Financial Performance - The company's Earnings Available for Distribution (EAD) for Q2 2023 was $0.60 per share[9, 10] - GAAP net income per share for Q2 2023 was $0.10, including a $(0.31) impact from a $2.7 million provision for CECL reserves[9, 10] - The company's book value was $24.50, a year-over-year increase of $0.02, and an annual increase of 12.9% since the ACRES acquisition in Q3 2020[9, 11] Loan Portfolio - The company's CRE loan portfolio totaled $2.0 billion, comprising 78 loans with a weighted average LTV of 74%[11] - The company had $22.5 million in CRE loan production and $47.3 million in loan repayments during the quarter[11] - Multifamily-focused CRE loans represent 75% of the loan portfolio[9] - 98% of the par value of the CRE loan portfolio is current on payments, with 5% rated 4 or 5[11] - Net CRE loan payoffs for the second quarter were $10 million[9] Capitalization and Liquidity - The company's total liquidity at June 30, 2023, was $91.2 million[9, 11] - Non-recourse, non-mark-to-market CLO financings comprised 80% of asset-specific borrowings[11, 34] Real Estate Investments - The company has $161.9 million of net investments in real estate and properties held for sale[11, 28] Loan Portfolio Composition - Texas represents 23.6% of the company's top state concentration, followed by Florida at 15.1% and Arizona at 8.9%[17]

Part I - Financial Information [Financial Statements](index=3&type=section&id=Item%201%3A%20Financial%20Statements) The company reported total assets of $2.32 billion as of March 31, 2023, with Q1 2023 net income of $2.3 million, driven by increased net interest income, reducing net loss per common share to ($0.28) Consolidated Balance Sheet Summary (in thousands) | Account | March 31, 2023 | December 31, 2022 | | :--- | :--- | :--- | | **Total Assets** | **$2,321,559** | **$2,376,652** | | CRE loans, net | $1,970,891 | $2,038,787 | | Cash and cash equivalents | $87,314 | $66,232 | | **Total Liabilities** | **$1,879,774** | **$1,935,338** | | Borrowings | $1,810,767 | $1,867,033 | | **Total Equity** | **$441,785** | **$441,314** | Consolidated Statement of Operations Summary (in thousands, except per share data) | Account | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :--- | :--- | :--- | | Total Interest Income | $45,329 | $22,676 | | Net Interest Income | $13,954 | $7,769 | | Total Revenues | $21,058 | $10,923 | | Total Operating Expenses | $19,625 | $8,897 | | Provision for (reversal of) credit losses, net | $5,096 | $(1,802) | | **Net Income** | **$2,293** | **$2,084** | | **Net Loss Allocable to Common Shares** | **$(2,416)** | **$(2,771)** | | **Net Loss Per Common Share - Basic & Diluted** | **$(0.28)** | **$(0.30)** | - Cash flow from operating activities was **$9.1 million** for Q1 2023, a significant increase from **$1.6 million** in Q1 2022[28](index=28&type=chunk) - Net cash provided by investing activities was **$70.0 million**, primarily due to **$94.1 million** in principal payments received on loans[28](index=28&type=chunk) - Net cash used in financing activities was **$62.6 million**, driven by payments on borrowings[28](index=28&type=chunk) [Notes to Consolidated Financial Statements](index=10&type=section&id=Notes%20to%20Consolidated%20Financial%20Statements) The notes detail accounting policies, including the transition of its $2.0 billion CRE loan portfolio to SOFR, with a $23.9 million allowance for credit losses and total borrowings of $1.81 billion - The company is a **REIT** focused on originating, holding, and managing CRE mortgage loans and equity investments, with ACRES Capital, LLC as its manager[31](index=31&type=chunk) - As of March 31, 2023, all of the company's **$2.0 billion** floating-rate loans have transitioned to SOFR[46](index=46&type=chunk) - However, **78%** (**$1.3 billion**) of its **$1.7 billion** floating-rate borrowings are still tied to LIBOR, with the conversion expected to be completed in **2023**[47](index=47&type=chunk) Allowance for Credit Losses Activity (in thousands) | Period | Beginning Balance | Provision for Credit Losses | Charge Offs | Ending Balance | | :--- | :--- | :--- | :--- | :--- | | **Q1 2023** | **$18,803** | **$5,096** | **$0** | **$23,899** | Borrowings Summary (in thousands) | Borrowing Type | Principal Outstanding (Mar 31, 2023) | Weighted Avg. Rate | | :--- | :--- | :--- | | ACR 2021-FL1 Senior Notes | $675,223 | 6.20% | | ACR 2021-FL2 Senior Notes | $567,000 | 6.51% | | Senior secured financing facility | $53,336 | 8.54% | | CRE - term warehouse financing facilities | $313,493 | 7.32% | | 5.75% Senior Unsecured Notes | $150,000 | 5.75% | | Unsecured junior subordinated debentures | $51,548 | 8.93% | | **Total** | **$1,829,310** | **6.62%** | - During Q1 2023, the company repurchased **79,744 shares** of its common stock for **$0.756 million**[155](index=155&type=chunk) - As of March 31, 2023, **$6.5 million** remains available under the repurchase plan[155](index=155&type=chunk) [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=43&type=section&id=Item%202%3A%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management attributes improved Q1 2023 results, including a reduced net loss per share of ($0.28) and EAD of $0.52 per share, to increased net interest income, with the CRE loan portfolio at $2.0 billion and CECL allowance at $23.9 million - In Q1 2023, the company originated one floating-rate CRE whole loan with a commitment of **$16.0 million**[217](index=217&type=chunk) - Loan payoffs were **$94.1 million**, resulting in a net portfolio decrease of **$64.4 million**[217](index=217&type=chunk) - The CECL allowance for the CRE loan portfolio was **$23.9 million** (**1.2%** of the portfolio) at March 31, 2023[231](index=231&type=chunk) - This is up from **$18.8 million** (**0.9%**) at year-end 2022, reflecting increased credit risk and macroeconomic decline[232](index=232&type=chunk) Net Interest Income Change Analysis (Q1 2023 vs Q1 2022, in thousands) | Description | Net Change | Change Due to Volume | Change Due to Rate | | :--- | :--- | :--- | :--- | | **Increase in Interest Income** | **$22,653** | **$2,041** | **$20,612** | | **Increase in Interest Expense** | **$16,468** | **$260** | **$16,208** | | **Net Increase in Net Interest Income** | **$6,185** | **$1,781** | **$4,404** | Earnings Available for Distribution (EAD) Reconciliation (in thousands, except per share) | Description | Q1 2023 | Q1 2023 Per Share | Q1 2022 | Q1 2022 Per Share | | :--- | :--- | :--- | :--- | :--- | | Net loss allocable to common shares - GAAP | $(2,416) | $(0.28) | $(2,771) | $(0.30) | | Non-cash provision for (reversal of) CRE credit losses | $5,096 | $0.59 | $(1,802) | $(0.20) | | Other reconciling items | $1,822 | $0.21 | $2,314 | $0.25 | | **EAD allocable to common shares** | **$4,502** | **$0.52** | **$(2,276)** | **$(0.25)** | [Quantitative and Qualitative Disclosures About Market Risk](index=70&type=section&id=Item%203%3A%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) The company manages credit, counterparty, financing, and interest rate risks, with 93.5% of its CRE loan portfolio having interest rate caps, and a 100 basis point rate increase estimated to boost net interest income by $0.865 million - To mitigate credit risk from rising interest rates, the company generally requires borrowers to purchase interest rate caps[367](index=367&type=chunk) - As of March 31, 2023, **93.5%** of the par value of the CRE loan portfolio had such caps in place[367](index=367&type=chunk) Interest Rate Sensitivity Analysis (Annualized Impact, in millions) | Scenario | Change to Net Interest Income | Change to Net Interest Income Per Share | | :--- | :--- | :--- | | **100 Basis Point Increase** | **$0.865** | **$0.10** | | **100 Basis Point Decrease** | **$(0.808)** | **$(0.09)** | [Controls and Procedures](index=72&type=section&id=Item%204%3A%20Controls%20and%20Procedures) Management concluded that the company's disclosure controls and procedures were effective as of March 31, 2023, with no material changes to internal control over financial reporting during the quarter - The CEO and CFO concluded that the company's disclosure controls and procedures were **effective** as of the end of the period covered by the report[376](index=376&type=chunk) - **No changes** in internal control over financial reporting occurred during the quarter that have materially affected, or are reasonably likely to materially affect, these controls[377](index=377&type=chunk) Part II - Other Information [Legal Proceedings](index=73&type=section&id=Item%201%3A%20Legal%20Proceedings) The company's subsidiary, PCM, maintains a $1.2 million reserve for potential mortgage repurchase claims, with no outstanding litigation demands as of March 31, 2023 - The company's subsidiary, PCM, has a reserve of **$1.2 million** for potential mortgage repurchase and indemnification claims, although **no litigation demands** were outstanding as of March 31, 2023[382](index=382&type=chunk) [Risk Factors](index=73&type=section&id=Item%201A%3A%20Risk%20Factors) No material changes to the risk factors disclosed in the company's 2022 Annual Report on Form 10-K were reported - **No material changes** to the risk factors from the 2022 Annual Report on Form 10-K were reported[383](index=383&type=chunk) [Unregistered Sales of Equity Securities and Use of Proceeds](index=73&type=section&id=Item%202%3A%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) During Q1 2023, the company repurchased 79,744 common shares at an average price of $9.52, with $6.5 million remaining available under the repurchase plan Common Stock Repurchases (Q1 2023) | Period | Total Shares Purchased | Average Price Paid per Share | Approx. Value Remaining for Purchase (in thousands) | | :--- | :--- | :--- | :--- | | Jan 2023 | 9,822 | $9.78 | $7,121 | | Feb 2023 | 24,754 | $9.48 | $6,887 | | Mar 2023 | 45,168 | $9.39 | $6,464 | - The company's Board authorized an additional **$20.0 million** for its share repurchase program in November 2021[384](index=384&type=chunk) [Exhibits](index=74&type=section&id=Item%206%3A%20Exhibits) This section lists all exhibits filed with the Form 10-Q, including key corporate and financing agreements, and CEO and CFO certifications - The filing includes **CEO and CFO certifications** pursuant to Rule 13a-14(a)/15d-14(a) and Section 1350[389](index=389&type=chunk) - A list of **key corporate and financing agreements** are provided as exhibits, including the Amended and Restated Loan and Servicing Agreement dated December 22, 2022, and various amendments to financing facilities[386](index=386&type=chunk)[389](index=389&type=chunk)[391](index=391&type=chunk)

UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) ☑ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2022 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 ACRES COMMERCIAL REALTY CORP. (Exact name of registrant as specified in its charter) Maryland 20-2287134 (St ...

