S-11 1 d25803ds11.htm S-11 S-11
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As filed with the Securities and Exchange Commission on October 8, 2021

Registration Statement No. 333-                

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form S-11

FOR REGISTRATION UNDER THE SECURITIES ACT OF 1933

OF SECURITIES OF CERTAIN REAL ESTATE COMPANIES

 

 

Claros Mortgage Trust, Inc.

(Exact name of registrant as specified in its governing instruments)

 

 

c/o Mack Real Estate Credit Strategies, L.P.

60 Columbus Circle, 20th Floor

New York, NY 10023

(212) 484-0050

(Address, including Zip Code, and Telephone Number, including Area Code, of Registrant’s Principal Executive Offices)

 

 

J.D. Siegel, Esq.

c/o Mack Real Estate Credit Strategies, L.P.

60 Columbus Circle, 20th Floor

New York, NY 10023

(212) 484-0050

(Name, Address, including Zip Code, and Telephone Number, including Area Code, of Agent for Service)

 

 

Copies to:

 

William J. Cernius, Esq.

Brent T. Epstein, Esq.

 

Edward F. Petrosky, Esq.

James O’Connor, Esq.

Latham & Watkins LLP   Sidley Austin LLP
650 Town Center Drive, 20th Floor   787 Seventh Avenue
Costa Mesa, CA 92626   New York, NY 10019
Tel (714) 755-8172   Tel (212) 839-5300
Fax (714) 755-8290   Fax (212) 839-5599

 

 

Approximate date of commencement of proposed sale to the public:

As soon as practicable after the effective date of this registration statement.

If any of the Securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act, check the following box:  ☐

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

If delivery of the prospectus is expected to be made pursuant to Rule 434, check the following box.  ☐

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

 

Large accelerated filer      Accelerated filer  
Non-accelerated filer      Smaller reporting company  
     Emerging growth company  

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act.  ☐

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title of Each Class of

Securities to be Registered

 

Proposed

Maximum
Aggregate

Offering Price(1)(2)

  Amount of
Registration Fee(1)

Common Stock, $0.01 par value per share

  $100,000,000   $9,270

 

 

(1)

Estimated solely for purposes of calculating the registration fee in accordance with Rule 457(o) under the Securities Act of 1933, as amended.

(2)

Includes the offering price of common stock that may be purchased by the underwriters upon the exercise of their option to purchase additional shares of our common stock.

 

 

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


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The information in this preliminary prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell nor does it seek an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

SUBJECT TO COMPLETION, DATED OCTOBER 8, 2021

PRELIMINARY PROSPECTUS

            Shares

 

LOGO

Claros Mortgage Trust, Inc.

Common Stock

 

 

Claros Mortgage Trust, Inc., a Maryland corporation, is focused primarily on originating senior and subordinate loans on transitional commercial real estate assets located in major U.S. markets. We are externally managed and advised by Claros REIT Management LP, or our Manager, under the terms of a management agreement.

This is our initial public offering and no public market currently exists for our common stock. We are offering all of the                  shares of our common stock as described in this prospectus. We currently anticipate the initial public offering price of our common stock will be between $         and $         per share. We intend to apply to list our common stock on the New York Stock Exchange, or the NYSE, under the symbol “CMTG.”

We have elected and believe we have qualified to be taxed as a real estate investment trust, or a REIT, for U.S. federal income tax purposes commencing with our taxable year ended December 31, 2015. To assist us in qualifying as a REIT, our charter prohibits, with certain exceptions, the beneficial or constructive ownership by any person of more than 9.6% in value of the aggregate of the outstanding shares of our capital stock or more than 9.6% (in value or in number of shares, whichever is more restrictive) of the aggregate of the outstanding shares of our common stock. In addition, our charter contains various other restrictions on the ownership and transfer of our common stock and capital stock. See “Description of Capital Stock—Restrictions on Ownership and Transfer.”

We are an “emerging growth company” as defined in Section 2(a) of the Securities Act of 1933, as amended, or the Securities Act, as modified by the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, and, as such, have elected to comply with certain reduced public company reporting requirements for this prospectus and future filings. See “Summary—Implications of Being an Emerging Growth Company.”

 

 

Investing in our common stock involves risks. You should read the section entitled “Risk Factors” beginning on page 47 of this prospectus for a discussion of certain risk factors that you should consider before making a decision to invest in our common stock.

 

     Per Share      Total  

Initial public offering price

   $                  $              

Underwriting discount(1)

   $        $    

Proceeds, before expenses, to us

   $        $    

 

(1)

See “Underwriting” for a description of the compensation payable to the underwriters.

We have granted the underwriters a 30-day option to purchase up to an additional                  shares of common stock from us at the initial public offering price less the underwriting discount.

None of the Securities and Exchange Commission, any state securities commission, or any other regulatory body has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

The underwriters expect to deliver the shares on or about                     , 2021.

 

 

Joint Lead Book-Running Managers

Morgan Stanley   J.P. Morgan

Joint Book-Running Managers

 

Goldman Sachs & Co. LLC   Deutsche Bank Securities   UBS Investment Bank   Wells Fargo Securities
JMP Securities  

Keefe, Bruyette & Woods

                         A Stifel Company

The date of this prospectus is                     , 2021.


Table of Contents

TABLE OF CONTENTS

 

     Page  

SUMMARY

     1  

RISK FACTORS

     47  

FORWARD-LOOKING STATEMENTS

     111  

USE OF PROCEEDS

     113  

DISTRIBUTION POLICY

     114  

CAPITALIZATION

     116  

DILUTION

     118  

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

     120  

BUSINESS

     172  

OUR MANAGER AND THE MANAGEMENT AGREEMENT

     210  

MANAGEMENT

     224  

PRINCIPAL STOCKHOLDERS

     231  

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     233  

DESCRIPTION OF CAPITAL STOCK

     239  

CERTAIN PROVISIONS OF MARYLAND LAW AND OUR CHARTER AND BYLAWS

     245  

SHARES ELIGIBLE FOR FUTURE SALE

     252  

MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS

     254  

ERISA MATTERS

     279  

UNDERWRITING

     282  

LEGAL MATTERS

     289  

EXPERTS

     289  

WHERE YOU CAN FIND MORE INFORMATION

     289  

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

     F-1  

 

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You should rely only on the information contained in this prospectus. We have not, and the underwriters have not, authorized any other person to provide you with different or additional information. If anyone provides you with different or additional information, you should not rely on it. We are not, and the underwriters are not, making an offer to sell these securities in any jurisdiction where the offer or sale is not permitted. You should assume that the information appearing in this prospectus is accurate only as of its date or on the date or dates which are specified herein. Our business, financial condition, liquidity, results of operations and prospects may have changed since those dates.

MARKET AND OTHER INDUSTRY DATA

This prospectus includes market and other industry data and estimates, as well as estimates that are based on our Manager’s knowledge and experience in the markets in which we operate. The sources of these third-party data and estimates generally state that the information they provide has been obtained from sources they believe to be reliable, but we have not investigated or verified the accuracy and completeness of this information. Our own estimates are based on information obtained from our Manager’s experience in the markets in which we operate and from other contacts in these markets. We are responsible for all of the disclosure in this prospectus, and we believe our estimates to be accurate as of the date of this prospectus or any other date stated in this prospectus. However, this information may prove to be inaccurate because of the method by which we obtained some of the data or estimates or because this information cannot always be verified with complete certainty due to the limits on the availability and reliability of raw data, the voluntary nature of the data gathering process and other limitations and uncertainties. As a result, you should be aware that market and other industry data included in this prospectus, and estimates and beliefs based on that data, may not be reliable.

 

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SUMMARY

This summary highlights some of the information in this prospectus. It does not contain all of the information that you should consider before making a decision to invest in our common stock. You should read carefully the more detailed information set forth under “Risk Factors” and the other information included in this prospectus. Except where the context suggests otherwise, the terms the “Company,” “we,” “us,” “our” and “CMTG” refer to Claros Mortgage Trust, Inc., a Maryland corporation, individually and together with its subsidiaries as the context may require; our “Manager” refers to Claros REIT Management LP, a Delaware limited partnership, our external manager and an affiliate of MRECS; and “MRECS” refers to Mack Real Estate Credit Strategies, L.P., the CRE lending and debt investment business affiliated with Mack Real Estate Group, LLC, which we refer to as the “Mack Real Estate Group” or “MREG.” Although MRECS and MREG are distinct legal entities, for convenience, references to our “Sponsor” in this prospectus are deemed to include reference to MRECS and MREG, individually or collectively, as appropriate for the context and unless otherwise indicated. References to “CRE” throughout this prospectus mean commercial real estate.

Unless we indicate otherwise or the context otherwise requires, all information in this prospectus (i) assumes no exercise of the underwriters’ option to purchase additional shares of our common stock, (ii) reflects a 2-for-1 reverse stock split of our common stock effected on October 6, 2021, and (iii) does not reflect 1,097,293 shares of common stock underlying unvested restricted stock units, or RSUs, that are expected to vest in full as of the date of this prospectus and an additional 8,281,594 shares of our common stock reserved for future grant or issuance under our 2016 Incentive Award Plan, or the 2016 Plan. In addition, unless otherwise indicated or required by context, all references in this prospectus to our “stockholders’ equity” and “common stock” include 7,306,984 shares of our common stock outstanding as of the date of this prospectus that we are currently required to classify as “redeemable common stock” on our balance sheet in accordance with generally accepted accounting principles, or GAAP, because the shares are subject to a stockholder’s contractual redemption right. The stockholder’s contractual redemption right will terminate upon completion of this offering, at which point the shares previously subject to that right will be reclassified as common stock on our balance sheet in accordance with GAAP.

Our Company

We are a CRE finance company focused primarily on originating senior and subordinate loans on transitional CRE assets located in major U.S. markets. Transitional CRE assets are properties that require repositioning, renovation, rehabilitation, leasing, development or redevelopment or other value-added elements in order to maximize value. We believe our Sponsor’s real estate development, ownership and operations experience and infrastructure differentiates us in lending on these transitional CRE assets. Our objective is to be a premier provider of debt capital for transitional CRE assets and, in doing so, to generate attractive risk-adjusted returns for our stockholders over time, primarily through dividends. We strive to create a diversified investment portfolio of CRE loans that we generally intend to hold to maturity.

Upon completion of this offering, we expect to be one of the largest public commercial mortgage real estate investment trusts in the U.S., based on total stockholders’ equity. From our inception in August 2015 through June 30, 2021, we have raised approximately $2.6 billion of equity capital and originated, co-originated or acquired 86 investments consisting of 131 loans on transitional CRE assets with aggregate loan commitments of approximately $11.5 billion. We have raised and invested significant institutional capital from major state and corporate pension funds, global insurance companies and leading investment managers, among others. We believe that these investors have been attracted to us by the experience of our team and our track record of disciplined underwriting and rigorous asset management. From our inception through June 30, 2021, 29 of the investments that we originated, representing aggregate loan commitments of $3.1 billion, have been repaid in full or sold, with no credit losses incurred and a realized gross internal rate of return of 13.2%. As of June 30, 2021,


 

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our loan portfolio was comprised of 56 loan investments consisting of 92 loans, representing aggregate loan commitments of $7.5 billion, remaining loan commitments (representing aggregate loan commitments less repayments received in respect thereof) of $7.3 billion and unpaid principal balance of $6.1 billion, and our stockholders’ equity was $2.5 billion, representing a book value of $18.76 per share of our common stock.

Leveraging our Sponsor’s broad real estate investment, development and management experience, our investment approach employs an ownership mindset. For each investment, we perform a thorough analysis of the underlying asset, the borrower and the borrower’s business plan and evaluate alternative uses of collateral in order to distinguish “execution risk” (i.e., the risk that a borrower will fail to execute its intended business plan) from “basis risk” (i.e., the risk of a material diminution in collateral value, as a result of the borrower over leveraging the collateral for the loan or otherwise). Although our objective is to originate loans for which the borrower will perform as expected and pay as agreed, we believe that in a downside scenario we have the ability to evaluate and mitigate much of the execution risk by utilizing our Sponsor’s broad experience and capabilities in developing, owning and managing real estate equity investments. We believe that this experience of our Sponsor enables our Manager to underwrite, originate and manage loans on transitional CRE assets, with an appropriate level of execution risk and, in its judgment, relatively limited basis risk. We offer bespoke and flexible lending solutions to our borrowers that are designed to both align with their business plans and enable us to protect our capital even in a downside scenario.

We focus primarily on originating loans ranging from $50 million to $300 million on transitional CRE assets located in major U.S. markets with attractive fundamental characteristics supported by macroeconomic tailwinds. As of June 30, 2021, our average loan investment commitment was $134.8 million. The below table summarizes our loan portfolio as of June 30, 2021 (dollars in thousands):

 

                                  Weighted Average(4)  
    Number of
Investments(1)
    Number
of
Loans(1)
    Aggregate
Loan
Commitment(2)
    Remaining
Loan
Commitment(3)
    Unpaid
Principal
Balance
    All-In
Yield(5)
    Term to
Initial
Maturity(6)
    Term to
Fully
Extended
Maturity(6)
    LTV(7)     %
Floating
Rate
 

Senior loans(8)

    49       83     $ 6,899,919     $ 6,743,983     $ 5,640,715       6.2     1.2       2.7       66.4     98.5

Subordinate loans

    7       9       649,126       524,201       488,902       11.2     0.4       2.3       60.8     95.8
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

           

Total / Weighted Average

    56       92     $ 7,549,045     $ 7,268,184     $ 6,129,617       6.6     1.1       2.6       65.9     98.3
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

           

 

(1)

Certain investments include multiple loans for which we made commitments to the same borrower or affiliated borrowers on the same date. The loan portfolio table excludes our one real estate owned investment.

(2)

Aggregate loan commitment represents initial loan commitments, as adjusted by commitment reductions, less transfers which qualified for sale accounting under GAAP.

(3)

Remaining loan commitment represents the aggregate loan commitment less repayments received in respect thereof.

(4)

Weighted averages are based on unpaid principal balance.

(5)

All-in yield represents the weighted average annualized yield to initial maturity of each loan within our loan portfolio, inclusive of coupon, origination fees, exit fees, and extension fees received, based on the applicable floating benchmark rate (if applicable), including LIBOR floors (if applicable), as of June 30, 2021.

(6)

Term to initial and fully extended maturity are measured in years. Fully extended maturity assumes all extension options are exercised by the borrower upon satisfaction of the applicable conditions.

(7)

LTV represents “loan-to-value” or “loan-to-cost”, which is calculated as our total loan commitment from time to time, as if fully funded, plus any financings that are pari passu with or senior to our loan, divided by our estimate of either (1) the value of the underlying real estate, determined in accordance with our underwriting process (typically consistent with, if not less than, the value set forth in a third-party appraisal) or (2) the borrower’s projected, fully funded cost basis in the asset, in each case as we deem appropriate for the relevant loan and other loans with similar characteristics. Underwritten values and projected costs should not be assumed to reflect our judgment of current market values or project costs, which may have changed materially since the date of origination including, without limitation, as a result of the COVID-19


 

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  pandemic. LTV is updated only in connection with a partial loan paydown and/or release of collateral, material changes to expected project costs, the receipt of a new appraisal (typically in connection with financing or refinancing activity) or a change in our loan commitment.
(8)

Includes contiguous subordinate loans (i.e., loans for which we also hold the mortgage loan) representing aggregate loan commitments of $807.3 million, remaining loan commitments of $796.8 million, and aggregate unpaid principal balance of $645.5 million, in each case as of June 30, 2021.

In February 2021, we foreclosed on a portfolio of seven limited service hotel properties located in New York, New York that secured a mezzanine loan with an unpaid principal balance of $103.9 million as of February 8, 2021 that we originated in February 2018. Neither the prior mezzanine loan nor the portfolio of hotel properties, which we refer to as our real estate owned investment, is included in the table above. Our real estate owned investment at the time of foreclosure was encumbered by a securitized senior mortgage, which we assumed on February 8, 2021 with a principal balance of $300.0 million. In June 2021, the terms of the securitized senior mortgage were modified, which included the repayment of $10.0 million of principal and extension of its maturity date by an additional three years to February 2024. At June 30, 2021, the outstanding balance of our debt related to real estate owned was $290.0 million.

We were organized as a Maryland corporation on April 29, 2015 and commenced operations on August 25, 2015. We have elected and believe we have qualified to be taxed as a real estate investment trust, or REIT, for U.S. federal income tax purposes commencing with our taxable year ended December 31, 2015. We are externally managed and advised by our Manager, an investment adviser registered with the U.S. Securities and Exchange Commission, or the SEC, pursuant to the Investment Advisers Act of 1940, as amended, or the Advisers Act. We operate our business in a manner that permits us to maintain our exclusion from registration under the Investment Company Act of 1940, as amended, or the 1940 Act.

