ACRES Commercial Realty(ACR) - 2019 Q3 - Quarterly Report

PART I This section presents the company's unaudited consolidated financial statements, management's discussion and analysis, market risk disclosures, and internal controls for the reporting period Item 1. Financial Statements This section presents the unaudited consolidated financial statements of Exantas Capital Corp. and its subsidiaries, including the balance sheets, statements of operations, comprehensive income (loss), changes in stockholders' equity, and cash flows, along with detailed notes to these financial statements for the periods ended September 30, 2019, and December 31, 2018 Consolidated Balance Sheets This section provides a snapshot of the company's financial position, detailing assets, liabilities, and equity at specific points in time Consolidated Balance Sheet Highlights (in thousands) | Metric | Sep 30, 2019 | Dec 31, 2018 | |:-----------------------------|:-------------|:-------------| | Total Assets | $2,472,193 | $2,130,913 | | CRE loans, net | $1,795,310 | $1,551,967 | | Investment securities AFS | $471,848 | $418,998 | | Total Liabilities | $1,912,167 | $1,577,094 | | Borrowings | $1,887,426 | $1,554,223 | | Total Stockholders' Equity | $560,026 | $553,819 | | Consolidated VIEs Assets | $1,117,051 | $742,031 | | Consolidated VIEs Liabilities| $883,700 | $501,829 | - Total assets increased by $341,280 thousand (16.0%) from December 31, 2018, to September 30, 2019, primarily driven by growth in CRE loans and investment securities available-for-sale[5][6] Consolidated Statements of Operations This section outlines the company's revenues, expenses, and net income over specific reporting periods Consolidated Statements of Operations Highlights (in thousands, except per share data) | Metric | 3 Months Ended Sep 30, 2019 | 3 Months Ended Sep 30, 2018 | 9 Months Ended Sep 30, 2019 | 9 Months Ended Sep 30, 2018 | |:------------------------------------------|:----------------------------|:----------------------------|:----------------------------|:----------------------------| | Net Income | $12,557 | $8,624 | $29,581 | $17,473 | | Net Income Allocable to Common Shares | $9,969 | $6,036 | $21,818 | $(394) | | Total Revenues | $16,605 | $14,539 | $46,751 | $39,670 | | Total Operating Expenses | $4,037 | $5,481 | $15,764 | $17,572 | | Basic EPS | $0.32 | $0.19 | $0.69 | $(0.01) | - Net income allocable to common shares significantly increased for both the three and nine months ended September 30, 2019, compared to the prior year, with a notable turnaround from a net loss in the nine-month period of 2018[10] Consolidated Statements of Comprehensive Income (Loss) This section presents the company's comprehensive income or loss, including net income and other comprehensive income items Consolidated Statements of Comprehensive Income (Loss) Highlights (in thousands) | Metric | 3 Months Ended Sep 30, 2019 | 3 Months Ended Sep 30, 2018 | 9 Months Ended Sep 30, 2019 | 9 Months Ended Sep 30, 2018 | |:------------------------------------------|:----------------------------|:----------------------------|:----------------------------|:----------------------------| | Comprehensive Income Allocable to Common Shares | $9,448 | $8,449 | $26,031 | $3,938 | | Total Other Comprehensive (Loss) Income | $(521) | $2,413 | $4,213 | $4,332 | - Comprehensive income allocable to common shares saw substantial growth for the nine months ended September 30, 2019, reaching $26,031 thousand, a significant increase from $3,938 thousand in the prior year[13] Consolidated Statements of Changes in Stockholders' Equity This section details the changes in the company's equity accounts, reflecting net income, distributions, and other adjustments Changes in Stockholders' Equity (in thousands) | Metric | Jan 1, 2019 Balance | Sep 30, 2019 Balance | |:--------------------------------------------------|:--------------------|:---------------------| | Total Stockholders' Equity | $553,819 | $560,026 | | Net Income (9 months ended Sep 30, 2019) | N/A | $29,581 | | Distributions on Common Stock (9 months ended Sep 30, 2019) | N/A | $(21,512) | | Securities AFS, fair value adjustment, net (9 months ended Sep 30, 2019) | N/A | $10,579 | | Designated derivatives, fair value adjustment (9 months ended Sep 30, 2019) | N/A | $(6,366) | - Total stockholders' equity increased from $553,819 thousand at January 1, 2019, to $560,026 thousand at September 30, 2019, primarily driven by net income and fair value adjustments on available-for-sale securities, partially offset by distributions[15] Consolidated Statements of Cash Flows This section categorizes cash inflows and outflows from operating, investing, and financing activities Consolidated Statements of Cash Flows Highlights (Nine Months Ended Sep 30, in thousands) | Metric | 2019 | 2018 |\n|:--------------------------------------------------|:------------|:------------|\n| Net Cash Provided by Operating Activities | $28,443 | $31,238 |\n| Net Cash Used in Investing Activities | $(353,500) | $(248,547) |\n| Net Cash Provided by Financing Activities | $297,483 | $67,578 |\n| Net Decrease in Cash and Cash Equivalents and Restricted Cash | $(27,574) | $(149,731) |\n| Cash and Cash Equivalents and Restricted Cash at End of Period | $67,900 | $54,633 | - The company experienced a significant increase in net cash provided by financing activities in 2019, primarily from proceeds from borrowings, which helped offset increased cash used in investing activities and resulted in a smaller net decrease in cash compared to 2018[16][17] Notes to Consolidated Financial Statements This section provides detailed disclosures and explanations for the consolidated financial