Financial Performance - Net interest income for the three months ended September 30, 2022, was $11,126 thousand, up from $9,452 thousand for the same period in 2021, reflecting a year-over-year increase of 17.7%[7] - The company reported a net income of $713 thousand for the three months ended September 30, 2022, compared to a net loss of $9,805 thousand for the same period in 2021, indicating a significant turnaround[7] - Net income for the three months ended September 30, 2022, was $5,486,000, compared to a net loss of $4,928,000 for the same period in 2021, representing a significant turnaround[8] - Comprehensive income before allocation to preferred shares for the nine months ended September 30, 2022, was $14,424,000, down from $23,151,000 in the same period of 2021[8] - Net income for the nine months ended September 30, 2022, was $13.1 million, a decrease of 39.5% compared to $21.8 million for the same period in 2021[12] - Total revenues for the three months ended September 30, 2022, were $20,936, compared to $12,096 for the same period in 2021, representing a 73.5% increase[7] Assets and Liabilities - Total assets increased to $2,426,386 thousand as of September 30, 2022, compared to $2,284,275 thousand on December 31, 2021, representing a growth of approximately 6.2%[5] - Total liabilities rose to $1,978,907 thousand as of September 30, 2022, from $1,836,080 thousand at the end of 2021, marking an increase of approximately 7.8%[5] - The company’s total equity decreased slightly to $447,479 thousand as of September 30, 2022, from $448,195 thousand at the end of 2021, reflecting a marginal decline of 0.16%[5] - Total stockholders' equity as of September 30, 2022, was $442,549,000, with a non-controlling interest of $4,930,000[9] - Total assets as of September 30, 2022, amounted to $1,500,325,000, with CRE securitizations contributing $1,499,956,000[32] Cash Flow and Investments - Net cash provided by operating activities was $19.0 million, down 25.4% from $25.5 million in the prior year[12] - Cash and cash equivalents and restricted cash at the end of the period totaled $76.9 million, down 46.1% from $142.4 million at the end of the previous year[12] - The company recorded a net cash used in investing activities of $300,507 for the nine months ended September 30, 2022, compared to $316,421 in 2021, showing a slight improvement[12] - The company has $193.7 million in unfunded loan commitments as of September 30, 2022, compared to $157.6 million at December 31, 2021[38] - The company reported a net cash used in investing activities of $300.5 million, a slight improvement from $316.4 million in the previous year[12] Credit Losses and Provisions - The provision for credit losses was $2,620 thousand for the three months ended September 30, 2022, compared to a reversal of $537 thousand for the same period in 2021, indicating a shift in credit quality assessment[7] - The company recorded a provision for expected credit losses of $2.6 million during the three months ended September 30, 2022, reflecting the impact of increased portfolio credit risk[142] - The allowance for credit losses decreased to $7.9 million from $8.8 million, representing a reduction of approximately 10.8%[5] - The provision for (reversal of) credit losses for the three months ended September 30, 2022, was $2,620, compared to a reversal of $537 in the same period of 2021[7] - The company reported a net reversal of credit losses of $15.4 million for the nine months ended September 30, 2021, indicating prior improvements in macroeconomic conditions[133] Stock and Equity - The weighted average number of common shares outstanding was 8,713,256 for the three months ended September 30, 2022, down from 9,553,412 for the same period in 2021, reflecting a decrease of approximately 8.8%[7] - The company repurchased common stock amounting to $8,194 during the nine months ended September 30, 2022, compared to $14,725 in the same period of 2021[12] - The company declared distributions of $0.54 per share for Series C Preferred Stock and $0.49 per share for Series D Preferred Stock for the three months ended September 30, 2022[91] - The company issued a total of 4.6 million shares of 7.875% Series D Cumulative Redeemable Preferred Stock, receiving net proceeds of $110.4 million[82] - The company had 4.8 million shares of Series C Preferred Stock and 4.6 million shares of Series D Preferred Stock outstanding as of September 30, 2022[82] Real Estate and Investments - Real estate income for the nine months ended September 30, 2022, was $21,700 thousand, compared to $7,013 thousand for the same period in 2021, representing a substantial increase of 209.5%[7] - The company acquired two real estate properties with a combined acquisition-date fair value of $51.6 million[52] - The company received a deed-in-lieu of foreclosure on a hotel property with an acquisition-date fair value of $14.3 million, which was reported as property held for sale[54] - The company recognized a realized loss of $2.3 million from a discounted payoff of a loan during the nine months ended September 30, 2022[51] - The total fair value of net assets acquired during the nine months ended September 30, 2022, was $65,926[53] Interest Rates and Financing - The weighted average interest rate for the Senior Secured Financing Facility was 5.75% as of September 30, 2022[158] - The company reported a total of $482,802,000 in outstanding borrowings across various financing facilities as of September 30, 2022[77] - The company entered into a Note and Warrant Purchase Agreement allowing for the issuance of up to $125.0 million of 12.00% Senior Unsecured Notes, with $42.0 million issued to Oaktree and $8.0 million to MassMutual[73] - The company exercised optional redemption for XAN 2020-RSO8 and XAN 2020-RSO9, paying off all outstanding senior notes from sales proceeds of certain securitization assets[71] - The company reported interest expense paid in cash of $46,999,000 for the nine months ended September 30, 2022, compared to $33,889,000 for the same period in 2021, reflecting a 38.7% increase[35] Economic Conditions and Outlook - The U.S. Federal Reserve raised the Federal Funds rate by 3.00% in five rate hikes between March 2022 and September 2022 to combat inflation[112] - The Company continuously monitors the effects of domestic and global events, including inflation and rising interest rates, on its operations and financial position[112] - The company expects to qualify as a REIT in the current fiscal year, focusing on commercial real estate mortgage loans and equity investments[14] - The company is focused on originating, holding, and managing commercial real estate mortgage loans and equity investments in commercial real estate properties[112] - The anticipated CRE loan originations, CRE debt securitizations, and other CRE-related investments for the year ended December 31, 2022, are projected to be between $600.0 million and $800.0 million[113]

UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) (Exact name of registrant as specified in its charter) Maryland 20-2287134 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 390 RXR Plaza, Uniondale, New York 11556 (Address of principal executive offices) (Zip Code) ☑ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2021 ☐ TRANSITION REPORT ...