Our Sponsor

Mack Real Estate Group, or MREG, was founded in 2013 by William, Richard and Stephen Mack to focus on real estate investments, with an initial emphasis on multifamily development, and has established several affiliates (including MRECS) that invest in and manage real estate debt and equity assets, loans and securities. We believe that the Mack family has developed a first-class reputation dating back to the 1960s as a real estate developer, investor and manager, including through successful prior ventures such as AREA Property Partners (formerly known as Apollo Real Estate Advisors), or AREA, among others. MRECS was founded in 2014 to focus on CRE credit investments as a core business affiliated with the broader MREG platform.

The members of our Sponsor’s senior management team have, on average, more than 25 years of real estate and finance experience. Today, our Sponsor owns, develops, invests in and manages real estate equity, debt and securities on behalf of third-party institutional and high net worth investors. Our Sponsor is headquartered in New York, New York with a team of approximately 60 people dedicated to MREG and MRECS and more than 200 people in total, including those associated with affiliates that provide a variety of services to MREG and MRECS. We believe that this depth of experience and relationships helps position our Sponsor to identify, analyze and execute on attractive lending opportunities on transitional CRE assets.

MREG primarily makes and manages CRE equity investments. It was launched as an opportunistic real estate investor expecting to leverage its founders’ deep experience across multifamily, office, industrial and other asset classes as warranted by market conditions. Initially, MREG invested predominantly in multifamily rental housing in major U.S. urban markets with high barriers to entry, creating a pipeline of more than 5,000 multifamily units in various stages of development and operation (some of which have been sold) with a projected gross development cost of more than $3.0 billion. MREG also invests in industrial properties and pursues other types of CRE equity investments that involve acquisitions of existing investments and ground up


 

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development as it deems desirable based upon prevailing market conditions from time to time. MREG has a development subsidiary with approximately 11 employees based in Los Angeles, Seattle and Phoenix and a property management subsidiary with approximately 130 employees.

MRECS was established to focus primarily on investing in and managing investments in CRE debt, CRE debt securities and highly structured CRE investments (such as preferred equity and mezzanine loans). As MREG’s credit-oriented affiliate, MRECS has assembled a multi-disciplinary team that works closely with other MREG professionals to source, underwrite, structure, execute and manage investments, led by the following professionals:

 

   

Richard Mack, our Chief Executive Officer and Chairman, MREG’s and MRECS’ Chief Executive Officer and a Managing Partner of MRECS, co-founded MREG in 2013 and MRECS in 2014 and serves as a member of MRECS’ Investment Committee. Prior to joining MRECS, Mr. Mack joined AREA Property Partners (formerly known as Apollo Real Estate Advisers) in 1993, the year of its formation, as one of the initial employees, where he oversaw ARCap (a subordinate commercial mortgage-backed securities, or CMBS, investor and special servicer), the Claros Real Estate Securities Fund (focused on investments in subordinate CMBS in the U.S. and Europe), the Apollo GMAC Mezzanine Fund and the Apollo Real Estate Finance Corporation, in addition to numerous equity investments;

 

   

Michael McGillis, our President, Chief Financial Officer and Director, MRECS’ Chief Financial Officer, and MREG’s President and Chief Operating Officer, joined MRECS in 2015 and serves as a member of MRECS’ Investment Committee. Prior to joining MRECS, Mr. McGillis was the Managing Director, Head of U.S. Funds and Chief Financial Officer at J.E. Robert Companies, where he was responsible for asset and portfolio management, capital markets, investor relations and financial management activities for a series of private equity real estate funds focused on both CRE debt and equity investments;

 

   

Kevin Cullinan, our Vice President, also serves as a Managing Director of MRECS and its Head of Originations. Prior to joining MRECS, he worked on the Global Real Assets team at J.P. Morgan Investment Management and at a family office in New York, New York; and

 

   

Priyanka Garg, our Vice President, also serves as a Managing Director of MRECS and its Head of Portfolio and Asset Management. Ms. Garg has more than 20 years of real estate investment management experience, including leadership positions at Treeview Real Estate Advisors and Westbrook Partners.

We leverage our Sponsor’s platform to originate, underwrite, structure and asset manage a portfolio of loan assets that align with our differentiated investment strategy. In particular, we believe that MREG’s experience and infrastructure in the areas of real estate ownership, development and property management strengthens our ability to lend on transitional CRE assets which involve a level of borrower execution risk that traditional lenders and other debt market participants without our expertise may be unable or unwilling to adequately underwrite.

Our Manager

Our Sponsor formed Claros REIT Management LP, or our Manager, concurrently with our inception to pursue what we believe is a compelling market opportunity to invest in our target assets. In performing its duties to us, our Manager benefits from the resources, relationships, fundamental real estate underwriting and management expertise of our Sponsor’s broad group of real estate professionals.

Our Manager is led by Richard Mack, Michael McGillis, Kevin Cullinan, Priyanka Garg and other members of our Sponsor’s senior management team. Pursuant to the terms of the management agreement between us and our Manager, or the Management Agreement, our Manager is responsible for executing our loan origination,


 

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capital markets, portfolio management, asset management and monitoring activities and managing our day-to-day operations. To perform its role in a flexible and efficient manner, our Manager leverages professionals employed by our Sponsor whose services are made available to our Manager and, in turn, to us. Neither we nor our Manager employs personnel directly and any reference herein to our Manager’s officers or employees is a reference to the officers or employees of our Sponsor made available to our Manager. In performing its duties to us, our Manager is at all times subject to the supervision, direction and management of our board of directors, or our Board.

Our Manager has ongoing access to MRECS’ senior management team as part of a services agreement between MRECS and our Manager. In addition, by virtue of the common ownership and control between our Manager and our Sponsor, our Manager also has access to the other personnel of our Sponsor and its affiliates. We believe our Manager benefits from access to individuals with extensive experience in identifying, analyzing, acquiring, financing, hedging, managing and operating real estate investments across investment cycles, geographies, property types, investment types and strategies, including debt and equity interests, controlling and non-controlling investments, corporate and securities investments (including CMBS) and a variety of joint ventures. We believe that this experience of our Sponsor and its affiliates enables our Manager to underwrite, originate and manage loans that facilitate the successful transition of CRE assets, with an appropriate level of execution risk and, in its judgment, relatively limited basis risk.

We believe that access to our Sponsor’s broad group of real estate professionals provides our Manager with the market expertise, strategic relationships and operational experience to allow us to execute on our business plan. For more information regarding our Manager and the Management Agreement, please see “—Management Agreement” below and “Our Manager and the Management Agreement.”

Market Opportunity

We believe there is an attractive, long-term market opportunity for non-traditional providers of transitional CRE debt financing to originate or acquire loans on transitional CRE assets located primarily in major U.S. markets. In addition, as a result of a fundamental shift in the competitive lending landscape coming out of the global financial crisis of 2008, we believe that a supply-demand disparity for CRE debt capital exists and provides attractive opportunities for non-traditional lenders to finance transitional CRE properties. There are a number of compelling near- and long-term factors that contribute to what we believe to be an attractive market opportunity for non-traditional lenders, including:

 

   

High volume of near-term commercial mortgage loan maturities;

 

   

CRE transaction volumes and construction activity over time;

 

   

Significant closed-end private equity real estate fund investable equity capital;

 

   

Limited supply of debt capital for transitional CRE assets relative to demand for such capital; and

 

   

Constructive long-term CRE fundamentals.

The total outstanding unpaid principal balance on all CRE loans was approximately $5.0 trillion as of June 30, 2021, according to the U.S. Federal Reserve Bank. Although demand for CRE debt financing has generally increased over recent years, we believe the supply of debt capital for transitional CRE assets has remained constrained in large part due to restrictive underwriting standards utilized by conventional financing sources and increased regulatory pressures on traditional bank lenders since the global financial crisis of 2008, even with the recent increase in private equity real estate fund investable debt capital. We believe that one legacy of the credit boom that preceded the global financial crisis of 2008 is that many traditional lenders, primarily banks, have withdrawn or otherwise significantly retrenched from the transitional CRE lending market over the past several years, a trend we believe was exacerbated by the recent economic downturn arising from the COVID-19 pandemic. The withdrawal or other retrenchment of such lenders that historically satisfied much of the demand for transitional CRE debt financing suggests that there may not


 

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be enough providers of the type of financing in which we specialize to meet the expected demand for both the origination of new transitional CRE loans and the refinancing or recapitalization of existing transitional CRE loans. While demand for real estate debt capital generally increased throughout the economic expansion following the global financial crisis, we believe CRE lenders exhibited more discipline, and lending standards were generally more conservative than in the past.

High Volume of Near-Term Commercial Mortgage Loan Maturities

The principal sources of debt investment opportunities are the refinancing of maturing loans and the origination of loans in connection with asset acquisition and development activity. Maturing loans lead to substantial demand for debt capital, as these loans are typically either refinanced or the underlying properties are sold, with buyers often requiring their own new financing. Based on research by Trepp LLC, between 2021 and 2025, commercial mortgage loans with a total outstanding unpaid principal balance of approximately $2.4 trillion will mature, the expected refinancing of some of which we believe will provide opportunities for us to originate new loans.

Commercial Mortgage Loan Maturities (in billions)

 

LOGO

Source: Trepp LLC, based on Flow of Funds data, 1Q 2021.

CRE Transaction Volumes and Construction Activity Over Time

CRE transaction and construction activity increased significantly following the global financial crisis of 2008, as many markets benefited from employment gains and historically low interest rates, and consequently experienced increased CRE demand and real estate values. In 2019, acquisition activity surpassed pre-crisis peaks, with annual CRE transaction volume increasing over eight times between 2009 and 2019, from $72 billion to $599 billion, according to Real Capital Analytics, Inc. 2019 was one of the highest years on record for aggregate total CRE transaction volume, and transaction volume during the first quarter of 2020 surpassed that of the first quarter of 2019. While overall 2020 transaction activity was significantly impacted by the COVID-19 pandemic, transaction volume


 

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increased in the second half of the year, with $165 billion of activity in the fourth quarter of 2020 alone. This recovery continued in the second quarter of 2021, with CRE transaction volume up 198% year-over-year, and we expect it will accelerate in parallel with the broader CRE sector recovery.

Private sector U.S. commercial construction activity, consisting of construction spending in categories such as retail, wholesale and selected services, healthcare, lodging and residential assets, has generally increased since 2011 into the second quarter of 2021, and, according to data from the U.S. Census Bureau and the U.S. Bureau of Economic Analysis, the amount of private sector U.S. commercial construction spending as a percentage of GDP increased by approximately 65% from 2011 to the end of the second quarter of 2021, representing 5.3% of GDP at June 30, 2021, slightly above 5.2%, the annual average from 1993 through the end of the second quarter of 2021. While construction activity slowed during 2020 in connection with the economic downturn, we expect it will continue to stabilize as economic conditions continue to improve coming out of the COVID-19 pandemic.

CRE Transaction Volume (in billions)

 

LOGO

Source: Real Capital Analytics, Inc., August 2021.


 

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Private Sector U.S. Commercial Construction Spending as a Percentage of GDP

 

LOGO

Source: Annual private sector commercial construction spending data from U.S. Census Bureau, August 2021. Annual GDP data from U.S. Bureau of Economic Analysis, August 2021.

Note: Reflects private sector commercial construction spending in categories such as retail, wholesale and selected services, healthcare, lodging and residential assets as categorized by the U.S. Census Bureau.

Significant Closed-End Private Equity Real Estate Fund Investable Equity Capital

According to Preqin data as of October 2021, closed-end private equity real estate funds had more than $370 billion of committed investable equity capital that has not yet been called for investment. This represents an increase of 120% from the 2007 level and a return to near pre-pandemic highs. We believe that the deployment of this equity capital may increase CRE transaction activity and, in turn, demand for CRE lending opportunities.


 

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Investable Equity Capital—Closed-End Private Equity Real Estate Funds (in billions)

 

LOGO

Source: Preqin, October 2021.

Limited Supply of Debt Capital for Transitional CRE Assets

We believe there is a limited supply of debt capital relative to demand for large balance loans on transitional CRE assets, even with the recent increase in private equity real estate fund investable debt capital. Historically, transitional CRE loans have been funded by U.S. commercial banks, foreign banks, life insurance companies, government sponsored entities, or GSEs, CMBS and other sources of capital, including private debt funds and commercial mortgage REITs. We believe that significant changes have occurred in the regulation of financial institutions, including the rules adopted by the Basel Committee on Banking Supervision, or Basel III, and the Dodd-Frank Wall Street Reform and Consumer Protection Act, or the Dodd-Frank Act, among others, which have caused traditional lenders (such as commercial banks) to be less active in financing transitional CRE assets, creating a lending supply-demand disparity. We believe that this disparity is especially pronounced in the lending market for moderate-to-heavy transitional assets, in which the properties being financed are not yet generating cash flow (or have limited or temporarily diminished cash flows) and require a significant outlay of capital for repositioning, renovation, rehabilitation, leasing, development or redevelopment. Changes in bank regulation resulting from the implementation of Basel III and the Dodd-Frank Act generally increased the capital requirements applicable to banks that have traditionally been a key provider of financing for transitional CRE assets. While the Economic Growth, Regulatory Relief, and Consumer Protection Act, or the EGRRCPA, signed into law on May 24, 2018, amended the approach to certain loans secured by High Volatility Commercial Real Estate, or HVCRE, to relieve some of the burdens on commercial banks, HVCRE and capital requirements still present potential issues for banks financing certain transitional CRE assets. We believe many traditional lenders are now less active in the transitional CRE lending space as they pursue lower leverage loans secured by fully-


 

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stabilized, prime assets in major markets. Financing transitional CRE assets requires traditional lenders to increase capital reserves and subjects them to greater regulatory scrutiny and administrative burden. The requirement for traditional lenders to maintain greater capital reserves decreases the profitability of these loans to them and we believe this has caused many of those lenders to withdraw or otherwise retrench from the transitional CRE lending market. Not only has the balance of construction loans held by banks dropped 37.5% since 2007, but the balance of construction loans held by banks as a proportion of U.S. CRE debt outstanding also saw a meaningful decline from 19% in 2007 to 8% in the second quarter of 2021, based on total U.S. CRE debt held by banks of $3.3 trillion as of December 31, 2007 and $5.0 trillion as of June 30, 2021, according to data from the Federal Deposit Insurance Corporation, or the FDIC, and the U.S. Federal Reserve Bank.

Construction Loans Held by Banks (in billions)

 

LOGO

Source: FDIC, June 30, 2021.

Note: Figures represent construction loans held by FDIC-insured commercial banks and savings institutions at the end of each year, except where noted otherwise.

We believe the supply-demand disparity in the transitional CRE lending market will remain significant over the foreseeable future, continuing to create attractive opportunities for transitional CRE lenders. We believe the significant infrastructure-related launch costs of an effective transitional CRE lending platform creates a meaningful barrier to entry for new competitors. Although the balance of construction loans held by banks, both nominally and in proportion to the total amount of outstanding CRE debt, has decreased since 2007, private construction spending simultaneously grew 41% from $859 billion in 2007 to $1,212 billion in the second quarter of 2021 according to private construction spending data collected by the U.S. Census Bureau. We believe that this confluence of factors has resulted in, and will continue to result in, non-traditional lenders, including commercial mortgage REITs, being more active in transitional CRE lending. At the end of the second quarter of 2021, total CRE loans by non-traditional lenders, including commercial mortgage REITs, increased 85.2% in dollar value since December 31, 2007 and comprised $623 billion or 12.6% of the CRE debt market, as compared to $336 billion, or 10.2% of the CRE debt market as of December 31, 2007, according to the U.S. Federal Reserve Bank.


 

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Outstanding U.S. CRE Debt Held By Commercial Mortgage REITS

and Other Non-Traditional Lenders (in billions)

 

 

LOGO

Source: U.S. Federal Reserve Bank—Financial Accounts of the United States, June 30, 2021.

Note: Other Non-Traditional Lenders are defined as all lenders other than U.S. banks and depository institutions, insurance companies, agency and GSEs and asset-backed securitizations.

Constructive Long-Term CRE Fundamentals

We believe that as a result of disciplined lending standards adopted following the global financial crisis of 2008, the CRE market was in a strong position entering the most recent economic downturn arising from the COVID-19 pandemic.

Over the last ten years, CRE property values increased significantly according to Green Street Advisors, or GSA, which helped to drive demand for debt capital within our target assets. During the global financial crisis of 2008, the Commercial Property Price Index, or CPPI, which represents a time series of unleveraged U.S. commercial property values that captures the prices at which CRE transactions are currently being negotiated and contracted, fell 36.7% from its peak in August 2007 to post-global financial crisis lows in May 2009. Since May 2009, the CPPI has increased from 63.3 to 146.4 as of September 1, 2021, representing growth of 131%. No assurance can be given as to the direction, magnitude or timing of future CRE property values. However, we have endeavored to actively limit our basis risk, and our loan portfolio had a weighted average LTV of 65.9% as of June 30, 2021 demonstrating our Manager’s disciplined underwriting standards. We believe that in the current market environment, investing in CRE debt with substantial underlying collateral that is evaluated and underwritten by MRECS’ experienced senior management team provides an attractive opportunity for stable risk-adjusted returns as we believe the basis in our loan portfolio is less exposed to volatility in property prices.


