,731 |
) |
|
CASH AND CASH EQUIVALENTS AND RESTRICTED CASH AT BEGINNING OF PERIOD |
|
|
95,474 |
|
|
|
204,364 |
|
|
CASH AND CASH EQUIVALENTS AND RESTRICTED CASH AT END OF PERIOD |
|
$ |
67,900 |
|
|
$ |
54,633 |
|
|
SUPPLEMENTAL DISCLOSURE: |
|
|
|
|
|
|
|
|
|
Interest expense paid in cash |
|
$ |
58,748 |
|
|
$ |
41,341 |
|
The accompanying notes are an integral part of these statements
10
EXANTAS CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2019
(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 September 30, 2019.
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, 2018. 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.
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 September 30, 2019 and December 31, 2018, approximately $48.3 million and $80.4 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 collateralized debt obligation ("CDO") securitizations and derivative instruments as well as cash held in the syndicated corporate loan CDOs.
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):
|
|
|
September 30, |
|
|||||
|
|
|
2019 |
|
|
2018 |
|
||
|
Cash and cash equivalents |
|
$ |
51,286 |
|
|
$ |
48,053 |
|
|
Restricted cash |
|
|
16,614 |
|
|
|
6,580 |
|
|
Total cash, cash equivalents and restricted cash shown on the Company's consolidated statements of cash flows |
|
$ |
67,900 |
|
|
$ |
54,633 |
|
11
EXANTAS CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
SEPTEMBER 30, 2019
(unaudited)
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 $53.0 million and $58.4 million (tax effected expense of $15.6 million and $15.3 million) at September 30, 2019 and December 31, 2018, respectively, 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.
Share-Based Compensation
Issuances of restricted stock and options are initially measured at fair value on the grant date and expensed monthly on a straight-line basis over the service period to equity compensation expense on the consolidated statements of operations, with a corresponding entry to additional paid-in capital on the consolidated balance sheets. Effective January 1, 2019, in accordance with updated guidance under GAAP, the fair value of all unvested issuances of restricted stock and options is not remeasured after the initial grant date. Previously, the Company adjusted unvested issuances of restricted stock and options to the Manager and to non-employees quarterly to reflect changes in fair value.
Recent Accounting Standards
Accounting Standards Adopted in 2019
In June 2018, the Financial Accounting Standards Board (the "FASB") issued guidance to simplify the accounting for share-based payment transactions for acquiring goods and services from nonemployees by including these payments in the scope of the guidance for share-based payments to employees. In accordance with the guidance, the Company's unvested issuances to the Manager and to non-employees granted prior to the January 1, 2019 adoption date were remeasured at fair value as of the adoption date with no subsequent remeasurement. Unvested issuances will continue to be amortized on a straight-line basis over the service period. Adoption did not have a material impact on the Company's consolidated financial statements.
In February 2018, the FASB issued guidance to allow a reclassification from accumulated other comprehensive income (loss) to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. Adoption did not have a material impact on the Company's consolidated financial statements.
In August 2017, the FASB issued guidance to improve the financial reporting of hedging relationships to better portray the economic results of an entity's risk management activities. Additionally, the guidance simplifies the application of the hedge accounting guidance via certain targeted improvements. In October 2018, the FASB updated the guidance to add a benchmark interest rate permitted for hedge accounting purposes. Adoption did not have a material impact on the Company's consolidated financial statements.
In February 2016, the FASB issued guidance requiring lessees to recognize a lease liability and a right-of-use asset for all leases. Lessor accounting remains largely unchanged. The guidance also requires new qualitative and quantitative disclosures to help financial statement users better understand the timing, amount and uncertainty of cash flows arising from leases. Adoption did not have a material impact on the Company's consolidated financial statements.
Accounting Standards to be Adopted in Future Periods
In August 2018, the 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. The guidance is effective for annual reporting periods beginning after December 15, 2019, and interim periods within that reporting period. The Company is in the process of evaluating the impact of this new guidance.
12
EXANTAS CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
SEPTEMBER 30, 2019
(unaudited)
In January 2017, the FASB issued guidance to add the Securities and Exchange Commission ("SEC") Staff Announcement "Disclosure of the Impact that Recently Issued Accounting Standards will have on the Financial Statements of a Registrant when such St andards are Adopted in a Future Period (in accordance with Staff Accounting Bulletin Topic 11.M)." The announcement applies to the May 2014 guidance on revenue recognition from contracts with customers, the February 2016 guidance on leases and the June 201 6 guidance on how credit losses for financial assets at amortized cost and certain other instruments that are measured at fair value through net income are determined. The announcement provides the SEC staff view that a registrant should evaluate certain r ecent accounting standards that have not yet been adopted to determine appropriate financial statement disclosures about the potential material effects of those recent accounting standards. If a registrant does not know or cannot reasonably estimate the im pact that adoption of the recent accounting standards referenced in this announcement is expected to have on the financial statements, then the registrant should make a statement to that effect and consider the additional qualitative financial statement di sclosures to assist the reader in assessing the significance of the impact that the recent accounting standards will have on the financial statements of the registrant when adopted. The Company completed its assessment under the new guidance on revenue rec ognition from contracts with customers in 2018 and on leases , see "Accounting Standards Adopted in 201 9 ." While t he Company is currently evaluating the impact of th e guidance on the measurement of credit losses on financial instruments , the Company expects this standard will impact the consolidated financial statements , as described below .
In June 2016, the FASB issued guidance that will change 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 will replace the current incurred loss approach with an expected loss 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. This guidance is effective for annual reporting periods beginning after December 15, 2019, and interim periods within that reporting period, with any adjustments reflected as of the beginning of the fiscal year of adoption. While the Company is currently evaluating the impact of this new guidance in conjunction with the implementation team that includes a third-party advisor, the Company expects the adoption of this standard will result in an increase to the allowance for credit losses as well as the recognition of provisions for credit losses earlier in the lending cycle. The impact of this guidance will be reflected as an adjustment to retained earnings at adoption. Subsequent increases and decreases in expected credit losses will be recorded in the Company's statement of operations.
Reclassifications
Certain reclassifications have been made to the 2018 consolidated financial statements to conform to the 2019 presentation. These reclassifications had no effect on the previously reported net cash provided by financing activities in the consolidated statements of cash flows.
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 five VIEs at September 30, 2019 and December 31, 2018 (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 ("ABS") and were financed by the issuance of debt securities. The Manager, with the help of C-III Asset Management LLC ("C3AM"), a subsidiary of C-III, 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.
13
EXANTAS CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
SEPTEMBER 30, 2019
(unaudited)
The Company has exposure to losses on its securitizations to the extent of its investments in the subordinated debt and preferred equity of each s ecuritization. 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 p referred 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 securitization s 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 securiti zations. 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 nine months ended September 30, 2019 and 2018, 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.
The following table shows the classification and carrying values of assets and liabilities of the Company's Consolidated VIEs at September 30, 2019 (in thousands):
|
|
|
CRE Securitizations |
|
|
Other |
|
|
Total |
|
|||
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted cash |
|
$ |
5,392 |
|
|
$ |
416 |
|
|
$ |
5,808 |
|
|
Accrued interest receivable |
|
|
4,308 |
|
|
|
— |
|
|
|
4,308 |
|
|
CRE loans, pledged as collateral |
|
|
1,080,532 |
|
|
|
— |
|
|
|
1,080,532 |
|
|
Principal paydowns receivable |
|
|
26,308 |
|
|
|
— |
|
|
|
26,308 |
|
|
Other assets |
|
|
74 |
|
|
|
21 |
|
|
|
95 |
|
|
Total assets (1) |
|
$ |
1,116,614 |
|
|
$ |
437 |
|
|
$ |
1,117,051 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and other liabilities |
|
$ |
137 |
|
|
$ |
— |
|
|
$ |
137 |
|
|
Accrued interest payable |
|
|
1,053 |
|
|
|
— |
|
|
|
1,053 |
|
|
Borrowings |
|
|
882,510 |
|
|
|
— |
|
|
|
882,510 |
|
|
Total liabilities |
|
$ |
883,700 |
|
|
$ |
— |
|
|
$ |
883,700 |
|
|
(1) |
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 September 30, 2019. 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 September 30, 2019. 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.
14
EXANTAS CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
SEPTEMBER 30, 2019
(unaudited)
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 related party that is not under common control, is the special servicer 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.
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 September 30, 2019 (in thousands):
|
|
|
Unsecured Junior Subordinated Debentures |
|
|
C40 |
|
|
Prospect Hackensack |
|
|
Santa Clarita |
|
|
Total |
|
|
Maximum Exposure to Loss |
|
||||||
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued interest receivable |
|
$ |
135 |
|
|
$ |
167 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
302 |
|
|
$ |
— |
|
|
CRE loans |
|
|
— |
|
|
|
— |
|
|
|
20,199 |
|
|
|
5,577 |
|
|
|
25,776 |
|
|
$ |
25,776 |
|
|
Investment securities available-for-sale (1) |
|
|
— |
|
|
|
22,620 |
|
|
|
— |
|
|
|
— |
|
|
|
22,620 |
|
|
$ |
21,912 |
|
|
Investments in unconsolidated entities |
|
|
1,548 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,548 |
|
|
$ |
1,548 |
|
|
Total assets |
|
|
1,683 |
|
|
|
22,787 |
|
|
|
20,199 |
|
|
|
5,577 |
|
|
|
50,246 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued interest payable |
|
|
276 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
276 |
|
|
N/A |
|
|
|
Borrowings |
|
|
51,548 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
51,548 |
|
|
N/A |
|
|
|
Total liabilities |
|
|
51,824 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
51,824 |
|
|
N/A |
|
|
|
Net (liability) asset |
|
$ |
(50,141 |
) |
|
$ |
22,787 |
|
|
$ |
20,199 |
|
|
$ |
5,577 |
|
|
$ |
(1,578 |
) |
|
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 September 30, 2019, there were no explicit arrangements or implicit variable interests that could require the Company to provide financial support to any of its unconsolidated VIEs.
15
EXANTAS CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
SEPTEMBER 30, 2019
(unaudited)
NOTE 4 - SUPPLEMENTAL CASH FLOW INFORMATION
The following table summarizes the Company's supplemental disclosure of cash flow information (in thousands):
|
|
|
For the Nine Months Ended |
|
|||||
|
|
|
September 30, |
|
|||||
|
|
|
2019 |
|
|
2018 |
|
||
|
Non-cash continuing financing activities include the following: |
|
|
|
|
|
|
|
|
|
Distributions on common stock accrued but not paid |
|
$ |
7,967 |
|
|
$ |
4,749 |
|
|
Distributions on preferred stock accrued but not paid |
|
$ |
1,725 |
|
|
$ |
1,725 |
|
16
EXANTAS CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
SEPTEMBER 30, 2019
(unaudited)
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 Loan Losses |
|
|
Carrying Value |
|
|
Contractual Interest Rates (2) |
|
|
Maturity Dates (3)(4)(5) |
|||||||
|
At September 30, 2019: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CRE loans held for investment: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Whole loans (6)(7) |
|
|
115 |
|
|
$ |
1,773,119 |
|
|
$ |
(6,825 |
) |
|
$ |
1,766,294 |
|
|
$ |
(1,460 |
) |
|
$ |
1,764,834 |
|
|
1M LIBOR plus 2.70% to 1M LIBOR plus 6.25% |
|
|
October 2019 to October 2023 |
|
|
Mezzanine loan |
|
|
1 |
|
|
|
4,700 |
|
|
|
— |
|
|
|
4,700 |
|
|
|
— |
|
|
|
4,700 |
|
|
10.00% |
|
|
June 2028 |
|
|
Preferred equity investments (see Note 3) (7)(8)(9) |
|
|
2 |
|
|
|
25,899 |
|
|
|
(123 |
) |
|
|
25,776 |
|
|
|
— |
|
|
|
25,776 |
|
|
11.00% to 11.50% |
|
|
June 2022 to April 2025 |
|
|
Total CRE loans held for investment |
|
|
|
|
|
$ |
1,803,718 |
|
|
$ |
(6,948 |
) |
|
$ |
1,796,770 |
|
|
$ |
(1,460 |
) |
|
$ |
1,795,310 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2018: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CRE loans held for investment: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Whole loans (6)(7) |
|
|
79 |
|
|
$ |
1,538,759 |
|
|
$ |
(9,646 |
) |
|
$ |
1,529,113 |
|
|
$ |
(1,401 |
) |
|
$ |
1,527,712 |
|
|
1M LIBOR plus 2.70% to 1M LIBOR plus 6.25% |
|
|
January 2019 to January 2022 |
|
|
Mezzanine loan |
|
|
1 |
|
|
|
4,700 |
|
|
|
— |
|
|
|
4,700 |
|
|
|
— |
|
|
|
4,700 |
|
|
10.00% |
|
|
June 2028 |
|
|
Preferred equity investment (see Note 3) (7)(8)(9) |
|
|
1 |
|
|
|
19,718 |
|
|
|
(163 |
) |
|
|
19,555 |
|
|
|
— |
|
|
|
19,555 |
|
|
11.50% |
|
|
April 2025 |
|
|
Total CRE loans held for investment |
|
|
|
|
|
$ |
1,563,177 |
|
|
$ |
(9,809 |
) |
|
$ |
1,553,368 |
|
|
$ |
(1,401 |
) |
|
$ |
1,551,967 |
|
|
|
|
|
|
|
|
(1) |
Amounts include unamortized loan origination fees of $8.7 million and $9.6 million and deferred amendment fees of $178,000 and $171,000 at September 30, 2019 and December 31, 2018, respectively. Additionally, the amounts include unamortized loan acquisition costs of $1.9 million at September 30, 2019. There were no unamortized loan acquisition costs at December 31, 2018. |
|
( 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 September 30, 2019 and December 31, 2018. |
|
( 5 ) |
Maturity dates include one whole loan with an original maturity date in October 2019 that was granted a one year extension in October 2019. |
|
( 6 ) |
Substantially all loans are pledged as collateral under various borrowings at September 30, 2019 and December 31, 2018. |
|
( 7 ) |
Whole loans had $109.9 million and $108.5 million in unfunded loan commitments at September 30, 2019 and December 31, 2018, respectively. Preferred equity investments had $3.1 million in unfunded commitments at September 30, 2019. There were no preferred equity investment unfunded commitments at December 31, 2018. 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. |
|
( 8 ) |
The interest rate on the Company's preferred equity investments each pay currently at 8.00%. The remaining interest is deferred until maturity. |
|
( 9 ) |
Beginning in April 2023, the Company has the right to unilaterally force the sale of Prospect Hackensack's underlying property. Beginning in June 2025, the Company has the right to unilaterally force the sale of Santa Clarita's underlying property. |
17
EXANTAS CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
SEPTEMBER 30, 2019
(unaudited)
The following is a summary of the contractual maturities, assuming full exercise of the extension options available to the borrowers, of the Company's CRE lo ans held for investment, at amortized cost (in thousands, except amount in the footnote ):
|
Description |
|
2019 |
|
|
2020 |
|
|
2021 and Thereafter |
|
|
Total |
|
||||
|
At September 30, 2019: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Whole loans (1) |
|
$ |
— |
|
|
$ |
123,895 |
|
|
$ |
1,630,902 |
|
|
$ |
1,754,797 |
|
|
Mezzanine loan |
|
|
— |
|
|
|
— |
|
|
|
4,700 |
|
|
|
4,700 |
|
|
Preferred equity investments |
|
|
— |
|
|
|
— |
|
|
|
25,776 |
|
|
|
25,776 |
|
|
Total CRE loans (1) |
|
$ |
— |
|
|
$ |
123,895 |
|
|
$ |
1,661,378 |
|
|
$ |
1,785,273 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Description |
|
2019 |
|
|
2020 |
|
|
2021 and Thereafter |
|
|
Total |
|
||||
|
At December 31, 2018: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Whole loans (1) |
|
$ |
10,379 |
|
|
$ |
182,422 |
|
|
$ |
1,324,797 |
|
|
$ |
1,517,598 |
|
|
Mezzanine loan |
|
|
— |
|
|
|
— |
|
|
|
4,700 |
|
|
|
4,700 |
|
|
Preferred equity investment |
|
|
— |
|
|
|
— |
|
|
|
19,555 |
|
|
|
19,555 |
|
|
Total CRE loans (1) |
|
$ |
10,379 |
|
|
$ |
182,422 |
|
|
$ |
1,349,052 |
|
|
$ |
1,541,853 |
|
|
(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 September 30, 2019 and December 31, 2018. |
At September 30, 2019, approximately 22.1%, 19.7% and 16.4% 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, 2018, approximately 32.3%, 20.9% and 17.1% of the Company's CRE loan portfolio was concentrated in the Southwest, Mountain and Pacific 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 September 30, 2019, the Company had $105.5 million of loan principal paydowns receivable, all of which was received in cash by the Company in October 2019. At December 31, 2018, the Company had $32.1 million of loan principal paydowns receivable, all of which was received in cash by the Company in January 2019.
NOTE 6 - FINANCING RECEIVABLES
The following tables show the activity in the allowance for loan losses for the nine months ended September 30, 2019 and year ended December 31, 2018 and the allowance for loan losses and recorded investments in loans at September 30, 2019 and December 31, 2018 (in thousands, except amount in the footnotes):
|
|
|
Nine Months Ended September 30, 2019 |
|
|
Year Ended December 31, 2018 |
|
||
|
|
|
Commercial Real Estate Loans |
|
|
Commercial Real Estate Loans |
|
||
|
Allowance for loan losses: |
|
|
|
|
|
|
|
|
|
Allowance for loan losses at beginning of period |
|
$ |
1,401 |
|
|
$ |
5,328 |
|
|
Provision for (recovery of) loan losses, net (1) |
|
|
59 |
|
|
|
(1,595 |
) |
|
Loans charged-off |
|
|
— |
|
|
|
(2,332 |
) |
|
Allowance for loan losses at end of period |
|
$ |
1,460 |
|
|
$ |
1,401 |
|
|
(1) |
Excludes the recovery of loan losses on one bank loan with no amortized cost or carrying value at September 30, 2019 and December 31, 2018 that received a payment of approximately $1,000 during the nine months ended September 30, 2019. |
18
EXANTAS CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
SEPTEMBER 30, 2019
(unaudited)
|
|
September 30, 2019 |
|
|
December 31, 2018 |
|
|||
|
|
|
Commercial Real Estate Loans |
|
|
Commercial Real Estate Loans |
|
||
|
Allowance for loan losses ending balance: |
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment |
|
$ |
— |
|
|
$ |
— |
|
|
Collectively evaluated for impairment |
|
$ |
1,460 |
|
|
$ |
1,401 |
|
|
Loans: |
|
|
|
|
|
|
|
|
|
Amortized cost ending balance: |
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment (1) |
|
$ |
30,476 |
|
|
$ |
24,255 |
|
|
Collectively evaluated for impairment |
|
$ |
1,766,294 |
|
|
$ |
1,529,113 |
|
|
(1) |
The Company's mezzanine loan and preferred equity investments are evaluated individually for impairment. |
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 loan-to-collateral value 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. Loans that are performing according to their underwritten plans generally will not require an allowance for loan loss.
|
|
||
|
|
|
|
|
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.
Whole loans are first individually evaluated for impairment; and to the extent not deemed impaired, a general reserve is established.
19
EXANTAS CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
SEPTEMBER 30, 2019
(unaudited)
The allowance for loan loss is 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 are loans rated as a 5. While the overall risk rating is generally not the sole factor used in determining whether a loan is 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.
The Company's mezzanine loan and preferred equity investments are evaluated individually for impairment.
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 (1) |
|
|
Rating 4 |
|
|
Rating 5 |
|
|
Held for Sale (2) |
|
|
Total |
|
|||||||
|
At September 30, 2019: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Whole loans |
|
$ |
— |
|
|
$ |
1,678,152 |
|
|
$ |
84,300 |
|
|
$ |
3,842 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
1,766,294 |
|
|
Mezzanine loan (3) |
|
|
— |
|
|
|
4,700 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
4,700 |
|
|
Preferred equity investments (3) |
|
|
— |
|
|
|
25,776 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
25,776 |
|
|
Legacy CRE loans held for sale |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
17,141 |
|
|
|
17,141 |
|
|
Total |
|
$ |
— |
|
|
$ |
1,708,628 |
|
|
$ |
84,300 |
|
|
$ |
3,842 |
|
|
$ |
— |
|
|
$ |
17,141 |
|
|
$ |
1,813,911 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2018: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Whole loans |
|
$ |
— |
|
|
$ |
1,447,206 |
|
|
$ |
77,067 |
|
|
$ |
4,840 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
1,529,113 |
|
|
Mezzanine loan (3) |
|
|
— |
|
|
|
4,700 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
4,700 |
|
|
Preferred equity investment (3) |
|
|
— |
|
|
|
19,555 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
19,555 |
|
|
Legacy CRE loans held for sale |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
17,000 |
|
|
|
17,000 |
|
|
Total |
|
$ |
— |
|
|
$ |
1,471,461 |
|
|
$ |
77,067 |
|
|
$ |
4,840 |
|
|
$ |
— |
|
|
$ |
17,000 |
|
|
$ |
1,570,368 |
|
|
(1) |
Includes one whole loan, with an amortized cost of $11.5 million, which was in maturity default at September 30, 2019 and December 31, 2018. The loan is performing with respect to debt service due in accordance with a forbearance agreement at September 30, 2019 and December 31, 2018. |
|
( 2 ) |
Includes one legacy CRE loan that was in default with a total carrying value of $17.1 million and $17.0 million at September 30, 2019 and December 31, 2018, respectively. |
|
( 3 ) |
The Company's mezzanine loan and preferred equity investments are evaluated individually for impairment. |
20
EXANTAS CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
SEPTEMBER 30, 2019
(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 and legacy CRE loans held for sale at the lower of cost or fair value (in thousands, except amounts in footnotes):
|
|
|
30-59 Days |
|
|
60-89 Days |
|
|
Greater than 90 Days (1)(2) |
|
|
Total Past Due |
|
|
Current |
|
|
Total Loans Receivable |
|
|
Total Loans > 90 Days and Accruing (1) |
|
|||||||
|
At September 30, 2019: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Whole loans |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
11,496 |
|
|
$ |
11,496 |
|
|
$ |
1,754,798 |
|
|
$ |
1,766,294 |
|
|
$ |
11,496 |
|
|
Mezzanine loan |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
4,700 |
|
|
|
4,700 |
|
|
|
— |
|
|
Preferred equity investments |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
25,776 |
|
|
|
25,776 |
|
|
|
— |
|
|
Legacy CRE loans held for sale |
|
|
— |
|
|
|
— |
|
|
|
17,141 |
|
|
|
17,141 |
|
|
|
— |
|
|
|
17,141 |
|
|
|
— |
|
|
Total |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
28,637 |
|
|
$ |
28,637 |
|
|
$ |
1,785,274 |
|
|
$ |
1,813,911 |
|
|
$ |
11,496 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2018: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Whole loans |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
11,516 |
|
|
$ |
11,516 |
|
|
$ |
1,517,597 |
|
|
$ |
1,529,113 |
|
|
$ |
11,516 |
|
|
Mezzanine loan |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
4,700 |
|
|
|
4,700 |
|
|
|
— |
|
|
Preferred equity investment |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
19,555 |
|
|
|
19,555 |
|
|
|
— |
|
|
Legacy CRE loans held for sale |
|
|
— |
|
|
|
— |
|
|
|
17,000 |
|
|
|
17,000 |
|
|
|
— |
|
|
|
17,000 |
|
|
|
— |
|
|
Total |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
28,516 |
|
|
$ |
28,516 |
|
|
$ |
1,541,852 |
|
|
$ |
1,570,368 |
|
|
$ |
11,516 |
|
|
|
|
|
( 1 ) |
Includes one whole loan, with an amortized cost of $11.5 million, which was in maturity default at September 30, 2019 and December 31, 2018. The loan is performing with respect to debt service due in accordance with a forbearance agreement at September 30, 2019 and December 31, 2018. During the three and nine months ended September 30, 2019, the Company recognized interest income of $170,000 and $587,000, respectively, on this whole loan. During the three and nine months ended September 30, 2018, the Company recognized interest income of $156,000 and $459,000, respectively, on this whole loan. |
|
( 2 ) |
Includes one legacy CRE loan that was in default with a total carrying value of $17.1 million and $17.0 million at September 30, 2019 and December 31, 2018, respectively. |
Impaired Loans
The Company did not have any impaired loans at September 30, 2019 and December 31, 2018.
Troubled-Debt Restructurings ("TDRs")
There were no TDRs for the nine months ended September 30, 2019 and 2018.
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 the footnote):
|
|
|
Amortized Cost |
|
|
Unrealized Gains |
|
|
Unrealized Losses |
|
|
Fair Value (1) |
|
||||
|
At September 30, 2019: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CMBS, fixed rate |
|
$ |
118,481 |
|
|
$ |
7,234 |
|
|
$ |
(517 |
) |
|
$ |
125,198 |
|
|
CMBS, floating rate |
|
|
346,408 |
|
|
|
1,374 |
|
|
|
(1,132 |
) |
|
|
346,650 |
|
|
Total |
|
$ |
464,889 |
|
|
$ |
8,608 |
|
|
$ |
(1,649 |
) |
|
$ |
471,848 |
|
|
At December 31, 2018: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CMBS, fixed rate |
|
$ |
121,487 |
|
|
$ |
559 |
|
|
$ |
(2,307 |
) |
|
$ |
119,739 |
|
|
CMBS, floating rate |
|
|
301,132 |
|
|
|
253 |
|
|
|
(2,126 |
) |
|
|
299,259 |
|
|
Total |
|
$ |
422,619 |
|
|
$ |
812 |
|
|
$ |
(4,433 |
) |
|
$ |
418,998 |
|
|
(1) |
At September 30, 2019 and December 31, 2018, investment securities available-for-sale with fair values of $410.0 million and $388.4 million, respectively, were pledged as collateral under related financings. |
21
EXANTAS CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
SEPTEMBER 30, 2019
(unaudited)
The following table summarizes the estimated payoff dates of the Company's investment securities available-for-sale according to their estimated weighted average life classifications ( dollars in thousand s, except amounts in footnotes ):
|
|
|
September 30, 2019 |
|
|
December 31, 2018 |
|
||||||||||||||||
|
|
|
Amortized Cost (1) |
|
|
Fair Value (1) |
|
|
Weighted Average Coupon (2) |
|
|
Amortized Cost (1) |
|
|
Fair Value (1) |
|
|
Weighted Average Coupon (2) |
|
||||
|
Less than one year (3) |
|
$ |
162,489 |
|
|
$ |
162,750 |
|
|
5.17% |
|
|
$ |
126,446 |
|
|
$ |
126,014 |
|
|
5.76% |
|
|
Greater than one year and less than five years |
|
|
70,473 |
|
|
|
70,977 |
|
|
5.37% |
|
|
|
98,220 |
|
|
|
97,083 |
|
|
5.21% |
|
|
Greater than five years and less than ten years |
|
|
231,927 |
|
|
|
238,121 |
|
|
3.96% |
|
|
|
197,953 |
|
|
|
195,901 |
|
|
4.06% |
|
|
Total |
|
$ |
464,889 |
|
|
$ |
471,848 |
|
|
4.54% |
|
|
$ |
422,619 |
|
|
$ |
418,998 |
|
|
4.76% |
|
|
(1) |
Includes CMBS positions subject to other-than-temporary-impairment that have no stated coupon rates that are excluded from the calculation of the weighted average coupon rate. The positions with greater than one year and less than five years of projected life had amortized costs of $106,000 and $105,000 and no fair values at September 30, 2019 and December 31, 2018, respectively. There were no positions subject to other-than-temporary impairment with projected lives less than one year and greater than five years and less than ten years at September 30, 2019 and December 31, 2018. |
|
(2) |
The weighted average coupon rate is based on the face values of the associated securities. |
|
( 3 ) |
The Company expects that the payoff dates of these CMBS will either be extended or that the securities will be paid off in full. |
At September 30, 2019, the contractual maturities, which may be different than the estimated weighted average lives reflected in the table above, of the CMBS investment securities available-for-sale range from December 2024 to August 2061.