statements, covering the company's organization, significant accounting policies, variable interest entities, loan portfolio, investment securities, borrowings, share-based compensation, earnings per share, related party transactions, distributions, fair value measurements, market risk, and commitments and contingencies Note 1 - Organization This note describes Exantas Capital Corp.'s structure as a REIT, its management, and its strategic focus on CRE debt investments - Exantas Capital Corp. operates as a REIT, primarily focusing on originating, holding, and managing commercial real estate (CRE) mortgage loans and other CRE-related debt investments[19] - The company is externally managed by Exantas Capital Manager Inc., a subsidiary of C-III Capital Partners LLC[19] - A strategic plan approved in November 2016 to focus on CRE debt investments and dispose of non-core assets is substantially complete[21] Note 2 - Summary of Significant Accounting Policies This note outlines the key accounting principles and policies applied in preparing the consolidated financial statements - The consolidated financial statements adhere to GAAP and include majority-owned/controlled subsidiaries and Variable Interest Entities (VIEs) where the Company is the primary beneficiary[23] - Restricted cash primarily consists of required account balance minimums for CRE collateralized debt obligation (CDO) securitizations and derivative instruments[26] - A full valuation allowance of $53.0 million was recorded against net deferred tax assets at September 30, 2019, due to historical losses and uncertainty of future taxable income[28] - Effective January 1, 2019, share-based compensation for unvested restricted stock and options is no longer remeasured after the initial grant date, simplifying accounting[29] - The adoption of new FASB guidance on credit losses (CECL) in future periods is expected to increase the allowance for credit losses and accelerate the recognition of provisions, impacting retained earnings at adoption[37] Note 3 - Variable Interest Entities (VIEs) This note details the company's involvement with consolidated and unconsolidated variable interest entities and associated exposures - The Company was the primary beneficiary of five consolidated VIEs (CRE securitizations, CDOs, and collateralized loan obligations) at September 30, 2019, and December 31, 2018, which are used to invest in real estate-related securities and are financed by debt issuance[40][41] - The Company holds variable interests but is not the primary beneficiary in several unconsolidated VIEs, including Resource Capital Trust I & II, Wells Fargo Commercial Mortgage Trust 2017-C40, Prospect Hackensack JV LLC, and WC Newhall MM, LLC[45][46][48][49][50] Maximum Exposure to Loss for Unconsolidated VIEs (Sep 30, 2019, in thousands) | Asset Category | Total Assets | Maximum Exposure to Loss | |:-----------------------------------------|:-------------|:-------------------------| | Accrued interest receivable | $302 | $0 | | CRE loans | $25,776 | $25,776 | | Investment securities available-for-sale | $22,620 | $21,912 | | Investments in unconsolidated entities | $1,548 | $1,548 | | Total | $50,246 | $49,236 | Note 4 - Supplemental Cash Flow Information This note provides additional details on non-cash financing and investing activities affecting cash flows Non-Cash Continuing Financing Activities (Nine Months Ended Sep 30, in thousands) | Metric | 2019 | 2018 | |:----------------------------------------|:--------|:--------| | Distributions on common stock accrued but not paid | $7,967 | $4,749 | | Distributions on preferred stock accrued but not paid | $1,725 | $1,725 | - Accrued but unpaid distributions on common stock increased significantly in 2019, reflecting higher dividend declarations[53] Note 5 - Loans This note provides a detailed breakdown of the company's commercial real estate loan portfolio, including types and commitments Summary of CRE Loans Held for Investment (in thousands) | Loan Type | Sep 30, 2019 Carrying Value | Dec 31, 2018 Carrying Value | |:-------------------------------|:----------------------------|:----------------------------| | Whole loans | $1,764,834 | $1,527,712 | | Mezzanine loan | $4,700 | $4,700 | | Preferred equity investments | $25,776 | $19,555 | | Total CRE loans held for investment | $1,795,310 | $1,551,967 | - Total CRE loans held for investment increased by $243,343 thousand (15.7%) from December 31, 2018, to September 30, 2019[57] - Unfunded loan commitments for whole loans were $109.9 million at September 30, 2019, and preferred equity investments had $3.1 million in unfunded commitments[57] - The CRE loan portfolio showed concentrations in the Mountain (22.1%), Southwest (19.7%), and Southeast (16.4%) regions at September 30, 2019[58] - Principal paydowns receivable significantly increased to $105.5 million at September 30, 2019, from $32.1 million at December 31, 2018, all of which was subsequently received in cash[59] Note 6 - Financing Receivables This note details the allowance for loan losses and the credit risk profiles of the company's financing receivables Allowance for Loan Losses (in thousands) | Metric | Sep 30, 2019 | Dec 31, 2018 | |:------------------------------------------|:-------------|:-------------| | Allowance for loan losses at end of period| $1,460 | $1,401 | | Provision for (recovery of) loan losses, net (9 months ended Sep 30) | $59 | $(1,595) | - The allowance for loan losses increased slightly to $1,460 thousand at September 30, 2019, and the company recorded a provision for loan losses of $59 thousand for the nine months ended September 30, 2019, compared to a recovery in the prior year[60] - CRE loans are assessed for credit