PART I [ITEM 1. FINANCIAL STATEMENTS](index=3&type=section&id=ITEM%201.%20FINANCIAL%20STATEMENTS) The unaudited consolidated financial statements for the period ended September 30, 2021, detail the company's financial position, performance, and cash flows [Consolidated Balance Sheets](index=3&type=section&id=CONSOLIDATED%20BALANCE%20SHEETS) Total assets and liabilities grew significantly due to increased CRE loans and borrowings, while equity rose from preferred stock issuances Balance Sheet Summary | Metric | Sep 30, 2021 (in thousands) | Dec 31, 2020 (in thousands) | | :--- | :--- | :--- | | Total Assets | $2,061,750 | $1,654,084 | | Total Liabilities | $1,618,481 | $1,319,702 | | Total Stockholders' Equity | $443,269 | $334,382 | - Total assets increased by approximately **$407.7 million (24.6%)** from December 31, 2020, to September 30, 2021, primarily due to an increase in CRE loans[6](index=6&type=chunk) - Total liabilities increased by approximately **$298.8 million (22.6%)** over the same period, mainly from increased borrowings[6](index=6&type=chunk) - Stockholders' equity increased by approximately **$108.9 million (32.6%)** due to new preferred stock issuances[7](index=7&type=chunk) [Consolidated Statements of Operations](index=5&type=section&id=CONSOLIDATED%20STATEMENTS%20OF%20OPERATIONS) A net loss in Q3 2021 contrasts with prior-year income due to debt extinguishment costs, though nine-month results show a significant profit turnaround Operations Summary | Metric (in thousands) | 3 Months Ended Sep 30, 2021 | 3 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | | :--- | :--- | :--- | :--- | :--- | | Total Revenues | $12,096 | $11,624 | $34,630 | $41,259 | | Total Operating Expenses | $8,089 | $324 | $5,240 | $68,881 | | Net (Loss) Income | $(4,928) | $8,159 | $21,767 | $(221,762) | | Net (Loss) Income Allocable to Common Shares | $(9,805) | $5,571 | $10,734 | $(229,525) | | Net (Loss) Income Per Common Share - Basic | $(1.03) | $0.51 | $1.09 | $(21.47) | - Net (loss) income allocable to common shares decreased significantly to **$(9.8) million** for the three months ended September 30, 2021, from $5.6 million in the prior year, primarily due to a **$9.0 million loss on extinguishment of debt**[11](index=11&type=chunk) - For the nine months ended September 30, 2021, net income allocable to common shares was **$10.7 million**, a substantial improvement from a **$(229.5) million net loss** in the prior year, largely driven by a net reversal of credit losses of **$15.4 million**[11](index=11&type=chunk) [Consolidated Statements of Comprehensive Income (Loss)](index=6&type=section&id=CONSOLIDATED%20STATEMENTS%20OF%20COMPREHENSIVE%20INCOME%20(LOSS)) Comprehensive income for the nine-month period reflects a significant recovery from the prior year's loss, driven by reduced unrealized losses Comprehensive Income (Loss) Summary | Metric (in thousands) | 3 Months Ended Sep 30, 2021 | 3 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | | :--- | :--- | :--- | :--- | :--- | | Net (Loss) Income | $(4,928) | $8,159 | $21,767 | $(221,762) | | Total Other Comprehensive Income (Loss) | $466 | $573 | $1,384 | $(12,265) | | Comprehensive (Loss) Income Allocable to Common Shares | $(9,339) | $6,144 | $12,118 | $(241,790) | - Comprehensive (loss) income allocable to common shares was **$(9.3) million** for the three months ended September 30, 2021, compared to **$6.1 million income** in the prior year[13](index=13&type=chunk) - For the nine months ended September 30, 2021, comprehensive income allocable to common shares was **$12.1 million**, a significant improvement from a **$(241.8) million loss** in the prior year, largely due to the absence of large unrealized losses on investment securities and derivatives seen in 2020[13](index=13&type=chunk) [Consolidated Statements of Changes in Stockholders' Equity](index=7&type=section&id=CONSOLIDATED%20STATEMENTS%20OF%20CHANGES%20IN%20STOCKHOLDERS'%20EQUITY) Total equity increased significantly due to proceeds from preferred stock issuance and net income, partially offset by common stock repurchases Stockholders' Equity Summary | Metric (in thousands) | Dec 31, 2020 | Sep 30, 2021 | | :--- | :--- | :--- | | Total Stockholders' Equity | $334,382 | $443,269 | | Additional Paid-In Capital | $1,085,941 | $1,182,706 | | Distributions in Excess of Earnings | $(741,596) | $(730,862) | - Total stockholders' equity increased by **$108.9 million** from $334.4 million at December 31, 2020, to **$443.3 million** at September 30, 2021[16](index=16&type=chunk)[18](index=18&type=chunk) - This increase was primarily due to **$115.0 million in proceeds from the issuance of preferred stock** and **$13.0 million in net income**, partially offset by **$9.5 million in common stock repurchases**[16](index=16&type=chunk) [Consolidated Statements of Cash Flows](index=9&type=section&id=CONSOLIDATED%20STATEMENTS%20OF%20CASH%20FLOWS) A net increase in cash was driven by significant cash from financing activities, which more than offset cash used in investing activities Cash Flow Summary | Metric (in thousands) | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | | :--- | :--- | :--- | | Net cash provided by operating activities | $25,494 | $20,289 | | Net cash (used in) provided by investing activities | $(316,421) | $154,725 | | Net cash provided by (used in) financing activities | $365,541 | $(113,567) | | Net increase in cash and cash equivalents and restricted cash | $74,614 | $61,447 | - Net cash provided by operating activities increased to **$25.5 million** for the nine months ended September 30, 2021, from $20.3 million in the prior year[20](index=20&type=chunk) - Investing activities shifted from providing $154.7 million in cash in 2020 to using **$(316.4) million** in 2021, mainly due to higher origination and purchase of loans[20](index=20&type=chunk) - Financing activities provided **$365.5 million** in cash in 2021, a significant turnaround from using $(113.6) million in 2020, driven by proceeds from preferred stock issuance and increased borrowings[20](index=20&type=chunk) [Notes to Consolidated Financial Statements](index=10&type=section&id=NOTES%20TO%20CONSOLIDATED%20FINANCIAL%20STATEMENTS) Detailed disclosures cover the company's organization, accounting policies, loan portfolio, borrowings, equity, and other key financial items [NOTE 1 - ORGANIZATION](index=10&type=section&id=NOTE%201%20-%20ORGANIZATION) The company operates as a REIT focused on CRE debt, undergoing a management change in 2020 and a reverse stock split in 2021 - ACRES Commercial Realty Corp. is a REIT primarily focused on originating, holding, and managing **CRE mortgage loans** and other CRE-related debt investments[22](index=22&type=chunk) - On July 31, 2020, ACRES Capital, LLC acquired the company's management contract, shifting focus to **nationwide middle market CRE lending**[22](index=22&type=chunk) - A **one-for-three reverse stock split** of outstanding common stock was effective February 16, 2021, with retroactive effect on financial statements[24](index=24&type=chunk) [NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES](index=10&type=section&id=NOTE%202%20-%20SUMMARY%20OF%20SIGNIFICANT%20ACCOUNTING%20POLICIES) Key accounting policies include consolidation principles, use of estimates impacted by COVID-19, and recent adoption of LIBOR transition guidance - The consolidated financial statements are prepared in conformity with GAAP, including accounts of majority-owned or controlled subsidiaries and VIEs where the company is the primary beneficiary[25](index=25&type=chunk) - Estimates, particularly those related to investment and derivative fair values, credit losses, and useful lives, are subject to **increased uncertainty due to the COVID-19 pandemic**[27](index=27&type=chunk)[28](index=28&type=chunk) - The company adopted guidance for LIBOR transition, replacing one-month LIBOR with **Compounded SOFR** plus a benchmark adjustment for certain senior notes in June 2021[40](index=40&type=chunk)[41](index=41&type=chunk) - New FASB guidance on convertible debt instruments, effective after December 15, 2021, will remove certain separation models, potentially impacting the accounting for convertible debt as a single liability[42](index=42&type=chunk) [NOTE 3 - VARIABLE INTEREST ENTITIES](index=15&type=section&id=NOTE%203%20-%20VARIABLE%20INTEREST%20ENTITIES) The company consolidates six CRE securitization VIEs for which it is the primary beneficiary, with assets and liabilities reflected on its balance sheet - The company was the primary beneficiary of **six Consolidated VIEs** at September 30, 2021, and December 31, 2020, which are CRE securitizations and CDOs[47](index=47&type=chunk) Consolidated VIE Metrics | Metric (in thousands) | Consolidated VIEs (Sep 30, 2021) | | :--- | :--- | | Total Assets | $1,231,607 | | Total Liabilities | $961,517 | - Creditors of Consolidated VIEs have **no recourse to the general credit of the company**, and the company did not provide financial support to any VIEs during the nine months ended September 30, 2021 or 2020[49](index=49&type=chunk) - The company holds a 100% interest in the common shares of unconsolidated VIEs, RCT I and RCT II, with an aggregate value of **$1.5 million**, and is not the primary beneficiary[53](index=53&type=chunk) [NOTE 4 - SUPPLEMENTAL CASH FLOW INFORMATION](index=17&type=section&id=NOTE%204%20-%20SUPPLEMENTAL%20CASH%20FLOW%20INFORMATION) This note provides supplemental disclosures on cash interest paid and significant non-cash operating, investing, and financing activities Supplemental Cash Flow Data | Metric (in thousands) | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | | :--- | :--- | :--- | | Interest expense paid in cash | $33,889 | $38,246 | | Income taxes paid in cash | $— | $— | | Distributions on preferred stock accrued but not paid | $3,260 | $6,900 | - Non-cash operating activities for the nine months ended September 30, 2021, included a receipt of right of use assets of **$(479) thousand** and execution of operating leases of **$479 thousand**[59](index=59&type=chunk) - Non-cash investing activities in 2020 included **$369.9 million** from the relinquishment of investment securities available-for-sale, with a corresponding non-cash financing activity of **$(369.9) million** for repayment of repurchase agreements[59](index=59&type=chunk) [NOTE 5 - LOANS](index=18&type=section&id=NOTE%205%20-%20LOANS) The company's loan portfolio, primarily CRE whole loans, increased significantly and is concentrated