 

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Commercial Property Price Index

 

 

LOGO

Source: GSA, October 2021.

Note: GSA Commercial Property Price Index data indexed to August 2007. Chart illustrates data through September 1, 2021.

Finally, while U.S. CRE capitalization rates, or cap rates, have compressed since 2009, the rates on 10-year U.S. treasury securities have declined at a greater rate over the same period. We believe there is cushion between CRE cap rates and rates on 10-year U.S. treasury securities to allow for some spread compression if cap rates decline or rates on 10-year U.S. treasury securities increase due to current macroeconomic conditions, including the possibility of near-term inflation. The current spread between CRE cap rates and 10-year U.S. treasury rates of 373 basis points as of September 30, 2021 is 36 basis points wider than the average spread from March 31, 2001 to September 30, 2021 of 337 basis points, as shown in the GSA data.


 

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Historical CRE Cap Rates and 10-year U.S. Treasury Securities Rates

 

 

LOGO

Source: GSA, U.S. Department of the Treasury, October 2021.

Note: Treasury security rates reflect trailing last quarter average. Chart illustrates data through September 30, 2021. CRE cap rate is an average of cap rates for apartment, industrial, mall, office and strip center property types.

Our Investment Approach

We believe that we have a differentiated investment approach, characterized by the following guiding principles:

We Have an Ownership Mindset

We employ an ownership mindset in our origination, underwriting and asset management disciplines, driven by our Sponsor’s real estate investment, development and management expertise. We believe our Sponsor’s experience as a real estate investor and developer helps us better understand borrower needs, and enables us to be a leading solutions provider of loans that are customized to borrowers and their business plans. As part of our ownership mindset, we seek to be patient and prudent, emphasizing long-term borrower relationships rather than short-term one-time investments.

We Leverage our Sponsor’s Real Estate Background and Platform

We believe our Sponsor’s capabilities and infrastructure help us determine potential alternative exit strategies in the event of borrower distress and maintain appropriate ongoing asset management and oversight of our investments. Although our objective is to originate loans for which the borrower will perform as expected and pay as agreed, we believe that in a downside scenario we have the ability to evaluate and mitigate much of the execution risk in borrower business plans by utilizing our Sponsor’s broad experience and capabilities. Our Sponsor has a team of more than 200 people in total, including a development subsidiary with approximately 11 employees based in Los Angeles, Seattle and Phoenix and a property management subsidiary with approximately 130 employees Additionally, approximately 65% of our loan portfolio based on unpaid principal balance as of June 30, 2021 is


 

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located in markets where MREG has its own investments or dedicated development or property management teams. We believe our ability to draw on this expertise enables us to carefully underwrite our loan solutions to our borrowers that may not be available from lenders that lack similar expertise and infrastructure, while selecting and structuring investments so as to limit downside risk for us.

We Underwrite Execution Risk, and Seek to Avoid Basis Risk

We consider execution risk to be the risk that a borrower fails to execute its intended business plan, and we leverage our Sponsor’s real estate platform and infrastructure to carefully underwrite this risk. We consider basis risk to be the risk of a material diminution in collateral value, as a result of the borrower over leveraging the collateral for the loan due to market conditions or other factors. In seeking to limit basis risk, we focus on last-dollar loan basis, as we believe that lower LTVs may provide substantial cushion in the event of declines in the value of our loans’ collateral. Our loan portfolio as of June 30, 2021 had a weighted average LTV of 65.9%, providing substantial subordinate capital to our funded loan amounts. In evaluating basis risk, we consider as-is and (if appropriate) as-stabilized LTV, as well as alternative uses of collateral.

We Offer Bespoke and Flexible Structuring Solutions

We draw on the deep structuring experience of our Manager and its principals to develop lending solutions that are customized to the needs of our borrowers, while protecting our loan basis and emphasizing preservation of capital. For example, a portion of our loans are structured with forward commitments, enabling borrowers to draw additional proceeds as specified milestones are met. We document these loans with structural protections aligned with our borrowers’ business plans designed to enable us to protect our capital even in a downside scenario. Examples of these structural protections include completion guarantees from well capitalized guarantors, among others. Our loans are also typically structured to provide borrowers with loan maturity extension rights, subject to borrowers meeting certain conditions, at agreed upon terms. In addition, under certain market circumstances, we may, in our discretion, negotiate loan amendments or modifications with borrowers where we believe this protects or enhances the value of our investment. Such amendments or modifications may allow the borrower to extend the loan, while we may negotiate a higher spread, loan extension fees, partial loan paydowns or other structural enhancements. Our goal is to be highly responsive to borrowers’ needs, while at the same time hold them accountable for their stated business plan milestones.

Competitive Strengths

We believe that we have the following competitive strengths in originating senior and subordinate loans on transitional CRE assets located primarily in major U.S. markets:

Established and Scaled Platform, Validated by Significant Institutional Capital

Upon completion of this offering, we expect to be one of the largest public commercial mortgage REITs in the U.S., based on total stockholders’ equity. From our inception in August 2015 through June 30, 2021, we have raised approximately $2.6 billion of equity capital and originated, co-originated or acquired 86 investments consisting of 131 loans on transitional CRE assets with aggregate loan commitments of approximately $11.5 billion. We employ a differentiated investment strategy focused on transitional loan opportunities secured by high quality CRE assets, with quality sponsorship, including assets located in major U.S. markets where our Sponsor has infrastructure or experience, at a compelling loan basis. We believe our ownership mindset and our Sponsor’s significant real estate development, ownership and operations experience and infrastructure enable us to underwrite transitional CRE assets, which may require varying degrees of additional capital to maximize their cash flow and value depending on prevailing market conditions, in a way that lenders without such infrastructure or expertise may be unable to do. In general, we choose to focus on fewer, larger loan opportunities representing


 

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what we believe to be the most attractive risk-adjusted returns in the market at any point in time. We have raised and invested significant institutional capital from major state and corporate pension funds, global insurance companies and leading investment managers, among others. We believe that these investors have been attracted to us by the experience of our team and our track record of disciplined underwriting and rigorous asset management. From our inception through June 30, 2021, 29 of the investments that we originated, representing aggregate loan commitments of $3.1 billion, have been repaid in full or sold, with no credit losses incurred and a realized gross internal rate of return of 13.2%. As of June 30, 2021, our loan portfolio was comprised of 56 loan investments consisting of 92 loans, representing aggregate loan commitments of $7.5 billion, remaining loan commitments (representing aggregate loan commitments repayments received in respect thereof) of $7.3 billion, and unpaid principal balance of $6.1 billion, and our stockholders’ equity was $2.5 billion, representing a book value of $18.76 per share of our common stock.

Sponsor with Roots in Real Estate Development and Operations

We believe we have a competitive advantage relative to other market participants with similar investment strategies due to the expertise of the principals and senior management and other personnel of our Sponsor and its affiliates in global real estate investment strategies across the debt and equity spectrum as a developer, owner and operator, as well as a lender. The members of our Sponsor’s senior management team have, on average, more than 25 years of real estate and finance experience. We believe that the Mack family has developed a first-class reputation dating back to the 1960s as a real estate developer, investor and manager, including through successful prior ventures such as AREA, among others.

In particular, our Sponsor’s hands-on real estate investment, development and management capabilities help us evaluate transitional CRE assets, including the feasibility of borrower business plans and potential alternative exit strategies for assets in the event of borrower failure to execute its stated business plan or borrower distress. We leverage our Sponsor’s broad real estate investment, development and management experience to employ an ownership mindset in underwriting our CRE loan originations.

Experienced Cycle-Tested Management and Investment Team

Our management team is made up of seasoned CRE professionals with extensive experience in the CRE equity and debt investment industries. Richard Mack, our Chief Executive Officer and Chairman, joined AREA in 1993, the year of its formation, as one of the initial employees. There, he oversaw ARCap (a subordinate CMBS investor and special servicer), the Claros Real Estate Securities Fund (focused on investments in subordinate CMBS in the U.S. and Europe), the Apollo GMAC Mezzanine Fund and the Apollo Real Estate Finance Corporation, in addition to numerous CRE equity investments. Michael McGillis, our President and Chief Financial Officer, was previously Managing Director, Head of U.S. Funds and Chief Financial Officer at J.E. Robert Companies, where he was responsible for asset and portfolio management, capital markets, investor relations and financial management activities for a series of private equity real estate funds. Kevin Cullinan, our Vice President, also serves as a Managing Director of MRECS and as its Head of Originations. Prior to joining MRECS, he worked on the Global Real Assets team at J.P. Morgan Investment Management and at a family office in New York, New York. Priyanka Garg, our Vice President, also serves as a Managing Director of MRECS and as its Head of Portfolio and Asset Management. Ms. Garg has more than 20 years of real estate investment management experience, including leadership positions at Treeview Real Estate Advisors and Westbrook Partners. Mr. Cullinan and Ms. Garg are also our Sponsor’s Co-Heads of Credit Strategies.

Messrs. Mack, McGillis and Cullinan and Ms. Garg, among others, lead our multi-disciplinary credit team, which works closely with our Sponsor’s professionals to source, underwrite and structure loans secured by transitional CRE assets. Our Sponsor’s principals and members of senior management have several decades of global real estate investing experience through multiple economic cycles with respect to debt, property and


 

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portfolio investments, mergers and acquisitions and public market transactions. Our Sponsor’s principals seek to focus on opportunities that are overlooked by or not readily executable by other lenders and have demonstrated the discipline to refrain from lending when they believe their targeted returns are unavailable or subject to an undue level of market or financing risk.

Differentiated Investment Strategy Focused on Larger, Transitional Lending Opportunities in Major Markets

We employ a differentiated investment strategy focused on transitional loan opportunities secured by high quality CRE assets, with quality sponsorship, including assets located in major U.S. markets where our Sponsor has infrastructure or experience, at a compelling loan basis. We believe our ownership mindset and our Sponsor’s significant real estate development, ownership and operations experience and infrastructure enable us to underwrite transitional CRE assets, which may require varying degrees of additional capital to maximize their cash flow and value depending on prevailing market conditions, in a way that lenders without such infrastructure or expertise may be unable to do. In general, we choose to focus on fewer, larger loan opportunities representing what we believe to be the most attractive risk-adjusted returns in the market at any point in time.

These assets may require light-to-heavy development, redevelopment, renovation, rehabilitation, repositioning or leasing. In light transitional lending, the properties being financed are generating cash flow, but typically require funding for value-added elements such as a new marketing or leasing program or other changes in business plan intended to maximize operating income, which in turn should increase value. In heavy transitional lending, which primarily consists of land and construction loans, the properties being financed are not yet generating operating cash flow and require a significant outlay of capital. In general, investments on properties that require less capital expenditures on a relative basis and/or have a smaller difference between their in-place operating income and projected stabilized operating income are considered “lighter” transition, while investments on properties that are expected to require more capital expenditures on a relative basis and/or have a more significant difference between their in-place operating income (if any) and projected stabilized operating income are considered “heavier” transition. We seek to construct a portfolio that has an attractive and carefully underwritten risk-adjusted return across the light-to-heavy transitional continuum as we deem appropriate for market conditions.

Certain of the transitional CRE assets that we seek to lend against involve a level of borrower execution risk that we believe is difficult for traditional lenders and other debt market participants to appropriately underwrite if they lack comparable real estate development, ownership and operations experience and infrastructure. In addition, we believe that there is inherently less competition in the market for larger CRE loans having a moderate-to-heavy transitional profile, potentially resulting in more attractive pricing to us. Traditional lenders became less active in the transitional CRE lending space following the global financial crisis of 2008 due in part to the adverse capital treatment applicable to them with respect to these loans stemming from post-crisis banking regulations. Our target loan profile is also challenging for many non-traditional lenders that do not have the experience or resources to originate, manage and monitor loans that fit our loan portfolio objectives. In particular, many traditional and non-traditional lenders do not have the broader real estate platform resources to draw upon to manage these loans, which we believe is especially important when borrower performance deviates (or is anticipated to deviate) from underwritten business plans. We expect land and construction loans to represent as much as 20% to 40% of our loan portfolio at any time, subject to our view of market conditions.

High Quality, Diversified Loan Portfolio with Stable, Attractive Yields

As of June 30, 2021, we had a $6.1 billion loan portfolio (based on unpaid principal balance) on transitional CRE assets, summarized as follows:

 

   

43.9% of our loans are secured by real estate (or equity interests relating thereto) located in the New York metropolitan area with an average remaining loan commitment of approximately $128.9 million, and no other metropolitan area represents more than 14.5% of our loan portfolio.


 

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Our loans are diversified across property types, with no property type representing more than 24.2% of our loan portfolio. We had no loans secured solely by retail real estate and a relatively small portion of the collateral value underlying our loans on mixed-use properties was related to retail components therein.

 

   

No individual investment exceeded 6.4% of our loan portfolio, our five largest investments represented 24.1% of our loan portfolio, and our 15 largest investments represented 53.6% of our loan portfolio.

 

   

98.3% of our loans based on unpaid principal balance were floating rate and 94.5% of our floating rate loans based on unpaid principal balance (and 99.7% of our floating rate loans based on unfunded loan commitments (which represents remaining loan commitments less unpaid principal balance of our loans)) had interest rate floors tied to market-standard floating rates, such as LIBOR, providing protection against certain decreases in prevailing interest rates.

 

   

The weighted average one-month LIBOR floor of our loans based on unpaid principal balance was 1.47%. The LIBOR floor on all of our floating rate loans which had a LIBOR floor was in excess of one-month LIBOR of 0.10% as of June 30, 2021.

 

   

Our loan portfolio’s weighted average all-in yield was 6.6%, with a weighted average term to initial and fully extended maturity of 1.1 years and 2.6 years, respectively, providing significant contractual cash flow visibility.

 

   

We had $1.1 billion in unfunded loan commitments outstanding across 24 investments, the funding of which remains subject to satisfactory completion of specified borrower conditions, all of which were floating rate loan commitments with the exception of $23.2 million in fixed rate loan commitments. Of the $1.1 billion in unfunded floating rate loan commitments, the weighted average coupon was one-month LIBOR + 4.48% (subject to weighted average LIBOR floors of 1.65%).

 

   

Our loan portfolio’s weighted average LTV was 65.9%, providing substantial subordinate capital to our funded loan amounts.

In addition, for each quarter from the quarter ended March 31, 2020 to the quarter ended June 30, 2021, we have paid dividends representing a yield of 7.7% to 9.1% on our book value per share, while maintaining conservative leverage with a Net Debt-to-Equity Ratio of 1.4x at December 31, 2019, 1.5x at December 31, 2020, and 1.5x at June 30, 2021.

We believe our current loan portfolio demonstrates our ability to deliver on our investment strategy.

In February 2021, we foreclosed on a portfolio of seven limited service hotel properties located in New York, New York that secured a mezzanine loan with an unpaid principal balance of $103.9 million as of February 8, 2021 that we originated in February 2018. Our real estate owned investment at the time of foreclosure was encumbered by a securitized senior mortgage, which we assumed on February 8, 2021 with a principal balance of $300.0 million. In June 2021 the terms of the securitized senior mortgage were modified, which included the repayment of $10.0 million of principal, and extension of its maturity date by an additional three years to February 2024. At June 30, 2021, the outstanding balance of our debt related to real estate owned was $290.0 million.

Established Sourcing and Origination Relationships

Our long-standing industry relationships provide us with valuable sources of investment opportunities and market insights that we believe allow us to selectively originate loans which best fit our loan portfolio objectives and investment criteria. Our Sponsor has cultivated extensive relationships in the real estate investment, development, lending and brokerage communities as well as with the executives and professionals of real estate operating companies and other companies that derive significant value from real estate investment activity. As a


 

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result of our Sponsor’s strong industry presence and deal flow, we have reviewed over 1,200 potential CRE lending opportunities totaling approximately $185.4 billion since our inception through June 30, 2021, of which 82%, 15% and 3% were sourced from brokers, existing borrowers and lenders, respectively. Of the transactions we have ultimately executed, 54%, 34% and 11% were sourced from brokers, existing borrowers and lenders, respectively. We believe our relationships with brokers, existing borrowers and lenders demonstrate the advantages of our platform, process and reputation in offering bespoke and flexible financing solutions. These factors have also enabled us to establish new client relationships with consistently high retention rates as repeat borrowers. Borrowers that were or became repeat borrowers or their affiliates comprised 57% of the total number of investments that we have originated as of June 30, 2021. Historically, our Sponsor has not competed with our borrowers to acquire the assets we finance, positioning us as a preferred lender against competitors who may also manage equity funds who compete with our borrowers.

The strength of our origination relationships and expertise is demonstrated by the growth in our origination volume and portfolio size over a relatively short time since our formation. We have originated aggregate loan commitments of approximately $11.5 billion since inception, including originating and increasing existing aggregate loan commitments of $235.3 million and $450.3 million, respectively, during the six months ended June 30, 2021 and 2020, and $513.1 million and $4.0 billion, respectively, during the years ended December 31, 2020 and 2019. Origination volume during the year ended December 31, 2020 was limited due to the COVID-19 pandemic, which we expect to return to normalized levels as the economy continues to improve.