quality on a scale from 1 (highest) to 5 (lowest), based on collateral performance, occupancy, loan structure, and exit plan[62][64] Credit Risk Profiles of CRE Loans (Sep 30, 2019, in thousands) | Risk Rating | Whole loans | Mezzanine loan | Preferred equity investments | Legacy CRE loans held for sale | |:------------|:------------|:---------------|:-----------------------------|:-------------------------------| | Rating 1 | $0 | $0 | $0 | $0 | | Rating 2 | $1,678,152 | $4,700 | $25,776 | $0 | | Rating 3 | $84,300 | $0 | $0 | $0 | | Rating 4 | $3,842 | $0 | $0 | $0 | | Rating 5 | $0 | $0 | $0 | $0 | | Held for Sale | $0 | $0 | $0 | $17,141 | - No impaired loans or troubled-debt restructurings were reported at September 30, 2019, or December 31, 2018[71][72] Note 7 - Investment Securities Available-for-Sale This note provides information on the company's investment securities available-for-sale, including fair values and unrealized gains/losses Investment Securities Available-for-Sale (in thousands) | Metric | Sep 30, 2019 | Dec 31, 2018 | |:------------------------------------------|:-------------|:-------------| | Total Investment Securities AFS (Fair Value) | $471,848 | $418,998 | | CMBS, fixed rate | $125,198 | $119,739 | | CMBS, floating rate | $346,650 | $299,259 | | Gross Unrealized Gains | $8,608 | $812 | | Gross Unrealized Losses | $(1,649) | $(4,433) | | Weighted Average Coupon | 4.54% | 4.76% | - The fair value of investment securities available-for-sale increased by $52,850 thousand (12.6%) from December 31, 2018, to September 30, 2019, primarily in floating-rate CMBS[73] - Unrealized losses of $1,649 thousand at September 30, 2019, are considered temporary due to market factors, not credit deterioration[78] - For the nine months ended September 30, 2019, the company sold one CMBS position for $638 thousand, realizing a gain of $4 thousand[79] Note 8 - Investments in Unconsolidated Entities This note details the company's equity investments in unconsolidated entities and their impact on earnings Investments in Unconsolidated Entities (in thousands) | Metric | Sep 30, 2019 | Dec 31, 2018 | |:------------------------------------------|:-------------|:-------------| | Total Investments in Unconsolidated Entities | $1,548 | $1,548 | | Equity in Earnings (9 months ended Sep 30) | $76 | $302 | - Equity in earnings from unconsolidated entities decreased significantly for the nine months ended September 30, 2019, compared to the prior year, primarily due to the liquidation of Pelium Capital and RCM Global LLC in 2018[81] Note 9 - Borrowings This note provides a comprehensive overview of the company's outstanding borrowings, rates, maturities, and collateral Summary of Borrowings (in thousands) | Metric | Sep 30, 2019 | Dec 31, 2018 | |:------------------------------------------|:-------------|:-------------| | Total Outstanding Borrowings | $1,887,426 | $1,554,223 | | Weighted Average Borrowing Rate | 3.69% | 4.21% | | Weighted Average Remaining Maturity | 8.6 years | 6.9 years | | Value of Collateral | $2,181,468 | $1,953,119 | - Total outstanding borrowings increased by $333,203 thousand (21.4%) from December 31, 2018, to September 30, 2019, while the weighted average borrowing rate decreased[84] - Key components of borrowings include securitized notes (XAN 2018-RSO6, XAN 2019-RSO7), unsecured junior subordinated debentures, convertible senior notes, and repurchase agreements[84] Contractual Maturity Dates of Borrowings (Sep 30, 2019, in thousands) | Maturity Period | Total | |:--------------------------|:------------| | Less than 1 Year (2019) | $364,397 | | 1 - 3 Years (2020-2021) | $459,614 | | 3 - 5 Years (2022) | $143,750 | | More than 5 Years | $942,269 | | Total | $1,910,030| Note 10 - Share Issuance and Repurchase This note details transactions related to the company's common and preferred stock, including redemptions and repurchase programs - All Series B Preferred Stock was redeemed in March 2018 for $115.3 million, resulting in a $7.5 million redemption charge[99] - At September 30, 2019, 4.8 million shares of 8.625% Fixed-to-Floating Series C Cumulative Redeemable Preferred Stock were outstanding, redeemable at $25.00 per share on or after July 30, 2024[100][101] - No shares of common or preferred stock were repurchased during the three and nine months ended September 30, 2019, or 2018, with $44.9 million remaining available under the repurchase program[102] Note 11 - Share-Based Compensation This note outlines the company's equity compensation plan, restricted stock transactions, and related expenses - Shareholders approved the Exantas Capital Corp. Second Amended and Restated Omnibus Equity Compensation Plan in June 2019, increasing authorized shares to 4,775,000 and extending the expiration to June 2029[103] Unvested Restricted Common Stock Transactions (Shares) | Metric | Jan 1, 2019 | Issued | Vested | Forfeited | Sep 30, 2019 | |:------------------------------------------|:------------|:--------|:--------|:----------|:-------------| | Unvested shares | 422,671 | 223,926 | (208,295)| (14,138) | 424,164 | - Total unrecognized restricted common stock expense for non-employees was $1.6 million at September 30, 2019, with a weighted average amortization period of 2.0 years[105] Equity Compensation Expense (in thousands) | Metric | 3 Months Ended Sep 30, 2019 | 3 Months Ended Sep 30, 2018 | 9 Months Ended Sep 30, 2019 | 9 Months Ended Sep 30, 2018 | |:------------------------------------------|:----------------------------|:----------------------------|:----------------------------|:----------------------------| | Total Equity Compensation Expense | $552 | $757 | $1,647 | $2,383 | | Incentive compensation payable