in the Southeast, Southwest, and Mountain regions Loan Portfolio Summary | Loan Type (in thousands) | Sep 30, 2021 (Carrying Value) | Dec 31, 2020 (Carrying Value) | | :--- | :--- | :--- | | CRE whole loans | $1,822,410 | $1,477,295 | | Mezzanine loan | $4,415 | $4,399 | | Preferred equity investments | $— | $25,988 | | Total CRE loans held for investment | $1,826,825 | $1,507,682 | - The total carrying value of CRE loans held for investment increased by approximately **$319.1 million (21.2%)** from December 31, 2020, to September 30, 2021[63](index=63&type=chunk) - At September 30, 2021, the CRE loan portfolio had a weighted-average one-month LIBOR floor of **1.03%**, down from 1.88% at December 31, 2020[63](index=63&type=chunk) - The portfolio is concentrated in the **Southeast (22.0%)**, **Southwest (18.4%)**, and **Mountain (15.7%)** regions at September 30, 2021[66](index=66&type=chunk) [NOTE 6 - FINANCING RECEIVABLES](index=19&type=section&id=NOTE%206%20-%20FINANCING%20RECEIVABLES) The allowance for credit losses decreased significantly due to net reversals reflecting improved macroeconomic conditions and loan performance Allowance for Credit Losses | Metric (in thousands) | 9 Months Ended Sep 30, 2021 | Year Ended Dec 31, 2020 | | :--- | :--- | :--- | | Allowance for credit losses at beginning of period | $34,310 | $1,460 | | (Reversal of) provision for credit losses | $(15,447) | $30,815 | | Allowance for credit losses at end of period | $18,863 | $34,310 | - A net reversal of expected credit losses of **$15.4 million** was recorded for the nine months ended September 30, 2021, driven by improved macroeconomic conditions, loan paydowns, and collateral performance[70](index=70&type=chunk) - At September 30, 2021, **$39.8 million** of whole loans were past due greater than 90 days, an increase from $11.4 million at December 31, 2020[85](index=85&type=chunk) - The company uses a **1-5 risk rating scale** for CRE loans, with Rating 2 representing performance consistent with expectations and Rating 5 indicating significant underperformance or default[75](index=75&type=chunk)[76](index=76&type=chunk) [NOTE 7 - INVESTMENT IN REAL ESTATE AND OTHER ACQUIRED ASSETS AND ASSUMED LIABILITIES](index=23&type=section&id=NOTE%207%20-%20INVESTMENT%20IN%20REAL%20ESTATE%20AND%20OTHER%20ACQUIRED%20ASSETS%20AND%20ASSUMED%20LIABILITIES) This note details investments in real estate, primarily a hotel property acquired via deed in lieu of foreclosure in November 2020 Real Estate Investment Summary | Asset Type (in thousands) | Sep 30, 2021 (Book Value) | Dec 31, 2020 (Book Value) | | :--- | :--- | :--- | | Investments in real estate | $32,799 | $33,806 | | Right of use assets | $5,529 | $5,592 | | Intangible assets | $3,041 | $3,294 | | Lease liabilities | $(3,072) | $(3,107) | - In November 2020, the company acquired a hotel property via deed in lieu of foreclosure, accounting for it as an asset acquisition with a fair value of total net assets acquired at **$39.8 million**[88](index=88&type=chunk) - Intangible assets include a franchise agreement and customer list, with expected amortization expenses of **$375,000** in 2021 and 2022[93](index=93&type=chunk) [NOTE 8 - LEASES](index=24&type=section&id=NOTE%208%20-%20LEASES) The company holds operating leases for office space, equipment, and a ground lease, with terms expiring between 2024 and 2028 - Operating leases for office space and equipment have terms expiring between **January 2024 and July 2028**[94](index=94&type=chunk) Lease Metrics | Metric (in thousands) | Sep 30, 2021 | | :--- | :--- | | Right of use assets | $455 | | Lease liabilities | $(488) | | Weighted average remaining lease term | 6.8 years | | Weighted average discount rate | 10.65% | - Operating lease costs for the nine months ended September 30, 2021, totaled **$50,000**[98](index=98&type=chunk) [NOTE 9 - INVESTMENT SECURITIES AVAILABLE-FOR-SALE](index=26&type=section&id=NOTE%209%20-%20INVESTMENT%20SECURITIES%20AVAILABLE-FOR-SALE) The company disposed of its CMBS portfolio due to COVID-19 market disruptions, incurring significant losses in 2020 but gains in 2021 - Substantially all CMBS available-for-sale were sold by April 2020 due to COVID-19 related liquidity shocks, resulting in **$180.3 million in realized losses** during the nine months ended September 30, 2020[101](index=101&type=chunk)[102](index=102&type=chunk) - The remaining two CMBS securities were sold in March 2021 for **$3.0 million** cash proceeds, generating **$878,000 in gains** during the nine months ended September 30, 2021[102](index=102&type=chunk) [NOTE 10 - INVESTMENTS IN UNCONSOLIDATED ENTITIES](index=26&type=section&id=NOTE%2010%20-%20INVESTMENTS%20IN%20UNCONSOLIDATED%20ENTITIES) The company holds a 100% interest in the common shares of two unconsolidated entities, valued at $1.5 million and accounted for using the cost method - The company holds a 100% interest in RCT I and RCT II common shares, totaling **$1.5 million**, accounted for using the cost method[103](index=103&type=chunk) - Dividend income from these investments was **$16,000** for the three months and **$49,000** for the nine months ended September 30, 2021[103](index=103&type=chunk) [NOTE 11 - BORROWINGS](index=28&type=section&id=NOTE%2011%20-%20BORROWINGS) Borrowings increased significantly through new securitizations and senior notes, while existing convertible and senior notes were partially or fully redeemed Borrowings Summary | Borrowing Type (in thousands) | Sep 30, 2021 (Outstanding Borrowings) | Dec 31, 2020 (Outstanding Borrowings) | | :--- | :--- | :--- | | Total Borrowings | $1,602,602 | $1,304,727 | | Weighted Average Borrowing Rate | 2.62% | 2.83% | | Weighted Average Remaining Maturity | 9.9 years | 13.0 years | - Total outstanding borrowings increased by approximately **$297.9 million (22.8%)** from December 31, 2020, to September 30, 2021[107](index=107&type=chunk) - The company closed ACR 2021-FL1, a **$802.6 million CRE debt securitization**, and issued **$150.0 million of 5.75% Senior Unsecured Notes** in August 2021[116](index=116&type=chunk)[121](index=121&type=chunk) - The 12.00% Senior Unsecured Notes were fully redeemed for **$55.3 million**, and **$55.7 million** of 4.50% Convertible Senior Notes were repurchased, resulting in a **$9.0 million loss on extinguishment of debt**[127](index=127&type=chunk)[120](index=120&type=chunk) [NOTE 12 - SHARE ISSUANCE AND REPURCHASE](index=34&type=section&id=NOTE%2012%20-%20SHARE%20ISSUANCE%20AND%20REPURCHASE) The company issued 4.6 million shares of Series D Preferred Stock and repurchased $14.7 million of common stock under an authorized program - Issued **4.6 million shares** of 7.875% Series D Cumulative Redeemable Preferred Stock for net proceeds of **$110.5 million**[142](index=142&type=chunk) - Repurchased **$14.7 million** of common stock (approximately 1.1 million shares) during the nine months ended September 30, 2021, completing a $20.0 million program[144](index=144&type=chunk) - The Board reauthorized a new **$20.0 million share repurchase program** for common stock in November 2021[144](index=144&type=chunk)[212](index=212&type=chunk) [NOTE 13 - SHARE-BASED COMPENSATION](index=35&type=section&id=NOTE%2013%20-%20SHARE-BASED%20COMPENSATION) Shareholders approved an increase in authorized shares for equity compensation plans, with $961,000 in related expense recognized for the nine-month period - Shareholders approved the Omnibus Plan and Manager Plan, increasing authorized shares for issuance to **1,700,817 shares** of common stock combined[146](index=146&type=chunk) - Stock-based compensation expense was **$771,000** for the three months and **$961,000** for the nine months ended September 30, 2021[147](index=147&type=chunk) - At September 30, 2021, 333,329 unvested restricted common stock shares were outstanding, with **$4.9 million in unrecognized compensation costs** expected to be recognized over a weighted average of 3.7 years[148](index=148&type=chunk)[149](index=149&type=chunk) [NOTE 14 - EARNINGS PER SHARE](index=36&type=section&id=NOTE%2014%20-%20EARNINGS%20PER%20SHARE) The company reported a net loss per share for Q3 2021 and net income per share for the nine-month period Earnings Per Share Summary | Metric | 3 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2021 | | :--- | :--- | :--- | | Net (Loss) Income Allocable to Common Shares | $(9,805) (in thousands) | $10,734 (in thousands) | | Net (Loss) Income Per Common Share - Basic | $(1.03) | $1.09 | | Net (Loss) Income Per Common Share - Diluted | $(1.03) | $1.09 | - Weighted average common shares outstanding (basic) were **9,086,751** for the three months and **9,351,477** for the nine months ended September 30, 2021[155](index=155&type=chunk) - The 4.50% Convertible Senior Notes were **excluded from diluted EPS calculations** because the average market price of common stock did not exceed the conversion price[157](index=157&type=chunk) [NOTE 15 - DISTRIBUTIONS](index=37&type=section&id=NOTE%2015%20-%20DISTRIBUTIONS) The company paid preferred stock distributions but suspended common share distributions to preserve liquidity and utilize net operating loss carryforwards - The company must distribute at least **90% of its taxable income** to qualify as a REIT[158](index=158&type=chunk) - **No common share distributions** were paid for the three or nine months ended September 30, 2021, or the year ended December 31, 2020, due to a focus on liquidity and net operating loss carryforwards[158](index=158&type=chunk)[159](index=159&type=chunk) Preferred Stock Distributions | Preferred Stock Type | Date Paid | Total Distributions Paid (in thousands) - 2021 | Distributions Per Share - 2021 | | :--- | :--- | :--- | :--- | | Series C Preferred Stock | Nov 1 | $2,588 | $0.5390625 | | Series C Preferred Stock | Jul 30 | $2,588 | $0.5390625 | | Series C Preferred Stock | Apr 30 | $2,588 | $0.5390625 | | Series D Preferred Stock | Nov 1 | $2,264 | $0.4921875 | | Series D Preferred Stock | Jul 30 | $1,736 | $0.377344 | [NOTE 16 - ACCUMULATED OTHER COMPREHENSIVE LOSS](index=38&type=section&id=NOTE%2016%20-%20ACCUMULATED%20OTHER%20COMPREHENSIVE%20LOSS) The accumulated other comprehensive loss, comprising net unrealized loss on derivatives, decreased due to reclassification adjustments AOCI Reconciliation | Metric (in thousands) | Amount | | :--- | :--- | | Balance at January 1, 2021 | $(9,978) | | Amounts reclassified from accumulated other comprehensive loss | $1,384 | | Balance at September 30, 2021 | $(8,594) | - The