Rigorous Underwriting Process and Proactive Asset Management

We leverage our Sponsor’s broad real estate investment, development and management experience to employ “ownership-like” underwriting methods. On each loan, we conduct a thorough analysis of the underlying asset, the borrower and the borrower’s business plan and evaluate alternative uses of collateral in order to distinguish execution risk from basis risk. Although our objective is to originate loans for which the borrower will perform as expected and pay as agreed, we believe that in a downside scenario, we have the ability to evaluate and mitigate much of the execution risk by utilizing our Sponsor’s broad experience and capabilities in developing, owning and managing real estate equity investments. In our view, options are limited to mitigate the basis risk taken by lenders who extend excess financing for a particular asset or property in light of unpredictable future market developments. Accordingly, our Manager is focused on creating a portfolio with an appropriate level of execution risk based on our Sponsor’s experience and capabilities and, in its judgment, relatively limited basis risk. We believe that the performance of certain of our loans since the COVID-19 pandemic demonstrates the strength of our underwriting, asset selection and asset management processes.

One example of how our underwriting and proactive management were employed to address a particular challenge was our recent experience with our mezzanine loan secured by seven limited service hotel properties. In February 2018, we originated an $85.0 million mezzanine loan secured by a portfolio of seven limited service hotel properties located in New York, New York. Following the onset of the COVID-19 pandemic, the hotels were forced to close, causing the borrower to experience financial difficulty, which resulted in the borrower not paying debt service on our mezzanine loan and the securitized senior mortgage. Beginning in June 2020, we began funding debt service on a $300.0 million securitized senior mortgage encumbering the portfolio as protective advances on our loan, which totaled $18.9 million through February 8, 2021. In February 2021, we foreclosed on the portfolio of hotel properties through a Uniform Commercial Code foreclosure and in June 2021 we modified the securitized senior mortgage by extending its maturity date for an additional three years to February 2024 and repaying $10.0 million of principal. Given our Sponsor’s experience and capabilities in real estate ownership and management, we believe we are well-positioned to own this real estate investment through what we expect to be improved operating performance as the New York City hotel market recovers. We believe we were able to foreclose on these assets at an attractive basis and can leverage our Sponsor’s deep experience and capabilities to ultimately achieve favorable risk-adjusted returns on this investment.


 

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From the closing of an investment through its realization, we leverage our Sponsor’s personnel and resources to remain in regular contact with borrowers, servicers and local market experts to actively monitor borrower progress against approved business plans, assess compliance with other loan terms, anticipate property and market issues and, when appropriate and necessary, enforce our rights and remedies. Our asset management team provides weekly updates on our loan portfolio and oversees a rigorous quarterly credit risk review and rating process for each loan in our loan portfolio.

Prudent Balance Sheet Management with Access to Diverse Financing Sources

As part of our financing strategy, we seek to diversify our financing sources and employ prudent levels of leverage, targeting a Total Leverage Ratio between 2.0x and 3.0x. Leveraging the experience of our Sponsor, we maintain relationships with diverse debt financing sources, with an emphasis on match-term financing for our loans. As of June 30, 2021, we had $4.4 billion in outstanding indebtedness, of which $1.5 billion, or 33.0% of all outstanding financings, was recourse to us. As of June 30, 2021, we had repurchase facilities with five counterparties representing a total financing capacity of up to $4.0 billion, of which $1.3 billion was undrawn, as well as asset-specific financing structures representing $762.0 million of total financing capacity, of which $112.9 million was undrawn, a $764.7 million secured term loan, or our Secured Term Loan, and a $290.0 million securitized senior mortgage on our one real estate owned investment. We actively evaluate financing alternatives for each investment, resulting in a leverage profile that we believe to be optimal for each investment and appropriate for our loan portfolio. As we continue to grow our platform, we expect to continue to employ conservative amounts of leverage and diversify our financing strategy from both a counterparty and financing-type standpoint.

Strong Alignment of Interest

At our inception, the Mack family, our Sponsor’s principals and senior management and other related parties, which we refer to as the Sponsor Parties, indirectly invested $30.0 million into the Company. We believe that the significant early-stage investment by these persons aligns our Sponsor’s interests with ours and creates an incentive to protect capital and maximize risk-adjusted returns for our stockholders over time.

In connection with the formation of MREG and MRECS, the Mack family invested significant capital to ensure that our Manager has a highly skilled team and the necessary infrastructure to execute our investment strategy with a long-term view of the opportunities within the transitional CRE lending space.

We do not lend to our Sponsor or its controlled affiliates.

Our Investment Strategy

We seek primarily to originate senior and subordinate loans on transitional CRE assets located in major U.S. markets and generally intend to hold our loans to maturity. Our investments typically have the following characteristics:

 

   

investment size of $50 million to $300 million;

 

   

secured by transitional CRE assets (or equity interests relating thereto) in diverse property types;

 

   

located primarily within major U.S. markets with attractive fundamental characteristics supported by macroeconomic tailwinds;

 

   

coupon rates that are determined periodically on the basis of a floating base lending rate plus a credit spread;

 

   

no more than 80% LTV on an individual investment basis and no more than 75% LTV across the portfolio, in each case, at the time of origination or acquisition;


 

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two- to four-year initial terms with one to three six-month or one-year borrower extension options that are subject to the borrower satisfying certain conditions precedent;

 

   

borrowers with substantial operating experience in the particular property type and geographic market being evaluated, a track record of executing a similar business plan, a strong reputation and substantial equity capital invested in the property being financed; and

 

   

performance covenants on future funding and natural person non-recourse carve-out guarantors and completion guarantors, where appropriate.

In addition to our primary focus on major U.S. markets, we are also seeking to originate senior and subordinate loans on transitional CRE assets located in other markets that we be believe demonstrate favorable demographic trends as a result of, among other factors, de-urbanization, migration to states with lower tax rates and perceived higher quality of life. We believe that our investment strategy currently provides significant opportunities for us to generate attractive risk-adjusted returns over time for our stockholders. However, to capitalize on the investment opportunities at different points in the economic and real estate investment cycle, we may modify or expand our investment strategy without our stockholders’ consent. We believe that the flexibility of our strategy supported by our Sponsor’s significant CRE experience and its extensive resources will allow us to take advantage of changing market conditions to maximize total returns for our stockholders.

Our Target Assets

We originate, co-originate and acquire senior and subordinate loans on transitional CRE assets located primarily in major U.S. markets. Together, we refer to the following types of investments as our target assets:

Senior Loans: We focus primarily on originating senior loans on transitional CRE assets, including:

 

   

Mortgage Loans. Mortgage loans secured by a first priority or subordinate mortgage on transitional CRE assets. These loans are non-amortizing, require a balloon payment of principal at maturity (and in some cases, earlier pay downs in the case of loans that provide for partial releases of collateral upon the occurrence of specified events, such as the sale of condominium units) and are typically structured to be floating rate. Some of our loan commitments include a mixture of up-front and future funding obligations, with future fundings subject to the borrower achieving conditions precedent specified in the loan documents, such as meeting certain construction milestones and leasing thresholds.

 

   

Participations in Mortgage Loans. Participations in the mortgage loans we co-originate or acquire, for which other participations have been or are expected to be syndicated to other investors.

 

   

Contiguous Subordinate Loans. Under certain circumstances, we may structure our investment on a property to include both a senior mortgage and a subordinate loan component, which we refer to as a contiguous subordinate loan. In these cases, we believe the subordinate loan component of the investment, when taken together with its related senior mortgage loan component, renders the entire investment most similar to our other senior loans in comparison to other loan types given its overall credit quality and risk profile.

Subordinate Loans: We also invest in mezzanine loans, which are primarily originated or co-originated by us, and are usually secured by a pledge of equity ownership interests in the direct or indirect property owner rather than directly by the underlying commercial properties. These loans are subordinate to a mortgage loan but senior to the property owner’s equity ownership interests. These loans may be tranched into senior and junior mezzanine loans. Rights under these loans are generally governed by intercreditor agreements which typically include the right to cure defaults under senior loans. Subordinate loans may also include subordinated mortgage interests, which are mortgage loan interests that are subordinate to senior mortgage loans but senior to the property owner’s equity interests.


 

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The allocation of our capital among our target assets will depend on prevailing market conditions at the time we invest and may change over time in response to changes in prevailing market conditions, including with respect to interest rates and general economic and credit market conditions as well as local economic conditions in markets where we are active. In addition, in the future we may invest in assets other than our target assets, in each case subject to maintaining our qualification as a REIT for U.S. federal income tax purposes and our exclusion from registration under 1940 Act.

Our Portfolio

We began operations in August 2015 and, as of June 30, 2021, had a $6.1 billion diversified loan portfolio (based on unpaid principal balance) of senior and subordinate loans. We believe our current loan portfolio, comprised of loans that we view as representative of our target assets and investment philosophy, validates our ability to execute on our investment strategy, including lending to experienced and well-capitalized sponsors against high-quality transitional CRE assets primarily in major U.S. markets with attractive fundamental characteristics supported by macroeconomic tailwinds.

As of June 30, 2021, our loan portfolio consisted of 83 senior loans with an aggregate unpaid principal balance of $5.6 billion, and 9 subordinate loans with an aggregate unpaid principal balance of $488.9 million.

The below table summarizes our loan portfolio as of June 30, 2021 (dollars in thousands):

 

                                  Weighted Average(4)  
    Number of
Investments(1)
    Number
of
Loans(1)
    Aggregate
Loan
Commitment(2)
    Remaining
Loan
Commitment(3)
    Unpaid
Principal
Balance
    All-In
Yield(5)
    Term to
Initial
Maturity(6)
    Term to
Fully
Extended
Maturity(6)
    LTV(7)     %
Floating
Rate
 

Senior loans(8)

    49       83     $ 6,899,919     $ 6,743,983     $ 5,640,715       6.2     1.2       2.7       66.4     98.5

Subordinate loans

    7       9       649,126       524,201       488,902       11.2     0.4       2.3       60.8     95.8
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

           

Total / Weighted Average

    56       92     $ 7,549,045     $ 7,268,184     $ 6,129,617       6.6     1.1       2.6       65.9     98.3
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

           

 

(1)

Certain investments include multiple loans for which we made commitments to the same borrower or affiliated borrowers on the same date. The loan portfolio table excludes our one real estate owned investment.

(2)

Aggregate loan commitment represents initial loan commitments, as adjusted by commitment reductions, less transfers which qualified for sale accounting under GAAP.

(3)

Remaining loan commitment represents the aggregate loan commitment less repayments received in respect thereof.

(4)

Weighted averages are based on unpaid principal balance.

(5)

All-in yield represents the weighted average annualized yield to initial maturity of each loan within our loan portfolio, inclusive of coupon, origination fees, exit fees, and extension fees received, based on the applicable floating benchmark rate (if applicable), including LIBOR floors (if applicable), as of June 30, 2021.

(6)

Term to initial and fully extended maturity are measured in years. Fully extended maturity assumes all extension options are exercised by the borrower upon satisfaction of the applicable conditions.

(7)

LTV represents “loan-to-value” or “loan-to-cost”, which is calculated as our total loan commitment from time to time, as if fully funded, plus any financings that are pari passu with or senior to our loan, divided by our estimate of either (1) the value of the underlying real estate, determined in accordance with our underwriting process (typically consistent with, if not less than, the value set forth in a third-party appraisal) or (2) the borrower’s projected, fully funded cost basis in the asset, in each case as we deem appropriate for the relevant loan and other loans with similar characteristics. Underwritten values and projected costs should not be assumed to reflect our judgment of current market values or project costs, which may have changed materially since the date of origination including, without limitation, as a result of the COVID-19 pandemic. LTV is updated only in connection with a partial loan paydown and/or release of collateral, material changes to expected project costs, the receipt of a new appraisal (typically in connection with financing or refinancing activity) or a change in our loan commitment.

(8)

Includes contiguous subordinate loans (i.e., loans for which we also hold the mortgage loan) representing aggregate loan commitments of $807.3 million, remaining loan commitments of $796.8 million, and aggregate unpaid principal balance of $645.5 million, in each case as of June 30, 2021.


 

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In February 2021, we foreclosed on a portfolio of seven limited service hotel properties located in New York, New York that secured a mezzanine loan with an unpaid principal balance of $103.9 million as of February 8, 2021 that we originated in February 2018. Neither the prior mezzanine loan nor the portfolio of hotel properties is included in the table above. Our real estate owned investment at the time of foreclosure was encumbered by a securitized senior mortgage, which we assumed on February 8, 2021 with a principal balance of $300.0 million. In June 2021 the terms of the securitized senior mortgage were modified, which included the repayment of $10.0 million of principal and extension of its maturity date by an additional three years to February 2024. At June 30, 2021, the outstanding balance of our debt related to real estate owned was $290.0 million.

The below table details our largest 15 loan investments individually based on unpaid principal balance as of June 30, 2021 (dollars in thousands):

 

Investment(1)

  Type   Origination
Date
    Remaining
Loan
Commitment(2)
    Unpaid
Principal
Balance
    Carrying
Value
    Coupon(3)     All-in
Yield(4)
    Initial
Maturity
    Fully
Extended
Maturity(5)
    LTV(6)     Location     Property
Type
 

Floating rate investments

                     

Investment 1

  Senior     11/1/2019     $ 390,000     $ 390,000     $ 388,059       L+2.75%       4.35     11/1/2024       11/1/2026       74.3     NY       Multifamily  

Investment 2

  Senior     10/18/2019       330,000       290,109       288,579       L+4.95%       7.69     10/18/2022       10/18/2024       73.3     CA      
For Sale
Condo
 
 

Investment 3

  Senior     7/12/2018       290,000       290,000       290,228       L+5.35%       7.57     8/1/2022       8/1/2023       52.9     NY       Hospitality  

Investment 4

  Senior     8/20/2018       379,895       264,533       262,331       L+4.80%       6.84     8/20/2022       8/20/2024       65.1     VA       Mixed-use  

Investment 5(7)

  Senior     9/29/2017       293,000       242,475       243,154       L+7.65%       8.78     9/28/2021       3/28/2022       64.1     FL       Mixed-use  

Investment 6(8)

  Subordinate     8/22/2019       245,000       229,391       229,508       L+8.59%       11.13     11/9/2021       9/9/2024       68.0     IL       Office  

Investment 7

  Senior     6/29/2018       306,800       225,598       225,564       L+4.25%       5.64     2/9/2022       8/9/2023       55.0     NY       Mixed-use  

Investment 8

  Senior     12/27/2018       210,000       206,839       206,462       L+2.70%       3.04     2/1/2022       2/1/2025       75.0     NY       Mixed-use  

Investment 9(8)

  Senior     8/14/2019       192,426       192,426       193,240       L+3.95%       6.95     8/15/2022       8/15/2022       67.5     NY       Hospitality  

Investment 10(7)

  Senior     7/26/2018       205,699       184,627       184,521       L+4.87%       5.46     7/9/2021       7/9/2022       39.1     CA       Mixed-use  

Investment 11(9)

  Senior     3/9/2018       186,500       161,831       161,331       L+7.46%       8.68     12/31/2022       12/31/2022       96.2     NY      
For Sale
Condo
 
 

Investment 12

  Senior     9/30/2019       167,500       155,208       154,820       L+3.48%       5.40     9/9/2022       9/9/2024       56.3     NY       Office  

Investment 13(7)

  Senior     8/2/2018       181,000       154,269       153,664       L+6.35%       7.14     8/2/2022       8/2/2023       66.7     DC       Multifamily  

Investment 14

  Senior     2/28/2019       150,000       150,000       150,000       L+3.50%       5.28     2/28/2022       2/28/2024       72.2     CT       Office  

Investment 15

  Senior     1/9/2018       148,500       147,979       147,735       L+4.25%       5.52     1/9/2022       1/9/2024       63.8     VA       Hospitality  

Investments
16—52(10)

  Various     Various       3,504,015       2,759,135       2,749,322       L+4.61%       6.50     Various       Various       65.5     Various       Various  
     

 

 

   

 

 

   

 

 

               

Floating Rate Total
/ Weighted Average(10)

      $ 7,180,335     $ 6,044,420     $ 6,028,518       L+4.79%       6.57         65.8    

Fixed Rate Investments
53—56(10)

  Various     Various       87,849       85,197       85,037       11.25%       11.63     Various       Various       79.3     Various       Various  
     

 

 

   

 

 

   

 

 

               

Total / Weighted Average(10)

      $ 7,268,184     $ 6,129,617     $ 6,113,555         6.64         65.9    
     

 

 

   

 

 

   

 

 

               

 

(1)

Certain investments include multiple loans for which we made commitments to the same borrower or affiliated borrowers on the same date.

(2)

Remaining loan commitment represents aggregate loan commitments (initial loan commitments, as adjusted by commitment reductions, less transfers which qualified for sale accounting under GAAP), less repayments received in respect thereof.