to Manager | $441 | $0 | $606 | $0 | - Equity compensation expense decreased due to the adoption of updated GAAP guidance discontinuing remeasurement of unvested restricted stock and options after the initial grant date[109][215] Note 12 - Earnings Per Share This note presents the calculation of basic and diluted earnings per share for common stockholders Net Income (Loss) Allocable to Common Shares and EPS (in thousands, except per share amounts) | Metric | 3 Months Ended Sep 30, 2019 | 3 Months Ended Sep 30, 2018 | 9 Months Ended Sep 30, 2019 | 9 Months Ended Sep 30, 2018 | |:------------------------------------------|:----------------------------|:----------------------------|:----------------------------|:----------------------------| | Net Income (Loss) Allocable to Common Shares | $9,969 | $6,036 | $21,818 | $(394) | | Basic EPS | $0.32 | $0.19 | $0.69 | $(0.01) | | Diluted EPS | $0.31 | $0.19 | $0.69 | $(0.01) | - The average market price of the company's common stock did not exceed the conversion price of the Convertible Senior Notes, thus they were excluded from the diluted EPS calculation for the periods presented[112] Note 13 - Accumulated Other Comprehensive Income (Loss) This note details the components and changes in accumulated other comprehensive income or loss, including unrealized gains and losses Changes in Accumulated Other Comprehensive Income (Loss) (Nine Months Ended Sep 30, 2019, in thousands) | Component | Balance Jan 1, 2019 | Other Comprehensive (Loss) Income before Reclassifications | Amounts Reclassified | Balance Sep 30, 2019 | |:------------------------------------------|:--------------------|:-----------------------------------------------------------|:---------------------|:---------------------| | Net Unrealized (Loss) Gain on Derivatives | $563 | $(6,298) | $(68) | $(5,803) | | Net Unrealized Gain on Investment Securities Available-for-Sale | $(3,620) | $10,583 | $(4) | $6,959 | | Total | $(3,057) | $4,285 | $(72) | $1,156 | - Accumulated other comprehensive income (loss) shifted from a net loss of $(3,057) thousand at January 1, 2019, to a net income of $1,156 thousand at September 30, 2019, primarily due to unrealized gains on investment securities available-for-sale, partially offset by unrealized losses on derivatives[113] Note 14 - Related Party Transactions This note discloses transactions and balances with related parties, including management fees and expense reimbursements - C-III Capital Partners LLC indirectly beneficially owned 2.4% of the Company's outstanding common stock at September 30, 2019[114] Management Fees and Expense Reimbursements (in thousands) | Metric | 3 Months Ended Sep 30, 2019 | 3 Months Ended Sep 30, 2018 | 9 Months Ended Sep 30, 2019 | 9 Months Ended Sep 30, 2018 | |:------------------------------------------|:----------------------------|:----------------------------|:----------------------------|:----------------------------| | Base Management Fees | $2,100 | $2,800 | $6,300 | $8,400 | | Incentive Compensation | $441 | $0 | $606 | $0 | | Expense Reimbursements | $1,000 | $1,200 | $3,200 | $4,000 | - C3AM, a related party, earned servicing fees of $424 thousand for the nine months ended September 30, 2019, an increase from $217 thousand in the prior year[123] Note 15 - Distributions This note outlines the company's dividend declarations and payments on common and preferred stock, and REIT distribution requirements - The company declared and paid common stock dividends of $0.25 per share for the quarter ended September 30, 2019, an increase from $0.15 per share in the same period of 2018[124][127] - To qualify as a REIT, the company must distribute at least 90% of its taxable income annually[125] - Dividends on Series C Preferred Stock were $0.539063 per share for each quarter in 2019 and 2018[128] Note 16 - Fair Value of Financial Instruments This note provides fair value measurements for financial instruments, categorized by valuation input levels Financial Instruments Carried at Fair Value (Sep 30, 2019, in thousands) | Instrument | Level 1 | Level 2 | Level 3 | Total | |:------------------------------------------|:--------|:--------|:--------|:--------| | Investment securities available-for-sale | $0 | $0 | $471,848| $471,848| | Derivatives (Liabilities) | $0 | $6,355 | $0 | $6,355 | - A legacy CRE loan held for sale incurred losses of $55 thousand and $1.5 million for the three and nine months ended September 30, 2019, respectively, due to fair value adjustments[133] Fair Value of Financial Instruments Not Reported at Fair Value (Sep 30, 2019, in thousands) | Instrument | Carrying Value | Fair Value | |:------------------------------------------|:---------------|:-----------| | CRE whole loans held for investment | $1,764,834 | $1,773,119 | | CRE mezzanine loan | $4,700 | $4,700 | | CRE preferred equity investments | $25,776 | $25,899 | | Legacy CRE loans held for sale | $17,141 | $17,141 | | Senior notes in CRE securitizations | $882,510 | $893,185 | | Junior subordinated notes | $51,548 | $26,667 | | Convertible notes | $153,855 | $164,932 | | Repurchase agreements | $799,513 | $802,829 | Note 17 - Market Risk and Derivative Instruments This note describes the company's exposure to market risks, primarily interest rate risk, and its use of derivative instruments for hedging - The primary market risk managed by the company through derivative instruments is interest rate risk, mitigated by matching adjustable-rate assets with variable-rate borrowings and using hedging agreements[143][145] - At September 30, 2019, the company had 18 interest rate swap contracts outstanding with an aggregate notional amount of $87.6 million, paying a weighted average fixed rate of 