accumulated other comprehensive loss decreased by **$1.384 million** during the nine months ended September 30, 2021, due to reclassification adjustments from unrealized losses on derivatives[165](index=165&type=chunk) [NOTE 17 - RELATED PARTY TRANSACTIONS](index=38&type=section&id=NOTE%2017%20-%20RELATED%20PARTY%20TRANSACTIONS) The company has significant related party transactions with its manager, ACRES Capital Corp., including management fees and expense reimbursements - The Manager (a subsidiary of ACRES Capital Corp.) earned base management fees of **$1.7 million** for the three months and **$4.4 million** for the nine months ended September 30, 2021[167](index=167&type=chunk) - The company reimbursed the Manager **$899,000** for the three months and **$3.5 million** for the nine months ended September 30, 2021, for compensation and costs[167](index=167&type=chunk) - A **$12.0 million loan** to ACRES Capital Corp. (the 'ACRES Loan') had a principal balance of **$11.7 million** at September 30, 2021, accruing interest at 3.00% per annum[167](index=167&type=chunk)[168](index=168&type=chunk)[169](index=169&type=chunk) - ACRES Share Holdings, LLC, an affiliate of the Manager, was granted **299,999 shares** under the Manager Incentive Plan during the nine months ended September 30, 2021[174](index=174&type=chunk) [NOTE 18 - FAIR VALUE OF FINANCIAL INSTRUMENTS](index=42&type=section&id=NOTE%2018%20-%20FAIR%20VALUE%20OF%20FINANCIAL%20INSTRUMENTS) Fair value measurements for financial instruments are provided, with most assets and liabilities valued using significant unobservable (Level 3) inputs Fair Value Summary | Asset/Liability (in thousands) | Carrying Value (Sep 30, 2021) | Fair Value (Sep 30, 2021) | Level 3 Fair Value (Sep 30, 2021) | | :--- | :--- | :--- | :--- | | CRE whole loans | $1,822,410 | $1,849,066 | $1,849,066 | | CRE mezzanine loan | $4,415 | $4,700 | $4,700 | | Loan receivable - related party | $11,675 | $10,473 | $10,473 | | Senior notes in CRE securitizations | $960,709 | $970,552 | $970,552 | | 4.50% Convertible Senior Notes | $85,810 | $87,935 | $87,935 | - The fair values of short-term financial instruments approximate their carrying values[185](index=185&type=chunk) - Fair values for CRE loans are estimated by discounting expected future cash flows using current interest rates for similar loans, with fixed-rate loans valued using third-party pricing sources[186](index=186&type=chunk)[187](index=187&type=chunk) [NOTE 19 - MARKET RISK AND DERIVATIVE INSTRUMENTS](index=44&type=section&id=NOTE%2019%20-%20MARKET%20RISK%20AND%20DERIVATIVE%20INSTRUMENTS) The company manages market risks using derivatives, though all interest rate swaps associated with its prior CMBS portfolio were terminated in 2020 - The company uses derivatives, primarily interest rate swaps, to mitigate interest rate risk[193](index=193&type=chunk) - All interest rate swap positions associated with the prior CMBS portfolio were terminated in April 2020, resulting in a **realized loss of $11.8 million**[195](index=195&type=chunk) - At September 30, 2021, the company had a **$9.0 million loss** recorded in accumulated other comprehensive (loss) income from terminated hedges, which will be amortized into earnings over the remaining debt life[195](index=195&type=chunk) Derivative Impact on Operations | Derivative Type | Consolidated Statements of Operations Location | Realized and Unrealized Gain (Loss) (in thousands) - 9 Months Ended Sep 30, 2021 | | :--- | :--- | :--- | | Interest rate swap contracts, hedging | Interest expense | $(1,384) | [NOTE 20 - OFFSETTING OF FINANCIAL LIABILITIES](index=45&type=section&id=NOTE%2020%20-%20OFFSETTING%20OF%20FINANCIAL%20LIABILITIES) Warehouse financing facilities are presented on a gross basis on the balance sheet, though underlying agreements provide for a right of offset Offsetting Summary | Liability (in thousands) | Gross Amounts of Recognized Liabilities (Sep 30, 2021) | Net Amounts of Liabilities Included on the Consolidated Balance Sheets (Sep 30, 2021) | | :--- | :--- | :--- | | Warehouse financing facilities | $320,465 | $320,465 | - All balances associated with warehouse financing facilities are presented on a **gross basis** on the consolidated balance sheets[201](index=201&type=chunk) - Underlying agreements for certain warehouse financing facilities provide a **right of offset** in the event of default or bankruptcy[201](index=201&type=chunk) [NOTE 21 - COMMITMENTS AND CONTINGENCIES](index=46&type=section&id=NOTE%2021%20-%20COMMITMENTS%20AND%20CONTINGENCIES) The company faces potential litigation, has significant unfunded loan commitments, and acknowledges uncertain long-term impacts from the COVID-19 pandemic - Reserves for potential litigation related to loan repurchases or indemnifications totaled **$1.4 million** at September 30, 2021[203](index=203&type=chunk) - Unfunded commitments on originated CRE loans were **$140.6 million** at September 30, 2021, an increase from $67.2 million at December 31, 2020[207](index=207&type=chunk) - The COVID-19 pandemic's prolonged duration and impact may continue to have a **long-term and material effect** on the company's results of operations, financial condition, and cash flows[204](index=204&type=chunk) [NOTE 22 - SUBSEQUENT EVENTS](index=48&type=section&id=NOTE%2022%20-%20SUBSEQUENT%20EVENTS) Subsequent events include an agreement to issue additional Series D Preferred Stock and the reauthorization of a common stock repurchase program - On October 4, 2021, the company entered into an Equity Distribution Agreement to issue and sell up to **2.2 million shares of Series D Preferred Stock**[211](index=211&type=chunk) - On November 5, 2021, the Board authorized a **$20.0 million common stock repurchase program**[212](index=212&type=chunk) [ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS](index=49&type=section&id=ITEM%202.%20MANAGEMENT'S%20DISCUSSION%20AND%20ANALYSIS%20OF%20FINANCIAL%20CONDITION%20AND%20RESULTS%20OF%20OPERATIONS) Management discusses financial results, the impact of the ACRES acquisition, COVID-19 challenges, and the transition from LIBOR [Overview](index=49&type=section&id=Overview) The company resumed loan originations and restructured its capital following the 2020 ACRES acquisition while managing risks from the COVID-19 pandemic - The company is an externally managed REIT focused on originating, holding, and managing **CRE mortgage loans** and debt investments[215](index=215&type=chunk) - Resumed originating floating-rate CRE loans in November 2020, with **41 loans totaling $1.1 billion** in commitments originated during the nine months ended September 30, 2021[219](index=219&type=chunk) - Issued **4.6 million shares of 7.875% Series D Preferred Stock** for net proceeds of $110.5 million and **$150.0 million of 5.75% Senior Unsecured Notes** for net proceeds of $146.7 million[217](index=217&type=chunk)[218](index=218&type=chunk) - Redeemed **$50.0 million of 12.00% Senior Unsecured Notes** and partially repurchased **$55.7 million of 4.50% Convertible Senior Notes**, incurring a **$9.0 million loss on extinguishment**[218](index=218&type=chunk) - The company has **not paid common share distributions in 2020 or 2021** due to the impact of COVID-19 and resulting net operating loss carryforwards[216](index=216&type=chunk) [Impact of COVID-19](index=52&type=section&id=Impact%20of%20COVID-19) The COVID-19 pandemic continues to create significant uncertainty for the CRE business, requiring active liquidity and credit risk management - The COVID-19 pandemic continues to cause **uncertainty** on the U.S. and global economies, and the CRE business in particular[232](index=232&type=chunk) - The company actively manages corporate liquidity and operations, using legal and structural options like **forbearance and extension provisions** to manage credit risk[232](index=232&type=chunk) - The pandemic's impact has had, and may continue to have, a **long-term and material impact** on the company's results of operations, financial condition, and liquidity[232](index=232&type=chunk) [Impact of Reference Rate Reform](index=52&type=section&id=Impact%20of%20Reference%20Rate%20Reform) The phase-out of LIBOR presents risks, with the company transitioning some borrowings to SOFR, which may increase financing costs - The company's CRE whole loans and asset-specific borrowings are primarily benchmarked to **one-month LIBOR**[233](index=233&type=chunk) - The U.K. Financial Conduct Authority announced the phase-out of LIBOR by the end of 2021 for one-week and two-month USD LIBOR, and by **June 30, 2023**, for remaining tenors[233](index=233&type=chunk) - In June 2021, two securitizations (XAN 2020-RSO8 and XAN 2020-RSO9) replaced one-month LIBOR with **Compounded SOFR** plus a benchmark adjustment[234](index=234&type=chunk) - The transition from LIBOR to SOFR or other alternative rates may cause **financial market disruptions and increased financing costs**, adversely affecting the company's business[235](index=235&type=chunk) [Results of Operations](index=52&type=section&id=Results%20of%20Operations) A Q3 net loss was driven by debt extinguishment costs, while nine-month net income was boosted by credit loss reversals and new real estate income Operations Summary | Metric (in thousands) | 3 Months Ended Sep 30, 2021 | 3 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | | :--- | :--- | :--- | :--- | :--- | | Net (Loss) Income Allocable to Common Shares | $(9,805) | $5,571 | $10,734 | $(229,525) | | Net (Loss) Income Per Common Share - Basic | $(1.03) | $0.51 | $1.09 | $(21.47) | [Net Interest Income](index=53&type=section&id=Net%20Interest%20Income) Net interest income decreased due to lower interest from paid-off investments and CMBS dispositions, partially offset by higher interest expense Net Interest Income Summary | Metric (in thousands) | 3 Months Ended Sep 30, 2021 | 3 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | | :--- | :--- | :--- | :--- | :--- | | Total Interest Income | $23,986 | $24,638 | $74,528 | $85,171 | | Total Interest Expense | $14,534 | $13,033 | $46,960 | $43,974 | | Net Interest Income | $9,452 | $11,605 | $27,568 | $41,197 | - Aggregate interest income decreased by **$652,000** for the three months and **$10.6 million** for the nine months ended September 30, 2021, primarily due to payoffs of preferred equity investments and disposition of the CMBS portfolio[242](index=242&type=chunk)[244](index=244&type=chunk) - Aggregate interest expense increased by **$1.5 million** for the three months