The following table summarizes the fair value, gross unrealized losses and number of securities aggregated by investment category and the length of time that individual investment securities available-for-sale have been in a continuous unrealized loss position during the periods specified (dollars in thousands):
|
|
|
Less than 12 Months |
|
|
More than 12 Months |
|
|
Total |
|
|||||||||||||||||||||||||||
|
|
|
Fair Value |
|
|
Unrealized Losses |
|
|
Number of Securities |
|
|
Fair Value |
|
|
Unrealized Losses |
|
|
Number of Securities |
|
|
Fair Value |
|
|
Unrealized Losses |
|
|
Number of Securities |
|
|||||||||
|
At September 30, 2019: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CMBS |
|
$ |
116,555 |
|
|
$ |
(1,317 |
) |
|
|
22 |
|
|
$ |
10,171 |
|
|
$ |
(332 |
) |
|
|
7 |
|
|
$ |
126,726 |
|
|
$ |
(1,649 |
) |
|
|
29 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2018: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CMBS |
|
$ |
329,441 |
|
|
$ |
(4,001 |
) |
|
|
49 |
|
|
$ |
6,757 |
|
|
$ |
(432 |
) |
|
|
7 |
|
|
$ |
336,198 |
|
|
$ |
(4,433 |
) |
|
|
56 |
|
The unrealized losses in the above table are considered to be temporary impairments due to market factors and are not reflective of credit deterioration.
The Company recognized no other-than-temporary impairments on its investment securities available-for-sale for the three and nine months ended September 30, 2019 and 2018.
The following table summarizes the Company's sales and redemptions of investment securities available-for-sale for the three and nine months ended September 30, 2019 and 2018 (dollars in thousands):
|
|
|
For the Three Months Ended |
|
|
For the Nine Months Ended |
|
||||||||||||||||||||||||||||||||||
|
|
|
Positions Sold/Redeemed |
|
|
Par Amount Sold/Redeemed |
|
|
Amortized Cost |
|
|
Realized Gain |
|
|
Proceeds |
|
|
Positions Sold/Redeemed |
|
|
Par Amount Sold/Redeemed |
|
|
Amortized Cost |
|
|
Realized Gain (Loss) |
|
|
Proceeds |
|
||||||||||
|
September 30, 2019: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CMBS |
|
|
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
|
1 |
|
|
$ |
634 |
|
|
$ |
634 |
|
|
$ |
4 |
|
|
$ |
638 |
|
|
September 30, 2018: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CMBS |
|
|
1 |
|
|
$ |
10,000 |
|
|
$ |
7,821 |
|
|
$ |
282 |
|
|
$ |
8,103 |
|
|
|
1 |
|
|
$ |
10,000 |
|
|
$ |
7,821 |
|
|
$ |
282 |
|
|
$ |
8,103 |
|
|
ABS |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
2 |
|
|
|
411 |
|
|
|
265 |
|
|
|
(217 |
) |
|
|
48 |
|
|
Total |
|
|
1 |
|
|
$ |
10,000 |
|
|
$ |
7,821 |
|
|
$ |
282 |
|
|
$ |
8,103 |
|
|
|
3 |
|
|
$ |
10,411 |
|
|
$ |
8,086 |
|
|
$ |
65 |
|
|
$ |
8,151 |
|
22
EXANTAS CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
SEPTEMBER 30, 2019
(unaudited)
NOTE 8 - INVESTMENTS IN UNCONSOLIDATED ENTITIES
The following table summarizes the Company's investments in unconsolidated entities at September 30, 2019 and December 31, 2018 and equity in earnings of unconsolidated entities for the three and nine months ended September 30, 2019 and 2018 (dollars in thousands, except amount in the footnotes):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in Earnings (Losses) of Unconsolidated Entities |
|
|||||||||||||
|
|
|
Ownership % at |
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended |
|
|
For the Nine Months Ended |
|
|||||||||||
|
|
|
September 30, 2019 |
|
|
September 30, 2019 |
|
|
December 31, 2018 |
|
|
September 30, 2019 |
|
|
September 30, 2018 |
|
|
September 30, 2019 |
|
|
September 30, 2018 |
|
|||||||
|
Investment in LCC Preferred Stock (1) |
|
|
— |
% |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
411 |
|
|
$ |
— |
|
|
$ |
411 |
|
|
Pelium Capital (2) |
|
|
— |
% |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
50 |
|
|
|
— |
|
|
|
(180 |
) |
|
RCM Global |
|
|
— |
% |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(7 |
) |
|
|
— |
|
|
|
— |
|
|
Subtotal |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
454 |
|
|
|
— |
|
|
|
231 |
|
|
Investment in RCT I and RCT II (3) |
|
|
3.0 |
% |
|
|
1,548 |
|
|
|
1,548 |
|
|
|
25 |
|
|
|
25 |
|
|
|
76 |
|
|
|
71 |
|
|
Total |
|
|
|
|
|
$ |
1,548 |
|
|
$ |
1,548 |
|
|
$ |
25 |
|
|
$ |
479 |
|
|
$ |
76 |
|
|
$ |
302 |
|
|
(1) |
The Company's investment in LEAF Commercial Capital, Inc. ("LCC") liquidated in July 2017 as a result of the sale of LCC. Earnings for the three and nine months ended September 30, 2018 are related to the receipt of a distribution of funds formerly held in escrow accounts established as part of the sale. |
|
(2) |
During the nine months ended September 30, 2018, the Company received distributions of $10.4 million on its investment in Pelium Capital Partners, L.P. ("Pelium Capital"). |
|
( 3 ) |
During the three and nine months ended September 30, 2019 and 2018, dividends from the investments in RCT I and RCT II's common shares are recorded in other revenue. See Note 9 for the disclosures on the associated unsecured junior subordinated debentures. |
In 2018, Pelium Capital and RCM Global LLC were fully liquidated.
23
EXANTAS CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
SEPTEMBER 30, 2019
(unaudited)
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 facilities, warehouse 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 September 30, 2019: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
XAN 2018-RSO6 Senior Notes |
|
$ |
315,010 |
|
|
$ |
2,668 |
|
|
$ |
312,342 |
|
|
|
3.19 |
% |
|
15.7 years |
|
$ |
431,782 |
|
|
XAN 2019-RSO7 Senior Notes |
|
|
575,711 |
|
|
|
5,543 |
|
|
|
570,168 |
|
|
|
3.32 |
% |
|
16.6 years |
|
|
687,068 |
|
|
Unsecured junior subordinated debentures |
|
|
51,548 |
|
|
|
— |
|
|
|
51,548 |
|
|
|
6.24 |
% |
|
16.9 years |
|
|
— |
|
|
4.50% Convertible Senior Notes |
|
|
143,750 |
|
|
|
11,010 |
|
|
|
132,740 |
|
|
|
4.50 |
% |
|
2.9 years |
|
|
— |
|
|
8.00% Convertible Senior Notes |
|
|
21,182 |
|
|
|
67 |
|
|
|
21,115 |
|
|
|
8.00 |
% |
|
107 days |
|
|
— |
|
|
CRE - term repurchase facilities (1) |
|
|
475,706 |
|
|
|
3,316 |
|
|
|
472,390 |
|
|
|
4.09 |
% |
|
1.3 years |
|
|
635,084 |
|
|
CMBS - short term repurchase agreements (2) |
|
|
327,123 |
|
|
|
— |
|
|
|
327,123 |
|
|
|
3.18 |
% |
|
21 days |
|
|
427,534 |
|
|
Total |
|
$ |
1,910,030 |
|
|
$ |
22,604 |
|
|
$ |
1,887,426 |
|
|
|
3.69 |
% |
|
8.6 years |
|
$ |
2,181,468 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal Outstanding |
|
|
Unamortized Issuance Costs and Discounts |
|
|
Outstanding Borrowings |
|
|
Weighted Average Borrowing Rate |
|
|
Weighted Average Remaining Maturity |
|
Value of Collateral |
|
|||||
|
At December 31, 2018: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RCC 2017-CRE5 Senior Notes |
|
$ |
109,250 |
|
|
$ |
1,121 |
|
|
$ |
108,129 |
|
|
|
3.76 |
% |
|
15.6 years |
|
$ |
228,031 |
|
|
XAN 2018-RSO6 Senior Notes |
|
|
397,452 |
|
|
|
4,536 |
|
|
|
392,916 |
|
|
|
3.55 |
% |
|
16.5 years |
|
|
514,225 |
|
|
Unsecured junior subordinated debentures |
|
|
51,548 |
|
|
|
— |
|
|
|
51,548 |
|
|
|
6.61 |
% |
|
17.7 years |
|
|
— |
|
|
4.50% Convertible Senior Notes |
|
|
143,750 |
|
|
|
13,504 |
|
|
|
130,246 |
|
|
|
4.50 |
% |
|
3.6 years |
|
|
— |
|
|
8.00% Convertible Senior Notes |
|
|
21,182 |
|
|
|
238 |
|
|
|
20,944 |
|
|
|
8.00 |
% |
|
1.0 year |
|
|
— |
|
|
CRE - term repurchase facilities (1) |
|
|
512,716 |
|
|
|
5,269 |
|
|
|
507,447 |
|
|
|
4.47 |
% |
|
2.0 years |
|
|
696,215 |
|
|
Trust certificates - term repurchase facilities (3) |
|
|
47,451 |
|
|
|
279 |
|
|
|
47,172 |
|
|
|
6.41 |
% |
|
1.7 years |
|
|
118,780 |
|
|
CMBS - short term repurchase agreements (2) |
|
|
295,821 |
|
|
|
— |
|
|
|
295,821 |
|
|
|
3.63 |
% |
|
19 days |
|
|
395,868 |
|
|
Total |
|
$ |
1,579,170 |
|
|
$ |
24,947 |
|
|
$ |
1,554,223 |
|
|
|
4.21 |
% |
|
6.9 years |
|
$ |
1,953,119 |
|
|
(1) |
Principal outstanding includes accrued interest payable of $738,000 and $911,000 at September 30, 2019 and December 31, 2018, respectively. |
|
(2) |
Principal outstanding includes accrued interest payable of $432,000 and $773,000 at September 30, 2019 and December 31, 2018, respectively. |
|
( 3 ) |
Principal outstanding includes accrued interest payable of $118,000 at December 31, 2018. |
Securitizations
The following table sets forth certain information with respect to the Company's consolidated securitizations at September 30, 2019 (in thousands):
|
|
|
Closing Date |
|
Maturity Date |
|
End of Designated Principal Reinvestment Period (1) |
|
Total Note Paydowns Received from Closing Date through September 30, 2019 |
|
|
|
XAN 2018-RSO6 |
|
June 2018 |
|
June 2035 |
|
December 2020 |
|
$ |
82,442 |
|
|
XAN 2019-RSO7 |
|
April 2019 |
|
April 2036 |
|
April 2022 |
|
$ |
100 |
|
|
(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 September 30, 2019 and December 31, 2018 were eliminated in consolidation.
24
EXANTAS CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
SEPTEMBER 30, 2019
(unaudited)
In July 2017, the Company closed Resource Capital Corp. 2017-CRE5, Ltd. ( " RCC 2017-CRE5 " ), a $376.7 million CRE securitization transaction that provided financing for transitional CRE loans. In May 2019, the Company paid off all of the outstanding, third-party owned senior notes from the payoff proceeds of certain of the securitization's assets. In July 2019, the Company exercised the optional redemption feature 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 (together, the "Convertible Senior Notes"). 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.
The following table summarizes the Convertible Senior Notes at September 30, 2019 (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 |
% |
|
81.9466 |
|
$ |
12.20 |
|
|
August 15, 2022 |
|
8.00% Convertible Senior Notes |
|
$ |
21,182 |
|
|
|
8.00 |
% |
|
|
9.13 |
% |
|
46.8604 |
|
$ |
21.34 |
|
|
January 15, 2020 |
|
(1) |
Includes the amortization of the market discounts and deferred debt issuance costs, if any, for the 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 Convertible Senior Notes' principal outstanding, subject to adjustment as provided in the Second Supplemental Indenture (the "8.00% Convertible Senior Notes Indenture") and 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 September 30, 2019 are adjusted to reflect quarterly cash dividends in excess of a $0.10 dividend threshold, as defined in the 4.50% Convertible Senior Notes Indenture. The split-adjusted dividend threshold of $0.64, as defined in the 8.00% Convertible Senior Notes Indenture, was not exceeded for the three and nine months ended September 30, 2019 and 2018. |
The 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 Convertible Senior Notes prior to maturity. The closing price of the Company's common stock was $11.37 on September 30, 2019, which did not exceed the conversion price of either of its Convertible Senior Notes at September 30, 2019.
25
EXANTAS CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
SEPTEMBER 30, 2019
(unaudited)
Repurchase and Credit Facilities
Borrowings under the Company's 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 repurchase agreements (dollars in thousands, except amounts in footnotes):
|
|
|
September 30, 2019 |
|
|
December 31, 2018 |
|
||||||||||||||||||||||||||
|
|
|
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 Repurchase Facilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wells Fargo Bank, N.A. (2) |
|
$ |
201,920 |
|
|
$ |
268,965 |
|
|
|
30 |
|
|
|
4.04 |
% |
|
$ |
154,478 |
|
|
$ |
226,530 |
|
|
|
13 |
|
|
|
4.33 |
% |
|
Morgan Stanley Bank, N.A. (3) |
|
|
37,274 |
|
|
|
62,664 |
|
|
|
3 |
|
|
|
4.66 |
% |
|
|
37,113 |
|
|
|
62,457 |
|
|
|
3 |
|
|
|
5.09 |
% |
|
Barclays Bank PLC (4) |
|
|
104,716 |
|
|
|
135,649 |
|
|
|
13 |
|
|
|
4.30 |
% |
|
|
240,416 |
|
|
|
308,389 |
|
|
|
11 |
|
|
|
4.51 |
% |
|
JPMorgan Chase Bank, N.A. (5) |
|
|
128,480 |
|
|
|
167,806 |
|
|
|
10 |
|
|
|
3.84 |
% |
|
|
75,440 |
|
|
|
98,839 |
|
|
|
5 |
|
|
|
4.30 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trust Certificates - Term Repurchase Facilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RSO Repo SPE Trust 2017 (6) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
% |
|
|
47,172 |
|
|
|
118,780 |
|
|
|
2 |
|
|
|
6.41 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CMBS - Short-Term Repurchase Agreements |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deutsche Bank Securities Inc. |
|
|
30,774 |
|
|
|
51,075 |
|
|
|
5 |
|
|
|
3.39 |
% |
|
|
7,305 |
|
|
|
9,158 |
|
|
|
5 |
|
|
|
3.98 |
% |
|
JP Morgan Securities LLC |
|
|
52,245 |
|
|
|
66,917 |
|
|
|
15 |
|
|
|
3.16 |
% |
|
|
42,040 |
|
|
|
73,066 |
|
|
|
13 |
|
|
|
3.57 |
% |
|
Barclays Capital Inc. |
|
|
73,813 |
|
|
|
93,931 |
|
|
|
5 |
|
|
|
3.11 |
% |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
% |
|
RBC Capital Markets, LLC |
|
|
170,291 |
|
|
|
215,611 |
|
|
|
26 |
|
|
|
3.18 |
% |
|
|
246,476 |
|
|
|
313,644 |
|
|
|
33 |
|
|
|
3.64 |
% |
|
Total |
|
$ |
799,513 |
|
|
$ |
1,062,618 |
|
|
|
|
|
|
|
|
|
|
$ |
850,440 |
|
|
$ |
1,210,863 |
|
|
|
|
|
|
|
|
|
|
(1) |
Outstanding borrowings include accrued interest payable. |
|
(2) |
Includes $869,000 and $1.6 million of deferred debt issuance costs at September 30, 2019 and December 31, 2018, respectively. |
|
(3) |
Includes $167,000 of deferred debt issuance costs at December 31, 2018. There were no deferred debt issuance costs at September 30, 2019. |
|
(4) |
Includes $979,000 and $1.5 million of deferred debt issuance costs at September 30, 2019 and December 31, 2018, respectively. |
|
( 5 ) |
Includes $1.5 million and $2.0 million of deferred debt issuance costs at September 30, 2019 and December 31, 2018, respectively. |
|
(6) |
Includes $204,000 of deferred debt issuance costs at December 31, 2018. There were no deferred debt issuance costs at September 30, 2019. |
The following table shows information about the amount at risk under the repurchase facilities at September 30, 2019 (dollars in thousands):
|
|
|
Amount at Risk (1) |
|
|
Weighted Average Remaining Maturity |
|
Weighted Average Interest Rate |
|
||
|
At September 30, 2019: |
|
|
|
|
|
|
|
|
|
|
|
CRE - Term Repurchase Facilities |
|
|
|
|
|
|
|
|
|
|
|
Wells Fargo Bank, N.A. |
|
$ |
67,223 |
|
|
295 days |
|
|
4.04 |
% |
|
Morgan Stanley Bank, N.A. (2) |
|
$ |
25,722 |
|
|
31 days |
|
|
4.66 |
% |
|
Barclays Bank PLC |
|
$ |
30,567 |
|
|
1.5 years |
|
|
4.30 |
% |
|
JPMorgan Chase Bank, N.A. |
|
$ |
38,506 |
|
|
2.1 years |
|
|
3.84 |
% |
|
CMBS - Short-Term Repurchase Agreements |
|
|
|
|
|
|
|
|
|
|
|
Deutsche Bank Securities Inc. |
|
$ |
20,428 |
|
|
41 days |
|
|
3.39 |
% |
|
JP Morgan Securities LLC |
|
$ |
14,879 |
|
|
16 days |
|
|
3.16 |
% |
|
Barclays Capital Inc. |
|
$ |
20,303 |
|
|
16 days |
|
|
3.11 |
% |
|
RBC Capital Markets, LLC |
|
$ |
45,667 |
|
|
21 days |
|
|
3.18 |
% |
|
(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. |
|
(2) |
This facility was paid in full in October 2019. |
The Company was in compliance with all financial covenants in each of the respective agreements at September 30, 2019.
26
EXANTAS CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
SEPTEMBER 30, 2019
(unaudited)
CRE - Term Repurchase Facilities
In September 2015, the Company's wholly-owned subsidiary entered into a master repurchase and securities agreement (the "Morgan Stanley Facility") with Morgan Stanley Bank, N.A. to finance the origination of CRE loans. In September 2019, the Company executed an amendment of the Morgan Stanley Facility, which reduced its maximum capacity to $37.2 million and extended the maturity date through October 2019, at which time it was repaid in full.
Trust Certifications - Term Repurchase Facility
In September 2017, the Company's wholly-owned subsidiary entered into a repurchase and securities agreement (the "2017 Term Repurchase Trust Facility") with RSO Repo SPE Trust 2017. In July 2019, the Company paid off the outstanding balance of the 2017 Term Repurchase Trust Facility in connection with the redemption of RCC 2017-CRE5.
CMBS - Short-Term Repurchase Agreements
In February 2013, the Company's wholly-owned subsidiary entered into a master repurchase agreement (the "Barclays Capital Facility") with Barclays Capital Inc. to finance the purchase of CMBS. In August 2019, the Company entered into an amendment of the Barclays Capital Facility that updated certain reporting requirements and definitions.
Contractual maturity dates of the Company's borrowings' principal outstanding by category and year are presented in the table below (in thousands):
|
|
|
Total |
|
|
2019 |
|
|
2020 |
|
|
2021 |
|
|
2022 |
|
|
2023 and Thereafter |
|
||||||
|
At September 30, 2019: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CRE securitizations |
|
$ |
890,721 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
890,721 |
|
|
Unsecured junior subordinated debentures |
|
|
51,548 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
51,548 |
|
|
4.50% Convertible Senior Notes |
|
|
143,750 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
143,750 |
|
|
|
— |
|
|
8.00% Convertible Senior Notes |
|
|
21,182 |
|
|
|
— |
|
|
|
21,182 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Repurchase and credit facilities (1) |
|
|
802,829 |
|
|
|
364,397 |
|
|
|
202,789 |
|
|
|
235,643 |
|
|
|
— |
|
|
|
— |
|
|
Total |
|
$ |
1,910,030 |
|
|
$ |
364,397 |
|
|
$ |
223,971 |
|
|
$ |
235,643 |
|
|
$ |
143,750 |
|
|
$ |
942,269 |
|
|
(1) |
Includes accrued interest payable in the balances of principal outstanding. |
NOTE 10 - SHARE ISSUANCE AND REPURCHASE
In March 2018, the Company redeemed all remaining shares of its 8.25% Series B Cumulative Redeemable Preferred Stock ("Series B Preferred Stock") at a redemption price of $25.00 per share, or $115.3 million, plus accrued but unpaid distributions, resulting in a preferred stock redemption charge of $7.5 million on the consolidated statement of operations for the nine months ended September 30, 2018.
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 dividends, 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 September 30, 2019, 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.
In March 2016, the Board approved a securities repurchase program for up to $50.0 million of its outstanding securities. During the three and nine months ended September 30, 2019 and 2018, the Company did not repurchase any shares of its common or preferred stock through this program. At September 30, 2019, $44.9 million remains available under this repurchase plan.
27
EXANTAS CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
SEPTEMBER 30, 2019
(unaudited)
NOTE 11 - SHARE-BA SED 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) |
|
|
Former Employees |
|
|
Total |
|
||||
|
Unvested shares at January 1, 2019 |
|
|
30,234 |
|
|
|
386,628 |
|
|
|
5,809 |
|
|
|
422,671 |
|
|
Issued |
|
|
27,728 |
|
|
|
196,198 |
|
|
|
— |
|
|
|
223,926 |
|
|
Vested |
|
|
(27,032 |
) |
|
|
(175,454 |
) |
|
|
(5,809 |
) |
|
|
(208,295 |
) |
|
Forfeited |
|
|
(3,170 |
) |
|
|
(10,968 |
) |
|
|
— |
|
|
|
(14,138 |
) |
|
Unvested shares at September 30, 2019 |
|
|
27,760 |
|
|
|
396,404 |
|
|
|
— |
|
|
|
424,164 |
|
|
(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 nine months ended September 30, 2019 and 2018 was $2.0 million. The fair values at grant date of shares of restricted common stock issued to the Company's eight non-employee directors that served at any time during the nine months ended September 30, 2019 and 2018 were $300,000 and $255,000, respectively.
At September 30, 2019, the total unrecognized restricted common stock expense for non-employees was $1.6 million, with a weighted average amortization period remaining of 2.0 years. At December 31, 2018, 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 nine months ended September 30, 2019:
|
Grant Date (1) |
|
Shares (1) |
|
|
Vesting per Year (1) |
|
|
Vesting Date(s) (1) |
|
|
January 22, 2019 |
|
|
196,198 |
|
|
33% |
|
|
January 22, 2020, January 22, 2021 and January 22, 2022 |
|
February 1, 2019 |
|
|
3,308 |
|
|
100% |
|
|
February 1, 2020 |
|
March 8, 2019 |
|
|
14,108 |
|
|
100% |
|
|
March 8, 2020 |
|
June 3, 2019 |
|
|
3,164 |
|
|
100% |
|
|
June 3, 2020 |
|
June 6, 2019 |
|
|
3,170 |
|
|
100% |
|
|
June 6, 2020 |
|
June 19, 2019 |
|
|
900 |
|
|
100% |
|
|
June 19, 2020 |
|
September 30, 2019 |
|
|
3,078 |
|
|
100% |
|
|
September 30, 2020 |
|
(1) |
The restricted stock grant on June 6, 2019 was forfeited during the nine months ended September 30, 2019. |
The following table summarizes the status of the Company's vested stock options at September 30, 2019:
|
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, 2019 |
|
|
10,000 |
|
|
$ |
25.60 |
|
|
|
|
|
|
|
|
|
|
Vested |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
Exercised |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
Expired |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
Vested at September 30, 2019 |
|
|
10,000 |
|
|
$ |
25.60 |
|
|
|
1.63 |
|
|
$ |
— |
|
There were no options granted during the nine months ended September 30, 2019 or 2018. The outstanding stock options have contractual terms of ten years and will expire in 2021.
28
EXANTAS CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
SEPTEMBER 30, 2019
(unaudited)
The components of equity compensation expense for the periods presented are as follows (in thousands):
|
|
|
For the Three Months Ended |
|
|
For the Nine Months Ended |
|
||||||||||
|
|
|
September 30, |
|
|
September 30, |
|
||||||||||
|
|
|
2019 |
|
|
2018 |
|
|
2019 |
|
|
2018 |
|
||||
|
Restricted shares granted to non-employees (1) |
|
$ |
489 |
|
|
$ |
685 |
|
|
$ |
1,438 |
|
|
$ |
2,166 |
|
|
Restricted shares granted to non-employee directors |
|
|
63 |
|
|
|
72 |
|
|
|
209 |
|
|
|
217 |
|
|
Total |
|
$ |
552 |
|
|
$ |
757 |
|
|
$ |
1,647 |
|
|
$ |
2,383 |
|
|
(1) |
Non-employees are employees of C-III or Resource America. |
Under the Company's Third Amended and Restated Management Agreement ("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. During the three and nine months ended September 30, 2019, the Company incurred incentive compensation payable to the Manager of $441,000 and $606,000, respectively, of which $331,000 and $455,000, respectively, was paid or payable in cash and $110,000 and $151,000, respectively, representing 9,692 and 13,307 shares, respectively, was paid or payable in common stock. The Manager received no incentive compensation for the three and nine months ended September 30, 2018.