2.50% and receiving one-month LIBOR[147] Fair Value of Derivative Instruments (in thousands) | Metric | Sep 30, 2019 | Dec 31, 2018 | |:------------------------------------------|:-------------|:-------------| | Interest rate swap contracts (Liability) | $6,355 | $1,043 | | Interest rate swap contracts (Asset) | $0 | $985 | | Aggregate Unrealized Losses (Liability) | $5,803 | $0 | | Aggregate Unrealized Gains (Asset) | $0 | $563 | - The company posts collateral (initial and variation margin) for centrally cleared interest rate swap transactions[150] Note 18 - Offsetting of Financial Assets and Liabilities This note details the offsetting of financial assets and liabilities on the balance sheet, including collateral arrangements Offsetting of Financial Liabilities (Sep 30, 2019, in thousands) | Instrument | Gross Recognized Liabilities | Gross Offset | Net Amounts Included on Consolidated Balance Sheets | Cash Collateral Pledged | Net Amount | |:------------------------------------------|:-----------------------------|:-------------|:----------------------------------------------------|:------------------------|:-----------| | Derivatives, at fair value | $6,355 | $0 | $6,355 | $0 | $6,355 | | Repurchase agreements and term facilities | $799,513 | $0 | $799,513 | $798,682 | $831 | - The combined fair value of securities and loans pledged against the company's repurchase agreements and term facilities was $1.1 billion at September 30, 2019[155] Note 19 - Commitments and Contingencies This note discloses the company's various commitments and contingent liabilities, including litigation and unfunded loan commitments - Primary Capital Mortgage, LLC (PCM) is subject to litigation for loan repurchases or indemnifications, with reserves totaling $1.7 million at September 30, 2019, and December 31, 2018[158] - Several shareholder derivative actions (Federal Actions, New York State Actions, Hafkey Action, Canoles Action) were settled or dismissed in 2019, with the Federal Actions settlement including corporate governance changes and $550,000 in attorney fees funded by insurers[161][162][163][164] - A contingent liability of $703 thousand was outstanding at September 30, 2019, as a reserve for probable losses on a $4.3 million mezzanine loan indemnification agreement[166] - Unfunded commitments on CRE loans totaled $109.9 million for whole loans and $3.1 million for preferred equity investments at September 30, 2019[168] Note 20 - Discontinued Operations and Assets and Liabilities Held for Sale This note provides information on the company's discontinued operations and assets/liabilities classified as held for sale - The company has substantially completed its strategic plan to dispose of non-core asset classes (residential mortgage and middle market lending segments) and certain legacy CRE loans, with operations classified as discontinued[169] Net (Loss) Income from Discontinued Operations (in thousands) | Metric | 3 Months Ended Sep 30, 2019 | 3 Months Ended Sep 30, 2018 | 9 Months Ended Sep 30, 2019 | 9 Months Ended Sep 30, 2018 | |:------------------------------------------|:----------------------------|:----------------------------|:----------------------------|:----------------------------| | Total (Loss) Income from Discontinued Operations | $(63) | $364 | $(212) | $161 | Assets and Liabilities Held for Sale (in thousands) | Metric | Sep 30, 2019 | Dec 31, 2018 | |:------------------------------------------|:-------------|:-------------| | Loans held for sale | $17,141 | $17,000 | | Other assets | $266 | $645 | | Total Assets Held for Sale | $17,407 | $17,645 | | Accounts payable and other liabilities | $1,766 | $1,820 | | Total Liabilities Held for Sale | $1,766 | $1,820 | - At September 30, 2019, assets held for sale included one legacy CRE loan with a carrying value of $17,141 thousand and one mezzanine loan with no carrying value[174] Note 21 - Subsequent Events This note reports on events occurring after the balance sheet date that may require disclosure or adjustment - No subsequent events requiring adjustments to or disclosures in the consolidated financial statements were identified through the filing date of the report[175] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the company's financial condition and results of operations, highlighting key performance drivers, investment strategies, and financial trends for the periods ended September 30, 2019, and December 31, 2018. It also discusses the company's strategic focus on CRE debt investments and the completion of its disposition plan for non-core assets Overview This section provides an executive summary of the company's business, investment strategy, and key operational highlights - Exantas Capital Corp. is a REIT focused on originating, holding, and managing CRE mortgage loans and other CRE-related debt investments, with an objective to provide stockholders with total returns through distributions and capital appreciation[178] - The investment strategy targets various CRE credit investments, including first mortgage loans (whole loans, A-notes, B-notes), mezzanine debt, preferred equity, and CMBS[179][180][181][182][183][184] - The company uses leverage and derivative financial instruments (e.g., interest rate swaps) to enhance returns and mitigate interest rate risk, with 93% of the core investment portfolio match-funded at September 30, 2019[185][186] - The strategic plan to focus on CRE debt investments and dispose of non-core assets is substantially complete, with 95% of equity allocated to core assets at September 30, 2019[188][189] - For the three months ended September 30, 2019, nine CRE loans with total commitments of $105.1 million were originated, and the CRE