and **$3.0 million** for the nine months ended September 30, 2021, mainly due to new securitizations and the issuance of 5.75% Senior Unsecured Notes[244](index=244&type=chunk)[245](index=245&type=chunk)[246](index=246&type=chunk) [Average Net Yield and Average Cost of Funds](index=56&type=section&id=Average%20Net%20Yield%20and%20Average%20Cost%20of%20Funds) The average net yield on interest-earning assets decreased for the quarter but increased for the nine-month period, while the cost of funds rose Yield and Cost of Funds | Metric | 3 Months Ended Sep 30, 2021 | 3 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | | :--- | :--- | :--- | :--- | :--- | | Total interest income/average net yield | 5.25% | 5.43% | 5.78% | 5.67% | | Total interest expense/average cost of funds | (3.67)% | (3.32)% | (4.25)% | (3.48)% | - The average net yield on interest-earning assets decreased from **5.43% to 5.25%** for the three months ended September 30, 2021, but increased from **5.67% to 5.78%** for the nine months[250](index=250&type=chunk)[252](index=252&type=chunk) - The average cost of funds increased from **(3.32)% to (3.67)%** for the three months and from **(3.48)% to (4.25)%** for the nine months ended September 30, 2021[250](index=250&type=chunk)[252](index=252&type=chunk) [Real Estate Income and Other Revenue](index=57&type=section&id=Real%20Estate%20Income%20and%20Other%20Revenue) Real estate income increased significantly due to sales revenue from a hotel property acquired in late 2020 and reopened in Q1 2021 Revenue Summary | Metric (in thousands) | 3 Months Ended Sep 30, 2021 | 3 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | | :--- | :--- | :--- | :--- | :--- | | Real estate income | $2,627 | $— | $7,013 | $— | | Other revenue | $17 | $19 | $49 | $62 | | Total | $2,644 | $19 | $7,062 | $62 | - Real estate income increased by **$2.6 million** for the three months and **$7.0 million** for the nine months ended September 30, 2021, attributable to sales revenue from a hotel property acquired in November 2020[255](index=255&type=chunk) - The hotel property reopened in Q1 2021, initially benefiting from a federal government contract and later from **increased occupancy** as the economy reopened[255](index=255&type=chunk) [Operating Expenses](index=58&type=section&id=Operating%20Expenses) Operating expenses rose for the quarter due to hotel operations but decreased for the nine-month period, driven by lower G&A and equity compensation Operating Expenses Summary | Metric (in thousands) | 3 Months Ended Sep 30, 2021 | 3 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | | :--- | :--- | :--- | :--- | :--- | | Management fees | $1,700 | $1,284 | $4,405 | $4,728 | | Equity compensation | $771 | $1,905 | $961 | $3,118 | | Real estate operating expenses | $2,401 | $— | $6,713 | $— | | General and administrative | $2,664 | $5,295 | $8,533 | $11,552 | | Provision for (reversal of) credit losses, net | $537 | $(8,172) | $(15,447) | $49,449 | | Total Operating Expenses | $8,089 | $324 | $5,240 | $68,881 | - Real estate operating expenses increased by **$2.4 million** for the three months and **$6.7 million** for the nine months ended September 30, 2021, due to the acquired hotel property[260](index=260&type=chunk) - Equity compensation decreased by **$1.1 million** for the three months and **$2.2 million** for the nine months, primarily due to the acceleration of unvested stock awards upon the ACRES acquisition[259](index=259&type=chunk) - General and administrative expenses decreased by **$2.6 million** for the three months and **$3.0 million** for the nine months, mainly due to lower professional services and rent/utilities post-ACRES acquisition[262](index=262&type=chunk) - A provision for credit losses of **$537,000** was recorded for the three months, while a reversal of **$15.4 million** was recorded for the nine months ended September 30, 2021, reflecting improved macroeconomic conditions[264](index=264&type=chunk) [Other Income (Expense)](index=60&type=section&id=Other%20Income%20(Expense)) A $9.0 million loss on debt extinguishment drove other expenses for the quarter, while nine-month results improved due to the absence of prior-year investment losses Other Income (Expense) Summary | Metric (in thousands) | 3 Months Ended Sep 30, 2021 | 3 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | | :--- | :--- | :--- | :--- | :--- | | Net realized and unrealized gain (loss) on investment securities available-for-sale and loans and derivatives | $— | $96 | $878 | $(186,243) | | Fair value and other adjustments on asset held for sale | $— | $(3,371) | $— | $(8,089) | | Loss on extinguishment of debt | $(9,006) | $— | $(9,006) | $— | | Total Other Income (Expense) | $(8,935) | $(3,141) | $(7,623) | $(194,140) | - A **$9.0 million loss on extinguishment of debt** was recorded for the three and nine months ended September 30, 2021, due to the redemption of 12.00% Senior Unsecured Notes and partial repurchase of 4.50% Convertible Senior Notes[268](index=268&type=chunk) - The nine-month period saw a **$187.1 million decrease in losses** from investment securities and derivatives compared to 2020, which included $180.3 million in losses from CMBS portfolio disposition[267](index=267&type=chunk) [Financial Condition](index=62&type=section&id=Financial%20Condition) Total assets grew to $2.1 billion, driven by an expanding CRE loan portfolio, while stockholders' equity increased due to a preferred stock issuance - Total assets increased to **$2.1 billion** at September 30, 2021, from $1.7 billion at December 31, 2020[269](index=269&type=chunk) - The leverage ratio (borrowings to stockholders' equity) decreased to **3.6 times** at September 30, 2021, from 3.9 times at December 31, 2020, primarily due to the Series D Preferred Stock issuance[365](index=365&type=chunk) - Common stock book value was **$22.68 per share** at September 30, 2021, an increase of $2.11 per share from December 31, 2020[230](index=230&type=chunk)[337](index=337&type=chunk) [Summary](index=62&type=section&id=Summary) The company's total assets increased to $2.1 billion at September 30, 2021, from $1.7 billion at December 31, 2020 - Total assets were **$2.1 billion** at September 30, 2021, compared to **$1.7 billion** at December 31, 2020[269](index=269&type=chunk) [Investment Portfolio](index=62&type=section&id=Investment%20Portfolio) The investment portfolio grew to $1.87 billion, driven by CRE whole loan originations, while preferred equity and CMBS holdings were fully divested Investment Portfolio Summary | Asset Type (in thousands) | Sep 30, 2021 (Net Carrying Amount) | Dec 31, 2020 (Net Carrying Amount) | | :--- | :--- | :--- | | CRE whole loans | $1,822,410 | $1,477,295 | | CRE mezzanine loan | $4,415 | $4,399 | | Preferred equity investments | $— | $25,988 | | Total investment portfolio | $1,866,670 | $1,555,704 | - The net carrying amount of the investment portfolio increased by approximately **$311.0 million (20.0%)** from December 31, 2020, to September 30, 2021[271](index=271&type=chunk) - During the nine months ended September 30, 2021, the company originated **$1.1 billion** in floating-rate CRE whole loan commitments and received **$670.6 million** from loan payoffs and paydowns[272](index=272&type=chunk) - Preferred equity investments paid off, generating **$28.8 million** in proceeds, and the remaining CMBS securities were sold in March 2021[276](index=276&type=chunk)[278](index=278&type=chunk) [Financing Receivables](index=65&type=section&id=Financing%20Receivables) The allowance for credit losses decreased significantly due to net reversals, reflecting improved macroeconomic conditions and loan performance Allowance for Credit Losses | Metric (in thousands) | 9 Months Ended Sep 30, 2021 | Year Ended Dec 31, 2020 | | :--- | :--- | :--- | | Allowance for credit losses at beginning of period | $34,310 | $1,460 | | (Reversal of) provision for credit losses | $(15,447) | $30,815 | | Allowance for credit losses at end of period | $18,863 | $34,310 | - A net reversal of expected credit losses of **$15.4 million** was recorded for the nine months ended September 30, 2021, due to improved macroeconomic conditions and loan performance[281](index=281&type=chunk) - At September 30, 2021, **$39.8 million** of whole loans were past due greater than 90 days, an increase from $11.4 million at December 31, 2020[295](index=295&type=chunk) - **No TDRs** occurred during the nine months ended September 30, 2021, but 13 loans received term extensions with a weighted average of 11 months[297](index=297&type=chunk) [Restricted Cash](index=68&type=section&id=Restricted%20Cash) Restricted cash decreased by $6.0 million, primarily due to paydowns on CRE securitization senior notes and a securitization liquidation - Restricted cash decreased by **$6.0 million** from $38.4 million at December 31, 2020, to **$32.4 million** at September 30, 2021[298](index=298&type=chunk) - The decrease was mainly attributable to paydowns on CRE securitization senior notes and the liquidation of XAN 2019-RSO7[298](index=298&type=chunk) [Accrued Interest Receivable](index=69&type=section&id=Accrued%20Interest%20Receivable) Accrued interest receivable decreased due to lower coupon rates on floating-rate loans and the sale of remaining CMBS securities Accrued Interest Receivable Summary | Metric (in thousands) | Sep 30, 2021 | Dec 31, 2020 | | :--- | :--- | :--- | | Accrued interest receivable from loans | $6,643 | $7,310 | | Accrued interest receivable from securities | $— | $56 | | Total | $6,678 | $7,372 | - Accrued interest receivable decreased by **$694,000**, primarily due to declines in coupon rates of CRE floating-rate loans and the sale of remaining CMBS[301](index=301&type=chunk) [Other Assets](index=69&type=section&id=Other%20Assets) Other assets decreased due to the sale of fixed-rate CRE whole loans, partially offset by increased receivables related to the acquired hotel Other Assets Summary | Metric (in thousands) | Sep 30, 2021 | Dec 31, 2020 | | :--- | :--- | :--- | | Tax receivables and prepaid taxes | $2,120 | $2,244 | | Other receivables | $1,133 | $804 | | Other prepaid expenses | $2,305 | $568 | | CRE fixed-rate whole loans, held for sale | $— | $4,809 | | Total | $5,835 | $8,783 | - Other assets decreased by **$2.9 million**, primarily due to the sale of two fixed-rate CRE whole loans for **$4.8 million**[303](index=303&type=chunk) - This decrease was partially offset by a **$329,000** increase in other receivables and a **$1.7 million** increase