(3)

One-month LIBOR as of June 30, 2021 was 0.10%, and 94.5% of our floating rate loans have LIBOR floors with a weighted average LIBOR floor of 1.47%.

(4)

All-in yield represents the weighted average annualized yield to initial maturity of each loan within our loan portfolio, inclusive of coupon, origination fees, exit fees, and extension fees received based on the applicable floating benchmark rate (if applicable), including LIBOR floors (if applicable), as of June 30, 2021.

(5)

Fully extended maturity assumes all extension options are exercised by the borrower upon satisfaction of the applicable conditions.

(6)

LTV represents “loan-to-value” or “loan-to-cost”, which is calculated as our total loan commitment from time to time, as if fully funded, plus any financings that are pari passu with or senior to our loan, divided by our estimate of either (1) the value of the underlying real estate, determined in accordance with our underwriting process (typically consistent with, if not less than, the value set forth in a third-party appraisal) or (2) the borrower’s projected, fully funded cost basis in the asset, in each case as we deem appropriate for the relevant loan and other loans with similar characteristics. Underwritten values and projected costs should not be assumed to reflect our judgment of current market values or project costs, which may have changed materially since the date of origination including, without limitation, as a result of the COVID-19 pandemic. LTV is updated only in connection with a partial loan paydown and/or release of collateral, material changes to expected project costs, the receipt of a new appraisal (typically in connection with financing or refinancing activity) or a change in our loan commitment.

(7)

Subsequent to June 30, 2021, this loan was repaid.

(8)

Initial maturity reflects an extension option that was exercised subsequent to June 30, 2021.

(9)

Includes a fixed-rate loan with an unpaid principal balance of $19.2 million and a remaining loan commitment of $20.5 million.

(10)

Weighted averages are based on unpaid principal balance.


 

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The following charts illustrate the diversification of our loan portfolio (based on location, including within the New York metropolitan area, underlying property type, including within the New York metropolitan area, loan purpose, type of investment, investment size and LTV, excluding our real estate owned investment), as of June 30, 2021 (based on unpaid principal balance):

 

LOGO

 

(1)

We may structure our investment on a property to include both a senior mortgage and a subordinate loan component, which we refer to as a contiguous subordinate loan. We believe these investments are most similar to our other senior loans in comparison to other loan types given their overall credit quality and risk profile.

(2)

These charts do not include our real estate owned investment. See “Business—Our Portfolio” for more information.

(3)

LTV represents “loan-to-value” or “loan-to-cost”, which is calculated as our total loan commitment from time to time, as if fully funded, plus any financings that are pari passu with or senior to our loan, divided by our estimate of either (1) the value of the underlying real estate, determined in accordance with our underwriting process (typically consistent with, if not less than, the value set forth in a third-party appraisal) or (2) the borrower’s projected, fully funded cost basis in the asset, in each case as we deem appropriate for the relevant loan and other loans with similar characteristics. Underwritten values and projected costs should not be assumed to reflect our judgment of current market values or project costs, which may have changed materially since the date of origination including, without limitation, as a result of the COVID-19 pandemic. LTV is updated only in connection with a partial loan paydown and/or release of collateral, material changes to expected project costs, the receipt of a new appraisal (typically in connection with financing or refinancing activity) or a change in our loan commitment.


 

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As of June 30, 2021, no individual investment represented more than 6.4% of our loan portfolio, our five largest investments represented 24.1% of our loan portfolio, and our 15 largest investments represented 53.6% of our loan portfolio (in each case, based on unpaid principal balance). As of June 30, 2021, 43.9% of our loans are secured by real estate (or equity interests relating thereto) located in the New York metropolitan area, of which the four largest submarkets were Midtown, Brooklyn, Hudson Yards and Downtown, representing 40.7%, 22.0%, 17.1% and 12.2% of our New York metropolitan loan portfolio, respectively, and the four largest property types included mixed-use, hospitality, land, and multifamily, representing 23.2%, 20.1%, 19.5% and 14.5% of our New York metropolitan loan portfolio, respectively (in each case, based on unpaid principal balance). As of June 30, 2021, approximately 90% of our unfunded loan commitments related to loans secured by real estate (or equity interests relating thereto) are located outside of the New York metropolitan area. Our loan portfolio excludes our one real estate owned investment comprised of a portfolio of seven limited service hotel properties located in New York, New York.

Our Financing Strategy

We use diverse financing sources as part of a disciplined financing strategy. To date, we have financed our business through a combination of common stock issuances, repurchase facilities, asset-specific financing structures and our Secured Term Loan borrowings. The amount and type of leverage we may employ for particular loans will depend on our Manager’s assessment of such loan’s characteristics, including the level of in place, if any, and projected stabilized operating cash flow, credit quality, liquidity, price volatility and other risks of the underlying collateral as well as the availability and attractiveness of particular types of financing at the relevant time. We seek to minimize the risks associated with recourse borrowings and generally seek to match-fund our investments by minimizing the differences between the durations and indices of our investments and those of our liabilities, respectively, including in certain cases the potential use of derivatives; however, under certain circumstances, we may determine not to do so or we may otherwise be unable to do so. We also seek to diversify our financing counterparties.

Over time, in addition to these types of financings, we may also use other forms of leverage, such as secured and unsecured credit facilities, structured financings such as CMBS and collateralized loan obligations, or CLOs, derivative instruments and public and private secured and unsecured debt issuances by us or our subsidiaries, as well as issuances of public and private equity and equity-related securities.

As of June 30, 2021, our Total Leverage Ratio was 2.0x, and we expect that, going forward, our Total Leverage Ratio will range from 2.0x and 3.0x. As of June 30, 2021, our Net Debt-to-Equity Ratio was 1.5x.

Recent Developments

Our Loan Portfolio

Originations and Advances

Between July 1, 2021 and August 31, 2021, we originated five new investments consisting of eight loans, with aggregate loan commitments of $610.8 million, of which $530.7 million was funded at closing. During such period, we funded $127.7 million of advances towards loan commitments outstanding as of June 30, 2021.

Repayments and Sales

Between July 1, 2021 and August 31, 2021, we received proceeds of $248.6 million from loan principal repayments, including the full repayment of three investments comprised of three loans.


 

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Financing Activities

Between July 1, 2021 and August 31, 2021, we pledged two investments with a combined unpaid principal balance of $207.1 million to a repurchase facility in exchange for gross proceeds of $160.5 million. We also transferred a $20.0 million junior participation in a $185.0 million senior loan commitment. In addition, between July 1, 2021 and August 31, 2021, we borrowed $314.6 million, including $134.2 million under financing commitments that were in place as of June 30, 2021, $160.4 million relating to the initial financing of two investments using repurchase facilities, and entering into a $20.0 million loan participation financing with an existing investment, which was transferred as described above. Between July 1, 2021 and August 31, 2021, we repaid $138.9 million of borrowings that were outstanding as of June 30, 2021. In September 2021, we entered into a $300.0 million repurchase facility arrangement with Wells Fargo Bank, National Association, an affiliate of one of the underwriters in this offering.

Dividends

On July 7, 2021, we paid a cash dividend of $50.0 million, or $0.37 per share, to our common stockholders of record as of June 16, 2021 with respect to the second quarter of 2021. In September 2021, our board of directors approved the payment of a cash dividend of $50.0 million, or $0.37 per share, to our common stockholders of record as of September 17, 2021 with respect to the third quarter of 2021, which was paid on October 7, 2021.

Loan Pipeline

As of             , 2021, we have a loan origination pipeline that is in various stages of our underwriting process, representing potential total loan commitments of approximately $            , of which $             represents loan commitments under executed non-binding term sheets. Each investment remains subject to satisfactory completion of our diligence, underwriting, documentation, and investment approval process, and as such, we cannot give assurance that any of these potential investments will close on our anticipated terms, or at all.

COVID-19

The global crisis resulting from the COVID-19 pandemic has had an adverse impact on us. Although as of August 2021, the global economy has begun to recover and the widespread availability of vaccines has encouraged greater economic activity, the COVID-19 pandemic created disruptive economic conditions which have had a material adverse impact on some of our borrowers’ industries, businesses and financial condition, liquidity and results of operations. In particular, hospitality (representing the property type of our one real estate owned investment and 15.4% of our loan portfolio’s unpaid principal balance, as of June 30, 2021), office (representing 17.8% of our loan portfolio’s unpaid principal balance, as of June 30, 2021) and other property types and markets such as New York, New York have been disproportionately impacted. While the adverse financial impact on our business has thus far been limited, it is not possible to estimate the duration or the severity of the impact, operationally or financially, that the COVID-19 pandemic could have on us in the future. See “Risk Factors—Risks Related to the COVID-19 Pandemic—The COVID-19 pandemic has had an adverse effect on us and may have a material adverse effect on us in the future and any other pandemic, epidemic or outbreak of an infectious disease in the markets in which we operate may have a material adverse effect on us in the future” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.”

In response to these developments, we have continued our active engagement with our borrowers and ongoing monitoring of their collateral performance relative to their business plans. In some cases, we have modified, and may continue to modify, loans that have the potential to enhance or protect the value of our investments by allowing for term extensions, repurposing of reserves, temporary deferrals of interest payments, additional financing commitments, and performance test waivers, among other items, in exchange for future credit enhancements such as partial loan repayments, operating cash flow sweeps, and mandatory future principal paydowns.


 

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From March 15, 2020 through August 31, 2021, we modified 39 investments representing $3.5 billion of unpaid principal balance, or 54.0% of our loan portfolio based on unpaid principal balance as of August 31, 2021. Many loan modifications included credit enhancements such as partial loan repayments, operating cash flow sweeps, and mandatory future principal paydowns in exchange for term extensions, repurposing of reserves, temporary deferrals of interest payments, additional financing commitments, and performance test waivers, among other items. With respect to our loans that were modified during the pandemic, as of August 31, 2021, reported LTVs changed on sixteen of the modified investments, representing $1.5 billion of unpaid principal balance or 22.8% of the loans based on unpaid principal balance. Reported LTVs increased in modifications representing 9.9% of our loans based on unpaid principal balance and decreased in modifications representing 12.9% of our loans based on unpaid principal balance. For investments with changes to reported LTVs due to loan modifications, ten were due to an investment paydown or reduced loan commitment, four were due to an increase in construction costs or increased loan commitment, one was due to a revised appraisal and one was due to a collateral release in connection with a partial loan repayment. Only one of the modifications, relating to a loan secured by a hospitality asset in San Diego, California with an unpaid principal balance representing 1.6% of our loan portfolio as of June 30, 2021, was considered a “troubled debt restructuring” under GAAP.

On February 8, 2021, we foreclosed on a portfolio of seven limited service hotel properties located in New York, New York through a Uniform Commercial Code foreclosure. The hotel portfolio now appears as real estate owned, net on our balance sheet and at the time of foreclosure was encumbered by a $300.0 million securitized senior mortgage, which is included as a liability on our balance sheet. In June 2021 the terms of the securitized senior mortgage were modified, which included the repayment of $10.0 million of principal and extension of its maturity date by an additional three years to February 2024. At June 30, 2021, the outstanding balance of our debt related to real estate owned was $290.0 million.

As of June 30, 2021, there were five investments consisting of six loans that were on non-accrual status, representing $525.0 million of unpaid principal balance, or 8.6% of our portfolio (based on unpaid principal balance), of which there were four investments consisting of five loans on non-accrual status, representing $282.6 million of unpaid principal balance, or 4.6% of our loan portfolio (based on unpaid principal balance), as a result of not being current on debt service for 90 days. One of these investments, with an unpaid principal balance of $78.0 million as of June 30, 2021, was modified in September 2021, which involved the borrower satisfying all previously unpaid debt service with a combination of a cash payment and compounding the remaining amount due into the unpaid principal balance. In August 2021, one investment comprised of one loan with an unpaid principal balance of $95.0 million as of June 30, 2021 was placed on non-accrual status as a result of becoming 90 days past due. Additionally, there was one investment, with an outstanding principal balance of $242.5 million, representing 4.0% of our portfolio (based on unpaid principal balance) at June 30, 2021, which had been placed on non-accrual status in the third quarter of 2020 as a result of interest payments becoming 90 days past due, which was modified in December 2020 resulting in all past due interest being paid, bringing the loan current. In September 2021, this loan was repaid. We believe our borrowers are generally committed to supporting the assets collateralizing our loans, evidenced in some cases by making additional equity contributions, and that we will benefit from our longstanding core business model of originating senior loans collateralized by large assets in major markets with experienced, committed, well-capitalized institutional borrowers. We believe that our loan portfolio’s weighted-average LTV of 65.9% as of June 30, 2021 reflects significant subordinate borrower equity capital that our borrowers are motivated to protect through periods of market disruption or otherwise.

With respect to financing agreements, approximately half of our repurchase facilities (based on approximately $4.0 billion of total financing capacity as of June 30, 2021) permit valuation adjustments solely as a result of collateral-specific credit events. The remaining repurchase facilities contain provisions allowing our lenders to make margin calls or require additional collateral solely upon the occurrence of adverse changes in the markets or interest rate or spread fluctuations, subject to minimum thresholds, among other factors. We have not


 

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experienced any margin calls as of August 31, 2021 under any of our repurchase facilities. However, given the breadth of the COVID-19 pandemic, we have reduced the advance rate on certain assets (primarily hospitality loans) within these facilities, thereby reducing the amount we are able to borrow against such assets, and voluntarily repaid $300.0 million of outstanding repurchase facility borrowings between March 15, 2020 and August 31, 2021 to reduce the risk of potential margin calls. We maintain frequent dialogue with our repurchase facility counterparties regarding our management of their collateral assets in light of the impact of the COVID-19 pandemic and are required to obtain consent from the applicable lender prior to entering into any loan modifications. Our other sources of debt, including asset-specific financings, our Secured Term Loan, and our securitized senior mortgage on our real estate owned investment are not subject to mark-to-market valuation adjustments or margin calls. We previously entered into select standstill agreements with our repurchase facility counterparties, which have all expired as of August 31, 2021, and may pursue additional standstill agreements if or when we deem appropriate, although there is no assurance that such efforts will be successful.

Our Structure

We were organized as a Maryland corporation on April 29, 2015 and commenced operations on August 25, 2015. The following chart summarizes our organizational structure and equity ownership as of                , 2021 after giving effect to the completion of this offering:

 

LOGO

 

(1)

Does not include interests in us resulting from grants of RSUs under the 2016 Plan.

(2)

Includes 1,097,293 shares of common stock underlying unvested RSUs that are expected to vest in full as of the date of this prospectus. Does not reflect future grants of equity awards under the 2016 Plan. See “Management—Compensation of Executives—2016 Incentive Award Plan.”

(3)

As of                , we have issued                shares of our common stock to other third-party investors.

For a more detailed description of our structure, see “Business—Our Structure.”


 

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Investment Guidelines

Our Board has established the following investment guidelines:

 

   

No investment will be made that would cause the Company to fail to qualify as a REIT for U.S. federal income tax purposes.

 

   

No investment will be made that would require the Company to register as an investment company under the 1940 Act.

 

   

Prior to the deployment of capital into investments, our Manager may cause the capital of the Company to be invested in any interest-bearing short-term investments, including money market funds, bank accounts, overnight repurchase agreements with primary federal reserve bank dealers collateralized by direct U.S. government obligations and other instruments or investments reasonably determined by our Manager to be of high quality.

Our investment guidelines may be changed from time to time by our Board without our stockholders’ consent.

Management Agreement

We are externally managed and advised by our Manager, an investment adviser registered with the SEC pursuant to the Advisers Act. Our Manager is responsible for administering (or engaging and overseeing external vendors that administer) our business activities and day-to-day operations and, through a services agreement with MRECS, provides us with our management team and other necessary professionals and support personnel. Our Manager has access to our Sponsor’s broader infrastructure, including a cross-disciplinary team of real estate professionals outside of MRECS that our Manager expects to leverage on an informal basis in some cases without us incurring additional cost. Our Manager is at all times subject to supervision, direction and management through our Board and will have only such functions and authority as our Board delegates to it. We do not currently have any employees.

We entered into the Management Agreement with our Manager on August 25, 2015, which we amended and restated on July 8, 2016. Pursuant to the terms of the Management Agreement, our Manager implements our business strategy and performs (or facilitates the provision of) certain services for us, subject to oversight by our Board, including:

 

   

our day-to-day functions;

 

   

determining investment criteria subject to our investment guidelines;

 

   

sourcing, analyzing and executing loan origination activities, asset acquisitions, sales and financings; and

 

   

performing asset, portfolio and risk management duties.

The term of the Management Agreement with our Manager extends until the earlier of August 25, 2025 and the time at which all of our investments have been disposed of by complete repayment, a complete sale or other disposition, or a complete write-off, which we refer to herein as a Complete Disposition.

If we default in the performance or observance of any material term, condition or covenant contained in the Management Agreement and our Manager terminates the Management Agreement, the Management Agreement provides that we will pay our Manager a termination fee as described in the table below.