loan portfolio comprised approximately $1.8 billion in floating rate CRE whole loans[190] - The company anticipates $850.0 million to $1.0 billion in CRE loan originations and other CRE-related investments for both 2019 and 2020[191] Book Value per Share (Sep 30, 2019) | Metric | Per Share |\n|:------------------------------------------|:----------|\n| Common Stock Book Value | $14.12 |\n| Non-cash convertible senior notes' unamortized discounts | $(0.28) |\n| Series C Preferred Stock redemption value in excess of carrying value | $(0.13) |\n| Economic Book Value (Non-GAAP) | $13.71| Results of Operations This section analyzes the company's financial performance, including revenues, expenses, and net income trends Net Income Allocable to Common Shares and EPS (in thousands, except per share data) | Metric | 3 Months Ended Sep 30, 2019 | 3 Months Ended Sep 30, 2018 | 9 Months Ended Sep 30, 2019 | 9 Months Ended Sep 30, 2018 | |:------------------------------------------|:----------------------------|:----------------------------|:----------------------------|:----------------------------| | Net Income Allocable to Common Shares | $10,000 | $6,000 | $21,800 | $(394) | | Basic EPS | $0.32 | $0.19 | $0.69 | $(0.01) | Net Interest Income Change Analysis (Nine Months Ended Sep 30, in thousands) | Component | Net Change (2019 vs 2018) | Due to Volume | Due to Rate | |:------------------------------------------|:--------------------------|:--------------|:------------| | Total Interest Income | $22,909 | $23,925 | $(1,016) | | Total Interest Expense | $15,823 | $13,087 | $2,736 | | Net Increase in Net Interest Income | $7,086 | $10,838 | $(3,752)| - Interest income increased primarily due to higher weighted-average outstanding balances of CRE whole loans and acquisitions of CMBS, partially offset by declines in coupon rates[200][204] - Interest expense increased mainly due to new securitized borrowings (XAN 2018-RSO6 and XAN 2019-RSO7) and increased utilization of CRE term repurchase facilities, partially offset by liquidations of older securitizations and redemption of convertible senior notes[205][206][207] Operating Expenses (in thousands) | Metric | 3 Months Ended Sep 30, 2019 | 3 Months Ended Sep 30, 2018 | 9 Months Ended Sep 30, 2019 | 9 Months Ended Sep 30, 2018 | |:------------------------------------------|:----------------------------|:----------------------------|:----------------------------|:----------------------------| | Total Operating Expenses | $4,037 | $5,481 | $15,764 | $17,572 | | 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 | | (Recovery of) provision for loan losses, net | $(1,137) | $(461) | $58 | $(1,260) | - Operating expenses decreased for both periods, driven by lower base management fees (due to a change in calculation methodology), reduced equity compensation expense (due to accounting guidance changes), and decreased general and administrative costs (lower wages/benefits and legal fees)[214][215][218] Other Income (Expense) (in thousands) | Metric | 3 Months Ended Sep 30, 2019 | 3 Months Ended Sep 30, 2018 | 9 Months Ended Sep 30, 2019 | 9 Months Ended Sep 30, 2018 | |:------------------------------------------|:----------------------------|:----------------------------|:----------------------------|:----------------------------| | Total Other Income (Expense) | $52 | $(798) | $(1,194) | $(4,817) | | Fair value adjustments on financial assets held for sale | $(55) | $(1,588) | $(1,457) | $(6,244) | - Other expense decreased significantly, primarily due to lower fair value adjustments on the remaining legacy CRE loan held for sale compared to the prior year[225] Net (Loss) Income from Discontinued Operations (in thousands) | Metric | 3 Months Ended Sep 30, 2019 | 3 Months Ended Sep 30, 2018 | 9 Months Ended Sep 30, 2019 | 9 Months Ended Sep 30, 2018 | |:------------------------------------------|:----------------------------|:----------------------------|:----------------------------|:----------------------------| | Total (Loss) Income from Discontinued Operations | $(63) | $364 | $(212) | $161 | - Discontinued operations reported a net loss for the nine months ended September 30, 2019, mainly due to wind-down expenses in the residential mortgage lending segment, contrasting with net income in the prior year from middle market loan sales[230] Financial Condition This section discusses the company's balance sheet items, investment portfolio, and overall financial health - Total assets increased to $2.5 billion at September 30, 2019, from $2.1 billion at December 31, 2018, driven by the origination and acquisition of CRE loans and CMBS[231] Investment Portfolio (Net Carrying Amount, in thousands) | Asset Type | Sep 30, 2019 | Dec 31, 2018 | |:------------------------------------------|:-------------|:-------------| | Total Investment Portfolio | $2,285,847 | $1,989,513 | | CRE whole loans | $1,764,834 | $1,527,712 | | CMBS | $471,848 | $418,998 | - CRE loan activity for the nine months ended September 30, 2019, included $528.3 million in originations, $210.8 million in acquisitions, and $478.0 million in payoffs and paydowns[233] - Restricted cash increased to $16.6 million at September 30, 2019, from $12.7 million at December 31, 2018, primarily due to increased initial margin requirements on interest rate swaps[261] - Accrued interest receivable increased to $8,647 thousand at September 30, 2019, from $8,198 thousand at December 31, 2018, mainly due to new loan production[262] - Core assets comprised 98.75% of the total investment portfolio at September 30, 2019, reflecting the company's strategic focus on CRE-related investments[267] - The company utilizes interest rate swaps as cash flow hedges to manage