in other prepaid expenses related to the acquired hotel property[303](index=303&type=chunk) [Core and Non-Core Asset Classes](index=69&type=section&id=Core%20and%20Non-Core%20Asset%20Classes) The company's strategy targets core CRE assets while exiting legacy non-core asset classes like residential real estate and commercial finance - Core asset classes include **first mortgage loans (whole loans)**, A notes, B notes, mezzanine debt, preferred equity investments, and CRE equity investments[305](index=305&type=chunk) - A strategic plan approved in November 2016 focused on CRE debt investments, disposing of legacy CRE debt, and **exiting non-core asset classes**[305](index=305&type=chunk) - Non-core asset classes historically included residential real estate-related assets (mortgage loans, MBS) and commercial finance assets (secured corporate loans, ABS, CDOs, structured notes)[306](index=306&type=chunk)[307](index=307&type=chunk) [Derivative Instruments](index=70&type=section&id=Derivative%20Instruments) All interest rate swaps associated with the prior CMBS portfolio were terminated in 2020, with remaining unrealized losses being amortized - The company historically used interest rate swaps to hedge interest rate risk, classifying them as cash flow hedges[308](index=308&type=chunk) - All interest rate swap positions associated with the CMBS portfolio were terminated in April 2020, realizing an **$11.8 million loss**[309](index=309&type=chunk) - At September 30, 2021, a **$9.0 million loss** from terminated hedges was recorded in accumulated other comprehensive (loss) income, amortized into earnings over the remaining debt life[309](index=309&type=chunk) [Senior Secured Financing Facility and Term Warehouse Financing Facilities](index=71&type=section&id=Senior%20Secured%20Financing%20Facility%20and%20Term%20Warehouse%20Financing%20Facilities) The company utilizes senior secured and term warehouse financing facilities, with borrowings increasing significantly and a new facility added Financing Facilities Summary | Facility (in thousands) | Sep 30, 2021 (Outstanding Borrowings) | Dec 31, 2020 (Outstanding Borrowings) | | :--- | :--- | :--- | | Senior Secured Financing Facility | $37,596 | $29,314 | | CRE - Term Warehouse Financing Facilities | $320,465 | $12,258 | - Outstanding borrowings under term warehouse financing facilities increased significantly from **$12.3 million** at December 31, 2020, to **$320.5 million** at September 30, 2021[314](index=314&type=chunk) - The JPMorgan Chase Facility's maturity was extended to October 2024, and a new **$250.0 million Morgan Stanley Facility** was entered into in November 2021[318](index=318&type=chunk)[319](index=319&type=chunk) - The Morgan Stanley Facility includes margin call provisions and financial covenants, with the company guaranteeing payment up to **25% of the unpaid aggregate repurchase price**[320](index=320&type=chunk)[321](index=321&type=chunk) [Securitizations](index=72&type=section&id=Securitizations) The company retains equity in six securitizations, recently closing a new $802.6 million CRE debt securitization and transitioning two others to SOFR - The company retains equity in **six securitization entities**, three of which are substantially liquidated[323](index=323&type=chunk) - XAN 2019-RSO7 was optionally redeemed in May 2021 in conjunction with the closing of ACR 2021-FL1[324](index=324&type=chunk) - ACR 2021-FL1, a new **$802.6 million CRE debt securitization**, includes a reinvestment period ending May 2023[327](index=327&type=chunk) - XAN 2020-RSO8 and XAN 2020-RSO9 transitioned their senior notes' benchmark rate from one-month LIBOR to **Compounded SOFR** plus a benchmark adjustment in June 2021[325](index=325&type=chunk)[326](index=326&type=chunk) [Corporate Debt](index=72&type=section&id=Corporate%20Debt) The company repurchased convertible notes, issued new senior unsecured notes, and fully redeemed its 12.00% senior unsecured notes - Repurchased **$55.7 million** of 4.50% Convertible Senior Notes during the three months ended September 30, 2021, resulting in a **$1.5 million charge to earnings**[330](index=330&type=chunk) - Issued **$150.0 million** of 5.75% Senior Unsecured Notes in August 2021, which are redeemable at the company's option with a make-whole premium prior to May 15, 2026[331](index=331&type=chunk) - Fully redeemed the 12.00% Senior Unsecured Notes for **$55.3 million** in August 2021, incurring an **$8.0 million charge to earnings**, including a $5.0 million make-whole amount[334](index=334&type=chunk) [Stockholders' Equity](index=75&type=section&id=Stockholders'%20Equity) Total stockholders' equity increased to $443.3 million, driven by proceeds from the Series D Preferred Stock offering and retained earnings - Total stockholders' equity was **$443.3 million** at September 30, 2021, up from $334.4 million at December 31, 2020[335](index=335&type=chunk) - The increase was primarily attributable to **$110.5 million in net proceeds** from the Series D Preferred Stock offering and an increase in retained earnings, offset by common stock repurchases[335](index=335&type=chunk) [Balance Sheet - Book Value Reconciliation](index=75&type=section&id=Balance%20Sheet%20-%20Book%20Value%20Reconciliation) Common stock book value per share increased to $22.68, primarily due to net income and changes in other comprehensive income Book Value Reconciliation | Metric | 9 Months Ended Sep 30, 2021 (Total Amount in thousands) | 9 Months Ended Sep 30, 2021 (Per Share Amount) | | :--- | :--- | :--- | | Common stock book value at beginning of period | $218,427 | $20.57 | | Net (loss) income allocable to common shares | $10,734 | $1.12 | | Change in other comprehensive income on derivatives | $1,384 | $0.15 | | Repurchase of common stock | $(14,725) | $0.77 | | Common stock book value at end of period | $216,765 | $22.68 | - Common stock book value increased by **$2.11 per share**, from $20.57 at December 31, 2020, to **$22.68** at September 30, 2021[337](index=337&type=chunk) [Management Agreement Equity](index=75&type=section&id=Management%20Agreement%20Equity) The monthly base management fee is calculated based on the company's equity, which was $447.2 million at September 30, 2021 - The monthly base management fee is the greater of 1/12 of the company's equity multiplied by **1.50%** or **$442,000** through July 31, 2022[338](index=338&type=chunk) Management Agreement Equity Calculation | Metric (in thousands) | Amount | | :--- | :--- | | Proceeds from capital stock issuances, net | $1,330,524 | | Retained earnings, net | $(656,225) | | Payments for repurchases of capital stock, net | $(227,103) | | Total Equity (as defined in Management Agreement) | $447,196 | [Core Earnings](index=75&type=section&id=Core%20Earnings) Core Earnings, a non-GAAP measure, improved significantly from the prior year, though still showing a slight loss for the nine-month period - **Core Earnings** is a non-GAAP financial measure used to evaluate operating performance, excluding non-cash equity compensation, unrealized gains/losses, non-cash credit loss provisions, and income/loss from non-core assets[340](index=340&type=chunk)[341](index=341&type=chunk) Core Earnings Reconciliation | Metric | 3 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2021 | | :--- | :--- | :--- | | Net (loss) income allocable to common shares - GAAP | $(9,805) (in thousands) | $10,734 (in thousands) | | Core Earnings allocable to common shares | $(3,396) (in thousands) | $(2,546) (in thousands) | | Core Earnings per common share - diluted | $(0.36) | $(0.26) | - For the nine months ended September 30, 2021, Core Earnings allocable to common shares was **$(2.5) million**, a substantial improvement from **$(162.3) million** in the prior year[343](index=343&type=chunk) [Incentive Compensation Hurdle](index=78&type=section&id=Incentive%20Compensation%20Hurdle) Core Earnings for the quarter did not exceed the defined hurdle, resulting in no incentive compensation payable to the Manager - Incentive compensation is earned when Core Earnings per common share (as defined in the Management Agreement) exceeds a specific **Incentive Compensation Hurdle**[346](index=346&type=chunk) - For the three months ended September 30, 2021, Core Earnings **did not exceed the Incentive Compensation Hurdle**, so no incentive compensation was payable[345](index=345&type=chunk)[347](index=347&type=chunk) - A new incentive compensation calculation methodology will be effective starting with the quarter ending December 31, 2022, based on **20% of Core Earnings exceeding 7% per annum of book value equity**[347](index=347&type=chunk) [Liquidity and Capital Resources](index=78&type=section&id=Liquidity%20and%20Capital%20Resources) Liquidity is supported by warehouse financing, debt issuances, and preferred stock offerings, while the company explores utilizing significant tax assets - Principal liquidity sources for the nine months ended September 30, 2021, included **$591.2 million** from warehouse financing, **$147.0 million** from 5.75% Senior Unsecured Notes, and **$110.5 million** from Series D Preferred Stock offering[349](index=349&type=chunk) - At October 31, 2021, liquidity consisted of **$117.9 million in unrestricted cash**, **$47.9 million in unlevered financeable CRE loans**, and **$75.0 million in availability** under the Oaktree and MassMutual 12.00% Senior Unsecured Notes[364](index=364&type=chunk) - The company had approximately **$47.7 million of NOL carryforwards** and an estimated **$136.9 million of net capital losses** as of December 31, 2020, and is exploring investments to utilize these tax assets[366](index=366&type=chunk)[367](index=367&type=chunk) - The company uses senior secured financing facilities, term warehouse financing facilities, and securitizations for financing, and was in **compliance with all covenants** at September 30, 2021[351](index=351&type=chunk)[352](index=352&type=chunk)[353](index=353&type=chunk)[354](index=354&type=chunk) [Off-Balance Sheet Arrangements](index=83&type=section&id=Off-Balance%20Sheet%20Arrangements) The company has no off-balance sheet arrangements but has significant unfunded commitments on CRE loans totaling $140.6 million - The company does not maintain relationships with unconsolidated entities for off-balance sheet arrangements[372](index=372&type=chunk) - Unfunded commitments on originated CRE loans totaled **$140.6 million** at September 30, 2021, subject to borrowers meeting specified criteria[374](index=374&type=chunk) - The company provides guarantees and indemnifications in the ordinary course of business, such as an indemnification agreement for up to **$536,000** on a mezzanine loan (extinguished in October 2020)[375](index=375&type=chunk)[376](index=376&type=chunk) [Guarantees and Indemnifications](index=84&type=section&id=Guarantees%20and%20Indemnifications) The company provides guarantees and indemnifications in the ordinary course of business, which contingently obligate it to make payments - The company provides guarantees and indemnifications that contingently obligate it to make payments based on changes in asset value or another entity's failure to perform[375](index=375&type=chunk) - A previous indemnification agreement for up to **$4.3 million** (reduced to $536,000) on a mezzanine loan was extinguished in October 2020 upon the loan's payoff[376](index=376&type=chunk) [ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK](index=84&type=section&id=ITEM%203.