 

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We may terminate the Management Agreement without payment of this fee in certain circumstances described in “Our Manager and the Management Agreement—Management Agreement—Term and Termination.” Additionally, unless we determine that qualification for taxation as a REIT is no longer desirable, we may terminate the Management Agreement with 30 days prior notice in the event that (x)(i) there is a determination by a court of competent jurisdiction, in a non-appealable binding order, or the Internal Revenue Service, or the IRS, in a closing agreement made under Section 7121 of the Internal Revenue Code of 1986, as amended, or the Code, that a provision of the Management Agreement has caused or will cause us to fail to satisfy a requirement for qualification as a REIT, or (ii) a nationally recognized law or accounting firm advises us that a provision of the Management Agreement has caused or could cause us to fail to satisfy a requirement for qualification as a REIT and (y) within 30 days of that determination or advice, our Manager has not agreed to amend or modify the Management Agreement in a manner that would allow us to qualify as a REIT.

Pursuant to the Management Agreement, we are obligated to pay our Manager certain base management and incentive fees, as set forth below. These fees to be paid by us to our Manager will be reduced by an amount equal to our percentage ownership interest in any joint venture or other similar pooled investment arrangement multiplied by the aggregate management fees (including base management fees and incentive fees) paid by such joint venture or other similar pooled investment arrangement to our Manager or an affiliate of our Manager for the same period. This includes fees paid to our Manager pursuant to its separate management agreement with our 51%-owned joint venture, CMTG/TT Mortgage REIT LLC, a Delaware limited liability company, or the JV, that as of June 30, 2021 held 1 of the 56 loan investments in our loan portfolio comprised of 2 loans with an aggregate unpaid principal balance of $73.5 million. We do not anticipate making any new loan investments in the JV. A detailed summary of the terms of the Management Agreement, including the fees and expense reimbursements, is provided in “Our Manager and the Management Agreement—Management Agreement—Management Fees, Incentive Fees and Expense Reimbursements.” The following table summarizes the fees and expense reimbursements that we will pay to our Manager:

 

Type 

  

Description

Base management fee, paid quarterly in arrears in cash (without regard to investment performance)   

We will pay our Manager a base management fee in an amount equal to 1.5% per annum of our stockholders’ equity, determined on a quarterly basis.

 

For purposes of calculating the base management fee, our stockholders’ equity means our stockholders’ equity (excluding any amounts resulting from issuances of equity securities covered in the following clause), plus the sum of the net proceeds from all issuances of our equity securities from and after the date of the Management Agreement (allocated on a pro rata daily basis for such issuances during the fiscal quarter of any such issuance), plus our retained earnings at the end of the most recently completed fiscal quarter (as determined in accordance with GAAP, without taking into account any non-cash equity compensation expense incurred in current or prior periods), less any amount that we paid for repurchases of our common stock since inception, and excluding any unrealized gains, losses (other than permanent impairments) or other items that have impacted stockholders’ equity as reported in financial statements prepared under GAAP (regardless of whether such items are included in other comprehensive income or loss, or net income). This amount will be adjusted to exclude one-time events pursuant to changes in GAAP and certain non-cash items (such as depreciation and amortization) after discussions between our Manager and our Board and after approval by our Board. Our stockholders’ equity, for purposes of calculating the base management fee, could be greater than or less than the amount of stockholders’ equity shown on our financial statements.


 

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Type 

  

Description

Incentive fee, paid quarterly in arrears in cash   

Our Manager will be entitled to an incentive fee with respect to each calendar quarter (or part thereof that the Management Agreement is in effect) payable quarterly in arrears in cash, in an amount not less than zero, equal to the difference between the (1) product of (a) 20% and (b) the difference between (i) Core Earnings (as defined below) on a rolling four-quarter basis and before the incentive fee for the current quarter, and (ii) the product of (A) the weighted average of the issue price per share of our common stock in all of our offerings from and after the date of the Management Agreement (including an offering that results in a listing on a national stock exchange) multiplied by the weighted average number of shares of our common stock outstanding (including any restricted shares of our common stock and any other shares of our common stock underlying awards granted under our equity incentive plans, if any) in such four quarter period and (B) 7% per annum (or 1.75% per quarter) and (2) the sum of any incentive fee paid to our Manager with respect to the first three calendar quarters of such previous four quarters, if any.

 

No incentive fee will be payable with respect to any calendar quarter unless Core Earnings for the 12 most recently completed calendar quarters are greater than zero.

 

“Core Earnings” is a non-GAAP financial measure and is defined as our net income (loss) as determined according to GAAP, excluding non-cash equity compensation expense, the incentive fee, real estate depreciation and amortization, any unrealized gains or losses from mark-to-market valuation changes (other than permanent impairments) that are included in net income for the applicable period (regardless of whether such items are included in other comprehensive income or loss, or in net income or loss), one-time events pursuant to changes in GAAP and certain non-cash items, which in the judgment of our Manager, should not be included in Core Earnings. In the case of the final two exclusions above, such exclusions will only be applied after approval by us.

Expense reimbursement, paid quarterly in cash    We will reimburse our Manager for certain costs and expenses incurred on our behalf, including those costs and expenses related to legal, accounting, due diligence and other services, in each case to the extent consistent with an annual budget prepared by our Manager and approved by our Board. We will not reimburse our Manager or its affiliates for the salaries and other fees of their investment management personnel or for rent and other overhead expenses.
Fee upon termination    If we default in the performance of any material term, condition or covenant contained in the Management Agreement, and our Manager consequently terminates the Management Agreement, we will pay our Manager a fee equal to three times the sum of the average annual base management fee and the average annual incentive fee earned during the 24-month period preceding the date of termination.

Conflicts of Interest

We are externally managed and advised by our Manager, an affiliate of our Sponsor. The Management Agreement was negotiated among related parties, with involvement from affiliates of the Almanac Realty Investors business unit of NB Alternatives Advisers LLC, or Almanac, whose advisory clients together own approximately     % of our common stock, and, upon completion of this offering, will own approximately     % of our outstanding common stock. In addition, as of June 30, 2021, Almanac had a limited partnership interest in


 

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our Manager, resulting in an economic interest in its profits and losses. As a result, the terms of the Management Agreement, including fees, expense reimbursements and other amounts payable to our Manager, may not be as favorable to us as if they had been negotiated at arm’s length between unaffiliated third parties. In addition, pursuant to board nomination rights set forth in our organizational documents, Almanac has the right to designate one director to our Board and Fuyou Investment Management Limited, or Fuyou, has the right to designate one director to our Board. Such directors will remain on our Board until the next succeeding annual meeting of stockholders following his or her election and until his or her successor is duly elected and qualifies; provided, however, that for so long as Almanac directly or indirectly owns 4.9% or more of the outstanding shares of our common stock, at least one director will be designated by Almanac, and for so long as Fuyou is an affiliate of Ping An Insurance (Group) Company of China, Ltd., or Ping An, and Fuyou, together with other affiliates of Ping An, owns 4.9% or more of the outstanding shares of common stock, at least one director will be designated by Fuyou.

All of our officers are employees or principals of MRECS or its affiliates. Our officers and executive directors, and the other personnel of MRECS or its affiliates who provide services to our Manager, typically also manage or support other investment vehicles or accounts managed by our Sponsor. These investment vehicles and accounts include, without limitation, other pooled investment vehicles and managed accounts that exist as of the date hereof and/or may exist in the future. To the extent that personnel engage in other business activities, it may reduce the time our Manager spends managing our business. In addition, these persons may have legal, contractual or fiduciary obligations to investors in other entities, the fulfillment of which might not be in our best interests or those of our stockholders. Furthermore, to the extent the other investment management entities affiliated with our Sponsor have more limited ownership (if any) by unaffiliated third parties, or have a higher fee structure, in each case as compared to our Manager’s ownership and fee structure, the activities conducted by such entities may be more profitable to our Sponsor than those conducted by our Manager.

As of the date of this prospectus, we, the JV and a private high yield real estate credit fund, or the High Yield Fund, are the sole multi-investor pooled investment vehicles managed by our Sponsor and its affiliates, including our Manager, that invest in CRE debt. No existing investment vehicles or accounts managed by our Sponsor or its affiliates, including our Manager, currently have an investment strategy that is substantially similar to our core investment strategy. Though we do not anticipate making any new loan investments in the JV, and our Sponsor and its affiliates, including our Manager, do not anticipate forming or managing any other investment vehicles or accounts that would have an investment strategy that is substantially similar to our core investment strategy, our Sponsor and its affiliates, including our Manager, are not legally prohibited from forming or managing such investment vehicles or accounts and, regardless, the High Yield Fund and future investment vehicles or accounts managed by our Sponsor or its affiliates may from time to time invest in assets that overlap with our target assets. If any such situation arises, investment opportunities may be allocated between us, the High Yield Fund and other investment vehicles or accounts in a manner that may result in fewer investment opportunities being allocated to us than would have otherwise been the case. Additionally, our Sponsor and its affiliates, including our Manager, are not restricted from entering into other investment advisory relationships or from engaging in other business activities from time to time. As a result, there may be conflicts in allocating assets that are suitable for us as well as other vehicles and separate accounts managed by our Manager or its affiliates. To the extent that a conflict arises, our Sponsor and its affiliates, including our Manager, will seek to allocate investment opportunities in a fair and equitable manner in accordance with the investment allocation policy and procedures of our Manager and our Sponsor, which we refer to as the “Allocation Policy.” In determining the allocation of investments, our Manager and our Sponsor expect to consider the following factors or a subset thereof as may be appropriate under the circumstances:

 

   

the investment objectives, limitations, guidelines and contractual provisions of each vehicle or account;

 

   

characteristics of the investment and their appropriateness for a particular vehicle or account;


 

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the availability and timing of capital;

 

   

portfolio management considerations, including but not limited to diversification objectives and concentration risks, exposure of the applicable vehicle or account to a specific underlying borrower, geographical area, asset strategy or asset type;

 

   

the anticipated holding period and remaining investment period of the relevant vehicle or account;

 

   

the availability of co-investment capital for purposes of spreading risk;

 

   

legal, tax, accounting and regulatory considerations deemed relevant by our Manager;

 

   

the ability of a vehicle or account to employ leverage, hedging, derivatives, or other similar strategies in connection with acquiring, holding or disposing of the particular investment opportunity, and any requirements or other terms of any existing leverage facilities;

 

   

structural or practical limitations on structuring an investment so that it may be allocated to more than one vehicle or account;

 

   

potential conflicts of interest, including whether a vehicle or account has an existing interest in the investment in question; and

 

   

such other considerations as our Manager and our Sponsor deem relevant in good faith.

At no time will multiple investment vehicles or accounts managed by our Sponsor participate in different or divergent portions of the same property’s capitalization. In addition, although not currently expected, our Manager from time to time may seek to cause us to buy and/or sell investments to and/or from other investment vehicles or accounts managed by our Manager or Sponsor or their respective affiliates. Under the Management Agreement, if we purchase target assets from, or sell investments to, MRECS or its affiliates or their respective managed investment vehicles or accounts, any such transaction will require approval of our Board.

Summary Risk Factors

An investment in shares of our common stock involves a high degree of risk. You should carefully consider the risk factors discussed below and under the heading “Risk Factors” before making a decision to invest in our common stock. Any of the following facts and circumstances could have a material adverse impact on our business, financial condition, liquidity, results of operations and prospects, which could impair our ability to pay dividends to our stockholders and cause you to lose some or all of your investment in our common stock:

 

   

The COVID-19 pandemic has had an adverse effect on us and may have a material adverse effect on us in the future and any other pandemic, epidemic or outbreak of an infectious disease in the markets in which we operate may have a material adverse effect on us in the future.

 

   

Our future success depends on our Manager and its access to the key personnel and investment professionals of our Sponsor and its affiliates.

 

   

We may compete with other investment vehicles managed by our Sponsor or its affiliates, including our Manager, or have other conflicts of interest with our Sponsor or its affiliates, including our Manager, which may result in decisions that are not in the best interests of our stockholders.

 

   

Our Manager is responsible for the management of our business as well as the JV’s business, and an affiliate of our Manager is responsible for the management of the High Yield Fund’s business, which could result in conflicts in allocating its investment opportunities, time, resources and services among us, the High Yield Fund and other vehicles or accounts managed by our Sponsor or its affiliates.


 

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The structure of our Manager’s fees may not create effective incentives and may cause our Manager to make riskier investments.

 

   

Termination of the Management Agreement would be costly.

 

   

Our business strategy is focused on lending against assets primarily in major U.S. markets which have been, and in the future may continue to be, subject to protests, riots or other forms of civil unrest.

 

   

Our investment strategy, our investment guidelines, our target assets and our financing strategy may be changed without stockholder consent.

 

   

Changes in laws or regulations governing our operations or those of our competitors, or changes in the interpretation thereof, or newly enacted laws or regulations, could result in increased competition for our target assets, require changes to our business practices and collectively could adversely impact our revenues and impose additional costs on us, which could materially and adversely affect us.

 

   

We have a significant amount of debt outstanding, and may incur a significant amount of additional debt in the future, which subjects us to increased risk of loss, which could materially and adversely affect us.

 

   

We depend or may depend on bank credit agreements and facilities, repurchase facilities and structured financing arrangements, public and private debt issuances and derivative instruments, in addition to transaction- or asset- specific financing arrangements and other sources of financing to execute our business plan, and our inability to access financing on favorable terms could have a material adverse effect on us.

 

   

Interest rate fluctuations could increase our financing costs, which could materially and adversely affect us.

 

   

The planned discontinuance of LIBOR has affected and will continue to affect financial markets generally, and may adversely affect our interest income, interest expense, or both.

 

   

We operate in a competitive market for the origination and acquisition of attractive investment opportunities and competition may limit our ability to originate or acquire attractive risk-adjusted investments in our target assets, which could have a material adverse effect on us.

 

   

Loans on properties in transition often involve a greater risk of loss than loans on stabilized properties, including the risk of cost overruns on and noncompletion of the construction or renovation of or other capital improvements to the properties underlying the loans we originate or acquire, and the risk that a borrower may fail to execute the business plan underwritten by us, potentially making it unable to refinance our loan at maturity, each of which could materially and adversely affect us.

 

   

Our investments are and may be concentrated in certain markets, property types and borrowers, among other factors, and will be subject to risk of default.

 

   

We will allocate our available capital without input from our stockholders.

 

   

The lack of liquidity in certain of the assets in our loan portfolio and our target assets generally may materially and adversely affect us.

 

   

In the event of borrower distress or a default, we may lack the liquidity necessary to protect our investment or avoid a corresponding default on any obligations we may have in connection with our own financing.

 

   

We may be unable to refinance debt incurred to finance our loans, thereby increasing the amount of equity capital risk we bear with respect to particular loans or preventing us from deploying our equity capital in the optimal manner.


 

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As a result of our real estate owned investment, we are subject to the risks commonly associated with real estate owned holdings, including risks related to ownership of hotel properties in New York, New York which vary from the risks associated with lending.

 

   

Difficult conditions in the commercial mortgage and real estate market, the financial markets and the economy generally could materially and adversely affect us.

 

   

If our Manager overestimates the yields or incorrectly prices the risks of our investments, we may experience losses.

 

   

Investments in subordinated mortgage interests, mezzanine loans and other assets that are subordinated or otherwise junior in a borrower’s capital structure may expose us to greater risk of loss.

 

   

CRE-related investments that are secured, directly or indirectly, by CRE are subject to potential delinquency, foreclosure and loss, which could materially and adversely affect us.

 

   

An increase in interest rates may cause a decrease in the demand for certain of our target assets, which could adversely affect our ability to originate or acquire target assets that satisfy our investment objectives to generate income and pay dividends.

 

   

There has been no public market for our common stock prior to this offering and an active trading market may not develop or be sustained following this offering, which may negatively affect the liquidity and market price of our common stock and make it difficult for investors to sell their shares on favorable terms when desired.

 

   

We have not established a minimum dividend payment level, and we may be unable to generate sufficient cash flows from our operations to pay dividends to our stockholders at any time in the future at a particular level, or at all, which could materially and adversely affect us.

 

   

Failure to maintain our qualification as a REIT would materially and adversely affect us and the market price of our common stock.

 

   

Complying with REIT requirements may force us to liquidate, restructure or forego otherwise attractive investments.

Operating and Regulatory Structure

REIT Qualification

We have elected and believe we have qualified to be taxed as a REIT for U.S. federal income tax purposes commencing with our taxable year ended December 31, 2015. We believe that we have been organized and have operated in conformity with the requirements for qualification and taxation as a REIT under the Code, and that our intended manner of operation will enable us to meet the requirements for qualification and taxation as a REIT. To qualify as a REIT, we must meet on a continuing basis, through our organization and actual investment and operating results, various requirements under the Code relating to, among other things, the sources of our gross income, the composition and values of our assets, our dividend levels and the diversity of ownership of shares of our stock. If we fail to qualify as a REIT in any taxable year and do not qualify for certain statutory relief provisions, we will be subject to U.S. federal income tax at regular corporate rates and may be precluded from qualifying as a REIT for the subsequent four taxable years following the year during which we failed to qualify as a REIT. Even if we qualify for taxation as a REIT, we may be subject to some U.S. federal, state and local taxes on our income or property. For more information regarding our election to qualify as a REIT, please see “Risk Factors—U.S. Federal Income Tax Risks” and “Material U.S. Federal Income Tax Considerations.”