interest rate risk, with 18 swap contracts outstanding at September 30, 2019, having a total notional value of $87.6 million and a fair value liability of $6.4 million[270][272][275] - Stockholders' equity increased to $560.0 million at September 30, 2019, reflecting net unrealized gains on the available-for-sale portfolio and net unrealized losses on cash flow hedges[290] Balance Sheet - Book Value Reconciliation This section reconciles common stock book value to economic book value per share, a non-GAAP measure Common Stock and Economic Book Value per Share (Sep 30, 2019) | Metric | Total Amount (in thousands) | Per Share |\n|:------------------------------------------|:----------------------------|:----------|\n| Common Stock Book Value | $444,070 | $14.12 |\n| Non-cash convertible senior notes' unamortized discounts | $(8,833) | $(0.28) |\n| Series C Preferred Stock redemption value in excess of carrying value | $(4,045) | $(0.13) |\n| Economic Book Value (Non-GAAP) | $431,151 | $13.71| - Economic book value, a non-GAAP measure, was $13.71 per share at September 30, 2019, after adjustments for convertible senior notes' unamortized discounts and the preferred stock redemption value[195][292] Management Agreement Equity This section details the calculation of equity as defined in the management agreement, used for base management fee determination Equity Calculation (as defined in Management Agreement, Sep 30, 2019, in thousands) | Component | Amount |\n|:------------------------------------------|:------------|\n| Proceeds from capital stock issuances, net| $1,219,936 |\n| Retained earnings, net | $(452,434) |\n| Payments for repurchases of capital stock, net | $(207,011) |\n| Total Equity | $560,491| - The base management fee is calculated as 1/12 of the company's equity (as defined in the Management Agreement) multiplied by 1.50%[293] Core Earnings (Non-GAAP) This section presents Core Earnings, a non-GAAP measure, to evaluate the company's operating performance excluding certain non-cash items - Core Earnings is a non-GAAP financial measure used to evaluate operating performance, excluding non-cash equity compensation, unrealized gains/losses, non-cash loan loss provisions, and income/loss from non-core assets and discontinued operations[295] Core Earnings Allocable to Common Shares (in thousands, except per share data) | Metric | 9 Months Ended Sep 30, 2019 | 9 Months Ended Sep 30, 2018 | |:------------------------------------------|:----------------------------|:----------------------------| | Core Earnings Allocable to Common Shares | $26,614 | $2,884 | | Diluted EPS (Core Earnings) | $0.84 | $0.10 | | Core Earnings Adjusted Allocable to Common Shares | $26,614 | $14,865 | | Diluted EPS (Core Earnings Adjusted) | $0.84 | $0.48 | - Core Earnings per common share (as defined in the Management Agreement) for the three months ended September 30, 2019, was $0.33, exceeding the Incentive Compensation Hurdle of $0.26[301][303] Liquidity and Capital Resources This section discusses the company's sources and uses of cash, capital structure, and ability to meet financial obligations - Principal sources of liquidity for the nine months ended September 30, 2019, included $616.8 million from repurchase facilities, $61.0 million from net loan repayments, and $31.5 million from the XAN 2019-RSO7 securitization close[307] - At October 30, 2019, liquidity consisted of $56.6 million in unrestricted cash and cash equivalents, and approximately $126.6 million from available financing of unlevered CRE and CMBS positions[317] - The leverage ratio (borrowings to stockholders' equity) increased to 3.4 times at September 30, 2019, from 2.8 times at December 31, 2018, primarily due to a net increase in borrowings[318] - The company intends to continue regular quarterly distributions to maintain its REIT status, requiring distribution of at least 90% of its taxable income annually[319] Contractual Obligations and Commitments (Sep 30, 2019, in thousands) | Type of Obligation | Total | Less than 1 Year | 1 - 3 Years | 3 - 5 Years | More than 5 Years | |:------------------------------------------|:------------|:-----------------|:------------|:------------|:------------------| | CRE securitizations | $890,721 | $0 | $0 | $0 | $890,721 | | Unsecured junior subordinated debentures | $51,548 | $0 | $0 | $0 | $51,548 | | 4.50% Convertible Senior Notes | $143,750 | $0 | $143,750 | $0 | $0 | | 8.00% Convertible Senior Notes | $21,182 | $21,182 | $0 | $0 | $0 | | Repurchase and credit facilities | $802,829 | $567,186 | $235,643 | $0 | $0 | | Unfunded commitments on CRE loans | $113,046 | $26,599 | $86,447 | $0 | $0 | | Base management fees | $8,407 | $8,407 | $0 | $0 | $0 | | Total | $2,031,483| $623,374 | $465,840| $0 | $942,269 | - Unfunded commitments on CRE loans totaled $109.9 million for whole loans and $3.1 million for preferred equity investments at September 30, 2019[324] - A contingent liability of $703 thousand was recorded at September 30, 2019, for a mezzanine loan indemnification agreement[326] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section details the company's exposure to market risks, primarily interest rate risk, and its strategies for managing these risks, including the use of hedging instruments and sensitivity analysis on fair value Effect on Fair Value This section analyzes the potential impact of interest rate changes on the fair value of the company's financial instruments - The primary market risk is interest rate risk, which can affect the fair value of assets and liabilities, and the company assesses this risk by estimating the duration of its financial instruments[327][328][329] Sensitivity Analysis on Fair Value (Sep 