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 |
|
|
For the Nine Months Ended |
|
||||||||||
|
|
|
September 30, |
|
|
September 30, |
|
||||||||||
|
|
|
2019 |
|
|
2018 |
|
|
2019 |
|
|
2018 |
|
||||
|
Net income from continuing operations |
|
$ |
12,620 |
|
|
$ |
8,260 |
|
|
$ |
29,793 |
|
|
$ |
17,312 |
|
|
Net income allocated to preferred shares |
|
|
(2,588 |
) |
|
|
(2,588 |
) |
|
|
(7,763 |
) |
|
|
(10,385 |
) |
|
Consideration paid in excess of carrying value of preferred shares |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(7,482 |
) |
|
Net income (loss) from continuing operations allocable to common shares |
|
|
10,032 |
|
|
|
5,672 |
|
|
|
22,030 |
|
|
|
(555 |
) |
|
Net (loss) income from discontinued operations, net of tax |
|
|
(63 |
) |
|
|
364 |
|
|
|
(212 |
) |
|
|
161 |
|
|
Net income (loss) allocable to common shares |
|
$ |
9,969 |
|
|
$ |
6,036 |
|
|
$ |
21,818 |
|
|
$ |
(394 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding - basic |
|
|
31,445,492 |
|
|
|
31,229,969 |
|
|
|
31,421,294 |
|
|
|
31,186,057 |
|
|
Effect of dilutive securities - unvested restricted stock |
|
|
269,263 |
|
|
|
247,429 |
|
|
|
213,077 |
|
|
|
— |
|
|
Weighted average number of common shares outstanding - diluted |
|
|
31,714,755 |
|
|
|
31,477,398 |
|
|
|
31,634,371 |
|
|
|
31,186,057 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common share - basic: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations |
|
$ |
0.32 |
|
|
$ |
0.18 |
|
|
$ |
0.70 |
|
|
$ |
(0.02 |
) |
|
Discontinued operations |
|
|
— |
|
|
|
0.01 |
|
|
|
(0.01 |
) |
|
|
0.01 |
|
|
Net income (loss) per common share - basic |
|
$ |
0.32 |
|
|
$ |
0.19 |
|
|
$ |
0.69 |
|
|
$ |
(0.01 |
) |
|
Net income (loss) per common share - diluted: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations |
|
$ |
0.31 |
|
|
$ |
0.18 |
|
|
$ |
0.70 |
|
|
$ |
(0.02 |
) |
|
Discontinued operations |
|
|
— |
|
|
|
0.01 |
|
|
|
(0.01 |
) |
|
|
0.01 |
|
|
Net income (loss) per common share - diluted |
|
$ |
0.31 |
|
|
$ |
0.19 |
|
|
$ |
0.69 |
|
|
$ |
(0.01 |
) |
29
EXANTAS CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
SEPTEMBER 30, 2019
(unaudited)
For the 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 co nversion 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 Convertible Senior Notes. For the three and nine months ended Septe mber 30, 2019 and 2018, the average market price of the Company ' s common stock did not exceed the conversion price of the Convertible Senior Notes and as such the Convertible Senior Notes have been excluded from the computation of diluted earnings per shar e . The conversion rate and conversion price for the Convertible Senior Notes are described further in Note 9.
NOTE 13 - ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The following table presents the changes in each component of accumulated other comprehensive income (loss) for the nine months ended September 30, 2019 (in thousands):
|
|
|
Net Unrealized Gain (Loss) on Derivatives |
|
|
Net Unrealized (Loss) Gain on Investment Securities Available-for-Sale |
|
|
Accumulated Other Comprehensive Income (Loss) |
|
|||
|
Balance at January 1, 2019 |
|
$ |
563 |
|
|
$ |
(3,620 |
) |
|
$ |
(3,057 |
) |
|
Other comprehensive (loss) income before reclassifications |
|
|
(6,298 |
) |
|
|
10,583 |
|
|
|
4,285 |
|
|
Amounts reclassified from accumulated other comprehensive income (1) |
|
|
(68 |
) |
|
|
(4 |
) |
|
|
(72 |
) |
|
Balance at September 30, 2019 |
|
$ |
(5,803 |
) |
|
$ |
6,959 |
|
|
$ |
1,156 |
|
|
(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 14 - 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 primary and special loan servicing, loan origination, fund management, CDO management, principal investment, zoning due diligence, investment sales and multifamily property management. 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 September 30, 2019, C-III indirectly beneficially owned 770,333, or 2.4%, of the Company's outstanding common stock.
30
EXANTAS CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
SEPTEMBER 30, 2019
(unaudited)
The Company has a Management Agreement with the Manager, amended an d restated on December 14, 2017, pursuant to which the Manager provides the day-to-day management of the Company's operations and receives substantial fees. For the three and nine months ended September 30, 2019 , the Manager earned base management fees of approximately $ 2 . 1 million and $ 6 . 3 million, respectively. For the three and nine months ended September 30, 2018 , the Manager earned base management fees of approximately $ 2 . 8 million and $ 8 . 4 million , respectively. For the three and nine months ended September 30, 2019 , the Manager earned incentive compensation of approximately $441,000 and $606,000 , respectively , of which $331,000 was payable in cash and approximately $110,000 was payable in common stock at September 30, 2019 . No incentive compensation was earned for the three and nine months ended September 30, 2018 . At September 30, 2019 and December 31, 2018 , $ 701,000 and $ 938,000 , respectively, of base management fees were payable by the Company to the Manager. There was no incentive com pensation payable at December 31, 2018. 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 Manage r'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 affilia tes that relate directly to the Company's operations. For the three and nine months ended September 30, 2019 , the Company reimbursed the Manager $ 1 . 0 million and $ 3 . 2 million, respectively, for all such compensation and costs. For the three and nine months ended September 30, 2018 , the Company reimbursed the Manager $ 1. 2 million and $ 4 . 0 million, respectively, for all such compensation and costs. At September 30, 2019 and December 31, 2018 , the Company had payables to Resource America and its subsidiaries p ursuant to the Management Agreement totaling approximately $ 354,000 and $ 333 ,000, respectively. The Company's base management fee payable and expense reimbursements payable are recorded in management fee payable and accounts payable and other liabilities o n the consolidated balance sheets, respectively.
At September 30, 2019, the Company retained equity in five securitization entities that were structured for the Company by the Manager, although three of the securitization entities had been substantially liquidated as of September 30, 2019. 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.
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 September 30, 2019 and December 31, 2018, the Company had net receivables from Resource Real Estate for loan deposits of $35,000 and $26,000, 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) RCC 2017-CRE5, a $376.7 million securitization that closed in July 2017 and liquidated in July 2019. Resource Real Estate did not earn any special servicing fees during the three and nine months ended September 30, 2019 and 2018.
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 and nine months ended September 30, 2019, C-III Commercial Mortgage did not earn any exit fees. The Company had no outstanding payables to C-III Commercial Mortgage at September 30, 2019.
Additionally, C3AM served as the primary servicer for the CRE loans collateralizing RCC 2017-CRE5 and serves as the primary servicer for the CRE loans acquired in the May 2019 Loan Acquisition Agreement and the CRE loans collateralizing 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 receives servicing fees, payable monthly on an asset-by-asset basis. C3AM serves as special servicer for C40, XAN 2018-RSO6 and XAN 2019-RSO7, under which it receives a base special servicing fee.
31
EXANTAS CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
SEPTEMBER 30, 2019
(unaudited)
During the three and nine months ended September 30, 2019 , C3AM earned approximately $ 161,000 and $ 424,000 , respectively, in servicing fees . During the nine months ended September 30, 2019, t he Company received $48,000 of exit fees from C3AM on a CRE loan acquired in the May 2019 Loan Acquisition Agreement . During the three and nine months ended September 30, 2018 , C3AM earned approximately $ 109 ,000 and $ 217 ,000 , respectively, in servicing fees. C3AM did not earn any special servicing fees during the three and nine months ended September 30, 2019 and 2018 . The Company had payables to C3AM of approximately $ 41,000 and $ 26 ,000 at September 30, 2019 and December 31, 2018 , respectively .
NOTE 15 - DISTRIBUTIONS
For the quarters ended September 30, 2019 and 2018, the Company declared and subsequently paid dividends of $0.25 and $0.15 per common share, respectively.
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 loan 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 2019 dividends are, and will be, determined by the Board, which will also consider the composition of any dividends declared, including the option of paying a portion in cash and the balance in additional shares of common stock.
The following tables present dividends declared (on a per share basis) for the nine months ended September 30, 2019 and year ended December 31, 2018, with respect to the Company's common stock and Series C Preferred Stock, and for the period from January 1, 2018 through March 26, 2018, with respect to the Company's Series B Preferred Stock:
|
|
|
Common Stock |
|
|||||||
|
|
|
Date Paid |
|
Total Dividend Paid |
|
|
Dividend Per Share |
|
||
|
|
|
|
|
(in thousands) |
|
|
|
|
|
|
|
2019 |
|
|
|
|
|
|
|
|
|
|
|
September 30 |
|
October 25 |
|
$ |
7,967 |
|
|
$ |
0.25 |
|
|
June 30 |
|
July 26 |
|
$ |
7,172 |
|
|
$ |
0.225 |
|
|
March 31 |
|
April 26 |
|
$ |
6,373 |
|
|
$ |
0.20 |
|
|
2018 |
|
|
|
|
|
|
|
|
|
|
|
December 31 |
|
January 25, 2019 |
|
$ |
5,540 |
|
|
$ |
0.175 |
|
|
September 30 |
|
October 26 |
|
$ |
4,749 |
|
|
$ |
0.15 |
|
|
June 30 |
|
July 27 |
|
$ |
3,165 |
|
|
$ |
0.10 |
|
|
March 31 |
|
April 27 |
|
$ |
1,584 |
|
|
$ |
0.05 |
|
|
|
|
Series B Preferred Stock |
|
|
Series C Preferred Stock |
|
||||||||||||||
|
|
|
Date Paid |
|
Total Dividend Paid |
|
|
Dividend Per Share |
|
|
Date Paid |
|
Total Dividend Paid |
|
|
Dividend Per Share |
|
||||
|
|
|
(in thousands) |
|
|
(in thousands) |
|
||||||||||||||
|
2019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30 |
|
N/A |
|
N/A |
|
|
N/A |
|
|
October 30 |
|
$ |
2,588 |
|
|
$ |
0.539063 |
|
||
|
June 30 |
|
N/A |
|
N/A |
|
|
N/A |
|
|
July 30 |
|
$ |
2,587 |
|
|
$ |
0.539063 |
|
||
|
March 31 |
|
N/A |
|
N/A |
|
|
N/A |
|
|
April 30 |
|
$ |
2,588 |
|
|
$ |
0.539063 |
|
||
|
2018 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31 |
|
N/A |
|
N/A |
|
|
N/A |
|
|
January 30, 2019 |
|
$ |
2,588 |
|
|
$ |
0.539063 |
|
||
|
September 30 |
|
N/A |
|
N/A |
|
|
N/A |
|
|
October 30 |
|
$ |
2,588 |
|
|
$ |
0.539063 |
|
||
|
June 30 |
|
N/A |
|
N/A |
|
|
N/A |
|
|
July 30 |
|
$ |
2,588 |
|
|
$ |
0.539063 |
|
||
|
March 31 |
|
N/A |
|
N/A |
|
|
N/A |
|
|
April 30 |
|
$ |
2,588 |
|
|
$ |
0.539063 |
|
||
|
March 26 (1) |
|
March 26 |
|
$ |
1,480 |
|
|
$ |
0.320830 |
|
|
N/A |
|
N/A |
|
|
N/A |
|
||
|
(1) |
In March 2018, the Company redeemed all remaining shares of its Series B Preferred Stock. |
32
EXANTAS CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
SEPTEMBER 30, 2019
(unaudited)
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 September 30, 2019: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities available-for-sale |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
471,848 |
|
|
$ |
471,848 |
|
|
Total assets at fair value |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
471,848 |
|
|
$ |
471,848 |
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives |
|
$ |
— |
|
|
$ |
6,355 |
|
|
$ |
— |
|
|
$ |
6,355 |
|
|
Total liabilities at fair value |
|
$ |
— |
|
|
$ |
6,355 |
|
|
$ |
— |
|
|
$ |
6,355 |
|
|
At December 31, 2018: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities available-for-sale |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
418,998 |
|
|
$ |
418,998 |
|
|
Derivatives |
|
|
— |
|
|
|
985 |
|
|
|
— |
|
|
|
985 |
|
|
Total assets at fair value |
|
$ |
— |
|
|
$ |
985 |
|
|
$ |
418,998 |
|
|
$ |
419,983 |
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives |
|
$ |
— |
|
|
$ |
1,043 |
|
|
$ |
— |
|
|
$ |
1,043 |
|
|
Total liabilities at fair value |
|
$ |
— |
|
|
$ |
1,043 |
|
|
$ |
— |
|
|
$ |
1,043 |
|
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, 2019 |
|
$ |
418,998 |
|
|
Included in earnings |
|
|
2,105 |
|
|
Purchases |
|
|
74,220 |
|
|
Sale |
|
|
(638 |
) |
|
Paydowns (1) |
|
|
(33,416 |
) |
|
Included in other comprehensive income |
|
|
10,579 |
|
|
Balance, September 30, 2019 |
|
$ |
471,848 |
|
|
(1) |
Includes non-cash adjustments in connection with the recalculation of the accretable yield on certain interest-only CMBS. |
33
EXANTAS CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
SEPTEMBER 30, 2019
(unaudited)
A l egacy CRE loan held for sale is measured at the lower of cost or market on a nonrecurring basis. To determine the fa ir value of the legacy CRE loan 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 estim ated disposition costs. During the three and nine months ended September 30, 2019, the Company recorded losses of $55,000 and $1.5 million , respectively, on one legacy CRE loan held for sale, which included protective advances to cover borrower operating l osses of $55,000 and $158,000, respectively . The loss during the nine months ended September 30, 2019 primarily comprised a $1.3 million fair value charge in connection with the updated fair value based on the average of three June 2019 brokers ' opinion s of value that were taken into account equally along with an appraisal received in February 2019 . The fair value of the collateral has subsequently increased in connection with capital improvements, which were deducted from the brokers' opinion s of value a nd appraisal. During the three and nine months ended September 30, 2018 , the Company recorded losses of $1.6 million and $6.3 million, respectively, on the same legacy CRE loan held for sale , which included protective advances to cover borrower operating losses of $600,000 and $772,000, respectively, to adjust the loan to the average value of two appraisals . The loan had a fair value, less the remaining estimated costs to repair the underlying collateral, equal to $17.1 million and $17.0 million at Septemb er 30, 2019 and December 31, 2018 , respectively . The terminal capitalization rate s used in the updated appraisal and brokers ' opinion s of values ranged from 8.50% to 10.00% at September 30, 2019 .
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 CRE loans had interest rates from 4.77% to 8.32% and 5.08% to 8.63% at September 30, 2019 and December 31, 2018, 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 8.00% Convertible Senior Notes are discounted at a rate of 9.13% and the 4.50% Convertible Senior Notes are discounted at a rate of 7.43%.
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.
34
EXANTAS CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
SEPTEMBER 30, 2019
(unaudited)
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 September 30, 2019: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CRE whole loans held for investment |
|
$ |
1,764,834 |
|
|
$ |
1,773,119 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
1,773,119 |
|
|
CRE mezzanine loan |
|
$ |
4,700 |
|
|
$ |
4,700 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
4,700 |
|
|
CRE preferred equity investments |
|
$ |
25,776 |
|
|
$ |
25,899 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
25,899 |
|
|
Legacy CRE loans held for sale |
|
$ |
17,141 |
|
|
$ |
17,141 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
17,141 |
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior notes in CRE securitizations |
|
$ |
882,510 |
|
|
$ |
893,185 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
893,185 |
|
|
Junior subordinated notes |
|
$ |
51,548 |
|
|
$ |
26,667 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
26,667 |
|
|
Convertible notes |
|
$ |
153,855 |
|
|
$ |
164,932 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
164,932 |
|
|
Repurchase agreements |
|
$ |
799,513 |
|
|
$ |
802,829 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
802,829 |
|
|
At December 31, 2018: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CRE whole loans held for investment |
|
$ |
1,527,712 |
|
|
$ |
1,538,759 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
1,538,759 |
|
|
CRE mezzanine loan |
|
$ |
4,700 |
|
|
$ |
4,700 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
4,700 |
|
|
CRE preferred equity investment |
|
$ |
19,555 |
|
|
$ |
19,718 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
19,718 |
|
|
Legacy CRE loans held for sale |
|
$ |
17,000 |
|
|
$ |
17,000 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
17,000 |
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior notes in CRE securitizations |
|
$ |
501,045 |
|
|
$ |
498,897 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
498,897 |
|
|
Junior subordinated notes |
|
$ |
51,548 |
|
|
$ |
27,800 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
27,800 |
|
|
Convertible notes |
|
$ |
151,190 |
|
|
$ |
164,932 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
164,932 |
|
|
Repurchase agreements |
|
$ |
850,440 |
|
|
$ |
855,783 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
855,783 |
|
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 risk managed by the Company through the use of derivative instruments is interest rate 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.
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.
35
EXANTAS CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
SEPTEMBER 30, 2019
(unaudited)
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 income (loss), and records changes in fair value of derivatives designated and ineffective as cash flow hedges in earnings.
At September 30, 2019 and December 31, 2018, the Company had 18 and 16, respectively, interest rate swap contracts outstanding whereby the Company paid a weighted average fixed rate of 2.50% and 2.54%, respectively, and received a variable rate equal to one-month LIBOR. The aggregate notional amount of these contracts was $87.6 million and $81.1 million at September 30, 2019 and December 31, 2018, respectively. The counterparty for the Company's designated interest rate hedge contracts at September 30, 2019 and December 31, 2018 was Wells Fargo Bank, N.A. ("Wells Fargo").
There were no interest rate swaps in an asset position at September 30, 2019. At December 31, 2018, the estimated fair value of the Company's interest rate swaps in an asset position was $985,000. At September 30, 2019 and December 31, 2018, the estimated fair value of the Company's interest rate swaps in a liability position was $6.4 million and $1.0 million, respectively. The Company had aggregate unrealized losses of $5.8 million and aggregate unrealized gains of $563,000 on its interest rate swaps at September 30, 2019 and December 31, 2018, respectively, which are recorded in accumulated other comprehensive income (loss) on the consolidated balance sheets.
At September 30, 2019 and December 31, 2018, the Company had an unrealized gain of $553,000 and $621,000, respectively, attributable to two terminated interest rate swaps, in accumulated other comprehensive income (loss) 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 and $68,000 during the three and nine months ended September 30, 2019, respectively, to accrete the accumulated other comprehensive income on the terminated swap agreements. The Company did not record any interest expense for the three and nine months ended September 30, 2018 to amortize accumulated other comprehensive income (loss) from terminated swap agreements.
The Company had a master netting agreement with Wells Fargo at September 30, 2019. 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 September 30, 2019. At December 31, 2018, the Company had centrally cleared interest rate swaps with fair values in an asset position of $985,000. At September 30, 2019 and December 31, 2018, the Company had centrally cleared interest rate swaps with a fair value in a liability position of $6.4 million and $1.0 million, respectively.
The following tables present the fair value of the Company's derivative financial instruments at September 30, 2019 and December 31, 2018 on the Company's consolidated balance sheets and the related effect of the derivative instruments on the consolidated statements of operations for the nine months ended September 30, 2019 and 2018:
Fair Value of Derivative Instruments (in thousands)
|
|
|
Liability Derivatives |
|
|||||||
|
At September 30, 2019 |
|
Notional Amount |
|
|
Consolidated Balance Sheets Location |
|
Fair Value |
|
||
|
Interest rate swap contracts, hedging (1) |
|
$ |
87,551 |
|
|
Derivatives, at fair value |
|
$ |
6,355 |
|
|
Interest rate swap contracts, hedging |
|
$ |
87,551 |
|
|
Accumulated other comprehensive income (loss) |
|
$ |
(5,803 |
) |
36
EXANTAS CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
SEPTEMBER 30, 2019
(unaudited)
|
|
Asset Derivatives |
|
||||||||
|
At December 31, 2018 |
|
Notional Amount |
|
|
Consolidated Balance Sheets Location |
|
Fair Value |
|
||
|
Interest rate swap contracts, hedging (1) |
|
$ |
31,725 |
|
|
Derivatives, at fair value |
|
$ |
985 |
|
|
|
|
Liability Derivatives |
|
|||||||
|
|
|
Notional Amount |
|
|
Consolidated Balance Sheets Location |
|
Fair Value |
|
||
|
Interest rate swap contracts, hedging (1) |
|
$ |
49,326 |
|
|
Derivatives, at fair value |
|
$ |
1,043 |
|
|
Interest rate swap contracts, hedging |
|
$ |
81,051 |
|
|
Accumulated other comprehensive income (loss) |
|
$ |
563 |
|
|
(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 |
|
|||
|
Nine Months Ended September 30, 2019 |
|
Consolidated Statements of Operations Location |
|
Realized and Unrealized Gain (Loss) |
|
|
|
Interest rate swap contracts, hedging |
|
Interest expense |
|
$ |
(16 |
) |
|
|
|
Derivatives |
|
|||
|
Nine Months Ended September 30, 2018 |
|
Consolidated Statements of Operations Location |
|
Realized and Unrealized Gain (Loss) |
|
|
|
Interest rate swap contracts, hedging |
|
Interest expense |
|
$ |
(141 |
) |
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, 2018: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives, at fair value |
|
$ |
985 |
|
|
$ |
— |
|
|
$ |
985 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
985 |
|
There were no derivatives with a fair value in an asset position at September 30, 2019.
37
EXANTAS CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
SEPTEMBER 30, 2019
(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 September 30, 2019: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives, at fair value (2) |
|
$ |
6,355 |
|
|
$ |
— |
|
|
$ |
6,355 |
|
|
$ |
— |
|
|
$ |
6,355 |
|
|
$ |
— |
|
|
Repurchase agreements and term facilities (3) |
|
|
799,513 |
|
|
|
— |
|
|
|
799,513 |
|
|
|
798,682 |
|
|
|
831 |
|
|
|
— |
|
|
Total |
|
$ |
805,868 |
|
|
$ |
— |
|
|
$ |
805,868 |
|
|
$ |
798,682 |
|
|
$ |
7,186 |
|
|
$ |
— |
|
|
At December 31, 2018: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives, at fair value (2) |
|
$ |
1,043 |
|
|
$ |
— |
|
|
$ |
1,043 |
|
|
$ |
— |
|
|
$ |
1,043 |
|
|
$ |
— |
|
|
Repurchase agreements and term facilities (3) |
|
|
850,440 |
|
|
|
— |
|
|
|
850,440 |
|
|
|
850,440 |
|
|
|
— |
|
|
|
— |
|
|
Total |
|
$ |
851,483 |
|
|
$ |
— |
|
|
$ |
851,483 |
|
|
$ |
850,440 |
|
|
$ |
1,043 |
|
|
$ |
— |
|
|
(1) |
Amounts represent financial instruments pledged that are available to be offset against liability balances associated with term facilities, repurchase agreements and derivatives. |
|
(2) |
The Company posted excess cash collateral of $3.6 million and $1.3 million related to interest rate swap contracts outstanding at September 30, 2019 and December 31, 2018, respectively. |
|
( 3 ) |
The combined fair value of securities and loans pledged against the Company's various repurchase agreements and term facilities was $1.1 billion and $1.2 billion at September 30, 2019 and December 31, 2018, 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 September 30, 2019.
Primary Capital Mortgage, LLC ("PCM") is subject to litigation related to claims for repurchases or indemnifications on loans that PCM has sold to third parties. At September 30, 2019 and December 31, 2018, 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 September 30, 2019 and December 31, 2018. The reserves for mortgage repurchases and indemnifications are included in liabilities held for sale on the consolidated balance sheets.
Settled and Dismissed Litigation Matters
In April 2018, the Company funded $2.0 million into escrow in connection with the proposed settlement of outstanding litigation, which was settled in August 2018. The Company did not have any general litigation reserve at September 30, 2019 or December 31, 2018.
38
EXANTAS CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
SEPTEMBER 30, 2019
(unaudited)
The Company previously disclosed a securities litigation suit against certain of the Company's current and former officers and directors titled Levin v. Resource Capital Corp. (the "Levin Action"). On February 5, 2018, the Company entered into a sti pulation and agreement of settlement (the "Levin Action Settlement Agreement"), which received final approval from the United States District Court for the Southern District of New York (the "Court") on August 3, 2018. The Levin Action Settlement Agreement settled all claims asserted in the action on behalf of the certified class (the "Settlement"), which consisted, with specified exceptions, of all persons who purchased the Company's common stock, Series B Preferred Stock or Series C Preferred Stock betwee n October 31, 2012 and August 5, 2015. Under the terms of the Levin Action Settlement Agreement, a payment of $9.5 million was made to settle the litigation. The settlement payment was funded principally by insurance coverage. In exchange for the settlemen t consideration, the Company and the individual defendants in the Levin Action (and certain related parties) have been released from all claims that have been or could have been asserted in the case by class members (and certain related parties), excluding one holder of less than 500 shares who opted out of the Settlement. The terms of the Settlement and release of claims are described in greater detail in the Levin Action Settlement Agreement filed with the Court and the Final Judgment and Order of Dismiss al with Prejudice entered by the Court on August 3, 2018. The Levin Action Settlement Agreement contains no admission of misconduct by the Company or any of the individual defendants and expressly acknowledges that the Company and the individual defendants deny all allegations of wrongdoing and maintain that it and they have at all times acted in good faith and in compliance with the law.
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.
39
EXANTAS CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
SEPTEMBER 30, 2019
(unaudited)
PCM was the subject of a lawsuit brought by a purchaser of residential mortgage loans alleging breaches of representa tions and warranties made on loans sold to the purchaser. The asserted repurchase claims related to loans sold to the purchaser that were subsequently sold by the purchaser to either the Federal National Mortgage Association or Federal Home Loan Mortgage C orporation and loans sold to the purchaser that were subsequently securitized and sold as residential mortgage-backed securities ("RMBS") by the purchaser to RMBS investors. This matter was settled and dismissed in January 2018.
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. At September 30, 2019 and December 31, 2018, the Company had a contingent liability, reported in accounts payable and other liabilities on its consolidated balance sheets, of $703,000 outstanding as a reserve for probable indemnification losses. The Company did not record any additional reserve for probable losses during the three and nine months ended September 30, 2019 and 2018.