 

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1940 Act

We intend to conduct our operations so that neither we nor any of our subsidiaries are required to register as an investment company under the 1940 Act. Section 3(a)(1)(A) of the 1940 Act defines an investment company as any issuer that is, or holds itself out as being, engaged primarily, or proposes to engage primarily, in the business of investing, reinvesting or trading in securities. Section 3(a)(1)(C) of the 1940 Act defines an investment company as any issuer that is engaged or proposes to engage in the business of investing, reinvesting, owning, holding or trading in securities, and owns or proposes to acquire investment securities having a value exceeding 40% of the value of such issuer’s total assets (exclusive of U.S. government securities and cash items) on an unconsolidated basis, which we refer to as the 40% test. Excluded from the term “investment securities,” among other things, are U.S. government securities and securities issued by majority-owned subsidiaries that are not themselves investment companies and are not relying on the exception from the definition of “investment company” set forth in Section 3(c)(1) or Section 3(c)(7) of the 1940 Act.

We are organized as a holding company and conduct our businesses primarily through our subsidiaries. We intend to conduct our operations so that we comply with the 40% test. The securities issued by any wholly-owned or majority-owned subsidiaries that we may form in the future that are excepted from the definition of “investment company” based on Section 3(c)(1) or Section 3(c)(7) of the 1940 Act, together with any other investment securities we may own, may not have a value in excess of 40% of the value of our total assets (exclusive of U.S. government securities and cash items) on an unconsolidated basis. We will monitor our holdings to ensure continuing and ongoing compliance with this test. In addition, we believe that we will not be considered an investment company under Section 3(a)(1)(A) of the 1940 Act because we will not engage primarily or hold ourselves out as being engaged primarily in the business of investing, reinvesting or trading in securities. Rather, through our subsidiaries, we are primarily engaged in non-investment company businesses related to real estate.

The determination of whether an entity is a majority-owned subsidiary of our company is made by us. The 1940 Act defines a majority-owned subsidiary of a person as a company 50% or more of the outstanding voting securities of which are owned by such person, or by another company which is a majority-owned subsidiary of such person. The 1940 Act further defines voting securities as any security presently entitling the owner or holder thereof to vote for the election of directors of a company. Generally, we treat companies in which we own at least a majority of the outstanding voting securities as majority-owned subsidiaries for purposes of the 40% test. We have not requested that the SEC or its staff approve our treatment of any company as a majority-owned subsidiary, and neither the SEC nor its staff has done so. If the SEC or its staff were to disagree with our treatment of one or more companies as majority-owned subsidiaries, we would need to adjust our strategy and our assets in order to continue to pass the 40% test. Any such adjustment in our strategy or assets could have a material adverse effect on us.

We expect that most of our majority-owned subsidiaries will not be relying on either Section 3(c)(1) or Section 3(c)(7) of the 1940 Act. As a result, we expect that our interests in these subsidiaries (which we expect will constitute a substantial majority of our assets) will not constitute “investment securities” for purposes of the 40% test. Consequently, we expect to be able to conduct our operations so that we are not required to register as an investment company under the 1940 Act.

We expect certain of our subsidiaries to qualify for the exclusion from the definition of “investment company” pursuant to Section 3(c)(5)(C) of the 1940 Act, which is available for certain entities “primarily engaged in the business of purchasing or otherwise acquiring mortgages and other liens on and interests in real estate.” To qualify for the exclusion pursuant to Section 3(c)(5)(C), based on positions set forth by the staff of the SEC, each such subsidiary generally is required to hold (i) at least 55% of its assets in qualifying real estate assets and (ii) at least 80% of its assets in qualifying real estate assets and real estate-related assets. For our


 

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majority- or wholly-owned subsidiaries that will maintain this exclusion or another exclusion or exception under the 1940 Act (other than Section 3(c)(1) or Section 3(c)(7) thereof), our interests in these subsidiaries will not constitute “investment securities.” We expect each of our subsidiaries relying on Section 3(c)(5)(C) to rely on guidance published by the SEC staff or on our analyses of guidance published with respect to other types of assets to determine which assets are qualifying real estate assets and real estate-related assets.

Specifically, based on certain no-action letters and other guidance issued by the SEC staff, we expect to treat certain mortgage loans, mezzanine loans, subordinated mortgage interests and certain other assets that represent an actual interest in CRE or are a loan or lien fully secured by CRE as qualifying real estate assets. On the other hand, we expect to treat certain other types of mortgages, securities of REITs and certain other indirect interests in CRE as real estate-related assets. The SEC staff has not, however, published guidance with respect to the treatment of some of these assets under Section 3(c)(5)(C). To the extent the SEC staff publishes new or different guidance with respect to these matters, we may be required to adjust our strategy or assets accordingly. There can be no assurance that we will be able to maintain this exclusion from registration for certain of our subsidiaries. In addition, we may be limited in our ability to make certain investments, and these limitations could result in a subsidiary holding assets we might wish to sell or selling assets we might wish to hold.

We may hold a portion of our investments through partnerships, joint ventures, securitization vehicles or other entities with third-party investors. In connection with any such investment, and consistent with no-action letters and other guidance issued by the SEC staff addressing the classification of such investments for 1940 Act purposes, we generally intend to be active in the management and operation of any such entity and have the right to approve major decisions. We will not participate in joint ventures or similar arrangements in which we do not have or share control to the extent that we believe such participation would potentially threaten our ability to conduct our operations so that we comply with the 40% test or would otherwise potentially render any of our subsidiaries seeking to rely on Section 3(c)(5)(C) unable to rely on such exclusion.

It is possible that some of our subsidiaries may seek to rely on the 1940 Act exemption provided to certain structured financing vehicles by Rule 3a-7. Any such subsidiary would need to be structured to comply with any guidance that may be issued by the Division of Investment Management of the SEC on the restrictions contained in Rule 3a-7. In certain circumstances, compliance with Rule 3a-7 may require, among other things, that the indenture governing the subsidiary include limitations on the types of assets the subsidiary may sell or acquire out of the proceeds of assets that mature, are refinanced or otherwise sold, on the period of time during which such transactions may occur, and on the level of transactions that may occur. We expect that the aggregate value of our interests in subsidiaries that may in the future seek to rely on Rule 3a-7, if any, will comprise less than 20% of our total assets on an unconsolidated basis.

As a consequence of our seeking to avoid the need to register under the 1940 Act on an ongoing basis, we and/or our subsidiaries may be restricted from making certain investments or may structure investments in a manner that would be less advantageous to us than would be the case in the absence of such requirements. For example, these restrictions will limit the ability of our subsidiaries to invest directly in CMBS that represent less than the entire ownership in a pool of mortgage loans, debt and equity tranches of securitizations and certain asset-backed securities, and equity interests in real estate companies or in assets not related to real estate. Further, the mortgage-related investments that we acquire are limited by the provisions of the 1940 Act and the rules and regulations promulgated thereunder. We also may be required at times to adopt less efficient methods of financing certain of our mortgage-related investments, and we may be precluded from acquiring certain types of mortgage-related investments. Additionally, Section 3(c)(5)(C) of the 1940 Act prohibits us from issuing redeemable securities. If we fail to qualify for an exemption from registration as an investment company under the 1940 Act or an exclusion from the definition of an investment company, our ability to use leverage would be substantially reduced, and we would not be able to conduct our business as described in this prospectus.


 

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No assurance can be given that the SEC staff will concur with our classification of our or our subsidiaries’ assets or that the SEC staff will not, in the future, issue further guidance that may require us to reclassify those assets for purposes of qualifying for an exclusion or exemption from registration under the 1940 Act. To the extent that the SEC staff provides more specific guidance regarding any of the matters bearing upon the definition of “investment company” and the exclusions or exceptions to that definition, we may be required to adjust our investment strategies accordingly.

Additional guidance from the SEC staff could provide additional flexibility to us, or it could further inhibit our ability to pursue the investment strategies we have chosen. If the SEC or its staff take a position contrary to our view with respect to the characterization of any of the assets or securities we invest in, we may be deemed an unregistered investment company. Therefore, in order not to be required to register as an investment company, we may need to dispose of a significant portion of our assets or securities or acquire significant other additional assets that may have lower returns than our expected portfolio, or we may need to modify our business plan to register as an investment company, which would result in significantly increased operating expenses and would likely entail significantly reducing our indebtedness, which could also require us to sell a significant portion of our assets, which would likely reduce our profitability. We cannot assure you that we would be able to complete these dispositions or acquisitions of assets, or deleveraging, on favorable terms, or at all. Consequently, any modification of our business plan could have a material adverse effect on us.

There can be no assurance that we and our subsidiaries will be able to successfully avoid operating as an unregistered investment company. If the SEC determined that we were an unregistered investment company, there would be a risk that we would be subject to monetary penalties and injunctive relief in an action brought by the SEC, that we would potentially be unable to enforce contracts with third parties and that third parties could seek to obtain rescission of transactions undertaken during the period for which it was established that we were an unregistered investment company. Any of these results would have a material adverse effect on us. Since we will not be subject to the 1940 Act, we will not be subject to its substantive provisions, including but not limited to, provisions requiring diversification of investments, limiting leverage and restricting investments in illiquid assets. See “Risk Factors—Risks Related to Our Organization and Structure.”

Restrictions on Ownership of Our Common Stock

To assist us in complying with the limitations on the concentration of ownership of a REIT imposed by the Code, our charter prohibits, with certain exceptions, any person from beneficially or constructively owning, applying certain attribution rules under the Code, more than 9.6% in value or in number of shares, whichever is more restrictive, of the aggregate of the outstanding shares of our common stock, or 9.6% in value of the aggregate of the outstanding shares of our capital stock, in each case excluding any shares that are not treated as outstanding for U.S. federal income tax purposes, which we refer to as the ownership limits. Our Board, in its sole and absolute discretion, prospectively or retroactively, may exempt a person from either or both of the ownership limits if certain conditions are satisfied. Our Board has established excepted holder limits for certain of our stockholders. See “Description of Capital Stock—Restrictions on Ownership and Transfer.”

Our charter also prohibits any person from, among other things, beneficially or constructively owning shares of our capital stock if that would result in our being “closely held” under Section 856(h) of the Code (without regard to whether the ownership interest is held during the last half of a taxable year), or otherwise cause us to fail to qualify as a REIT. Any ownership or purported transfer of our capital stock in violation of the restrictions described above will result in the shares so owned or transferred being automatically transferred to a charitable trust for the benefit of a charitable beneficiary, and the purported owner or transferee will not acquire any rights in those shares. If a transfer to a charitable trust would be ineffective for any reason to prevent a violation of the restriction, the transfer resulting in the violation will be void from the time of the purported transfer.


 

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In addition, our charter provides that any transfer of shares of our capital stock that would result in our capital stock being beneficially owned by fewer than 100 persons will be void.

Implications of Being an Emerging Growth Company

As a company with less than $1.07 billion in annual gross revenues during our most recently completed fiscal year, we qualify as an “emerging growth company” as defined in Section 2(a) of the Securities Act, as modified by the JOBS Act. As an emerging growth company, we may take advantage of specified reduced disclosure and other requirements that are applicable to other public companies that are not emerging growth companies, including:

 

   

reduced disclosure about our executive compensation arrangements;

 

   

exemption from the requirement to seek non-binding stockholder advisory votes on executive compensation or golden parachute arrangements; and

 

   

exemption from the requirement to obtain an auditor attestation of our internal controls over financial reporting.

We may take advantage of these exemptions for up to five years or such earlier time that we are no longer an emerging growth company. We would cease to be an emerging growth company if (i) we have more than $1.07 billion in annual gross revenues as of the end of our fiscal year (subject to adjustment for inflation), (ii) we have more than $700.0 million in market value of our stock held by non-affiliates as of the end of our most recently completed second fiscal quarter, or (iii) we issue more than $1.0 billion of non-convertible debt over a three-year period. We may choose to take advantage of some or all of these reduced disclosure obligations.

The JOBS Act permits an emerging growth company such as us to take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards applicable to public companies. We have elected to use this extended transition period for complying with new or revised accounting standards that have different effective dates for public and private companies until the earlier of the day we (i) are no longer an emerging growth company or (ii) affirmatively and irrevocably opt out of the extended transition period provided in the JOBS Act. As a result, our financial statements may not be comparable to companies that comply with new or revised accounting pronouncements as of public company effective dates. While we have elected to use this extended transition period, to date we have not delayed the adoption of any applicable accounting standards.

Our Corporate Information

Our principal executive offices are located at c/o Mack Real Estate Credit Strategies, L.P., 60 Columbus Circle, 20th Floor, New York, New York 10023. Our telephone number is (212) 484-0050. Our website is www.clarosmortgage.com. The contents of our website are not a part of, or incorporated by reference into, this prospectus.


 

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THE OFFERING

 

Common stock offered by us

                shares (plus up to an additional                 shares of our common stock that we may issue and sell upon the exercise of the underwriters’ option to purchase additional shares of our common stock).

 

Common stock to be outstanding upon completion of this offering

                shares (or                 shares, if the underwriters exercise their option to purchase                 additional shares of our common stock in full).(1)

 

Use of proceeds

We estimate that the net proceeds we will receive from this offering, after deducting the underwriting discount and estimated offering expenses payable by us, will be approximately $             , or approximately $             if the underwriters exercise in full their option to purchase additional shares of common stock from us, assuming an initial public offering price of $ per share, which is the midpoint of the initial public offering price range set forth on the cover page of this prospectus. A $1.00 increase or decrease in the assumed initial public offering price of $             per share would increase or decrease the net proceeds to us from this offering by approximately $             , assuming the number of shares offered by us as set forth on the cover page of this prospectus remains the same.

 

  We intend to use the net proceeds from this offering to fund investments in our target assets. For more information regarding our target assets and investment strategy, please see “Business—Our Target Assets.”

 

  We intend to use any net proceeds from this offering that are not applied as described above for general corporate and working capital purposes. Until appropriate uses can be identified, our Manager may invest this balance initially in interest-bearing short-term investments, including money market funds, bank accounts, overnight repurchase agreements with primary federal reserve bank dealers collateralized by direct U.S. government obligations and other instruments or investments reasonably determined by our Manager to be of high quality and consistent with our intention to continue to qualify as a REIT and maintain our exclusion from registration under the 1940 Act. These initial investments are expected to provide a lower net return than we will seek to achieve from our target assets. In addition, prior to the time that we have permanently used all of the net proceeds from this offering, we may temporarily reduce amounts outstanding under our repurchase facilities with a portion of the net proceeds from this offering going to the counterparties, which may be

 

(1)

Includes 1,097,293 shares of common stock underlying unvested RSUs that are expected to vest in full as of the date of this prospectus, but excludes 8,281,594 shares of our common stock reserved for future issuance under the 2016 Plan. See “Management—Compensation of Executives—2016 Incentive Award Plan” and “Risk Factors—Risks Related to Our Reliance on Our Manager and its Affiliates—Our future success depends on our Manager and its access to the key personnel and investment professionals of our Sponsor and its affiliates.”


 

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the underwriters in this offering or their affiliates. See “Use of Proceeds” and “Underwriting—Other Relationships.”

 

Distribution policy

To satisfy the requirements to continue to qualify as a REIT and generally not be subject to U.S. federal income and excise tax, we intend to make regular quarterly distributions of all or substantially all of our REIT taxable income to holders of our common stock out of assets legally available therefor. Any distributions we make to our stockholders will be at the discretion of our Board and will depend upon our historical and anticipated REIT taxable income, results of operations, financial condition, liquidity, financing agreements (including covenants), maintenance of our REIT qualification, our exclusion from registration under the 1940 Act, applicable provisions of the Maryland General Corporation Law, or the MGCL, and such other factors as our Board deems relevant. Our REIT taxable income, results of operations, financial condition and liquidity will be affected by various factors, including the net interest and other income from our portfolio, our operating expenses and any other expenditures. See “Risk Factors.”

 

Proposed NYSE symbol

“CMTG”

 

Ownership and transfer restrictions

To assist us in complying with the limitations on the concentration of ownership of a REIT imposed by the Code, our charter prohibits, with certain exceptions, any person from beneficially or constructively owning, applying certain attribution rules under the Code, more than 9.6% in value or in number of shares, whichever is more restrictive, of the aggregate of the outstanding shares of our common stock, or 9.6% in value of the aggregate of the outstanding shares of our capital stock, in each case excluding any shares that are not treated as outstanding for U.S. federal income tax purposes. Our Board has established excepted holder limits for certain of our stockholders. See “Description of Capital Stock—Restrictions on Ownership and Transfer.”