30, 2019, in thousands) | Scenario | Fair Value of Interest Rate-Sensitive Investment Securities | Change in Fair Value of Investment Securities | Change in Fair Value of Hedging Instruments | |:------------------------------------------|:------------------------------------------------------------|:----------------------------------------------|:--------------------------------------------| | Interest Rates Fall 100 Basis Points | $124,210 | $5,154 (4% increase) | $(6,060) | | Interest Rates Rise 100 Basis Points | $111,602 | $(7,454) (6% decrease) | $5,618 | - The impact of changing interest rates on fair value can significantly increase when rates change beyond 100 basis points from current levels, and other factors like yield curve shape and market expectations also influence fair value[333] Risk Management This section describes the company's strategies and tools used to identify, assess, and mitigate market risks, particularly interest rate risk - The company manages interest rate risk by monitoring and adjusting borrowing rates, structuring borrowing agreements with diverse maturities and terms, and utilizing derivatives like interest rate swaps[334] Item 4. Controls and Procedures This section confirms the effectiveness of the company's disclosure controls and procedures and reports no material changes in internal control over financial reporting during the quarter ended September 30, 2019 Disclosure Controls and Procedures This section confirms the effectiveness of the company's disclosure controls and procedures as assessed by management - Management, including the Chief Executive Officer and Chief Financial Officer, concluded that the company's disclosure controls and procedures were effective at the reasonable assurance level as of September 30, 2019[336] Changes in Internal Control over Financial Reporting This section reports on any material changes to the company's internal control over financial reporting during the quarter - There were no changes in internal control over financial reporting during the quarter ended September 30, 2019, that materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting[337] PART II This section addresses legal proceedings, updates to risk factors, a list of exhibits, and official signatures for the report Item 1. Legal Proceedings This section outlines ongoing and settled legal proceedings, primarily related to litigation claims against Primary Capital Mortgage, LLC (PCM) and various shareholder derivative actions, noting the substantial completion of PCM's business disposition and the dismissal of several shareholder suits General Litigation This section details ongoing litigation, primarily concerning loan repurchase claims against Primary Capital Mortgage, LLC - Primary Capital Mortgage, LLC (PCM) is subject to litigation related to claims for repurchases or indemnifications on loans, with reserves totaling $1.7 million at September 30, 2019, and December 31, 2018. The disposition of PCM's business is substantially complete[340] Settled and Dismissed Litigation Matters This section reports on shareholder derivative actions that have been settled or dismissed during the reporting period - No general litigation reserve was held at September 30, 2019, or December 31, 2018[341] - Two consolidated shareholder derivative actions (Federal Actions) were settled in May 2019, involving corporate governance changes and $550,000 in plaintiffs' attorneys' fees funded by insurers[342] - Six separate shareholder derivative suits (New York State Actions) were dismissed in June, July, and October 2019[343] - Other shareholder derivative actions (Hafkey Action and Canoles Action) were voluntarily dismissed in May and July 2019, respectively, in light of the Federal Actions settlement[344][345] Item 1A. Risk Factors This section states that there have been no material changes to the risk factors previously disclosed in the company's Annual Report on Form 10-K, but acknowledges that future filings may include updates or additional factors Updates to Risk Factors This section confirms no material changes to previously disclosed risk factors and notes potential future updates - As of the report date, there have been no material changes to the risk factors disclosed in the company's Annual Report on Form 10-K[346] - The company may disclose changes to such factors or additional factors in future filings with the SEC[346] Item 6. Exhibits This section provides a comprehensive list of exhibits filed with the Form 10-Q, including various agreements, certificates, indentures, and certifications, along with their respective filing references Exhibit List This section provides a comprehensive listing of all documents filed as exhibits to the Form 10-Q report - The exhibits include various corporate documents such as the Asset Purchase Agreement, Restated Certificate of Incorporation, Bylaws, Forms of Certificates for Common and Preferred Stock, Junior Subordinated Indentures, Master Repurchase and Securities Contracts, Management Agreement, Omnibus Equity Compensation Plan, and certifications from the CEO and CFO[347][348] SIGNATURES This section contains the official signatures of the company's authorized officers, including the Chief Executive Officer, Chief Financial Officer and Treasurer, and Vice President, certifying the filing of the quarterly report on Form 10-Q Authorized Signatories This section lists the names and titles of the company's officers who officially signed the quarterly report - The report was signed on November 6, 2019, by Robert C. Lieber (Chief Executive Officer), David J. Bryant (Senior Vice President, Chief Financial Officer and Treasurer), and Eldron C. Blackwell (Vice President)[353]