PCM is subject to additional claims for repurchases or indemnifications on loans that PCM has sold to investors. At both September 30, 2019 and December 31, 2018, 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 $109.9 million and $108.5 million in unfunded loan commitments at September 30, 2019 and December 31, 2018, respectively. Preferred equity investments had $3.1 million in unfunded investment commitments at September 30, 2019. There were no preferred equity investment unfunded commitments at December 31, 2018.
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 September 30, 2019, the Company has substantially completed the execution of the Plan.
40
EXANTAS CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
SEPTEMBER 30, 2019
(unaudited)
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 and nine months ended September 30, 2019 and 2018 (in thousands):
|
|
|
For the Three Months Ended |
|
|
For the Nine Months Ended |
|
||||||||||
|
|
|
September 30, |
|
|
September 30, |
|
||||||||||
|
|
|
2019 |
|
|
2018 |
|
|
2019 |
|
|
2018 |
|
||||
|
REVENUES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
580 |
|
|
Other |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
13 |
|
|
Total interest income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
593 |
|
|
Interest expense |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Net interest income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
593 |
|
|
Other revenue |
|
|
24 |
|
|
|
280 |
|
|
|
24 |
|
|
|
312 |
|
|
Total revenues |
|
|
24 |
|
|
|
280 |
|
|
|
24 |
|
|
|
905 |
|
|
OPERATING EXPENSES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative |
|
|
87 |
|
|
|
62 |
|
|
|
371 |
|
|
|
1,165 |
|
|
Total operating expenses |
|
|
87 |
|
|
|
62 |
|
|
|
371 |
|
|
|
1,165 |
|
|
|
|
|
(63 |
) |
|
|
218 |
|
|
|
(347 |
) |
|
|
(260 |
) |
|
OTHER INCOME (EXPENSE) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized and unrealized gain on investment securities available-for-sale and loans and derivatives |
|
|
— |
|
|
|
146 |
|
|
|
135 |
|
|
|
421 |
|
|
Total other income |
|
|
— |
|
|
|
146 |
|
|
|
135 |
|
|
|
421 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(LOSS) INCOME FROM DISCONTINUED OPERATIONS BEFORE TAXES |
|
|
(63 |
) |
|
|
364 |
|
|
|
(212 |
) |
|
|
161 |
|
|
Income tax expense |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
TOTAL (LOSS) INCOME FROM DISCONTINUED OPERATIONS |
|
$ |
(63 |
) |
|
$ |
364 |
|
|
$ |
(212 |
) |
|
$ |
161 |
|
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 September 30, 2019 and December 31, 2018 (in thousands):
|
|
|
September 30, 2019 |
|
|
December 31, 2018 |
|
||
|
ASSETS |
|
|
|
|
|
|
|
|
|
Loans held for sale |
|
$ |
17,141 |
|
|
$ |
17,000 |
|
|
Other assets |
|
|
266 |
|
|
|
645 |
|
|
Total |
|
$ |
17,407 |
|
|
$ |
17,645 |
|
|
LIABILITIES |
|
|
|
|
|
|
|
|
|
Accounts payable and other liabilities |
|
$ |
1,766 |
|
|
$ |
1,820 |
|
|
Total |
|
$ |
1,766 |
|
|
$ |
1,820 |
|
41
EXANTAS CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
SEPTEMBER 30, 2019
(unaudited)
The following table summarizes the non-performing legacy CRE loans transferred to held for sale in the fourth quarter of 2016. The loans held for sale are carried at the lower of cost or fair value (in thousands, except number of loans and amount in the footnote):
|
Loan Description |
|
Number of Loans |
|
|
Amortized Cost |
|
|
Carrying Value |
|
|||
|
At September 30, 2019: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Legacy CRE loan |
|
|
1 |
|
|
$ |
23,265 |
|
|
$ |
17,141 |
|
|
Mezzanine loan (1) |
|
|
1 |
|
|
|
— |
|
|
|
— |
|
|
Total |
|
|
2 |
|
|
$ |
23,265 |
|
|
$ |
17,141 |
|
|
At December 31, 2018: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Legacy CRE loan |
|
|
1 |
|
|
$ |
21,666 |
|
|
$ |
17,000 |
|
|
Mezzanine loan (1) |
|
|
1 |
|
|
|
— |
|
|
|
— |
|
|
Total |
|
|
2 |
|
|
$ |
21,666 |
|
|
$ |
17,000 |
|
|
( 1 ) |
The mezzanine loan has a par value of $38.1 million and was acquired at a fair value of zero as a result of the liquidations of Resource Real Estate Funding CDO 2006-1, Ltd. in April 2016 and Resource Real Estate Funding CDO 2007-1, Ltd. in November 2016. The mezzanine loan is comprised of 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 there have not been any events that have occurred that would require adjustments to or disclosures in the consolidated financial statements.
42
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, 2018.
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 September 30, 2019. 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. We have financed a substantial portion of our portfolio investments through borrowing strategies seeking to match the maturities and repricing dates of our financings with the maturities and repricing dates of our investments, and we have sought to mitigate interest rate risk through derivative instruments.
We are organized and have elected to be taxed as a REIT for U.S. federal income tax purposes under Subchapter M of the Internal Revenue Code of 1986, as amended. We also intend to operate our business in a manner that will permit us to remain excluded from registration as an investment company under the Investment Company Act of 1940.
Our investment strategy targets the following CRE credit investments, including:
|
|
• |
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. |
|
|
• |
First priority interests in first mortgage loans, which we refer to as A-notes. An A-note is typically a privately negotiated loan that is secured by a first mortgage on a commercial property or group of related properties that is senior to a B-Note secured by the same first mortgage property or group. |
|
|
• |
Subordinated interests in first mortgage loans, which we refer to as B-notes. A B-note is typically a privately negotiated loan that is secured by a first mortgage on a commercial property or group of related properties and is subordinated to an A-note secured by the same first mortgage property or group. B-notes are subject to more credit risk with respect to the underlying mortgage collateral than the corresponding A-note. |
|
|
• |
Mezzanine debt that is senior to borrower's equity but is subordinated to other third-party debt. Like B-notes, these loans are also subordinated CRE loans, but are 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. |
|
|
• |
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. |
|
|
• |
Commercial mortgage-backed securities ("CMBS") that are collateralized by commercial mortgage loans, including senior and subordinated investment grade CMBS, below investment grade CMBS and unrated CMBS. |
|
|
• |
CRE investments: We may invest in other income producing real estate debt and equity investments. |
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.
43
We use leverage to enhance our returns, and we have financed each of our different ass et classes with different degrees of leverage. The cost of borrowings to finance our investments is a significant part of our expenses. Our net income depends on our ability to control these expenses relative to our revenue. We historically have financed o ur CRE loan portfolio with repurchase agreements as a short-term financing source and securitizations and, to a lesser extent, other term financing as long-term financing sources. We expect to continue to use these financing sources into the near term futu re. At September 30, 2019 our match-funded, floating - rate CRE and CMBS investments, at carrying value , comprise d 93 % of the core investment portfolio totaling $2.3 billion . Additionally, in April 2019, we closed a CRE debt securitization that financed $687.2 million of CRE loans and sold $575.8 million of non-recourse, floating-rate notes to third-party investors.
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.
Our CRE floating rate loans have London Interbank Offered Rate ("LIBOR") floors. In a lower interest rate environment, LIBOR floors do provide some asset yield protection. At the same time, investment returns would also be enhanced by a decline in the corresponding costs of our floating rate liabilities. Since the start of 2018, we have originated or acquired CRE loans with total commitments of $1.6 billion with a weighted average LIBOR floor of 2.06%.
In November 2016, our board of directors (our "Board") approved the strategic plan (the "Plan") to focus our strategy on CRE debt investments. The Plan contemplated disposing of certain loans underwritten prior to 2010 ("legacy CRE loans"), exiting non-core asset classes and businesses and maintaining a dividend policy based on sustainable earnings.
Our residential mortgage and middle market lending segments were classified as discontinued operations and certain legacy CRE loans were classified as held for sale, subject to impairments to adjust the carrying value of these investments to their estimated fair market value. We have substantially completed the execution of the Plan. As of September 30, 2019, we had approximately $28.6 million, composed of two legacy CRE loans, remaining of the $480.1 million of identified Plan assets. We have deployed the capital received from executing the Plan primarily into our CRE lending business and CMBS investments, bringing our equity allocation in core assets and non-core assets to 95% and 5%, respectively, at both September 30, 2019 and December 31, 2018. These investments were initially financed in part through our CRE and CMBS term facilities and, in the case of CRE loans, through securitizations.
We typically target transitional floating-rate CRE loans between $20.0 million and $30.0 million. During the three months ended September 30, 2019, we originated nine CRE loans with total commitments of $105.1 million. At September 30, 2019, our CRE loan portfolio comprised approximately $1.8 billion of floating rate CRE whole loans with a weighted average spread of 3.64% over one-month LIBOR. Additionally, our CRE loan portfolio comprised one $4.7 million mezzanine loan and $25.8 million of preferred equity investments at September 30, 2019. During the three months ended September 30, 2019, we acquired CMBS with total face values of $33.5 million. At September 30, 2019, our $471.8 million CMBS portfolio, at fair value, comprised $346.6 million of floating-rate bonds and $125.2 million of fixed-rate bonds. We expect to continue to diversify and extend the duration of our core CRE portfolio by investing in CMBS where we see attractive investment opportunities.
We anticipate that our CRE loan originations and other CRE-related investments for the year ended December 31, 2019 will be between $850.0 million and $1.0 billion. In addition, we expect to maintain positive momentum in 2020 and anticipate that our CRE loan originations and other CRE-related investments will again range between $850.0 million and $1.0 billion for the calendar year.
Common stock book value was $14.12 per share at September 30, 2019, a $0.10 per share increase from December 31, 2018. 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 $8.9 million, or $(0.28) per share, at September 30, 2019. 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 September 30, 2019. |
Adjusting for these two items yields economic book value of $13.71 per share at September 30, 2019.
44
Our net income allocable to common shares for the three and nine months ended September 30, 2019 was $10.0 million, or $0.32 per share-basic ($0.31 per share-diluted) and $21.8 million, or $0.69 per share-basic ($0.69 per share-diluted), respectively, as compared to net income allocable to common shares for the three months ended September 30, 2018 of $6.0 million, or $0.19 per share-basic ($0.19 per share-diluted) and a net loss allocable to common shares for the nine months ended September 30, 2018 of $394,000, or $(0.01) per share-basic ($(0.01) per share-diluted).
Net Interest Income
The following tables analyze the change in interest income and interest expense for the comparative three and nine months ended September 30, 2019 and 2018 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 September 30, 2019 Compared to Three Months Ended September 30, 2018 |
|
|||||||||||||
|
|
|
|
|
|
|
|
|
|
|
Due to Changes in |
|
|||||
|
|
|
Net Change |
|
|
Percent Change (1) |
|
|
Volume |
|
|
Rate |
|
||||
|
Increase (decrease) in interest income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CRE whole loans (2) |
|
$ |
6,045 |
|
|
|
24 |
% |
|
$ |
7,543 |
|
|
$ |
(1,498 |
) |
|
Legacy CRE loans (2)(3) |
|
|
(182 |
) |
|
|
(52 |
)% |
|
|
(221 |
) |
|
|
39 |
|
|
CRE mezzanine loan |
|
|
— |
|
|
|
— |
% |
|
|
— |
|
|
|
— |
|
|
CRE preferred equity investments (2) |
|
|
199 |
|
|
|
35 |
% |
|
|
204 |
|
|
|
(5 |
) |
|
Securities (4) |
|
|
1,379 |
|
|
|
26 |
% |
|
|
1,218 |
|
|
|
161 |
|
|
Other |
|
|
15 |
|
|
|
12 |
% |
|
|
15 |
|
|
|
— |
|
|
Total increase in interest income |
|
|
7,456 |
|
|
|
23 |
% |
|
|
8,759 |
|
|
|
(1,303 |
) |
|
Increase (decrease) in interest expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securitized borrowings: (5) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RCC 2015-CRE3 Senior Notes |
|
|
(276 |
) |
|
|
(100 |
)% |
|
|
(276 |
) |
|
|
— |
|
|
RCC 2015-CRE4 Senior Notes |
|
|
(153 |
) |
|
|
(100 |
)% |
|
|
(153 |
) |
|
|
— |
|
|
RCC 2017-CRE5 Senior Notes |
|
|
(2,242 |
) |
|
|
(100 |
)% |
|
|
(2,233 |
) |
|
|
(9 |
) |
|
XAN 2018-RSO6 Senior Notes |
|
|
365 |
|
|
|
10 |
% |
|
|
176 |
|
|
|
189 |
|
|
XAN 2019-RSO7 Senior Notes |
|
|
5,749 |
|
|
|
100 |
% |
|
|
5,749 |
|
|
|
— |
|
|
Unsecured junior subordinated debentures |
|
|
— |
|
|
|
— |
% |
|
|
— |
|
|
|
— |
|
|
Convertible senior notes: (5) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.50% Convertible Senior Notes |
|
|
62 |
|
|
|
3 |
% |
|
|
62 |
|
|
|
— |
|
|
6.00% Convertible Senior Notes |
|
|
(1,310 |
) |
|
|
(100 |
)% |
|
|
(1,310 |
) |
|
|
— |
|
|
8.00% Convertible Senior Notes |
|
|
— |
|
|
|
— |
% |
|
|
— |
|
|
|
— |
|
|
CRE - term repurchase facilities (5) |
|
|
2,578 |
|
|
|
79 |
% |
|
|
2,447 |
|
|
|
131 |
|
|
CMBS - term repurchase facilities (6) |
|
|
151 |
|
|
|
137 |
% |
|
|
149 |
|
|
|
2 |
|
|
Trust certificates - term repurchase facilities (5) |
|
|
(597 |
) |
|
|
(65 |
)% |
|
|
(589 |
) |
|
|
(8 |
) |
|
CMBS - short term repurchase agreements |
|
|
1,087 |
|
|
|
70 |
% |
|
|
1,144 |
|
|
|
(57 |
) |
|
Hedging |
|
|
(24 |
) |
|
|
(40 |
)% |
|
|
(24 |
) |
|
|
— |
|
|
Total increase in interest expense |
|
|
5,390 |
|
|
|
31 |
% |
|
|
5,142 |
|
|
|
248 |
|
|
Net increase (decrease) in net interest income |
|
$ |
2,066 |
|
|
|
|
|
|
$ |
3,617 |
|
|
$ |
(1,551 |
) |
|
(1) |
Percent change is calculated as the net change divided by the respective interest income or interest expense for the three months ended September 30, 2018. |
|
(2) |
Includes increases in fee income of approximately $617,000, $9,000 and $24,000 recognized on our CRE whole loans, legacy CRE loans and our CRE preferred equity investments that were due to changes in volume in connection with originations, extensions and payoffs of the CRE loans. |
|
(3) |
Includes the change in interest income recognized on two legacy CRE loans reclassified to CRE whole loans in 2018. One of the reclassified legacy CRE loans paid off at par in December 2018. |
|
( 4 ) |
Includes a decrease of net accretion income of approximately $176,000 that was due to changes in volume. |
|
( 5 ) |
Includes increases of net amortization expense of approximately $162,000, $239,000 and $101,000 on our securitized borrowings, CRE-term repurchase facilities and trust certificates - term repurchase facilities, respectively, and a decrease of approximately $191,000 on our convertible senior notes that were due to changes in volume in connection with deferred debt issuance costs and discounts capitalized to the respective borrowings. |
|
( 6 ) |
Includes the change in interest expense recognized on our Deutsche Bank Securities Inc. ("Deutsche Bank Securities") CMBS repurchase agreement, reclassified from a term repurchase facility to a short-term repurchase agreement at June 30, 2018. |
45
|
|
Nine Months Ended September 30, 2019 Compared to Nine Months Ended September 30, 2018 |
|
||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
Due to Changes in |
|
|||||
|
|
|
Net Change |
|
|
Percent Change (1) |
|
|
Volume |
|
|
Rate |
|
||||
|
Increase (decrease) in interest income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CRE whole loans (2) |
|
$ |
15,339 |
|
|
|
21 |
% |
|
$ |
17,197 |
|
|
$ |
(1,858 |
) |
|
Legacy CRE loans (2)(3) |
|
|
(425 |
) |
|
|
(42 |
)% |
|
|
(594 |
) |
|
|
169 |
|
|
CRE mezzanine loan |
|
|
205 |
|
|
|
137 |
% |
|
|
205 |
|
|
|
— |
|
|
CRE preferred equity investments (2) |
|
|
856 |
|
|
|
74 |
% |
|
|
862 |
|
|
|
(6 |
) |
|
Securities (4) |
|
|
6,684 |
|
|
|
52 |
% |
|
|
6,005 |
|
|
|
679 |
|
|
Other |
|
|
250 |
|
|
|
96 |
% |
|
|
250 |
|
|
|
— |
|
|
Total increase in interest income |
|
|
22,909 |
|
|
|
26 |
% |
|
|
23,925 |
|
|
|
(1,016 |
) |
|
Increase (decrease) in interest expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securitized borrowings: (5) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RCC 2015-CRE3 Senior Notes |
|
|
(1,268 |
) |
|
|
(100 |
)% |
|
|
(1,268 |
) |
|
|
— |
|
|
RCC 2015-CRE4 Senior Notes |
|
|
(1,472 |
) |
|
|
(100 |
)% |
|
|
(1,472 |
) |
|
|
— |
|
|
RCC 2017-CRE5 Senior Notes |
|
|
(3,953 |
) |
|
|
(64 |
)% |
|
|
(4,839 |
) |
|
|
886 |
|
|
XAN 2018-RSO6 Senior Notes |
|
|
8,237 |
|
|
|
214 |
% |
|
|
8,035 |
|
|
|
202 |
|
|
XAN 2019-RSO7 Senior Notes |
|
|
10,598 |
|
|
|
100 |
% |
|
|
10,598 |
|
|
|
— |
|
|
Unsecured junior subordinated debentures |
|
|
187 |
|
|
|
8 |
% |
|
|
— |
|
|
|
187 |
|
|
Convertible senior notes: (5) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.50% Convertible Senior Notes |
|
|
180 |
|
|
|
3 |
% |
|
|
180 |
|
|
|
— |
|
|
6.00% Convertible Senior Notes |
|
|
(3,926 |
) |
|
|
(100 |
)% |
|
|
(3,926 |
) |
|
|
— |
|
|
8.00% Convertible Senior Notes |
|
|
— |
|
|
|
— |
% |
|
|
— |
|
|
|
— |
|
|
CRE - term repurchase facilities (5) |
|
|
4,529 |
|
|
|
36 |
% |
|
|
3,303 |
|
|
|
1,226 |
|
|
CMBS - term repurchase facilities (6) |
|
|
(41 |
) |
|
|
(8 |
)% |
|
|
(21 |
) |
|
|
(20 |
) |
|
Trust certificates - term repurchase facilities (5) |
|
|
(1,519 |
) |
|
|
(45 |
)% |
|
|
(1,568 |
) |
|
|
49 |
|
|
CMBS - short term repurchase agreements |
|
|
4,396 |
|
|
|
124 |
% |
|
|
4,190 |
|
|
|
206 |
|
|
Hedging |
|
|
(125 |
) |
|
|
(89 |
)% |
|
|
(125 |
) |
|
|
— |
|
|
Total increase in interest expense |
|
|
15,823 |
|
|
|
33 |
% |
|
|
13,087 |
|
|
|
2,736 |
|
|
Net increase (decrease) in net interest income |
|
$ |
7,086 |
|
|
|
|
|
|
$ |
10,838 |
|
|
$ |
(3,752 |
) |
|
(1) |
Percent change is calculated as the net change divided by the respective interest income or interest expense for the nine months ended September 30, 2018. |
|
(2) |
Includes increases in fee income of approximately $661,000, $96,000 and $108,000 recognized on our CRE whole loans, legacy CRE loans and our CRE preferred equity investments, respectively, that were due to changes in volume in connection with originations, extensions and payoffs of the CRE loans. |
|
(3) |
Includes the change in interest income recognized on two legacy CRE loans reclassified to CRE whole loans in 2018. One of the reclassified legacy CRE loans paid off at par in December 2018. |
|
(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 $1.5 million, $485,000 and $27,000 on our securitized borrowings, CRE-term repurchase facilities and trust certificates - term repurchase facilities, respectively, and a decrease of approximately $576,000 on our convertible senior notes that were due to changes in volume in connection with deferred debt issuance costs and discounts capitalized to the respective borrowings. |
|
(6) |
Includes the change in interest expense recognized on our Deutsche Bank Securities CMBS repurchase agreement, reclassified from a term repurchase facility to a short-term repurchase agreement at June 30, 2018. |
Net Change in Interest Income for the Comparative Three and Nine Months Ended September 30, 2019 and 2018:
Aggregate interest income increased by $7.5 million and $22.9 million for the comparative three and nine months ended September 30, 2019 and 2018, respectively. We attribute the changes to the following:
CRE whole loans. The increases of $6.0 million and $15.3 million for the comparative three and nine months ended September 30, 2019 and 2018, respectively, were primarily attributable to increases in the weighted-average outstanding balance of CRE whole loans in connection with loan originations and acquisitions net of loan repayments of $446.8 million and $342.0 million over those same comparative periods, respectively. These volume increases were partially offset by decreases in the yields on CRE whole loans, attributable to declines in the coupon rates on the originated CRE whole loans over the comparative periods.
Legacy CRE loans. The decrease of $425,000 for the comparative nine months ended September 30, 2019 and 2018 was primarily attributable to one legacy CRE loan that paid off in December 2018.
CRE preferred equity investments. The increase of $856,000 for the comparative nine months ended September 30, 2019 and 2018 was attributable to the recognition of a full nine months' interest income on our March 2018 investment in a preferred equity interest with an outstanding principal balance of $20.2 million and an 11.50% interest rate as well as the closing of our June 2019 investment in a preferred equity interest with an outstanding principal balance of $5.7 million and an 11.00% interest rate.
46
Securities. The increase s of $1.4 million and $6.7 million for the comparative three and nine months ended September 30, 2019 and 2018 , respectively, w ere primarily attributable to acquisitions , net of sales and repayments , of CMBS of $111.6 million during the 12 months ended September 30, 2019 and increases in coupon rates on our floating rate CMBS over the comparative period s .
Other. The increase of $250,000 for the comparative nine months ended September 30, 2019 and 2018 was primarily attributable to higher average balances in our interest earning money market accounts during the nine months ended September 30, 2019.
Net Change in Interest Expense for the Comparative Three and Nine Months Ended September 30, 2019 and 2018:
Aggregate interest expense increased by $5.4 million and $15.8 million for the comparative three and nine months ended September 30, 2019 and 2018, respectively. We attribute the changes to the following:
Securitized borrowings. The net increases of $3.4 million and $12.1 million for the comparative three and nine months ended September 30, 2019 and 2018, respectively, were primarily attributable to the issuances of Exantas Capital Corp. 2018-RSO6, Ltd. ("XAN 2018-RSO6") and Exantas Capital Corp. 2019-RSO7, Ltd. ("XAN 2019-RSO7"), which closed in June 2018 and April 2019, respectively. The increases were offset by the liquidations of Resource Capital Corp. 2015-CRE4, Ltd. ("RCC 2015-CRE4"), Resource Capital Corp. 2015-CRE3, Ltd. ("RCC 2015-CRE3") and Resource Capital Corp. 2017-CRE5, Ltd. ("RCC 2017-CRE5") in July 2018, August 2018 and July 2019, respectively.
Convertible senior notes. The net decreases of $1.2 million and $3.7 million for the comparative three and nine months ended September 30, 2019 and 2018, respectively, were primarily attributable to the redemption of our 6.00% convertible senior notes in December 2018.
CRE - term repurchase facilities. The net increases of $2.6 million and $4.5 million for the comparative three and nine months ended September 30, 2019 and 2018 were primarily attributable to additional CRE loans financed on the CRE term repurchase facilities in addition to an increase in the weighted average one-month LIBOR over the comparative periods then ended.
Trust certificates - term repurchase facilities. The decreases of $597,000 and $1.5 million for the comparative three and nine months ended September 30, 2019 and 2018, respectively, were primarily attributable to the repayment of the RSO Repo SPE Trust 2015 and RSO Repo SPE Trust 2017 facilities in July 2018 and July 2019, respectively.
CMBS - short term repurchase agreements. The increases of $1.1 million and $4.4 million for the comparative three and nine months ended September 30, 2019 and 2018, respectively, were primarily attributable to the increased utilization of short term repurchase agreements to finance CMBS acquired in 2018 and 2019, which increased principal outstanding on borrowings by $82.2 million from September 30, 2018 to September 30, 2019.