%20QUANTITATIVE%20AND%20QUALITATIVE%20DISCLOSURES%20ABOUT%20MARKET%20RISK) The company is exposed to credit, counterparty, financing, and interest rate risks, which are exacerbated by the COVID-19 pandemic and LIBOR transition - Primary market risks include **credit risk, counterparty risk, financing risk, and interest rate risk**[377](index=377&type=chunk) - The company manages interest rate risk by monitoring and adjusting the reset index and interest rate of borrowings, and historically used interest rate swaps[386](index=386&type=chunk) - The COVID-19 pandemic has significantly impacted CRE markets, causing reduced occupancy and potential borrower non-compliance, particularly affecting **multifamily, hotel, and retail properties**[379](index=379&type=chunk) [Credit Risks](index=84&type=section&id=Credit%20Risks) The company's loans are subject to credit risk from collateral performance and market conditions, exacerbated by the COVID-19 pandemic - Loans and investments are subject to credit risk, dependent on sponsors' ability to operate collateral properties to generate adequate cash flows[378](index=378&type=chunk) - The COVID-19 pandemic has significantly impacted CRE markets, causing reduced occupancy, rent deferral requests, and construction delays, particularly affecting **multifamily (66.2% of portfolio)**, **hotel (9.9%)**, and **retail (2.6%)** properties[379](index=379&type=chunk) - The company mitigates credit risk through **underwriting, asset management processes**, and proactive engagement with borrowers, especially those with near-term maturities[378](index=378&type=chunk)[381](index=381&type=chunk) [Counterparty Risk](index=85&type=section&id=Counterparty%20Risk) Counterparty risk from financial institutions is mitigated by engaging with high credit-quality institutions for cash holdings and financing - The company is exposed to counterparty risk from financial institutions that hold its cash and provide financing[382](index=382&type=chunk) - This risk is mitigated by depositing cash and entering into financing agreements with **high credit-quality institutions**[382](index=382&type=chunk) [Financing Risk](index=85&type=section&id=Financing%20Risk) The company relies on various financing facilities, and market volatility, exacerbated by COVID-19, could increase financing costs or reduce availability - The company finances target assets using **CRE debt securitizations, a senior secured financing facility, and warehouse financing facilities**[383](index=383&type=chunk) - Weakness or volatility in financial markets, including the impact of COVID-19, could adversely affect lenders, potentially **increasing financing costs or decreasing available financing**[383](index=383&type=chunk) [Interest Rate Risk](index=85&type=section&id=Interest%20Rate%20Risk) The company's floating-rate loan portfolio is sensitive to interest rate changes, with rising rates generally increasing net income - Rising interest rates generally increase net income, while declining rates decrease it, subject to interest rate floors[384](index=384&type=chunk) - At September 30, 2021, **98.6% of the CRE loan portfolio** earned a floating rate of interest, with a weighted-average one-month LIBOR floor of **1.03%**; all interest rate floors were in the money[384](index=384&type=chunk) Interest Rate Sensitivity Analysis | Metric (in thousands) | 100 Basis Point Decrease | 100 Basis Point Increase | | :--- | :--- | :--- | | Increase (Decrease) to Net Interest Income | $261 | $(1,130) | | Increase (Decrease) to Net Interest Income per Share | $0.03 | $(0.11) | - Two securitizations transitioned from LIBOR to **compounded SOFR** plus a benchmark adjustment in June 2021[385](index=385&type=chunk) [Risk Management](index=85&type=section&id=Risk%20Management) The company manages interest rate risk by monitoring and adjusting the reset index and interest rate of its borrowings - The company manages interest rate risk exposure by monitoring and adjusting the reset index and interest rate related to its borrowings[386](index=386&type=chunk) [ITEM 4. CONTROLS AND PROCEDURES](index=86&type=section&id=ITEM%204.%20CONTROLS%20AND%20PROCEDURES) Management concluded that disclosure controls and procedures were effective, with no material changes in internal control over financial reporting - The Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures are **effective at the reasonable assurance level** as of September 30, 2021[388](index=388&type=chunk) - **No material changes** in internal control over financial reporting occurred during the quarter ended September 30, 2021[389](index=389&type=chunk) PART II [ITEM 1. LEGAL PROCEEDINGS](index=87&type=section&id=ITEM%201.%20LEGAL%20PROCEEDINGS) A subsidiary is subject to potential litigation for loan repurchases, with reserves of $1.4 million maintained at September 30, 2021 - PCM is subject to potential litigation related to claims for repurchases or indemnifications on loans sold to third parties[392](index=392&type=chunk) - Reserves for such litigation demands totaled **$1.4 million** at September 30, 2021[392](index=392&type=chunk) - **No pending litigation matters** or general litigation reserve existed at September 30, 2021, or December 31, 2020[393](index=393&type=chunk) [ITEM 1A. RISK FACTORS](index=87&type=section&id=ITEM%201A.%20RISK%20FACTORS) The company updated risk factors to highlight the adverse effects of the LIBOR transition, which may increase financing costs - The company updated its risk factor regarding changes in LIBOR determination or its replacement, which may **adversely affect the value of loans, investments, and borrowings**[394](index=394&type=chunk) - The U.K. FCA announced the phase-out of LIBOR by the end of 2021 and June 30, 2023, with **SOFR** identified as a preferred alternative rate[395](index=395&type=chunk) - The transition from LIBOR to SOFR or other alternative rates may result in financial market disruptions and **significant increases in benchmark rates**, leading to increased financing costs[395](index=395&type=chunk) [ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS](index=87&type=section&id=ITEM%202.%20UNREGISTERED%20SALES%20OF%20EQUITY%20SECURITIES%20AND%20USE%20OF%20PROCEEDS) The company completed a $20.0 million common stock repurchase program in July 2021 and authorized a new one in November 2021 - The company completed its **$20.0 million common stock repurchase program** in July 2021, repurchasing 1,607,382 shares[144](index=144&type=chunk)[396](index=396&type=chunk) - The Board authorized a new **$20.0 million common stock repurchase program** in November 2021[396](index=396&type=chunk) Share Repurchase Summary | Period | Total Number of Shares Purchased | Average Price Paid per Share (in thousands) | | :--- | :--- | :--- | | Jan 4, 2021 - Jan 29, 2021 | 283,374 | $12.30 | | Feb 1, 2021 - Feb 26, 2021 | 281,912 | $12.21 | | Mar 1, 2021 - Mar 31, 2021 | 179,379 | $14.44 | | Apr 1, 2021 - Apr 30, 2021 | 140,260 | $15.41 | | May 3, 2021 - May 12, 2021 | 47,820 | $15.51 | | Jun 2, 2021 - Jun 30, 2021 | 85,709 | $16.52 | | Jul 1, 2021 - Jul 9, 2021 | 53,443 | $16.64 | [ITEM 3. DEFAULTS UPON SENIOR SECURITIES](index=88&type=section&id=ITEM%203.%20DEFAULTS%20UPON%20SENIOR%20SECURITIES) There were no defaults upon senior securities during the period - **No defaults** upon senior securities occurred during the period[400](index=400&type=chunk) [ITEM 5. OTHER INFORMATION](index=88&type=section&id=ITEM%205.%20OTHER%20INFORMATION) A subsidiary entered into a new $250.0 million Master Repurchase Agreement to finance its core CRE lending business - In November 2021, the company's subsidiary entered into a new **$250.0 million Master Repurchase and Securities Contract Agreement (Morgan Stanley Facility)** to finance its core commercial real estate lending business[400](index=400&type=chunk) - The Morgan Stanley Facility matures in November 2022 with two one-year automatic extensions and includes **margin call provisions**[400](index=400&type=chunk)[401](index=401&type=chunk) - The company guaranteed the subsidiary's payment and performance under the facility, subject to a **25% limit** of the unpaid aggregate repurchase price, and the guaranty includes financial covenants[402](index=402&type=chunk) [ITEM 6. EXHIBITS](index=88&type=section&id=ITEM%206.%20EXHIBITS) This section lists all exhibits filed with the report, including key corporate documents, agreements, and officer certifications - The exhibits include key corporate documents such as Amended and Restated Articles of Incorporation, Bylaws, and various Articles Supplementary for preferred stock[404](index=404&type=chunk)[405](index=405&type=chunk) - Significant agreements filed include the Fourth Amended and Restated Management Agreement, Loan and Servicing Agreements, and the new Master Repurchase and Securities Contract Agreement with Morgan Stanley[405](index=405&type=chunk)[407](index=407&type=chunk)[408](index=408&type=chunk) - Certifications from the Chief Executive Officer and Chief Financial Officer (Rule 13a-14(a)/Rule 15d-14(a) and 18 U.S.C. Section 1350) are included[408](index=408&type=chunk) [SIGNATURES](index=97&type=section&id=SIGNATURES) The report is certified by the registrant's authorized officers as of November 8, 2021 - The report is signed by Mark Fogel (President & Chief Executive Officer), David J. Bryant (Senior Vice President, Chief Financial Officer and Treasurer), and Eldron C. Blackwell (Vice President)[416](index=416&type=chunk) - All signatures are dated **November 8, 2021**[416](index=416&type=chunk)