47
Average Net Yield and Average Cost of Funds:
The following tables present the average net yield and average cost of funds for the three and nine months ended September 30, 2019 and 2018 (dollars in thousands, except amounts in footnotes):
|
|
|
For the Three Months Ended September 30, 2019 |
|
|
For the Three Months Ended September 30, 2018 |
|
||||||||||||||||||
|
|
|
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 (2) |
|
$ |
1,882,068 |
|
|
$ |
31,496 |
|
|
|
6.64 |
% |
|
$ |
1,435,254 |
|
|
$ |
25,451 |
|
|
|
7.03 |
% |
|
Legacy CRE loans (2) |
|
|
39,793 |
|
|
|
170 |
|
|
|
1.70 |
% |
|
|
58,567 |
|
|
|
352 |
|
|
|
2.39 |
% |
|
CRE mezzanine loan |
|
|
4,700 |
|
|
|
120 |
|
|
|
9.97 |
% |
|
|
4,700 |
|
|
|
120 |
|
|
|
10.09 |
% |
|
CRE preferred equity investments (2) |
|
|
25,549 |
|
|
|
772 |
|
|
|
11.98 |
% |
|
|
19,432 |
|
|
|
573 |
|
|
|
11.69 |
% |
|
Securities (3) |
|
|
453,363 |
|
|
|
6,596 |
|
|
|
5.77 |
% |
|
|
331,708 |
|
|
|
5,217 |
|
|
|
6.24 |
% |
|
Other |
|
|
7,677 |
|
|
|
138 |
|
|
|
7.06 |
% |
|
|
5,865 |
|
|
|
123 |
|
|
|
8.26 |
% |
|
Total interest income/average net yield |
|
|
2,413,150 |
|
|
|
39,292 |
|
|
|
6.46 |
% |
|
|
1,855,526 |
|
|
|
31,836 |
|
|
|
6.80 |
% |
|
Interest-bearing liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateralized by: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CRE whole loans (4) |
|
|
1,374,573 |
|
|
|
(15,663 |
) |
|
|
(4.52 |
)% |
|
|
861,564 |
|
|
|
(9,642 |
) |
|
|
(4.44 |
)% |
|
CMBS |
|
|
332,993 |
|
|
|
(2,904 |
) |
|
|
(3.46 |
)% |
|
|
186,983 |
|
|
|
(1,666 |
) |
|
|
(3.53 |
)% |
|
General corporate debt: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unsecured junior subordinated debentures |
|
|
51,548 |
|
|
|
(829 |
) |
|
|
(6.29 |
)% |
|
|
51,548 |
|
|
|
(829 |
) |
|
|
(6.29 |
)% |
|
4.50% Convertible Senior Notes (5) |
|
|
132,316 |
|
|
|
(2,473 |
) |
|
|
(7.31 |
)% |
|
|
143,750 |
|
|
|
(2,411 |
) |
|
|
(6.56 |
)% |
|
6.00% Convertible Senior Notes (5) |
|
|
— |
|
|
|
— |
|
|
|
— |
% |
|
|
70,453 |
|
|
|
(1,310 |
) |
|
|
(7.28 |
)% |
|
8.00% Convertible Senior Notes (5) |
|
|
21,087 |
|
|
|
(481 |
) |
|
|
(8.92 |
)% |
|
|
21,182 |
|
|
|
(481 |
) |
|
|
(8.88 |
)% |
|
Trust certificates - term repurchase facilities (6) |
|
|
7,744 |
|
|
|
(326 |
) |
|
|
(16.68 |
)% |
|
|
55,248 |
|
|
|
(923 |
) |
|
|
(7.01 |
)% |
|
Hedging (7) |
|
|
87,231 |
|
|
|
(36 |
) |
|
|
(0.16 |
)% |
|
|
75,108 |
|
|
|
(60 |
) |
|
|
(0.32 |
)% |
|
Total interest expense/average cost of funds |
|
$ |
2,007,492 |
|
|
|
(22,712 |
) |
|
|
(4.48 |
)% |
|
$ |
1,465,836 |
|
|
|
(17,322 |
) |
|
|
(4.68 |
)% |
|
Total net interest income |
|
|
|
|
|
$ |
16,580 |
|
|
|
|
|
|
|
|
|
|
$ |
14,514 |
|
|
|
|
|
|
(1) |
Average net yield includes net amortization/accretion and fee income. |
|
(2) |
Includes fee income of approximately $2.5 million, $9,000 and $33,000 recognized on our CRE whole loans, legacy CRE loans and our CRE preferred equity investments, respectively, for the three months ended September 30, 2019 and approximately $1.9 million and $10,000 on our CRE whole loans and our CRE preferred equity investments, respectively, for the three months ended September 30, 2018. There was no fee income recognized on our legacy CRE loans for the three months ended September 30, 2018. |
|
(3) |
Includes net accretion income of approximately $688,000 and $864,000 for the three months ended September 30, 2019 and 2018, respectively, on our CMBS securities. |
|
(4) |
Includes amortization expense of approximately $2.3 million and $1.9 million for the three months ended September 30, 2019 and 2018, respectively, on our interest-bearing liabilities collateralized by CRE whole loans. |
|
(5) |
Includes aggregated amortization expense of approximately $913,000 and $1.1 million for the three months ended September 30, 2019 and 2018, respectively, on our convertible senior notes. |
|
(6) |
Includes amortization expense of approximately $200,000 and $99,000 for the three months ended September 30, 2019 and 2018, respectively, on our trust certificates - term repurchase facilities. |
|
(7) |
Includes accretion income of approximately $23,000 for the three months ended September 30, 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 income (loss) on the consolidated balance sheets, will be accreted over the remaining life of the debt. |
48
|
|
For the Nine Months Ended September 30, 2019 |
|
|
For the Nine Months Ended September 30, 2018 |
|
|||||||||||||||||||
|
|
|
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 (2) |
|
$ |
1,720,844 |
|
|
$ |
87,338 |
|
|
|
6.78 |
% |
|
$ |
1,378,869 |
|
|
$ |
71,999 |
|
|
|
6.98 |
% |
|
Legacy CRE loans (2) |
|
|
39,145 |
|
|
|
587 |
|
|
|
2.00 |
% |
|
|
70,067 |
|
|
|
1,012 |
|
|
|
1.93 |
% |
|
CRE mezzanine loan |
|
|
4,700 |
|
|
|
355 |
|
|
|
9.97 |
% |
|
|
1,980 |
|
|
|
150 |
|
|
|
10.10 |
% |
|
CRE preferred equity investments (2) |
|
|
21,913 |
|
|
|
2,009 |
|
|
|
12.26 |
% |
|
|
13,181 |
|
|
|
1,153 |
|
|
|
11.69 |
% |
|
Securities (3) |
|
|
440,952 |
|
|
|
19,562 |
|
|
|
5.91 |
% |
|
|
272,996 |
|
|
|
12,878 |
|
|
|
6.32 |
% |
|
Other |
|
|
15,829 |
|
|
|
511 |
|
|
|
4.26 |
% |
|
|
9,658 |
|
|
|
261 |
|
|
|
3.57 |
% |
|
Total interest income/average net yield |
|
|
2,243,383 |
|
|
|
110,362 |
|
|
|
6.57 |
% |
|
|
1,746,751 |
|
|
|
87,453 |
|
|
|
6.69 |
% |
|
Interest-bearing liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateralized by: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CRE whole loans (4) |
|
|
1,199,465 |
|
|
|
(42,055 |
) |
|
|
(4.69 |
)% |
|
|
767,401 |
|
|
|
(25,384 |
) |
|
|
(4.42 |
)% |
|
CMBS |
|
|
310,899 |
|
|
|
(8,393 |
) |
|
|
(3.61 |
)% |
|
|
156,441 |
|
|
|
(4,038 |
) |
|
|
(3.45 |
)% |
|
General corporate debt: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unsecured junior subordinated debentures |
|
|
51,548 |
|
|
|
(2,546 |
) |
|
|
(6.51 |
)% |
|
|
51,548 |
|
|
|
(2,359 |
) |
|
|
(6.03 |
)% |
|
4.50% Convertible Senior Notes (5) |
|
|
131,486 |
|
|
|
(7,345 |
) |
|
|
(7.37 |
)% |
|
|
143,750 |
|
|
|
(7,165 |
) |
|
|
(6.57 |
)% |
|
6.00% Convertible Senior Notes (5) |
|
|
— |
|
|
|
— |
|
|
|
— |
% |
|
|
70,453 |
|
|
|
(3,926 |
) |
|
|
(7.35 |
)% |
|
8.00% Convertible Senior Notes (5) |
|
|
21,030 |
|
|
|
(1,442 |
) |
|
|
(9.04 |
)% |
|
|
21,182 |
|
|
|
(1,442 |
) |
|
|
(8.98 |
)% |
|
Trust certificates - term repurchase facilities (6) |
|
|
32,955 |
|
|
|
(1,891 |
) |
|
|
(7.67 |
)% |
|
|
66,785 |
|
|
|
(3,410 |
) |
|
|
(6.83 |
)% |
|
Hedging (7) |
|
|
83,903 |
|
|
|
(16 |
) |
|
|
(0.03 |
)% |
|
|
55,090 |
|
|
|
(141 |
) |
|
|
(0.34 |
)% |
|
Total interest expense/average cost of funds |
|
$ |
1,831,286 |
|
|
|
(63,688 |
) |
|
|
(4.64 |
)% |
|
$ |
1,332,650 |
|
|
|
(47,865 |
) |
|
|
(4.78 |
)% |
|
Total net interest income |
|
|
|
|
|
$ |
46,674 |
|
|
|
|
|
|
|
|
|
|
$ |
39,588 |
|
|
|
|
|
|
(1) |
Average net yield includes net amortization/accretion and fee income. |
|
(2) |
Includes fee income of approximately $6.0 million, $96,000 and $127,000 recognized on our CRE whole loans, legacy CRE loans and our CRE preferred equity investments, respectively, for the nine months ended September 30, 2019 and approximately $5.3 million and $19,000 on our CRE whole loans and our CRE preferred equity investments, respectively, for the nine months ended September 30, 2018. There was no fee income recognized on our legacy CRE loans for the nine months ended September 30, 2018. |
|
(3) |
Includes net accretion income of approximately $2.1 million and $2.2 million for the nine months ended September 30, 2019 and 2018, respectively, on our CMBS securities. |
|
(4) |
Includes amortization expense of approximately $5.9 million and $4.0 million for the nine months ended September 30, 2019 and 2018, respectively, on our interest-bearing liabilities collateralized by CRE whole loans. |
|
(5) |
Includes aggregated amortization expense of approximately $2.7 million and $3.2 million for the nine months ended September 30, 2019 and 2018, respectively, on our convertible senior notes. |
|
(6) |
Includes amortization expense of approximately $279,000 and $252,000 for the nine months ended September 30, 2019 and 2018, respectively, on our trust certificates - term repurchase facilities. |
|
(7) |
Includes accretion income of approximately $68,000 for the nine months ended September 30, 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 income (loss) on the consolidated balance sheets, will be accreted over the remaining life of the debt. |
Operating Expenses
Three and Nine Months Ended September 30, 2019 as compared to Three and Nine Months Ended September 30, 2018
The following tables set forth information relating to our operating expenses for the periods presented (dollars in thousands):
|
|
|
For the Three Months Ended |
|
|
|
|
|
|
|
|
|
|||||
|
|
|
September 30, |
|
|
|
|
|
|
|
|
|
|||||
|
|
|
2019 |
|
|
2018 |
|
|
Dollar Change |
|
|
Percent Change |
|
||||
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Management fees |
|
$ |
2,528 |
|
|
$ |
2,813 |
|
|
$ |
(285 |
) |
|
|
(10 |
)% |
|
Equity compensation |
|
|
552 |
|
|
|
757 |
|
|
|
(205 |
) |
|
|
(27 |
)% |
|
General and administrative |
|
|
2,086 |
|
|
|
2,336 |
|
|
|
(250 |
) |
|
|
(11 |
)% |
|
Depreciation and amortization |
|
|
8 |
|
|
|
36 |
|
|
|
(28 |
) |
|
|
(78 |
)% |
|
Recovery of loan losses |
|
|
(1,137 |
) |
|
|
(461 |
) |
|
|
(676 |
) |
|
|
147 |
% |
|
Total |
|
$ |
4,037 |
|
|
$ |
5,481 |
|
|
$ |
(1,444 |
) |
|
|
(26 |
)% |
49
|
|
For the Nine Months Ended |
|
|
|
|
|
|
|
|
|
||||||
|
|
|
September 30, |
|
|
|
|
|
|
|
|
|
|||||
|
|
|
2019 |
|
|
2018 |
|
|
Dollar Change |
|
|
Percent Change |
|
||||
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Management fees |
|
$ |
6,862 |
|
|
$ |
8,438 |
|
|
$ |
(1,576 |
) |
|
|
(19 |
)% |
|
Equity compensation |
|
|
1,647 |
|
|
|
2,383 |
|
|
|
(736 |
) |
|
|
(31 |
)% |
|
General and administrative |
|
|
7,158 |
|
|
|
7,943 |
|
|
|
(785 |
) |
|
|
(10 |
)% |
|
Depreciation and amortization |
|
|
39 |
|
|
|
68 |
|
|
|
(29 |
) |
|
|
(43 |
)% |
|
Provision for (recovery of) loan losses, net |
|
|
58 |
|
|
|
(1,260 |
) |
|
|
1,318 |
|
|
|
(105 |
)% |
|
Total |
|
$ |
15,764 |
|
|
$ |
17,572 |
|
|
$ |
(1,808 |
) |
|
|
(10 |
)% |
Aggregate operating expenses decreased by $1.4 million and $1.8 million for the comparative three and nine months ended September 30, 2019 and 2018, respectively. We attribute the changes to the following:
Management fees. The decreases of $285,000 and $1.6 million for the comparative three and nine months ended September 30, 2019 and 2018, respectively, were primarily attributable to our base management fee reverting from a fixed amount of $937,500 per month from October 1, 2017 to December 31, 2018 per our Third Amended and Restated Management Agreement ("Management Agreement") to an amount equal to 1/12 th of the amount of our equity multiplied by 1.50%. The base management fee declines over the comparative periods were offset by incentive compensation of $441,000 and $606,000 earned by our Manager during the three and nine months ended September 30, 2019, respectively.
Equity compensation. The decreases of $205,000 and $736,000 for the comparative three and nine months ended September 30, 2019 and 2018, respectively, were attributable to the adoption of updated guidance issued by the Financial Accounting Standards Board that discontinued the remeasurement of all unvested issuances of restricted stock and options after the initial grant date during the nine months ended September 30, 2019. Additionally, the decrease during the comparative nine months ended September 30, 2019 and 2018 was attributable to accelerations of certain restricted stock awards during the nine months ended September 30, 2018.
General and administrative. General and administrative expenses decreased by $250,000 and $785,000 for the comparative three and nine months ended September 30, 2019 and 2018, respectively. 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 |
|
|
|
|
|
|
|
|
|
|||||
|
|
|
September 30, |
|
|
|
|
|
|
|
|
|
|||||
|
|
|
2019 |
|
|
2018 |
|
|
Dollar Change |
|
|
Percent Change |
|
||||
|
General and administrative: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wages and benefits |
|
$ |
698 |
|
|
$ |
724 |
|
|
$ |
(26 |
) |
|
|
(4 |
)% |
|
Professional services |
|
|
484 |
|
|
|
784 |
|
|
|
(300 |
) |
|
|
(38 |
)% |
|
D&O insurance |
|
|
287 |
|
|
|
286 |
|
|
|
1 |
|
|
|
0 |
% |
|
Operating expenses |
|
|
205 |
|
|
|
177 |
|
|
|
28 |
|
|
|
16 |
% |
|
Director fees |
|
|
150 |
|
|
|
164 |
|
|
|
(14 |
) |
|
|
(9 |
)% |
|
Dues and subscriptions |
|
|
145 |
|
|
|
66 |
|
|
|
79 |
|
|
|
120 |
% |
|
Rent and utilities |
|
|
72 |
|
|
|
87 |
|
|
|
(15 |
) |
|
|
(17 |
)% |
|
Travel |
|
|
37 |
|
|
|
44 |
|
|
|
(7 |
) |
|
|
(16 |
)% |
|
Tax penalties, interest and franchise tax |
|
|
8 |
|
|
|
4 |
|
|
|
4 |
|
|
|
100 |
% |
|
Total |
|
$ |
2,086 |
|
|
$ |
2,336 |
|
|
$ |
(250 |
) |
|
|
(11 |
)% |
The decrease in general and administrative expenses for the comparative three months ended September 30, 2019 and 2018 was primarily attributable to a $300,000 decrease in professional services in connection with legal fees incurred to liquidate two CRE securitizations and an additional general legal reserve established during the three months ended September 30, 2018, as compared to legal fees to liquidate one CRE securitization during the three months ended September 30, 2019.
50
|
|
For the Nine Months Ended |
|
|
|
|
|
|
|
|
|
||||||
|
|
|
September 30, |
|
|
|
|
|
|
|
|
|
|||||
|
|
|
2019 |
|
|
2018 |
|
|
Dollar Change |
|
|
Percent Change |
|
||||
|
General and administrative: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wages and benefits |
|
$ |
2,122 |
|
|
$ |
2,670 |
|
|
$ |
(548 |
) |
|
|
(21 |
)% |
|
Professional services |
|
|
1,879 |
|
|
|
2,348 |
|
|
|
(469 |
) |
|
|
(20 |
)% |
|
D&O insurance |
|
|
851 |
|
|
|
878 |
|
|
|
(27 |
) |
|
|
(3 |
)% |
|
Operating expenses |
|
|
752 |
|
|
|
629 |
|
|
|
123 |
|
|
|
20 |
% |
|
Director fees |
|
|
537 |
|
|
|
491 |
|
|
|
46 |
|
|
|
9 |
% |
|
Dues and subscriptions |
|
|
446 |
|
|
|
492 |
|
|
|
(46 |
) |
|
|
(9 |
)% |
|
Rent and utilities |
|
|
244 |
|
|
|
249 |
|
|
|
(5 |
) |
|
|
(2 |
)% |
|
Travel |
|
|
187 |
|
|
|
190 |
|
|
|
(3 |
) |
|
|
(2 |
)% |
|
Tax penalties, interest and franchise tax |
|
|
140 |
|
|
|
(4 |
) |
|
|
144 |
|
|
|
(3,600 |
)% |
|
Total |
|
$ |
7,158 |
|
|
$ |
7,943 |
|
|
$ |
(785 |
) |
|
|
(10 |
)% |
The decrease in general and administrative expenses during the comparative nine months ended September 30, 2019 and 2018 was primarily attributable to a decrease of $548,000 in wages and benefits allocated to us by our Manager and a decrease of $469,000 in professional services in connection with legal fees incurred to liquidate two CRE securitizations and an additional general legal reserve established during the nine months ended September 30, 2018, as compared to legal fees to liquidate one CRE securitization during the nine months ended September 30, 2019. Additionally, the decrease in professional services was attributable to decreases in trustee fee expenses on our CRE securitizations and other professional services expenses. The decrease of general and administrative expenses during the comparative nine months ended September 30, 2019 and 2018 was partially offset by an increase of $144,000 in connection with an increase in franchise taxes incurred and an increase of $123,000 in connection with an increase in other operating expenses.
(Recovery of) provision for loan losses, net. The increase of $676,000 of recoveries of loan losses for the comparative three months ended September 30, 2019 and 2018 was primarily attributable to a decrease in the general reserve of approximately $1.1 million during the three months ended September 30, 2019, in connection with the repayment of $72.6 million of loans, as compared to a decrease in the general reserve of $292,000 during the three months ended September 30, 2018, primarily attributable to one loan that was upgraded due to improved performance.
The decrease of $1.3 million from a recovery of to a provision for loan losses for the comparative nine months ended September 30, 2019 and 2018 was primarily attributable to a decrease in the general reserve of approximately $1.1 million during the nine months ended September 30, 2018, in connection with the repayment of one $26.6 million loan and two loans that were upgraded due to improved performance.
Other Income (Expense)
Three and Nine Months Ended September 30, 2019 as compared to Three and Nine Months Ended September 30, 2018
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 |
|
|
|
|
|
|
|
|
|
|||||
|
|
|
September 30, |
|
|
|
|
|
|
|
|
|
|||||
|
|
|
2019 |
|
|
2018 |
|
|
Dollar Change |
|
|
Percent Change |
|
||||
|
Other Income (Expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in earnings of unconsolidated entities |
|
$ |
— |
|
|
$ |
454 |
|
|
$ |
(454 |
) |
|
|
(100 |
)% |
|
Net realized and unrealized gain on investment securities available-for-sale and loans and derivatives |
|
|
— |
|
|
|
279 |
|
|
|
(279 |
) |
|
|
(100 |
)% |
|
Fair value adjustments on financial assets held for sale |
|
|
(55 |
) |
|
|
(1,588 |
) |
|
|
1,533 |
|
|
|
97 |
% |
|
Other income |
|
|
107 |
|
|
|
57 |
|
|
|
50 |
|
|
|
88 |
% |
|
Total |
|
$ |
52 |
|
|
$ |
(798 |
) |
|
$ |
850 |
|
|
|
107 |
% |
51
|
|
For the Nine Months Ended |
|
|
|
|
|
|
|
|
|
||||||
|
|
|
September 30, |
|
|
|
|
|
|
|
|
|
|||||
|
|
|
2019 |
|
|
2018 |
|
|
Dollar Change |
|
|
Percent Change |
|
||||
|
Other Income (Expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in earnings of unconsolidated entities |
|
$ |
— |
|
|
$ |
231 |
|
|
$ |
(231 |
) |
|
|
(100 |
)% |
|
Net realized and unrealized gain on investment securities available-for-sale and loans and derivatives |
|
|
4 |
|
|
|
569 |
|
|
|
(565 |
) |
|
|
(99 |
)% |
|
Net realized and unrealized gain on investment securities, trading |
|
|
— |
|
|
|
53 |
|
|
|
(53 |
) |
|
|
(100 |
)% |
|
Fair value adjustments on financial assets held for sale |
|
|
(1,457 |
) |
|
|
(6,244 |
) |
|
|
4,787 |
|
|
|
77 |
% |
|
Other income |
|
|
259 |
|
|
|
574 |
|
|
|
(315 |
) |
|
|
(55 |
)% |
|
Total |
|
$ |
(1,194 |
) |
|
$ |
(4,817 |
) |
|
$ |
3,623 |
|
|
|
75 |
% |
Aggregate other expense decreased $850,000 for the comparative three months ended September 30, 2019 and 2018 and aggregate other expense decreased $3.6 million for the comparative nine months ended September 30, 2019 and 2018. We attribute the changes to the following:
Equity in earnings of unconsolidated entities . The decrease of $454,000 for the comparative three months ended September 30, 2019 and 2018 was primarily attributable to the recognition of earnings from the receipt of $411,000 of distributed funds, formerly held in escrow accounts established as part of the LEAF Commercial Capital, Inc. ( " LCC " ) sale, during the three months ended September 30, 2018.
Net realized and unrealized gain on investment securities available-for-sale and loans and derivatives. The decreases of $279,000 and $565,000 for the comparative three and nine months ended September 30, 2019 and 2018, respectively, were primarily attributable to a realized gain of $282,000 on the sale of an investment security available-for-sale during the three and nine months ended September 30, 2018. Additionally, during the nine months ended September 30, 2018, we recognized a realized gain of $1.0 million attributable to the payoff on one legacy CRE loan that was offset by net losses of approximately $463,000 on our life settlement contract portfolio and a realized loss of $217,000 on the sale of one asset-backed security.
Fair value adjustments on financial assets held for sale. The changes of $1.5 million and $4.8 million during the three and nine months ended September 30, 2019 and 2018, respectively, were primarily attributable to charges of $1.6 million and $6.3 million on the remaining legacy CRE loan held for sale during the three and nine months ended September 30, 2018, respectively, partially offset by a charge of $1.5 million during the nine months ended September 30, 2019. The charges during the three and nine months ended September 30, 2018 included a $1.0 million reserve for estimated costs for repairs to be performed on the underlying collateral and $600,000 of protective advances to cover borrower operating losses. Additionally, the charge during the nine months ended September 30, 2018 included an additional $4.5 million reserve to adjust the loan to the average value of two appraisals and $172,000 of protective advances to cover borrower operating losses. The charge during the nine months ended September 30, 2019 included $158,000 of protective advances to cover borrower operating losses and additional charges of $1.3 million in connection with the receipt of three brokers ' opinions of value in June 2019 that were taken into account equally along with an appraisal received in February 2019.
Other income. The decrease of $315,000 for the comparative nine months ended September 30, 2019 and 2018 was primarily attributable to the receipt of $478,000 of cash in excess of the total carrying value of an asset secured by collateral management fees during the nine months ended September 30, 2018.
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 September 30, 2019, we have substantially completed the execution of the Plan.
52
The following table summarizes the operating results of the residential mortgage a nd middle market lending segments' discontinued operations as reported separately as ne t (loss) income from discontinued operations, net of tax for the three and nine months ended September 30, 2019 and 2018 (in thousands):
|
|
|
For the Three Months Ended |
|
|
For the Nine Months Ended |
|
||||||||||
|
|
|
September 30, |
|
|
September 30, |
|
||||||||||
|
|
|
2019 |
|
|
2018 |
|
|
2019 |
|
|
2018 |
|
||||
|
REVENUES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
580 |
|
|
Other |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
13 |
|
|
Total interest income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
593 |
|
|
Interest expense |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Net interest income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
593 |
|
|
Other revenue |
|
|
24 |
|
|
|
280 |
|
|
|
24 |
|
|
|
312 |
|
|
Total revenues |
|
|
24 |
|
|
|
280 |
|
|
|
24 |
|
|
|
905 |
|
|
OPERATING EXPENSES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative |
|
|
87 |
|
|
|
62 |
|
|
|
371 |
|
|
|
1,165 |
|
|
Total operating expenses |
|
|
87 |
|
|
|
62 |
|
|
|
371 |
|
|
|
1,165 |
|
|
|
|
|
(63 |
) |
|
|
218 |
|
|
|
(347 |
) |
|
|
(260 |
) |
|
OTHER INCOME (EXPENSE) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized and unrealized gain on investment securities available-for-sale and loans and derivatives |
|
|
— |
|
|
|
146 |
|
|
|
135 |
|
|
|
421 |
|
|
Total other income |
|
|
— |
|
|
|
146 |
|
|
|
135 |
|
|
|
421 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(LOSS) INCOME FROM DISCONTINUED OPERATIONS BEFORE TAXES |
|
|
(63 |
) |
|
|
364 |
|
|
|
(212 |
) |
|
|
161 |
|
|
Income tax expense |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
TOTAL (LOSS) INCOME FROM DISCONTINUED OPERATIONS |
|
$ |
(63 |
) |
|
$ |
364 |
|
|
$ |
(212 |
) |
|
$ |
161 |
|
Net (loss) income from discontinued operations. The residential mortgage lending segment incurred net losses during the three and nine months ended September 30, 2019 and the nine months ended September 30, 2018, which were primarily attributable to Primary Capital Mortgage, LLC's ( " PCM " ) general and administrative expenses, particularly from consulting fees, incurred in the wind-down of that business. Net income during the three months ended September 30, 2018 was primary attributable to the write-off of PCM liabilities. The middle market lending segment incurred a net loss for the three months ended September 30, 2019 and generated net income for the nine months ended September 30, 2019 and for the three and nine months ended September 30, 2018, which were primarily attributable to net gains on proceeds from the 2018 sales and paydowns of the remaining middle market loans.
Financial Condition
Summary
Our total assets were $2.5 billion at September 30, 2019 as compared to $2.1 billion at December 31, 2018. The increase was primarily attributable to the origination and acquisition of CRE loans and acquisitions of CMBS financed through the use of a CRE debt securitization, term repurchase facilities and short-term repurchase agreements.
53
The tables below summarize the amortized cost and net carrying amount of our investment portfolio, classified by asset type, at September 30, 2019 and December 31, 2018 as follows (dollars in thousands, except amounts in footnotes):
|
At September 30, 2019 |
|
Amortized Cost |
|
|
Net Carrying Amount |
|
|
Percent of Portfolio |
|
|
Weighted Average Coupon |
|
||||
|
Loans held for investment: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CRE whole loans (1) |
|
$ |
1,766,294 |
|
|
$ |
1,764,834 |
|
|
|
77.20 |
% |
|
5.82% |
|
|
|
CRE mezzanine loan |
|
|
4,700 |
|
|
|
4,700 |
|
|
|
0.21 |
% |
|
10.00% |
|
|
|
CRE preferred equity investments |
|
|
25,776 |
|
|
|
25,776 |
|
|
|
1.13 |
% |
|
11.39% |
|
|
|
|
|
|
1,796,770 |
|
|
|
1,795,310 |
|
|
|
78.54 |
% |
|
|
|
|
|
Investment securities available-for-sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CMBS, fixed rate |
|
|
118,481 |
|
|
|
125,198 |
|
|
|
5.48 |
% |
|
4.10% |
|
|
|
CMBS, floating rate |
|
|
346,408 |
|
|
|
346,650 |
|
|
|
15.16 |
% |
|
4.75% |
|
|
|
|
|
|
464,889 |
|
|
|
471,848 |
|
|
|
20.64 |
% |
|
|
|
|
|
Other investments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments in unconsolidated entities |
|
|
1,548 |
|
|
|
1,548 |
|
|
|
0.07 |
% |
|
N/A (3) |
|
|
|
Other assets held for sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Legacy CRE loans (2) |
|
|
23,265 |
|
|
|
17,141 |
|
|
|
0.75 |
% |
|
N/A (3) |
|
|
|
Total investment portfolio |
|
$ |
2,286,472 |
|
|
$ |
2,285,847 |
|
|
|
100.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2018 |
|
Amortized Cost |
|
|
Net Carrying Amount |
|
|
Percent of Portfolio |
|
|
Weighted Average Coupon |
|
||||
|
Loans held for investment: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CRE whole loans (1) |
|
$ |
1,529,113 |
|
|
$ |
1,527,712 |
|
|
|
76.79 |
% |
|
6.33% |
|
|
|
CRE mezzanine loan |
|
|
4,700 |
|
|
|
4,700 |
|
|
|
0.24 |
% |
|
10.00% |
|
|
|
CRE preferred equity investment |
|
|
19,555 |
|
|
|
19,555 |
|
|
|
0.98 |
% |
|
11.50% |
|
|
|
|
|
|
1,553,368 |
|
|
|
1,551,967 |
|
|
|
78.01 |
% |
|
|
|
|
|
Investment securities available-for-sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CMBS, fixed rate |
|
|
121,487 |
|
|
|
119,739 |
|
|
|
6.02 |
% |
|
4.12% |
|
|
|
CMBS, floating rate |
|
|
301,132 |
|
|
|
299,259 |
|
|
|
15.04 |
% |
|
5.11% |
|
|
|
|
|
|
422,619 |
|
|
|
418,998 |
|
|
|
21.06 |
% |
|
|
|
|
|
Other investments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments in unconsolidated entities |
|
|
1,548 |
|
|
|
1,548 |
|
|
|
0.08 |
% |
|
N/A (3) |
|
|
|
Other assets held for sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Legacy CRE loans (2) |
|
|
21,666 |
|
|
|
17,000 |
|
|
|
0.85 |
% |
|
N/A (3) |
|
|
|
Total investment portfolio |
|
$ |
1,999,201 |
|
|
$ |
1,989,513 |
|
|
|
100.00 |
% |
|
|
|
|
|
(1) |
Net carrying amount includes an allowance for loan losses of $1.5 million and $1.4 million at September 30, 2019 and December 31, 2018, respectively. |
|
( 2 ) |
Net carrying amount includes lower of cost or market value adjustments of $6.1 million and $4.7 million at September 30, 2019 and December 31, 2018, respectively. |
|
( 3 ) |
There are no stated rates associated with these investments. |
C RE loans. During the nine months ended September 30, 2019, we originated $528.3 million and acquired $210.8 million of CRE loan commitments (of which $39.6 million and $14.0 million, respectively, were unfunded loan commitments), funded $32.4 million of previously unfunded loan commitments and received $478.0 million of payoffs and paydowns. Included in the loans activities were $36.3 million of CRE loan commitments and $32.7 million of payoffs in connection with the refinancing of CRE loans during the nine months ended September 30, 2019.
54
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 Loan Losses |
|
|
Carrying Value |
|
|
Contractual Interest Rates |
|
|
Maturity Dates (2)(3)(4) |
|||||||
|
At September 30, 2019: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CRE loans held for investment: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Whole loans (5)(6) |
|
|
115 |
|
|
$ |
1,773,119 |
|
|
$ |
(6,825 |
) |
|
$ |
1,766,294 |
|
|
$ |
(1,460 |
) |
|
$ |
1,764,834 |
|
|
1M LIBOR plus 2.70% to 1M LIBOR plus 6.25% |
|
|
October 2019 to October 2023 |
|
|
Mezzanine loan |
|
|
1 |
|
|
|
4,700 |
|
|
|
— |
|
|
|
4,700 |
|
|
|
— |
|
|
|
4,700 |
|
|
10.00% |
|
|
June 2028 |
|
|
Preferred equity investments (see Note 3) (6)(7)(8) |
|
|
2 |
|
|
|
25,899 |
|
|
|
(123 |
) |
|
|
25,776 |
|
|
|
— |
|
|
|
25,776 |
|
|
11.00% to 11.50% |
|
|
June 2022 to April 2025 |
|
|
Total CRE loans held for investment |
|
|
|
|
|
$ |
1,803,718 |
|
|
$ |
(6,948 |
) |
|
$ |
1,796,770 |
|
|
$ |
(1,460 |
) |
|
$ |
1,795,310 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2018: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CRE loans held for investment: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Whole loans (5)(6) |
|
|
79 |
|
|
$ |
1,538,759 |
|
|
$ |
(9,646 |
) |
|
$ |
1,529,113 |
|
|
$ |
(1,401 |
) |
|
$ |
1,527,712 |
|
|
1M LIBOR plus 2.70% to 1M LIBOR plus 6.25% |
|
|
January 2019 to January 2022 |
|
|
Mezzanine loan |
|
|
1 |
|
|
|
4,700 |
|
|
|
— |
|
|
|
4,700 |
|
|
|
— |
|
|
|
4,700 |
|
|
10.00% |
|
|
June 2028 |
|
|
Preferred equity investment (see Note 3) (6)(7)(8) |
|
|
1 |
|
|
|
19,718 |
|
|
|
(163 |
) |
|
|
19,555 |
|
|
|
— |
|
|
|
19,555 |
|
|
11.50% |
|
|
April 2025 |
|
|
Total CRE loans held for investment |
|
|
|
|
|
$ |
1,563,177 |
|
|
$ |
(9,809 |
) |
|
$ |
1,553,368 |
|
|
$ |
(1,401 |
) |
|
$ |
1,551,967 |
|
|
|
|
|
|
|
|
(1) |
Amounts include unamortized loan origination fees of $8.7 million and $9.6 million and deferred amendment fees of $178,000 and $171,000 at September 30, 2019 and December 31, 2018, respectively. Additionally, the amounts include unamortized loan acquisition costs of $1.9 million at September 30, 2019. There were no unamortized loan acquisition costs at December 31, 2018. |
|
( 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 September 30, 2019 and December 31, 2018. |
|
( 4 ) |
Maturity dates include one whole loan with an original maturity date in October 2019 that was granted a one year extension in October 2019. |
|
( 5 ) |
Substantially all loans are pledged as collateral under various borrowings at September 30, 2019 and December 31, 2018. |
|
( 6 ) |
Whole loans had $109.9 million and $108.5 million in unfunded loan commitments at September 30, 2019 and December 31, 2018, respectively. Preferred equity investments had $3.1 million in unfunded commitments at September 30, 2019. There were no preferred equity investment unfunded commitments at December 31, 2018. 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 our preferred equity investments pay currently at 8.00%. The remaining interest is deferred until maturity. |
|
( 8 ) |
Beginning in April 2023, we have the right to unilaterally force the sale of Prospect Hackensack JV LLC's underlying property. Beginning in June 2025, we have the right to unilaterally force the sale of WC Newhall MM, LLC's underlying property. |
At September 30, 2019, approximately 22.1%, 19.7% and 16.4% of our 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, 2018, approximately 32.3%, 20.9% and 17.1% of our CRE loan portfolio was concentrated in the Southwest, Mountain and Pacific regions, respectively, based on carrying value.
CMBS. During the nine months ended September 30, 2019, we purchased 13 CMBS positions with aggregate face values of $74.2 million, at a total cost of $74.2 million, sold one CMBS position with a face value of $634,000 for proceeds of $638,000 received in June 2019 and received paydowns of $33.4 million. At September 30, 2019 and December 31, 2018, the remaining discount to be accreted into income over the remaining lives of the securities was $42.1 million and $43.9 million, respectively. At September 30, 2019 and December 31, 2018, the remaining premium to be amortized into income over the remaining lives of the securities was $808,000 and $466,000, respectively. These securities are classified as available-for-sale and carried at fair value.
55
The following table summarizes the activities in our CMBS investments at fair value for the nine months ended September 30, 2019 (in thousands, except amounts in footnote s ):
|
|
|
Fair Value at December 31, 2018 |
|
|
Net Purchases (Sales) (1) |
|
|
Net Upgrades (Downgrades) |
|
|
Paydowns (2) |
|
|
MTM Change on Same Ratings |
|
|
Fair Value at September 30, 2019 |
|
||||||
|
Moody's ratings category: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aaa |
|
$ |
5,954 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
(1,699 |
) |
|
$ |
(41 |
) |
|
$ |
4,214 |
|
|
Aa1 through Aa3 |
|
|
— |
|
|
|
— |
|
|
|
874 |
|
|
|
(809 |
) |
|
|
— |
|
|
|
65 |
|
|
A1 through A3 |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Baa1 through Baa3 |
|
|
10,084 |
|
|
|
— |
|
|
|
(2,116 |
) |
|
|
— |
|
|
|
662 |
|
|
|
8,630 |
|
|
Ba1 through Ba3 |
|
|
4,921 |
|
|
|
— |
|
|
|
(2,892 |
) |
|
|
(353 |
) |
|
|
2 |
|
|
|
1,678 |
|
|
B1 through B3 |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Caa1 through Caa3 |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Ca through C |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Non-Rated |
|
|
398,039 |
|
|
|
73,582 |
|
|
|
4,134 |
|
|
|
(30,555 |
) |
|
|
12,061 |
|
|
|
457,261 |
|
|
Total |
|
$ |
418,998 |
|
|
$ |
73,582 |
|
|
$ |
— |
|
|
$ |
(33,416 |
) |
|
$ |
12,684 |
|
|
$ |
471,848 |
|
|
S&P ratings category: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AAA |
|
$ |
117 |
|
|
$ |
— |
|
|
$ |
(117 |
) |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
AA+ through AA- |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
A+ through A- |
|
|
5,298 |
|
|
|
— |
|
|
|
(5,298 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
BBB+ through BBB- |
|
|
29,254 |
|
|
|
— |
|
|
|
(5,014 |
) |
|
|
(809 |
) |
|
|
2,419 |
|
|
|
25,850 |
|
|
BB+ through BB- |
|
|
92,649 |
|
|
|
25,021 |
|
|
|
(1,124 |
) |
|
|
(4,657 |
) |
|
|
628 |
|
|
|
112,517 |
|
|
B+ through B- |
|
|
22,124 |
|
|
|
5,318 |
|
|
|
— |
|
|
|
— |
|
|
|
684 |
|
|
|
28,126 |
|
|
CCC+ through CCC- |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
D |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Non-Rated |
|
|
269,556 |
|
|
|
43,243 |
|
|
|
11,553 |
|
|
|
(27,950 |
) |
|
|
8,953 |
|
|
|
305,355 |
|
|
Total |
|
$ |
418,998 |
|
|
$ |
73,582 |
|
|
$ |
— |
|
|
$ |
(33,416 |
) |
|
$ |
12,684 |
|
|
$ |
471,848 |
|
|
Fitch ratings category: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AAA |
|
$ |
4,351 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
(1,483 |
) |
|
$ |
(69 |
) |
|
$ |
2,799 |
|
|
AA+ through AA- |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
A+ through A- |
|
|
118 |
|
|
|
— |
|
|
|
(118 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
BBB+ through BBB- |
|
|
64,018 |
|
|
|
1,893 |
|
|
|
(2,405 |
) |
|
|
— |
|
|
|
6,818 |
|
|
|
70,324 |
|
|
BB+ through BB- |
|
|
12,257 |
|
|
|
— |
|
|
|
(2,892 |
) |
|
|
— |
|
|
|
927 |
|
|
|
10,292 |
|
|
B+ through B- |
|
|
60,072 |
|
|
|
— |
|
|
|
(5,014 |
) |
|
|
(353 |
) |
|
|
751 |
|
|
|
55,456 |
|
|
CCC |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
CC through D |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Non-Rated |
|
|
278,182 |
|
|
|
71,689 |
|
|
|
10,429 |
|
|
|
(31,580 |
) |
|
|
4,257 |
|
|
|
332,977 |
|
|
Total |
|
$ |
418,998 |
|
|
$ |
73,582 |
|
|
$ |
— |
|
|
$ |
(33,416 |
) |
|
$ |
12,684 |
|
|
$ |
471,848 |
|
|
(1) |
During the nine months ended September 30, 2019, we acquired $7.2 million of CMBS, at a cost of approximately $7.2 million, with a weighted average spread, based on cost, of 3.67% over the interpolated interest rate swap curve and $67.0 million of CMBS, at a cost of $67.0 million, with a weighted average spread, based on face value, of 2.49% over LIBOR. |
|
(2) |
Includes non-cash adjustments in connection with the recalculation of the accretable yield on certain interest-only CMBS. |
56
The following table summarizes our CMBS investments earning coupon interest at floating rates or fixed rates at September 30, 2019 and December 31, 2018 ( dollars in thousands , except amounts in the footnote ):
|
|
|
Face Value |
|
|
Amortized Cost |
|
|
Fair Value |
|
|
Coupon Rates |
|||
|
At September 30, 2019: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CMBS, fixed rate (1) |
|
$ |
185,794 |
|
|
$ |
118,481 |
|
|
$ |
125,198 |
|
|
2.88% - 8.48% |
|
CMBS, floating rate |
|
|
346,199 |
|
|
|
346,408 |
|
|
|
346,650 |
|
|
3.99% - 6.05% |
|
Total |
|
$ |
531,993 |
|
|
$ |
464,889 |
|
|
$ |
471,848 |
|
|
|
|
At December 31, 2018: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CMBS, fixed rate (1) |
|
$ |
190,601 |
|
|
$ |
121,487 |
|
|
$ |
119,739 |
|
|
2.88% - 8.48% |
|
CMBS, floating rate |
|
|
301,254 |
|
|
|
301,132 |
|
|
|
299,259 |
|
|
4.25% - 6.48% |
|
Total |
|
$ |
491,855 |
|
|
$ |
422,619 |
|
|
$ |
418,998 |
|
|
|
|
(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 September 30, 2019 and December 31, 2018. |
Investment in unconsolidated entities. The following table shows our investments in unconsolidated entities at September 30, 2019 and December 31, 2018 and equity in earnings of unconsolidated entities for the three and nine months ended September 30, 2019 and 2018 (dollars in thousands, except amount in the footnotes):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in Earnings (Losses) of Unconsolidated Entities |
|
|||||||||||||
|
|
|
Ownership % at |
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended |
|
|
For the Nine Months Ended |
|
|||||||||||
|
|
|
September 30, 2019 |
|
|
September 30, 2019 |
|
|
December 31, 2018 |
|
|
September 30, 2019 |
|
|
September 30, 2018 |
|
|
September 30, 2019 |
|
|
September 30, 2018 |
|
|||||||
|
Investment in LCC Preferred Stock (1) |
|
|
— |
% |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
411 |
|
|
$ |
— |
|
|
$ |
411 |
|
|
Pelium Capital (2) |
|
|
— |
% |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
50 |
|
|
|
— |
|
|
|
(180 |
) |
|
RCM Global |
|
|
— |
% |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(7 |
) |
|
|
— |
|
|
|
— |
|
|
Subtotal |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
454 |
|
|
|
— |
|
|
|
231 |
|
|
Investment in RCT I and RCT II (3) |
|
|
3.0 |
% |
|
|
1,548 |
|
|
|
1,548 |
|
|
|
25 |
|
|
|
25 |
|
|
|
76 |
|
|
|
71 |
|
|
Total |
|
|
|
|
|
$ |
1,548 |
|
|
$ |
1,548 |
|
|
$ |
25 |
|
|
$ |
479 |
|
|
$ |
76 |
|
|
$ |
302 |
|
|
(1) |
Our investment in LCC liquidated in July 2017 as a result of the sale of LCC. Earnings for the three and nine months ended September 30, 2018 are related to the receipt of a distribution of funds formerly held in escrow accounts established as part of the sale. |
|
(2 ) |
During the nine months ended September 30, 2018, we received distributions of $10.4 million on our investment in Pelium Capital Partners, L.P. ("Pelium Capital"). |
|
( 3 ) |
During the three and nine months ended September 30, 2019 and 2018, dividends from the investments in Resource Capital Trust I and RCC Trust II's common shares are recorded in other revenue. See "Item 1. Financial Statements - Note 9" for the disclosures on the associated unsecured junior subordinated debentures. |
In 2018, Pelium Capital and RCM Global LLC were fully liquidated.
57
The following tables show the activity in the allowance for loan losses for the nine months ended September 30, 2019 and year ended December 31, 2018 and the allowance for loan losses and recorded investments in loans at September 30, 2019 and December 31, 2018 (in thousands, except amount in the footnotes):
|
|
|
Nine Months Ended September 30, 2019 |
|
|
Year Ended December 31, 2018 |
|
||
|
|
|
Commercial Real Estate Loans |
|
|
Commercial Real Estate Loans |
|
||
|
Allowance for loan losses: |
|
|
|
|
|
|
|
|
|
Allowance for loan losses at beginning of period |
|
$ |
1,401 |
|
|
$ |
5,328 |
|
|
Provision for (recovery of) loan losses, net (1) |
|
|
59 |
|
|
|
(1,595 |
) |
|
Loans charged-off |
|
|
— |
|
|
|
(2,332 |
) |
|
Allowance for loan losses at end of period |
|
$ |
1,460 |
|
|
$ |
1,401 |
|
|
(1) |
Excludes the recovery of loan losses on one bank loan with no amortized cost or carrying value at September 30, 2019 and December 31, 2018 that received a payment of approximately $1,000 during the nine months ended September 30, 2019. |
|
|
|
September 30, 2019 |
|
|
December 31, 2018 |
|
||
|
|
|
Commercial Real Estate Loans |
|
|
Commercial Real Estate Loans |
|
||
|
Allowance for loan losses ending balance: |
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment |
|
$ |
— |
|
|
$ |
— |
|
|
Collectively evaluated for impairment |
|
$ |
1,460 |
|
|
$ |
1,401 |
|
|
Loans: |
|
|
|
|
|
|
|
|
|
Amortized cost ending balance: |
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment (1) |
|
$ |
30,476 |
|
|
$ |
24,255 |
|
|
Collectively evaluated for impairment |
|
$ |
1,766,294 |
|
|
$ |
1,529,113 |
|
|
(1) |
Our mezzanine loan and preferred equity investments are evaluated individually for impairment. |
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 loan-to-collateral value 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.
58
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. Loans that are performing according to their underwritten plans generally will not require an allowance for loan loss.
|
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.
Whole loans are first individually evaluated for impairment; and to the extent not deemed impaired, a general reserve is established.
The allowance for loan loss is 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 are loans rated as a 5. While the overall risk rating is generally not the sole factor used in determining whether a loan is 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.
Our mezzanine loan and preferred equity investments are evaluated individually for impairment.
59
Credit risk profiles of CRE loans a t 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 (1) |
|
|
Rating 4 |
|
|
Rating 5 |
|
|
Held for Sale (2) |
|
|
Total |
|
|||||||
|
At September 30, 2019: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Whole loans |
|
$ |
— |
|
|
$ |
1,678,152 |
|
|
$ |
84,300 |
|
|
$ |
3,842 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
1,766,294 |
|
|
Mezzanine loan (3) |
|
|
— |
|
|
|
4,700 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
4,700 |
|
|
Preferred equity investments (3) |
|
|
— |
|
|
|
25,776 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
25,776 |
|
|
Legacy CRE loans held for sale |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
17,141 |
|
|
|
17,141 |
|
|
Total |
|
$ |
— |
|
|
$ |
1,708,628 |
|
|
$ |
84,300 |
|
|
$ |
3,842 |
|
|
$ |
— |
|
|
$ |
17,141 |
|
|
$ |
1,813,911 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2018: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Whole loans |
|
$ |
— |
|
|
$ |
1,447,206 |
|
|
$ |
77,067 |
|
|
$ |
4,840 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
1,529,113 |
|
|
Mezzanine loan (3) |
|
|
— |
|
|
|
4,700 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
4,700 |
|
|
Preferred equity investment (3) |
|
|
— |
|
|
|
19,555 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
19,555 |
|
|
Legacy CRE loans held for sale |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
17,000 |
|
|
|
17,000 |
|
|
Total |
|
$ |
— |
|
|
$ |
1,471,461 |
|
|
$ |
77,067 |
|
|
$ |
4,840 |
|
|
$ |
— |
|
|
$ |
17,000 |
|
|
$ |
1,570,368 |
|
|
(1) |
Includes one whole loan, with an amortized cost of $11.5 million, which was in maturity default at September 30, 2019 and December 31, 2018. The loan is performing with respect to debt service due in accordance with a forbearance agreement at September 30, 2019 and December 31, 2018. |
|
( 2 ) |
Includes one legacy CRE loan that was in default with a total carrying value of $17.1 million and $17.0 million at September 30, 2019 and December 31, 2018, respectively. |
|
( 3 ) |
Our mezzanine loan and preferred equity investments are evaluated individually for impairment. |
At September 30, 2019 and December 31, 2018, we had one legacy CRE loan and one mezzanine loan included in assets held for sale with total carrying values of $17.1 million and $17.0 million, respectively, comprising total amortized cost bases of $23.3 million and $21.7 million, respectively, less accumulated lower of cost or market charges of $6.1 million and $4.7 million, respectively. The mezzanine loan held for sale had no fair value at September 30, 2019 and December 31, 2018.
Our remaining legacy CRE loan held for sale incurred fair value adjustments to reduce the carrying value of $55,000 and $1.5 million, which included protective advances to cover borrower operating losses of $55,000 and $158,000, during the three and nine months ended September 30, 2019, respectively. The adjustments for the nine months ended September 30, 2019 comprised a $1.3 million fair value charge in connection with the updated fair value based on the average of three June 2019 brokers' opinions of value that were taken into account equally along with an appraisal received in February 2019. The fair value of the collateral has subsequently increased in connection with the funding of capital improvements. During the three and nine months ended September 30, 2018, we incurred fair value adjustments to reduce the carrying value of $1.6 million and $6.3 million, respectively, which included protective advances to cover borrower operating losses of $600,000 and $772,000, respectively, to adjust the loan to the average value of two appraisals. The loan is currently in default.
During the three months ended September 30, 2019, we recorded a decrease in the reserve of $1.1 million, which was primarily attributable to $72.6 million of loans risk rated as a 3 that repaid. During the nine months ended September 30, 2019, we recorded an increase in the reserve of $59,000, which was primarily attributable to two loans that migrated from a risk rating of 2 to a risk rating of 3, in which performance lagged behind underwritten expectations, and partially offset by $18.7 million of loans risk rated as a 3 that repaid. During the three and nine months ended September 30, 2018, we recorded a decrease in the reserve of approximately $2.8 million and $3.6 million, respectively, which were primarily attributable to one $7.0 million loan risk rated as a 5 that repaid, and one and two loans, respectively, that migrated from a risk rating of 3 to a risk rating of 2, in which performance improved to within underwritten expectations. The decrease during the nine months ended September 30, 2018 was also attributable to one $26.6 million loan risk rated as a 3 that repaid.
60
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 and legacy CRE loans held for sale at the lower of cost or fair value (in thousands, except amounts in footnotes):
|
|
|
30-59 Days |
|
|
60-89 Days |
|
|
Greater than 90 Days (1)(2) |
|
|
Total Past Due |
|
|
Current |
|
|
Total Loans Receivable |
|
|
Total Loans > 90 Days and Accruing (1) |
|
|||||||
|
At September 30, 2019: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Whole loans |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
11,496 |
|
|
$ |
11,496 |
|
|
$ |
1,754,798 |
|
|
$ |
1,766,294 |
|
|
$ |
11,496 |
|
|
Mezzanine loan |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
4,700 |
|
|
|
4,700 |
|
|
|
— |
|
|
Preferred equity investments |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
25,776 |
|
|
|
25,776 |
|
|
|
— |
|
|
Legacy CRE loans held for sale |
|
|
— |
|
|
|
— |
|
|
|
17,141 |
|
|
|
17,141 |
|
|
|
— |
|
|
|
17,141 |
|
|
|
— |
|
|
Total |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
28,637 |
|
|
$ |
28,637 |
|
|
$ |
1,785,274 |
|
|
$ |
1,813,911 |
|
|
$ |
11,496 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2018: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Whole loans |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
11,516 |
|
|
$ |
11,516 |
|
|
$ |
1,517,597 |
|
|
$ |
1,529,113 |
|
|
$ |
11,516 |
|
|
Mezzanine loan |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
4,700 |
|
|
|
4,700 |
|
|
|
— |
|
|
Preferred equity investment |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
19,555 |
|
|
|
19,555 |
|
|
|
— |
|
|
Legacy CRE loans held for sale |
|
|
— |
|
|
|
— |
|
|
|
17,000 |
|
|
|
17,000 |
|
|
|
— |
|
|
|
17,000 |
|
|
|
— |
|
|
Total |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
28,516 |
|
|
$ |
28,516 |
|
|
$ |
1,541,852 |
|
|
$ |
1,570,368 |
|
|
$ |
11,516 |
|
|
|
|
|
( 1 ) |
Includes one whole loan, with an amortized cost of $11.5 million, which was in maturity default at September 30, 2019 and December 31, 2018. The loan is performing with respect to debt service due in accordance with a forbearance agreement at September 30, 2019 and December 31, 2018. During the three and nine months ended September 30, 2019, we recognized interest income of $170,000 and $587,000, respectively, on this whole loan. During the three and nine months ended September 30, 2018, we recognized interest income of $156,000 and $459,000, respectively, on this whole loan. |
|
( 2 ) |
Includes one legacy CRE loan that was in default with a total carrying value of $17.1 million and $17.0 million at September 30, 2019 and December 31, 2018, respectively. |
Impaired Loans
We did not have any impaired loans at September 30, 2019 and December 31, 2018.
Troubled-Debt Restructurings ("TDRs")
There were no TDRs for the nine months ended September 30, 2019 and 2018.
Restricted Cash
At September 30, 2019, we had restricted cash of $16.6 million, which consisted of $5.8 million of restricted cash within our five consolidated securitization entities, $10.8 million held as margin and $31,000 held in various reserve accounts. At December 31, 2018, we had restricted cash of $12.7 million, which consisted of $6.2 million of restricted cash within four of our six consolidated securitization entities, $6.4 million held as margin and $21,000 held in various reserve accounts. The increase of $3.9 million was primarily attributable to an increase due to initial margin requirements under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 on interest rates swaps.
Accrued Interest Receivable
The following table summarizes our accrued interest receivable at September 30, 2019 and December 31, 2018 (in thousands):
|
|
|
September 30, 2019 |
|
|
December 31, 2018 |
|
|
Net Change |
|
|||
|
Accrued interest receivable from loans |
|
$ |
7,454 |
|
|
$ |
6,974 |
|
|
$ |
480 |
|
|
Accrued interest receivable from securities |
|
|
1,041 |
|
|
|
1,156 |
|
|
|
(115 |
) |
|
Accrued interest receivable from escrow, sweep and reserve accounts |
|
|
152 |
|
|
|
68 |
|
|
|
84 |
|
|
Total |
|
$ |
8,647 |
|
|
$ |
8,198 |
|
|
$ |
449 |
|
The increase of $449,000 in accrued interest receivable was primarily attributable to new loan production, including the acquisition of a portfolio of CRE loans from an affiliate of our Manager, partially offset by loan payoffs during the nine months ended September 30, 2019.
61
The following table summarizes our other assets at September 30, 2019 and December 31, 2018 (in thousands):
|
|
|
September 30, 2019 |
|
|
December 31, 2018 |
|
|
Net Change |
|
|||
|
Tax receivables and prepaid taxes |
|
$ |
2,327 |
|
|
$ |
3,219 |
|
|
$ |
(892 |
) |
|
Other prepaid expenses |
|
|
1,242 |
|
|
|
361 |
|
|
|
881 |
|
|
Other receivables |
|
|
403 |
|
|
|
261 |
|
|
|
142 |
|
|
Fixed assets - non real estate |
|
|
97 |
|
|
|
108 |
|
|
|
(11 |
) |
|
Direct financing leases |
|
|
— |
|
|
|
66 |
|
|
|
(66 |
) |
|
Total |
|
$ |
4,069 |
|
|
$ |
4,015 |
|
|
$ |
54 |
|
The increase of $54,000 in other assets was primarily attributable to an increase of $881,000 in other prepaid expenses, in connection with August 2019 expenses incurred on a legacy CRE loan held for sale and the March 2019 payment of $1.1 million for D&O insurance for the ensuing year, and an increase of $142,000 in other receivables, due to the timing of the receipt of exit fees from our CRE whole loans. The increase was partially offset by a decrease of $892,000 in tax receivables and prepaid taxes, due to tax refunds of approximately $832,000 received during the nine months ended September 30, 2019, and a decrease of $66,000 in direct financing leases, resulting from the receipt of cash in excess of the remaining carrying value of our direct financing leases.
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. |
As we discussed in the "Overview" section, 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:
|
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. |
62
The table below summarizes the amortized costs and net carrying amounts of our core and non-core investments at September 30, 2019 , classified by asset type (in thousands, except percentages and amounts in footnotes):
|
At September 30, 2019 |
|
Amortized Cost |
|
|
Net Carrying Amount |
|
|
Percent of Portfolio |
|
|
Weighted Average Coupon |
|
||||
|
Core Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CRE whole loans (1)(2) |
|
$ |
1,754,797 |
|
|
$ |
1,753,337 |
|
|
|
76.76 |
% |
|
5.82% |
|
|
|
CRE mezzanine loan and preferred equity investments (2) |
|
|
30,476 |
|
|
|
30,476 |
|
|
|
1.33 |
% |
|
11.18% |
|
|
|
CMBS, fixed rate (3) |
|
|
118,481 |
|
|
|
125,198 |
|
|
|
5.48 |
% |
|
4.10% |
|
|
|
CMBS, floating rate (3) |
|
|
346,408 |
|
|
|
346,650 |
|
|
|
15.18 |
% |
|
4.75% |
|
|
|
Total Core Assets |
|
|
2,250,162 |
|
|
|
2,255,661 |
|
|
|
98.75 |
% |
|
|
|
|
|
Non-Core Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Legacy CRE loans (4)(5) |
|
|
34,762 |
|
|
|
28,638 |
|
|
|
1.25 |
% |
|
1.51% |
|
|
|
Total Core and Non-Core Assets |
|
$ |
2,284,924 |
|
|
$ |
2,284,299 |
|
|
|
100.00 |
% |
|
|
|
|
|
(1) |
Net carrying amount includes an allowance for loan losses of $1.5 million at September 30, 2019. |
|
(2) |
Classified as CRE loans on the consolidated balance sheet. |
|
(3) |
Classified as investment securities available-for-sale on the consolidated balance sheet. |
|
( 4 ) |
Includes one legacy CRE loan with an amortized cost of $11.5 million classified as a CRE loan on the consolidated balance sheet as we intend to hold this loan to maturity. |
|
( 5 ) |
Net carrying amount includes a lower of cost or market value adjustment of $6.1 million at September 30, 2019. |
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 September 30, 2019 and December 31, 2018 (in thousands):
|
|
|
September 30, 2019 |
|
|
December 31, 2018 |
|
||
|
ASSETS |
|
|
|
|
|
|
|
|
|
Loans held for sale |
|
$ |
17,141 |
|
|
$ |
17,000 |
|
|
Other assets |
|
|
266 |
|
|
|
645 |
|
|
Total |
|
$ |
17,407 |
|
|
$ |
17,645 |
|
|
LIABILITIES |
|
|
|
|
|
|
|
|
|
Accounts payable and other liabilities |
|
$ |
1,766 |
|
|
$ |
1,820 |
|
|
Total |
|
$ |
1,766 |
|
|
$ |
1,820 |
|
Hedging 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 income (loss), and record changes in fair value of derivatives designated and ineffective as cash flow hedges in earnings.
63
The following tables present the fair value of our derivative financial instruments at September 30, 2019 and December 31, 2018 on our consolidated balance sheets and the related effect of derivative instruments on the consolidat ed statements of operations for the nine months ended September 30, 2019 and 2018 :
Fair Value of Derivative Instruments (in thousands)
|
|
|
Liability Derivatives |
|
|||||||
|
At September 30, 2019 |
|
Notional Amount |
|
|
Consolidated Balance Sheets Location |
|
Fair Value |
|
||
|
Interest rate swap contracts, hedging (1) |
|
$ |
87,551 |
|
|
Derivatives, at fair value |
|
$ |
6,355 |
|
|
Interest rate swap contracts, hedging |
|
$ |
87,551 |
|
|
Accumulated other comprehensive income (loss) |
|
$ |
(5,803 |
) |
|
|
|
Asset Derivatives |
|
|||||||
|
At December 31, 2018 |
|
Notional Amount |
|
|
Consolidated Balance Sheets Location |
|
Fair Value |
|
||
|
Interest rate swap contracts, hedging (1) |
|
$ |
31,725 |
|
|
Derivatives, at fair value |
|
$ |
985 |
|
|
|
|
Liability Derivatives |
|
|||||||
|
|
|
Notional Amount |
|
|
Consolidated Balance Sheets Location |
|
Fair Value |
|
||
|
Interest rate swap contracts, hedging (1) |
|
$ |
49,326 |
|
|
Derivatives, at fair value |
|
$ |
1,043 |
|
|
Interest rate swap contracts, hedging |
|
$ |
81,051 |
|
|
Accumulated other comprehensive income (loss) |
|
$ |
563 |
|
|
(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 |
|
|||
|
Nine Months Ended September 30, 2019 |
|
Consolidated Statements of Operations Location |
|
Realized and Unrealized Gain (Loss) |
|
|
|
Interest rate swap contracts, hedging |
|
Interest expense |
|
$ |
(16 |
) |
|
|
|
Derivatives |
|
|||
|
Nine Months Ended September 30, 2018 |
|
Consolidated Statements of Operations Location |
|
Realized and Unrealized Gain (Loss) |
|
|
|
Interest rate swap contracts, hedging |
|
Interest expense |
|
$ |
(141 |
) |
At September 30, 2019, we had 18 swap contracts outstanding in order to hedge against adverse rate movements on our one-month LIBOR borrowings. Our interest rate hedges at September 30, 2019 were as follows (dollars in thousands):
|
|
|
Benchmark Rate |
|
Notional Value |
|
|
Strike Rate |
|
|
Effective Date |
|
Maturity Date |
|
Fair Value |
|
|||
|
Interest rate swap |
|
One-month LIBOR |
|
$ |
3,010 |
|
|
|
2.02 |
% |
|
6/18/2017 |
|
1/18/2026 |
|
$ |
(120 |
) |
|
Interest rate swap |
|
One-month LIBOR |
|
|
3,640 |
|
|
|
2.15 |
% |
|
8/18/2017 |
|
3/18/2027 |
|
|
(199 |
) |
|
Interest rate swap |
|
One-month LIBOR |
|
|
4,025 |
|
|
|
2.09 |
% |
|
8/18/2017 |
|
10/18/2026 |
|
|
(196 |
) |
|
Interest rate swap |
|
One-month LIBOR |
|
|
13,550 |
|
|
|
2.09 |
% |
|
10/18/2017 |
|
9/18/2027 |
|
|
(727 |
) |
|
Interest rate swap |
|
One-month LIBOR |
|
|
7,500 |
|
|
|
2.20 |
% |
|
10/18/2017 |
|
9/18/2027 |
|
|
(463 |
) |
|
Interest rate swap |
|
One-month LIBOR |
|
|
2,820 |
|
|
|
2.77 |
% |
|
3/18/2018 |
|
3/18/2028 |
|
|
(313 |
) |
|
Interest rate swap |
|
One-month LIBOR |
|
|
2,571 |
|
|
|
2.86 |
% |
|
5/18/2018 |
|
3/18/2028 |
|
|
(304 |
) |
|
Interest rate swap |
|
One-month LIBOR |
|
|
3,720 |
|
|
|
2.86 |
% |
|
5/18/2018 |
|
11/18/2025 |
|
|
(332 |
) |
|
Interest rate swap |
|
One-month LIBOR |
|
|
7,325 |
|
|
|
2.80 |
% |
|
7/18/2018 |
|
1/18/2026 |
|
|
(640 |
) |
|
Interest rate swap |
|
One-month LIBOR |
|
|
4,300 |
|
|
|
2.80 |
% |
|
7/18/2018 |
|
1/18/2026 |
|
|
(376 |
) |
|
Interest rate swap |
|
One-month LIBOR |
|
|
2,300 |
|
|
|
2.85 |
% |
|
7/18/2018 |
|
2/18/2027 |
|
|
(241 |
) |
|
Interest rate swap |
|
One-month LIBOR |
|
|
4,020 |
|
|
|
2.76 |
% |
|
7/18/2018 |
|
7/18/2026 |
|
|
(367 |
) |
|
Interest rate swap |
|
One-month LIBOR |
|
|
4,020 |
|
|
|
2.76 |
% |
|
7/18/2018 |
|
7/18/2026 |
|
|
(367 |
) |
|
Interest rate swap |
|
One-month LIBOR |
|
|
4,420 |
|
|
|
2.89 |
% |
|
8/18/2018 |
|
7/18/2028 |
|
|
(553 |
) |
|
Interest rate swap |
|
One-month LIBOR |
|
|
7,330 |
|
|
|
2.85 |
% |
|
8/18/2018 |
|
12/18/2026 |
|
|
(752 |
) |
|
Interest rate swap |
|
One-month LIBOR |
|
|
6,500 |
|
|
|
2.72 |
% |
|
9/18/2018 |
|
7/18/2022 |
|
|
(235 |
) |
|
Interest rate swap |
|
One-month LIBOR |
|
|
4,770 |
|
|
|
2.17 |
% |
|
5/18/2019 |
|
7/18/2022 |
|
|
(100 |
) |
|
Interest rate swap |
|
One-month LIBOR |
|
|
1,730 |
|
|
|
1.87 |
% |
|
7/18/2019 |
|
6/18/2029 |
|
|
(70 |
) |
|
Total interest rate swaps |
|
|
|
$ |
87,551 |
|
|
|
|
|
|
|
|
|
|
$ |
(6,355 |
) |
64
Repurchase and Credit Facilities
Borrowings under our repurchase agreements are guaranteed by us or one of our subsidiaries. The following table sets forth certain information with respect to our repurchase agreements (dollars in thousands, except amounts in footnotes):
|
|
|
September 30, 2019 |
|
|
December 31, 2018 |
|
||||||||||||||||||||||||||
|
|
|
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 Repurchase Facilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wells Fargo Bank, N.A. (2) |
|
$ |
201,920 |
|
|
$ |
268,965 |
|
|
|
30 |
|
|
|
4.04 |
% |
|
$ |
154,478 |
|
|
$ |
226,530 |
|
|
|
13 |
|
|
|
4.33 |
% |
|
Morgan Stanley Bank, N.A. (3) |
|
|
37,274 |
|
|
|
62,664 |
|
|
|
3 |
|
|
|
4.66 |
% |
|
|
37,113 |
|
|
|
62,457 |
|
|
|
3 |
|
|
|
5.09 |
% |
|
Barclays Bank PLC (4) |
|
|
104,716 |
|
|
|
135,649 |
|
|
|
13 |
|
|
|
4.30 |
% |
|
|
240,416 |
|
|
|
308,389 |
|
|
|
11 |
|
|
|
4.51 |
% |
|
JPMorgan Chase Bank, N.A. (5) |
|
|
128,480 |
|
|
|
167,806 |
|
|
|
10 |
|
|
|
3.84 |
% |
|
|
75,440 |
|
|
|
98,839 |
|
|
|
5 |
|
|
|
4.30 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trust Certificates - Term Repurchase Facilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RSO Repo SPE Trust 2017 (6) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
% |
|
|
47,172 |
|
|
|
118,780 |
|
|
|
2 |
|
|
|
6.41 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CMBS - Short-Term Repurchase Agreements |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deutsche Bank Securities Inc. |
|
|
30,774 |
|
|
|
51,075 |
|
|
|
5 |
|
|
|
3.39 |
% |
|
|
7,305 |
|
|
|
9,158 |
|
|
|
5 |
|
|
|
3.98 |
% |
|
JP Morgan Securities LLC |
|
|
52,245 |
|
|
|
66,917 |
|
|
|
15 |
|
|
|
3.16 |
% |
|
|
42,040 |
|
|
|
73,066 |
|
|
|
13 |
|
|
|
3.57 |
% |
|
Barclays Capital Inc. |
|
|
73,813 |
|
|
|
93,931 |
|
|
|
5 |
|
|
|
3.11 |
% |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
% |
|
RBC Capital Markets, LLC |
|
|
170,291 |
|
|
|
215,611 |
|
|
|
26 |
|
|
|
3.18 |
% |
|
|
246,476 |
|
|
|
313,644 |
|
|
|
33 |
|
|
|
3.64 |
% |
|
Total |
|
$ |
799,513 |
|
|
$ |
1,062,618 |
|
|
|
|
|
|
|
|
|
|
$ |
850,440 |
|
|
$ |
1,210,863 |
|
|
|
|
|
|
|
|
|
|
(1) |
Outstanding borrowings include accrued interest payable. |
|
(2) |
Includes $869,000 and $1.6 million of deferred debt issuance costs at September 30, 2019 and December 31, 2018, respectively. |
|
(3) |
Includes $167,000 of deferred debt issuance costs at December 31, 2018. There were no deferred debt issuance costs at September 30, 2019. |
|
(4) |
Includes $979,000 and $1.5 million of deferred debt issuance costs at September 30, 2019 and December 31, 2018, respectively. |
|
(5) |
Includes $1.5 million and $2.0 million of deferred debt issuance costs at September 30, 2019 and December 31, 2018, respectively. |
|
(6) |
Includes $204,000 of deferred debt issuance costs at December 31, 2018. There were no deferred debt issuance costs at September 30, 2019. |
|
|
|
We were in compliance with all financial covenants in each of the respective agreements at September 30, 2019 and December 31, 2018.
CRE - Term Repurchase Facilities
In September 2015, a wholly-owned subsidiary entered into a master repurchase and securities agreement (the "Morgan Stanley Facility") with Morgan Stanley Bank, N.A. to finance the origination of CRE loans. In September 2019, we executed an amendment of the Morgan Stanley Facility, which reduced our maximum capacity to $37.2 million and extended the maturity date through October 2019, at which time it was repaid in full.
Trust Certifications - Term Repurchase Facility
In September 2017, a wholly-owned subsidiary entered into a repurchase and securities agreement (the "2017 Term Repurchase Trust Facility") with RSO Repo SPE Trust 2017. In July 2019, we paid off the outstanding balance of the 2017 Term Repurchase Trust Facility in connection with the redemption of RCC 2017-CRE5.
CMBS - Short-Term Repurchase Agreements
In February 2013, a wholly-owned subsidiary entered into a master repurchase agreement (the "Barclays Capital Facility") with Barclays Capital Inc. to finance the purchase of CMBS. In August 2019, we entered into an amendment of the Barclays Capital Facility that updated certain reporting requirements and definitions.
Securitizations
At September 30, 2019, we retained equity in five of the securitization entities we have executed, of which three have been substantially liquidated.
65
In July 2017, we closed RCC 2017-CRE5, a $376.7 million CRE securitization transaction that provided financing for transitional CRE loans. In May 2019, we paid off all of the outstanding, third-party owned senior notes from the payoff proceeds of certain of the securitization's assets. In July 2019, we exercised the optional redemption feature 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 (together, the "Convertible Senior Notes"). 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.
The following table summarizes the Convertible Senior Notes at September 30, 2019 (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 |
% |
|
81.9466 |
|
$ |
12.20 |
|
|
August 15, 2022 |
|
8.00% Convertible Senior Notes |
|
$ |
21,182 |
|
|
|
8.00 |
% |
|
|
9.13 |
% |
|
46.8604 |
|
$ |
21.34 |
|
|
January 15, 2020 |
|
(1) |
Includes the amortization of the market discounts and deferred debt issuance costs, if any, for the 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 Convertible Senior Notes' principal outstanding, subject to adjustment as provided in the Second Supplemental Indenture (the "8.00% Convertible Senior Notes Indenture") and 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 September 30, 2019 are adjusted to reflect quarterly cash dividends in excess of a $0.10 dividend threshold, as defined in the 4.50% Convertible Senior Notes Indenture. The split-adjusted dividend threshold of $0.64, as defined in the 8.00% Convertible Senior Notes Indenture, was not exceeded for the three and nine months ended September 30, 2019 and 2018. |
The 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 Convertible Senior Notes prior to maturity. The closing price of our common stock was $11.37 on September 30, 2019, which did not exceed the conversion price of either of our Convertible Senior Notes at September 30, 2019.
Stockholders' Equity
Total stockholders' equity at September 30, 2019 was $560.0 million and gave effect to $5.8 million of net unrealized losses on our cash flow hedges and $7.0 million of net unrealized gains on our available-for-sale portfolio, shown as a component of accumulated other comprehensive income (loss). Stockholders' equity at December 31, 2018 was $553.8 million and gave effect to $563,000 of unrealized gains on our cash flow hedges and $3.6 million of net unrealized losses, after tax, on our available-for-sale portfolio, shown as a component of accumulated other comprehensive income (loss). The increase in stockholders' equity during the nine months ended September 30, 2019 was primarily attributable to the $4.2 million decrease in net unrealized losses in connection with mark-to-market adjustments on our CMBS and derivative contracts.
66
Balance Sheet - Book Value Reconciliation
The following table rolls forward our common stock book value for the three and nine months ended September 30, 2019 and reconciles our common stock book value to our economic book value, a non-GAAP measure, at September 30, 2019 (in thousands, except per share data and amounts in footnotes):
|
|
|
For the Three Months Ended September 30, 2019 |
|
|
For the Nine Months Ended September 30, 2019 |
|
||||||||||
|
|
|
Total Amount |
|
|
Per Share Amount |
|
|
Total Amount |
|
|
Per Share Amount |
|
||||
|
Common stock book value at beginning of period (1) |
|
$ |
441,996 |
|
|
$ |
14.06 |
|
|
$ |
437,863 |
|
|
$ |
14.02 |
|
|
Net income allocable to common shares |
|
|
9,969 |
|
|
|
0.31 |
|
|
|
21,818 |
|
|
|
0.69 |
|
|
Change in other comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale securities |
|
|
1,387 |
|
|
|
0.04 |
|
|
|
10,579 |
|
|
|
0.34 |
|
|
Derivatives |
|
|
(1,908 |
) |
|
|
(0.06 |
) |
|
|
(6,366 |
) |
|
|
(0.20 |
) |
|
Common stock dividends |
|
|
(7,862 |
) |
|
|
(0.25 |
) |
|
|
(21,224 |
) |
|
|
(0.67 |
) |
|
Common stock dividends on unvested shares |
|
|
(106 |
) |
|
|
— |
|
|
|
(288 |
) |
|
|
(0.01 |
) |
|
Accretion (dilution) from additional shares outstanding at September 30, 2019 (2) |
|
|
594 |
|
|
|
0.02 |
|
|
|
1,688 |
|
|
|
(0.05 |
) |
|
Total net increase |
|
|
2,074 |
|
|
|
0.06 |
|
|
|
6,207 |
|
|
|
0.10 |
|
|
Common stock book value at end of period (1)(3) |
|
|
444,070 |
|
|
|
14.12 |
|
|
|
444,070 |
|
|
|
14.12 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciling items in arriving at economic book value at September 30, 2019: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash convertible senior notes' unamortized discounts: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.50% Convertible Senior Notes |
|
|
(8,833 |
) |
|
|
(0.28 |
) |
|
|
(8,833 |
) |
|
|
(0.28 |
) |
|
8.00% Convertible Senior Notes |
|
|
(41 |
) |
|
|
— |
|
|
|
(41 |
) |
|
|
— |
|
|
Series C Preferred Stock redemption value in excess of carrying value |
|
|
(4,045 |
) |
|
|
(0.13 |
) |
|
|
(4,045 |
) |
|
|
(0.13 |
) |
|
Economic book value at September 30, 2019 |
|
$ |
431,151 |
|
|
$ |
13.71 |
|
|
$ |
431,151 |
|
|
$ |
13.71 |
|
|
(1) |
Per share calculations exclude unvested restricted stock, as disclosed on our consolidated balance sheets, of 424,164, 426,771 and 422,671 shares at September 30, 2019, June 30, 2019 and December 31, 2018, respectively. The denominator for the calculation is 31,446,738, 31,443,123 and 31,234,828 shares at September 30, 2019, June 30, 2019 and December 31, 2018, respectively. |
|
(2) |
Per share amount calculations include 3,615 and 211,910 shares of restricted stock that vested during the three and nine months ended September 30, 2019. |
|
(3) |
Common stock book value is calculated as total stockholders' equity of $560.0 million less preferred stock equity of $116.0 million at September 30, 2019. |
Management Agreement Equity
Our base management fee, as defined in the Management Agreement, is equal to (i) 1/12 of the amount of our equity multiplied by (ii) 1.50%.
The following table summarizes the calculation of equity, as defined in the Management Agreement (in thousands):
|
|
|
Amount |
|
|
|
At September 30, 2019: |
|
|
|
|
|
Proceeds from capital stock issuances, net (1) |
|
$ |
1,219,936 |
|
|
Retained earnings, net (2) |
|
|
(452,434 |
) |
|
Payments for repurchases of capital stock, net |
|
|
(207,011 |
) |
|
Total |
|
$ |
560,491 |
|
|
(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.
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.
67
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 loan 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") i s 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.
68
The following ta ble 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 da ta and amoun t in the footnotes):
|
|
|
For the Three Months Ended |
|
|
For the Nine Months Ended |
|
||||||||||||||||||||||||||
|
|
|
September 30, |
|
|
September 30, |
|
||||||||||||||||||||||||||
|
|
|
2019 |
|
|
Per Share Data |
|
|
2018 |
|
|
Per Share Data |
|
|
2019 |
|
|
Per Share Data |
|
|
2018 |
|
|
Per Share Data |
|
||||||||
|
Net income (loss) allocable to common shares - GAAP |
|
$ |
9,969 |
|
|
$ |
0.31 |
|
|
$ |
6,036 |
|
|
$ |
0.19 |
|
|
$ |
21,818 |
|
|
$ |
0.69 |
|
|
$ |
(394 |
) |
|
$ |
(0.01 |
) |
|
Adjustment for realized gains on CRE assets (3) |
|
|
— |
|
|
|
— |
|
|
|
(450 |
) |
|
|
(0.02 |
) |
|
|
— |
|
|
|
— |
|
|
|
(450 |
) |
|
|
(0.02 |
) |
|
Net income (loss) allocable to common shares - GAAP, adjusted |
|
|
9,969 |
|
|
|
0.31 |
|
|
|
5,586 |
|
|
|
0.17 |
|
|
|
21,818 |
|
|
|
0.69 |
|
|
|
(844 |
) |
|
|
(0.03 |
) |
|
Reconciling items from continuing operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash equity compensation expense |
|
|
552 |
|
|
|
0.02 |
|
|
|
757 |
|
|
|
0.02 |
|
|
|
1,647 |
|
|
|
0.05 |
|
|
|
2,383 |
|
|
|
0.08 |
|
|
Non-cash (recovery of) provision for CRE loan losses |
|
|
(1,137 |
) |
|
|
(0.04 |
) |
|
|
(293 |
) |
|
|
(0.01 |
) |
|
|
58 |
|
|
|
— |
|
|
|
(1,092 |
) |
|
|
(0.04 |
) |
|
Litigation settlement expense (4) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(2,167 |
) |
|
|
(0.07 |
) |
|
Non-cash amortization of discounts or premiums associated with borrowings |
|
|
722 |
|
|
|
0.02 |
|
|
|
815 |
|
|
|
0.03 |
|
|
|
2,107 |
|
|
|
0.07 |
|
|
|
2,389 |
|
|
|
0.08 |
|
|
Income tax benefit from non-core investments (1)(2) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(31 |
) |
|
|
— |
|
|
Net realized gain on non-core assets (1)(2) |
|
|
(108 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(123 |
) |
|
|
— |
|
|
|
(476 |
) |
|
|
(0.02 |
) |
|
Net (income) loss from non-core assets (2) |
|
|
(2 |
) |
|
|
— |
|
|
|
(456 |
) |
|
|
(0.01 |
) |
|
|
24 |
|
|
|
— |
|
|
|
(9 |
) |
|
|
— |
|
|
Reconciling items from discontinued operations and CRE loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income on legacy CRE loans |
|
|
(170 |
) |
|
|
— |
|
|
|
(352 |
) |
|
|
(0.01 |
) |
|
|
(586 |
) |
|
|
(0.02 |
) |
|
|
(1,013 |
) |
|
|
(0.03 |
) |
|
Realized gain on liquidation of legacy CRE loans |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(1,000 |
) |
|
|
(0.03 |
) |
|
Operating expenses on legacy CRE loans |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
187 |
|
|
|
0.01 |
|
|
Fair value adjustments on legacy CRE loans |
|
|
55 |
|
|
|
— |
|
|
|
1,588 |
|
|
|
0.05 |
|
|
|
1,457 |
|
|
|
0.04 |
|
|
|
6,260 |
|
|
|
0.20 |
|
|
Net loss from other non-CRE investments held for sale |
|
|
— |
|
|
|
— |
|
|
|
2 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
508 |
|
|
|
0.02 |
|
|
Loss (income) from discontinued operations, net of taxes |
|
|
63 |
|
|
|
— |
|
|
|
(364 |
) |
|
|
(0.01 |
) |
|
|
212 |
|
|
|
0.01 |
|
|
|
(161 |
) |
|
|
(0.01 |
) |
|
Core Earnings before net realized loss on CRE assets |
|
|
9,944 |
|
|
|
0.31 |
|
|
|
7,283 |
|
|
|
0.23 |
|
|
|
26,614 |
|
|
|
0.84 |
|
|
|
4,934 |
|
|
|
0.16 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment for realized loss on CRE loan |
|
|
— |
|
|
|
— |
|
|
|
(2,332 |
) |
|
|
(0.07 |
) |
|
|
— |
|
|
|
— |
|
|
|
(2,332 |
) |
|
|
(0.07 |
) |
|
Adjustment for realized gain on CRE-related investment |
|
|
— |
|
|
|
— |
|
|
|
282 |
|
|
|
0.01 |
|
|
|
— |
|
|
|
— |
|
|
|
282 |
|
|
|
0.01 |
|
|
Core Earnings allocable to common shares |
|
|
9,944 |
|
|
|
0.31 |
|
|
|
5,233 |
|
|
|
0.17 |
|
|
|
26,614 |
|
|
|
0.84 |
|
|
|
2,884 |
|
|
|
0.10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciling items in arriving at Core Earnings allocable to common shares, adjusted: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized loss on sale of a previously impaired CRE loan |
|
|
— |
|
|
|
— |
|
|
|
2,332 |
|
|
|
0.07 |
|
|
|
— |
|
|
|
— |
|
|
|
2,332 |
|
|
|
0.07 |
|
|
Loss on redemption of Series B Preferred Stock |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
7,482 |
|
|
|
0.24 |
|
|
Litigation settlement expense |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
2,167 |
|
|
|
0.07 |
|
|
Core Earnings allocable to common shares, adjusted (5)(6) |
|
$ |
9,944 |
|
|
$ |
0.31 |
|
|
$ |
7,565 |
|
|
$ |
0.24 |
|
|
$ |
26,614 |
|
|
$ |
0.84 |
|
|
$ |
14,865 |
|
|
$ |
0.48 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares - diluted |
|
|
31,715 |
|
|
|
|
|
|
|
31,477 |
|
|
|
|
|
|
|
31,634 |
|
|
|
|
|
|
|
31,186 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Core Earnings per common share - diluted |
|
$ |
0.31 |
|
|
|
|
|
|
$ |
0.17 |
|
|
|
|
|
|
$ |
0.84 |
|
|
|
|
|
|
$ |
0.09 |
|
|
|
|
|
|
Core Earnings per common share, adjusted - diluted (5)(6) |
|
$ |
0.31 |
|
|
|
|
|
|
$ |
0.24 |
|
|
|
|
|
|
$ |
0.84 |
|
|
|
|
|
|
$ |
0.48 |
|
|
|
|
|
|
( 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) |
Includes a realized gain of $282,000, or $0.01 per common share-diluted, in connection with the sale of CMBS and a realized recovery of CRE loan loss provision of $168,000, or $0.01 per common share-diluted, in connection with the sale of a previously impaired, 2013 vintage CRE loan for the three and nine months ended September 30, 2018. |
|
( 4 ) |
Reflects the payment of the settlement of a securities litigation, previously accrued in 2017, for the nine months ended September 30, 2018. |
|
( 5 ) |
Core Earnings, adjusted exclude a realized loss of $2.3 million, or $(0.07) per common share-diluted, for the three and nine months ended September 30, 2018 in connection with the sale of a previously impaired, 2013 vintage CRE loan. |
|
( 6 ) |
Core Earnings, adjusted exclude a non-recurring charge of $7.5 million, or $(0.24) per common share-diluted, for the nine months ended September 30, 2018 in connection with the redemption of our remaining 8.25% Series B Cumulative Redeemable Preferred Stock. |
Core Earnings in accordance with the Management Agreement, which excludes incentive compensation payable of $441,000, was $10.4 million, or $0.33 per common share outstanding, for the three months ended September 30, 2019.
69
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").
The following table summarizes the calculation of the Incentive Compensation Hurdle for the three months ended September 30, 2019 (dollars in thousands, except per share data):
|
|
|
Amount |
|
|
|
Book value: |
|
|
|
|
|
Stockholders' equity, excluding equity attributable to preferred stock at September 30, 2017 |
|
$ |
460,569 |
|
|
Net income (loss) from operations and gain (loss) on resolutions of Plan assets (1) |
|
|
(7,535 |
) |
|
Book value at September 30, 2019 |
|
$ |
453,034 |
|
|
Book value per share at September 30, 2019 |
|
$ |
14.67 |
|
|
|
|
|
|
|
|
One-fourth of the ten year treasury rate (2) |
|
|
0.45 |
% |
|
|
|
|
|
|
|
Greater of (a) 1.75% and (b) 0.4375% plus one-fourth of the ten year treasury rate |
|
|
1.75 |
% |
|
|
|
|
|
|
|
Incentive Compensation Hurdle (3) |
|
$ |
0.26 |
|
|
(1) |
Includes activity during the period beginning October 1, 2017 and ending December 31, 2018. |
|
(2) |
The ten year treasury rate, as defined in the Management Agreement, is the average of the weekly average yield to maturity for U.S. Treasury securities (adjusted to a constant maturity of ten years) as published weekly by the Federal Reserve Board during a fiscal quarter. During the three months ended September 30, 2019, the ten year treasury rate was 1.80%. |
|
(3) |
Calculated as book value per share at September 30, 2019 multiplied by 1.75%. |
We have not had a public offering of common shares nor have we issued any common shares resulting from the conversion of any of our convertible securities subsequent to September 30, 2017.
The amount by which Core Earnings per common share exceeds the Incentive Compensation Hurdle is multiplied by (a) 20% and (b) the weighted average number of common shares (as defined in the Management Agreement) outstanding during the quarter to arrive at incentive compensation for the quarter. Additionally, incentive compensation is adjusted: (i) to exclude events pursuant to changes in GAAP or the application of GAAP, as well as non-recurring or unusual transactions or events, after discussion between our Manager and the independent directors and approval by a majority of the independent directors in the case of non-recurring or unusual transactions or events, and (ii) by deducting an amount equal to any taxable REIT subsidiary directly paid fees accrued (calculated as if such fees were payable on a quarterly basis) not previously used to offset incentive compensation.
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.
For the nine months ended September 30, 2019, our principal sources of liquidity were: (i) proceeds of $616.8 million from financing sourced from our CRE - term repurchase facilities and net CMBS - short-term repurchase agreements, (ii) proceeds of $61.0 million from net repayments on our CRE loan portfolio, (iii) proceeds of $32.3 million from our CRE securitizations that used principal paydowns to invest in CRE loan future funding commitments and (iv) net proceeds of $31.5 million from the close of XAN 2019-RSO7. These sources of liquidity, offset by our deployments in CRE debt investments, distributions on our common and preferred stock and operating expenses, substantially resulted in the $51.3 million of unrestricted cash we held at September 30, 2019.
70
We utilize a variety of financing arrangements to finance certain assets. We generally utilize the following two types of financing arrangements:
|
|
1. |
Repurchase Agreements: Repurchase agreements effectively allow us to borrow against loans and securities that we own. Under these agreements, we sell our loans and securities to a counterparty and agree to repurchase the same loans and securities from the counterparty at a price equal to the original sales price plus interest. The counterparty retains the sole discretion over both whether to purchase the loan and security from us and, subject to certain conditions, the market 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 market 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 market value multiplied by (ii) the applicable advance rate. During the term of a repurchase agreement, we receive the principal and interest on the related loans and securities and pay interest to the counterparty. |
At September 30, 2019, we had various repurchase agreements, as summarized below (in thousands, except amounts in footnotes):
|
|
|
Execution Date |
|
Maturity Date (1) |
|
Maximum Capacity |
|
|
Principal Outstanding |
|
|
Availability |
|
|||
|
CRE - Term Repurchase Facilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wells Fargo Bank, N.A. |
|
February 2012 |
|
July 2020 |
|
$ |
400,000 |
|
|
$ |
202,457 |
|
|
$ |
197,543 |
|
|
Morgan Stanley Bank, N.A. |
|
September 2015 |
|
October 2019 |
|
$ |
67,936 |
|
|
|
37,206 |
|
|
$ |
30,730 |
|
|
Barclays Bank PLC |
|
April 2018 |
|
April 2021 |
|
$ |
250,000 |
|
|
|
105,545 |
|
|
$ |
144,455 |
|
|
JPMorgan Chase Bank, N.A. |
|
October 2018 |
|
October 2021 |
|
$ |
250,000 |
|
|
|
129,760 |
|
|
$ |
120,240 |
|
|
CMBS - Short-Term Repurchase Agreements |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deutsche Bank Securities Inc. |
|
March 2005 |
|
November 2019 |
|
N/A |
|
|
|
30,631 |
|
|
N/A |
|
||
|
JP Morgan Securities LLC |
|
November 2012 |
|
October 2019 |
|
N/A |
|
|
|
52,188 |
|
|
N/A |
|
||
|
Barclays Capital Inc. |
|
February 2013 |
|
October 2019 |
|
N/A |
|
|
|
73,721 |
|
|
N/A |
|
||
|
RBC Capital Markets, LLC |
|
August 2017 |
|
October 2019 |
|
N/A |
|
|
|
170,151 |
|
|
N/A |
|
||
|
Total (2) |
|
|
|
|
|
|
|
|
|
$ |
801,659 |
|
|
|
|
|
|
(1) |
The CMBS - short-term repurchase agreements' maturity dates represent the next interest payment and extension dates. The agreements do not contain defined maturity dates. |
|
(2) |
Excludes accrued interest payable of $1.2 million and deferred debt issuance costs and discounts of $3.3 million at September 30, 2019. |
The following table summarizes the average principal outstanding on our term and short-term repurchase agreements during the three months ended September 30, 2019 and December 31, 2018 and the principal outstanding on our term and short-term repurchase agreements at September 30, 2019 and December 31, 2018 (in thousands, except amounts in footnotes):
|
|
|
Three Months Ended September 30, 2019 |
|
|
September 30, 2019 |
|
|
Three Months Ended December 31, 2018 |
|
|
December 31, 2018 |
|
||||
|
|
|
Average Principal Outstanding |
|
|
Principal Outstanding (1)(2) |
|
|
Average Principal Outstanding |
|
|
Principal Outstanding (1)(2) |
|
||||
|
Term and Short-Term Repurchase Agreements |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateralized by CRE loans |
|
$ |
454,006 |
|
|
$ |
474,968 |
|
|
$ |
467,939 |
|
|
$ |
559,138 |
|
|
Collateralized by CMBS |
|
|
332,993 |
|
|
|
326,691 |
|
|
|
267,990 |
|
|
|
295,048 |
|
|
Total |
|
$ |
786,999 |
|
|
$ |
801,659 |
|
|
$ |
735,929 |
|
|
$ |
854,186 |
|
|
(1) |
Excludes accrued interest payable on repurchase agreements collateralized by CRE loans of $738,000 and $1.0 million and deferred debt issuance costs and discounts of $3.3 million and $5.5 million at September 30, 2019 and December 31, 2018, respectively. |
|
(2) |
Excludes accrued interest payable on repurchase agreements collateralized by CMBS of $432,000 and $773,000 at September 30, 2019 and December 31, 2018, respectively. |
71
The following table summarizes the maximum month-end principal outstanding on our term and short-term repurchase agreements during the period s presented (in thousands):
|
|
|
Maximum Month-End Principal Outstanding During the |
|
|||||||||||||
|
|
|
Nine Months Ended |
|
|
Years Ended December 31, |
|
||||||||||
|
|
|
September 30, 2019 |
|
|
2018 |
|
|
2017 |
|
|
2016 |
|
||||
|
Term and Short-Term Repurchase Agreements (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateralized by CRE loans |
|
$ |
665,294 |
|
|
$ |
561,382 |
|
|
$ |
469,228 |
|
|
$ |
379,670 |
|
|
Collateralized by CMBS |
|
$ |
341,221 |
|
|
$ |
295,048 |
|
|
$ |
122,574 |
|
|
$ |
82,916 |
|
|
(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. |
|
|
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 September 30, 2019, 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 Nine Months Ended September 30, 2019 |
|
|
For the Year Ended December 31, 2018 |
|
|
At September 30, 2019 |
|
|
At the Initial Measurement Date |
|
|
End of Designated Principal Reinvestment Period |
||||
|
XAN 2018-RSO6 (2) |
|
$ |
14,254 |
|
|
$ |
8,323 |
|
|
$ |
42,739 |
|
|
$ |
25,731 |
|
|
December 2020 |
|
XAN 2019-RSO7 (2) |
|
$ |
6,183 |
|
|
$ |
— |
|
|
$ |
34,352 |
|
|
$ |
34,341 |
|
|
April 2022 |
|
Apidos CDO I, Ltd. (3) |
|
$ |
708 |
|
|
$ |
— |
|
|
N/A |
|
|
$ |
17,136 |
|
|
N/A |
|
|
Apidos CDO III, Ltd. (3) |
|
$ |
— |
|
|
$ |
618 |
|
|
N/A |
|
|
$ |
11,269 |
|
|
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 and XAN 2019-RSO7 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 Nine Months Ended September 30, 2019 |
|
|
For the Year Ended December 31, 2018 |
|
|
Liquidation Date |
|
Remaining Assets at the Liquidation Date (1) |
|
|||
|
RCC 2015-CRE3 |
|
$ |
— |
|
|
$ |
3,529 |
|
|
August 2018 |
|
$ |
80,632 |
|
|
RCC 2015-CRE4 |
|
$ |
— |
|
|
$ |
4,487 |
|
|
July 2018 |
|
$ |
97,825 |
|
|
RCC 2017-CRE5 |
|
$ |
12,551 |
|
|
$ |
22,843 |
|
|
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. |
72
At October 3 0 , 2019 , our liquidity consisted of two primary sources:
|
|
• |
unrestricted cash and cash equivalents of $56.6 million; and |
|
|
|
|
|
|
• |
approximately $126.6 million of liquidity from available financing of unlevered CRE and CMBS positions. |
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 September 30, 2019 and December 31, 2018, our leverage ratio was 3.4 times and 2.8 times, respectively. The leverage ratio increase was primarily attributable to a net increase in borrowings.
Distributions
We intend to continue to make regular quarterly distributions to holders of our common stock and preferred stock. 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 September 30, 2019: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CRE securitizations |
|
$ |
890,721 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
890,721 |
|
|
Unsecured junior subordinated debentures (1) |
|
|
51,548 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
51,548 |
|
|
4.50% Convertible Senior Notes (2) |
|
|
143,750 |
|
|
|
— |
|
|
|
143,750 |
|
|
|
— |
|
|
|
— |
|
|
8.00% Convertible Senior Notes (3) |
|
|
21,182 |
|
|
|
21,182 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Repurchase and credit facilities (4) |
|
|
802,829 |
|
|
|
567,186 |
|
|
|
235,643 |
|
|
|
— |
|
|
|
— |
|
|
Unfunded commitments on CRE loans (5) |
|
|
113,046 |
|
|
|
26,599 |
|
|
|
86,447 |
|
|
|
— |
|
|
|
— |
|
|
Base management fees (6) |
|
|
8,407 |
|
|
|
8,407 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Total |
|
$ |
2,031,483 |
|
|
$ |
623,374 |
|
|
$ |
465,840 |
|
|
$ |
— |
|
|
$ |
942,269 |
|
|
(1) |
Contractual commitments exclude $25.4 million and $26.3 million of estimated interest expense payable through maturity, in June 2036 and October 2036, respectively, on our trust preferred securities. |
|
(2) |
Contractual commitments exclude $18.9 million of interest expense payable through maturity, in August 2022, on our 4.50% Convertible Senior Notes. |
|
( 3 ) |
Contractual commitments exclude $504,000 of interest expense payable through maturity, in January 2020, on our 8.00% Convertible Senior Notes. |
|
( 4 ) |
Contractual commitments include $1.2 million of accrued interest payable at September 30, 2019 on our repurchase facilities. |
|
( 5 ) |
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 September 30, 2019, we had unfunded commitments on 73 CRE whole loans and one CRE preferred equity investment. |
|
( 6 ) |
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 September 30, 2019, 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 September 30, 2019, 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.
73
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 $109.9 million and $108.5 million in unfunded loan commitments at September 30, 2019 and December 31, 2018, respectively. Preferred equity investments had $3.1 million in unfunded investment commitments at September 30, 2019. There were no preferred equity investment unfunded commitments at December 31, 2018.
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. At September 30, 2019 and December 31, 2018, we had a contingent liability, reported in accounts payable and other liabilities on our consolidated balance sheets, of $703,000 outstanding as a reserve for probable losses on the indemnification. We did not record any additional reserve for probable losses during the three and nine months ended September 30, 2019 and 2018.
At September 30, 2019, the primary component of our market risk was 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.
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.
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 September 30, 2019, 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):
|
|
|
September 30, 2019 |
|
|||||||||
|
|
|
Interest Rates Fall 100 Basis Points |
|
|
Unchanged |
|
|
Interest Rates Rise 100 Basis Points |
|
|||
|
Interest rate-sensitive investment securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value |
|
$ |
124,210 |
|
|
$ |
119,056 |
|
|
$ |
111,602 |
|
|
Change in fair value |
|
$ |
5,154 |
|
|
$ |
— |
|
|
$ |
(7,454 |
) |
|
Change as a percent of fair value |
|
|
4 |
% |
|
|
— |
% |
|
|
(6 |
)% |
|
Interest rate-sensitive hedging instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value |
|
$ |
(12,415 |
) |
|
$ |
(6,355 |
) |
|
$ |
(737 |
) |
|
Change in fair value |
|
$ |
(6,060 |
) |
|
$ |
— |
|
|
$ |
5,618 |
|
|
Change as a percent of fair value |
|
|
95 |
% |
|
|
— |
% |
|
|
(88 |
)% |
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.
74
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 cur rent 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 inve stment securities and hedging 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; |
|
|
• |
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 - Hedging Instruments." |
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 September 30, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
75
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 September 30, 2019.
Primary Capital Mortgage, LLC ("PCM") is subject to litigation related to claims for repurchases or indemnifications on loans that PCM has sold to third parties. At September 30, 2019 and December 31, 2018, 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 September 30, 2019 and December 31, 2018. The reserves for mortgage repurchases and indemnifications are included in liabilities held for sale on the consolidated balance sheets. As of September 30, 2019, we have substantially completed disposing of PCM's business.
Settled and Dismissed Litigation Matters
We did not have any general litigation reserve at September 30, 2019 or December 31, 2018.
We previously disclosed two consolidated shareholder derivative actions filed in the United States District Court for the Southern District of New York (the "Court") that purported to assert claims on our behalf 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 of directors (our "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 our 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, we agreed to implement certain corporate governance changes and paid $550,000 in plaintiffs' attorneys' fees, funded by our 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.
We previously disclosed six separate, additional shareholder derivative suits filed in the Supreme Court of New York purporting to assert claims on our behalf (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 our 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 our current and former officers and directors breached their fiduciary duties, wasted corporate assets and/or were unjustly enriched. Certain complaints asserted additional claims against Exantas Capital Manager Inc. (our "Manager") and Resource America, Inc. ("Resource America") for unjust enrichment based on allegations that our Manager received excessive management fees from us. 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.
We previously disclosed another shareholder derivative action filed in the United States District Court for the District of Maryland against certain of our former officers and directors and our 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.
We previously disclosed another shareholder derivative action filed in the Maryland Circuit Court against certain of our current and former officers and directors, as well as our 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.
76
As of the date of this report, there have been no material changes to the risk factors disclosed in our Annual Report on Form 10-K filed with the Securities and Exchange Commission ("SEC"), except we may disclose changes to such factors or disclose additional factors from time to time in our future filings with the SEC.
77
|
|
||
|
10.6 |
|
|
|
10.7 |
|
|
|
31.1 |
|
Rule 13a-14(a)/Rule 15d-14(a) Certification of Chief Executive Officer. |
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31.2 |
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Rule 13a-14(a)/Rule 15d-14(a) Certification of Chief Financial Officer. |
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32.1 |
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32.2 |
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99.1(a) |
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99.1(b) |
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99.1(c) |
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99.2(a) |
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99.2(b) |
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99.2(c) |
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99.2(d) |
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99.3(a) |
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99.3(b) |
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99.4(a) |
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99.4(b) |
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99.5(a) |
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Notice of Proposed Settlement of Shareholder Derivative Litigation. (43) |
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99.5(b) |
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99.6 |
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Federal Income Tax Consequences of our Qualification as a REIT. (42) |
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101 |
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Interactive Data Files. |
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(1) |
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Filed previously as an exhibit to the Company's registration statement on Form S-11, Registration No. 333-126517. |
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(2) |
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Filed previously as an exhibit to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2006. |
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(3) |
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Filed previously as an exhibit to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2006. |
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(4) |
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Filed previously as an exhibit to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2013. |
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(5) |
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Filed previously as an exhibit to the Company's Current Report on Form 8-K filed on June 26, 2014. |
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(6) |
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Filed previously as an exhibit to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2009. |
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(7) |
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Filed previously as an exhibit to the Company's Registration Statement on Form S-11 (File No. 333-132836). |
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(8) |
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Filed previously as an exhibit to the Company's Registration Statement on Form 8-A filed on June 9, 2014. |
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(9) |
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Filed previously as an exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 2010. |
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(10) |
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Filed previously as an exhibit to the Company's Current Report on Form 8-K filed on March 2, 2011. |
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(11) |
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Filed previously as an exhibit to the Company's Current Report on Form 8-K filed on July 25, 2018. |
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(12) |
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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. |
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(13) |
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Filed previously as an exhibit to the Company's Current Report on Form 8-K filed on March 2, 2012. |
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(14) |
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Filed previously as an exhibit to the Company's Current Report on Form 8-K filed on June 13, 2012. |
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(15) |
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Filed previously as an exhibit to the Company's registration statement on Form 8-A filed on June 8, 2012. |
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(16) |
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Filed previously as an exhibit to the Company's Current Report on Form 8-K filed on June 29, 2012. |
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(17) |
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Filed previously as an exhibit to the Company's Registration Statement on Form 8-A filed on September 28, 2012. |
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(18) |
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Filed previously as an exhibit to the Company's Current Report on Form 8-K filed on September 23, 2014. |
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(19) |
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Filed previously as an exhibit to the Company's Current Report on Form 8-K filed on January 13, 2015. |
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(20) |
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Filed previously as an exhibit to the Company's Current Report on Form 8-K filed on October 1, 2012. |
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(21) |
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Filed previously as an exhibit to the Company Current Report on Form 8-K filed on November 20, 2012. |
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(22) |
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Filed previously as an exhibit to the Company's Current Report on Form 8-K filed on April 8, 2013. |
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(23) |
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Filed previously as an exhibit to the Company's Current Report on Form 8-K filed on July 25, 2013. |
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(24) |
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Filed previously as an exhibit to the Company's Current Report on Form 8-K filed on October 21, 2013. |
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(25) |
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Filed previously as an exhibit to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2014. |
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(26) |
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Filed previously as an exhibit to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2015. |
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(27) |
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Filed previously as an exhibit to the Company's Current Report on Form 8-K filed on September 1, 2015. |
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(28) |
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Filed previously as an exhibit to the Company's Current Report on Form 8-K filed on September 16, 2015. |
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(29) |
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Filed previously as an exhibit to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2016. |
78
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Filed previously as an exhibit to the Company's Current Report on Form 8-K filed on August 5, 2016. |
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(31) |
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Filed previously as an exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 2016. |
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(32) |
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Filed previously as an exhibit to the Company's Current Report on Form 8-K filed on June 8, 2017. |
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(33) |
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Filed previously as an exhibit to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2017. |
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(34) |
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Filed previously as an exhibit to the Company's Current Report on Form 8-K filed on August 16, 2017. |
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(35) |
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Filed previously as an exhibit to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2016. |
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(36) |
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Filed previously as an exhibit to the Company's Current Report on Form 8-K filed on December 18, 2017. |
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(37) |
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Filed previously as an exhibit to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2017. |
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(38) |
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Filed previously as an exhibit to the Company's Current Report on Form 8-K filed on April 12, 2018. |
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(39) |
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Filed previously as an exhibit to the Company's Current Report on Form 8-K filed on May 25, 2018. |
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(40) |
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Filed previously as an exhibit to the Company's Current Report on Form 8-K filed on October 30, 2018. |
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(41) |
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Filed previously as an exhibit to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2018. |
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(42) |
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Filed previously as an exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 2018. |
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(43) |
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Filed previously as an exhibit to the Company's Current Report on Form 8-K filed on March 27, 2019. |
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(44) |
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Filed previously as an exhibit to the Company's Current Report on Form 8-K filed on May 30, 2019. |
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(45) |
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Filed previously as an exhibit to the Company's Proxy Statement filed on April 18, 2019. |
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(46) |
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Filed previously as an exhibit to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2019. |
79
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.
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EXANTAS CAPITAL CORP. |
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(Registrant) |
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November 6, 2019 |
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By: |
/s/ Robert C. Lieber |
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Robert C. Lieber |
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Chief Executive Officer |
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November 6, 2019 |
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By: |
/s/ David J. Bryant |
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David J. Bryant |
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Senior Vice President |
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Chief Financial Officer and Treasurer |
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November 6, 2019 |
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By: |
/s/ Eldron C. Blackwell |
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Eldron C. Blackwell |
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Vice President |
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Chief Accounting Officer |
80