 

Directed share program

At our request, the underwriters have reserved for sale up to     % of the shares of common stock being offered by this prospectus for sale at the initial public offering price to our officers and directors and other persons who are associated with us through a directed share program. If purchased by these persons, these shares will be subject to the lock-up agreements described in “Underwriting.” The sales will be made by                 , an underwriter of this offering. The number of shares of common stock available for sale to the general public will be reduced by the number of directed shares of common stock purchased by participants in the program. Any directed shares of common stock not purchased will be offered by                 to the general public on the same basis as all other shares of common stock offered. We have agreed to indemnify the underwriters against certain liabilities and expenses, including liabilities under the Securities Act, in connection with the sales of the directed shares of common stock.

 

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10b5-1 Purchase Plan

We have entered into an agreement, or the 10b5-1 Purchase Plan, with             , one of the underwriters in this offering. Pursuant to the 10b5-1 Purchase Plan,             , as our agent, will buy in the open market up to $             million in shares of our common stock in the aggregate during the period beginning four full calendar weeks following the completion of this offering and ending 12 months thereafter or, if sooner, the date on which all the capital committed to the 10b5-1 Purchase Plan has been exhausted. The 10b5-1 Purchase Plan will require              to purchase for us shares of our common stock when the market price per share is below the book value. The purchase of shares of our common stock by              for us pursuant to the 10b5-1 Purchase Plan is intended to satisfy the conditions of Rules 10b5-1 and 10b-18 under the Securities Exchange Act of 1934, as amended, or the Exchange Act, and will otherwise be subject to applicable law, including Regulation M under the Securities Act, which may prohibit purchases under certain circumstances. Under the 10b5-1 Purchase Plan,              will increase the volume of purchases made for us as the market price per share of our common stock declines below the book value, subject to volume restrictions imposed by the 10b5-1 Purchase Plan and Rule 10b-18 under the Exchange Act. For purposes of the 10b5-1 Purchase Plan, “book value” means, as of the date of any purchase, the book value per share of our common stock as of the end of the most recent quarterly period for which financial statements are available, calculated in accordance with GAAP and adjusted to give effect to any subsequent cash distribution made to holders of our common stock from and after the record date for such distribution. Purchases of shares of our common stock by              for us under the 10b5-1 Purchase Plan may result in the market price of our common stock being higher than the price that otherwise might exist in the open market absent such a plan. See “Risk Factors—Risks Related to our Common Stock and this Offering—Purchases of our common stock by              for us under the 10b5-1 Purchase Plan may result in the market price of our common stock being higher than the price that otherwise might exist in the open market absent such a plan.”

 

Risk factors

Investing in our common stock involves a high degree of risk. You should carefully read and consider the information set forth under the heading “Risk Factors” beginning on page 47 of this prospectus and all other information in this prospectus before making a decision to invest in our common stock.

 

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SUMMARY SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA

Our summary selected consolidated financial and other data as of December 31, 2020 and 2019 and for the years ended December 31, 2020 and 2019 were derived from our historical audited consolidated financial statements included elsewhere in this prospectus. Our summary selected consolidated financial and other data as of June 30, 2021 and for the six months ended June 30, 2021 and 2020 were derived from our historical unaudited consolidated financial statements included elsewhere in this prospectus and, in the opinion of management, have been prepared on a basis consistent with our historical audited consolidated financial statements and reflect all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of our financial condition as of the dates indicated and our results of operations for the periods presented. Our historical results for any prior period are not necessarily indicative of the results that may be expected for any future year or period.


 

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You should read the following information together with the information contained under the captions “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our audited and unaudited consolidated financial statements, related notes and other financial information included elsewhere in this prospectus.

 

     Six Months Ended
June 30,
     Year Ended
December 31,
 
(in thousands, except share and per share data)    2021     2020      2020     2019  

STATEMENT OF OPERATIONS DATA:

         

Revenue

         

Interest and related income

   $ 210,450     $ 234,802      $ 445,940     $ 389,361  

Less: interest and related expense

     103,118       89,341        172,232       139,747  
  

 

 

   

 

 

    

 

 

   

 

 

 

Net interest income

     107,332       145,461        273,708       249,614  
  

 

 

   

 

 

    

 

 

   

 

 

 

Revenue from real estate owned

     7,070       —          —         —    
  

 

 

   

 

 

    

 

 

   

 

 

 

Total revenue

     114,402       145,461        273,708       249,614  
  

 

 

   

 

 

    

 

 

   

 

 

 

Expenses

         

Management fees—affiliate

     19,363       19,267        38,960       32,611  

Incentive fees—affiliate

     —         6,438        7,766       10,219  

Equity compensation

     (190     4,903        5,670       29,489  

General and administrative expenses

     4,063       2,993        9,004       3,392  

Expenses from real estate owned

     12,024       —          —         —    
  

 

 

   

 

 

    

 

 

   

 

 

 

Total expenses

     35,260       33,601        61,400       75,711  
  

 

 

   

 

 

    

 

 

   

 

 

 

Other Income (expense)

         

Equity in income from investment in CMTG/CN Mortgage REIT LLC

     —         —          —         40  

Realized gain (loss) on sale of investments

     —         —          (640     103  

Provision for loan losses

     —         —          (6,000     —    

Gain on foreclosure of real estate owned

     1,430       —          —         —    
  

 

 

   

 

 

    

 

 

   

 

 

 

Other income

     5,855       —          —         —    
  

 

 

   

 

 

    

 

 

   

 

 

 

Reversal of current expected credit loss reserve

     8,107       —          —         —    
  

 

 

   

 

 

    

 

 

   

 

 

 

Income before income taxes

     94,534       111,860        205,668       174,046  
  

 

 

   

 

 

    

 

 

   

 

 

 

Income tax benefit

     6,025       —          —         —    
  

 

 

   

 

 

    

 

 

   

 

 

 

Net Income

   $ 100,559     $ 111,860      $ 205,668     $ 174,046  
  

 

 

   

 

 

    

 

 

   

 

 

 

Net (loss) income attributable to non-controlling interests

   $ (78   $ 2,699      $ 3,259     $ 5,289  

Net income attributable to preferred stock

     8       16        31       31  
  

 

 

   

 

 

    

 

 

   

 

 

 

Net income attributable to common stock

   $ 100,629     $ 109,145      $  202,378     $ 168,726  
  

 

 

   

 

 

    

 

 

   

 

 

 

Net Income Per Share of Common Stock(1)

         

Basic

   $ 0.75     $ 0.83      $ 1.52     $ 1.51  

Diluted

   $ 0.75     $ 0.83      $ 1.52     $ 1.51  
  

 

 

   

 

 

    

 

 

   

 

 

 

Weighted-Average Shares of Common Stock Outstanding(1)

         

Basic

     133,520,821       132,226,218        132,980,316       111,462,928  
  

 

 

   

 

 

    

 

 

   

 

 

 

Diluted

     133,520,821       132,226,218        132,980,316       111,462,928  
  

 

 

   

 

 

    

 

 

   

 

 

 

Dividends Declared per Share(2)

   $ 0.74     $ 0.87      $ 1.61     $ 1.75  
  

 

 

   

 

 

    

 

 

   

 

 

 

 

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(in thousands, except share and per share data)

   Six Months
Ended June 30, 2021
     Year Ended
December 31, 2020
 

Pro Forma Net Income Per Share of Common Stock(3)

     

Basic

   $ 0.75      $ 1.51  
  

 

 

    

 

 

 

Diluted

   $ 0.75      $ 1.51  
  

 

 

    

 

 

 

Pro Forma Weighted-Average Shares of Common Stock Outstanding(3)

     

Basic

     134,618,114        134,077,609  
  

 

 

    

 

 

 

Diluted

     134,618,114        134,077,609  
  

 

 

    

 

 

 

 

(1)

Includes 584,767 fully vested RSUs, which were settled on April 4, 2021, as of June 30, 2021. Includes 877,498 shares of our common stock underlying RSUs that were vested in full but not yet settled as of December 31, 2020, December 31, 2019, and June 30, 2020. Excludes the issuance of 1,097,293 shares of common stock underlying unvested RSUs that are expected to vest in full as of the date of this prospectus.

(2)

Includes, in the case of the second quarter of 2019 and through the fourth quarter of 2020, dividend equivalent payments made to holders of 877,498 fully-vested but not settled RSUs granted on April 4, 2019, and includes, in the case of the six months ended June 30, 2021, dividend equivalent payments made to holders of 584,767 fully-vested RSUs settled on April 4, 2021, both of which are entitled to and have received dividend equivalent payments per RSU equal to the dividends paid per share on our common stock since the date of grant. Amount does not include any accrued and unpaid dividend equivalent rights related to 1,097,293 unvested performance-based RSUs granted on April 4, 2019 that are expected to vest in full as of the date of this prospectus; however, dividend equivalent rights will accrue from the date of grant and will be paid in cash to the extent the underlying performance-based RSUs vest.

(3)

Includes the issuance of 1,097,293 shares of common stock underlying unvested RSUs that are expected to vest in full as of the date of this prospectus.

 

(in thousands, except per share data)           June 30,
2021
     December 31,
2020
     December 31,
2019
 

BALANCE SHEET DATA:

           

Total assets

      $ 7,013,463      $ 6,952,543      $ 6,548,121  

Total liabilities

        4,473,224        4,330,157        3,975,314  

Total CMTG equity(1)

        2,503,595        2,587,100        2,526,272  

Non-controlling interests

        36,644        35,286        46,535  
     

 

 

    

 

 

    

 

 

 

Total equity

      $ 2,540,239      $ 2,622,386      $ 2,572,807  
     

 

 

    

 

 

    

 

 

 
     Six Months Ended
June 30,
     Year Ended
December 31,
 
     2021      2020      2020      2019  

OTHER FINANCIAL DATA:

           

Distributable Earnings(2)

   $ 82,220      $ 120,444      $ 221,746      $ 204,379  
  

 

 

    

 

 

    

 

 

    

 

 

 

Distributable Earnings per weighted average share(3)

   $ 0.62      $ 0.91      $ 1.67      $ 1.83  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net Distributable Earnings(2)

   $ 82,220      $ 114,048      $ 214,048      $ 194,221  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net Distributable Earnings per weighted average share(3)

   $ 0.62      $ 0.86      $ 1.61      $ 1.74  
  

 

 

    

 

 

    

 

 

    

 

 

 

Dividends Declared per Share(7)

   $ 0.74      $ 0.87      $ 1.61      $ 1.75  
  

 

 

    

 

 

    

 

 

    

 

 

 
            June 30,
2021
     December 31,
2020
     December 31,
2019
 

Book value per share(4)

      $ 18.76      $ 19.35      $ 19.40  
     

 

 

    

 

 

    

 

 

 

Net Debt-to-Equity Ratio(5)

        1.5x        1.5x        1.4x  
     

 

 

    

 

 

    

 

 

 

Total Leverage Ratio(6)

        2.0x        2.1x        2.0x  
     

 

 

    

 

 

    

 

 

 

 

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(1)

Includes 7,306,984 shares of our common stock outstanding as of all periods presented in the table above that we are currently required to classify as “redeemable common stock” on our balance sheet in accordance with GAAP because the shares are subject to a stockholder’s contractual redemption right. The stockholder’s contractual redemption right will terminate upon completion of this offering, at which point the shares previously subject to that right will be reclassified as common stock on our balance sheet in accordance with GAAP.

(2)

Distributable Earnings and Net Distributable Earnings are non-GAAP measures used to evaluate our performance excluding the effects of certain transactions, non-cash items and GAAP adjustments, as determined by our Manager, that we believe are not necessarily indicative of our current performance and operations. Distributable Earnings is a non-GAAP measure, which we define as net income as determined in accordance with GAAP, excluding (i) non-cash equity compensation expense, (ii) incentive fees, (iii) real estate depreciation and amortization, (iv) any unrealized gains or losses from mark-to-market valuation changes (other than permanent impairments) that are included in net income for the applicable period, (v) one-time events pursuant to changes in GAAP and (vi) certain non-cash items, which in the judgment of our Manager, should not be included in Distributable Earnings. Net Distributable Earnings is Distributable Earnings less incentive fees due to our Manager. Distributable Earnings is substantially the same as Core Earnings, as defined in the Management Agreement, for the periods presented.

 

    

We believe that Distributable Earnings and Net Distributable Earnings provide meaningful information to consider in addition to our net income and cash flows from operating activities determined in accordance with GAAP. We believe the Distributable Earnings and Net Distributable Earnings measures help us to evaluate our performance excluding the effects of certain transactions, non-cash items and GAAP adjustments, as determined by our Manager, that we believe are not necessarily indicative of our current performance and operations. Distributable Earnings and Net Distributable Earnings do not represent net income or cash flows from operating activities and should not be considered as an alternative to GAAP net income, an indication of our cash flows from operating activities, a measure of our liquidity or an indication of funds available for our cash needs. In addition, our methodology for calculating Distributable Earnings and Net Distributable Earnings may differ from the methodologies employed by other companies to calculate the same or similar supplemental performance measures and, accordingly, our reported Distributable Earnings and Net Distributable Earnings may not be comparable to the Distributable Earnings and Net Distributable Earnings reported by other companies.

 

    

In order to maintain our status as a REIT, we are required to distribute at least 90% of our REIT taxable income, determined without regard to the deduction for dividends paid and excluding net capital gain, as dividends. Distributable Earnings is intended to serve as a proxy for our REIT taxable income and, as such, is a key indicator of our ability to generate sufficient income to pay our quarterly dividends and in determining the amount of such dividends, which we believe is the primary focus of yield/income investors who comprise a significant portion of our investor base. More broadly, Distributable Earnings, and other similar measures, have historically been a useful indicator of mortgage REITs’ ability to cover their dividends, and to mortgage REITs themselves in determining the amount of any dividends. Accordingly, we believe providing Distributable Earnings on a supplemental basis to our net income as determined in accordance with GAAP is helpful to our stockholders in assessing the overall performance of our business.

 

    

While Distributable Earnings excludes the impact of our unrealized current provision for credit losses, any loan losses are charged off and realized through Distributable Earnings when deemed non-recoverable. Non-recoverability is determined (i) upon the resolution of a loan (i.e. when the loan is repaid, fully or partially, or in the case of foreclosure, when the underlying asset is sold), or (ii) with respect to any amount due under any loan, when such amount is determined to be non-collectible.

 

    

Pursuant to the Management Agreement, we also use Core Earnings, which is substantially the same as Distributable Earnings, to determine the incentive fees we pay our Manager. For information on the fees we pay our Manager, see “Our Manager and the Management Agreement.”


 

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See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Financial Measures and Indicators—Distributable Earnings and Net Distributable Earnings” for a reconciliation of Distributable Earnings and Net Distributable Earnings to their nearest GAAP equivalent.

 

(3)

Includes 877,498 shares of our common stock underlying RSUs that were vested in full but not yet settled as of December 31, 2020, December 31, 2019 and June 30, 2020 and 584,767 shares of our common stock underlying fully vested RSUs, which were settled on April 4, 2021. Excludes the issuance of 1,097,293 shares of common stock underlying unvested RSUs that are expected to vest in full as of the date of this prospectus.

(4)

Calculated as (i) total stockholders’ equity less non-controlling interest and preferred stock divided by (ii) number of shares of common stock outstanding at period end, which as of (x) December 31, 2020, December 31, 2019 and June 30, 2020 includes 877,498 shares of common stock underlying RSUs that were vested in full but not yet settled and (y) June 30, 2021 includes 584,767 shares of our common stock underlying RSUs that were vested in full and settled, in each case as of period end. Excludes 1,097,293 shares of common stock underlying unvested RSUs that are expected to vest in full as of the date of this prospectus.

(5)

Net Debt-to-Equity Ratio is calculated as the ratio of (i) the sum of (a) repurchase agreements, (b) loan participations sold, net, (c) notes payable, net, (d) Secured Term Loan, net, and (e) debt related to real estate owned, less cash and cash equivalents to (ii) total equity. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Financial Measures and Indicators—Net Debt-to-Equity and Total Leverage Ratios” for a reconciliation of Net Debt-to-Equity Ratio to its nearest GAAP equivalent.

(6)

Total Leverage Ratio is calculated as the ratio of (i) the sum of (a) repurchase agreements, (b) loan participations sold, net, (c) notes payable, net, (d) Secured Term Loan, net, (e) non-consolidated senior interests sold, (f) non-consolidated senior interests held by third parties, and (g) debt related to real estate owned, less cash and cash equivalents to (ii) total equity. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Financial Measures and Indicators—Net Debt-to-Equity and Total Leverage Ratios” for a reconciliation of Total Leverage Ratio to its nearest GAAP equivalent.

(7)

See “Distribution Policy” for further description on dividends declared per share.


 

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RISK FACTORS

Investing in our common stock involves a high degree of risk. Before making an investment decision, you should carefully consider the following risk factors and all other information contained in this prospectus. If any of the risks discussed in this prospectus were to occur, our business, financial condition, liquidity, results of operations and prospects and our ability to service our debt and pay dividends to our stockholders could be materially and adversely affected (which we refer to collectively as “materially and adversely affecting us” or having “a material adverse effect on us,” and comparable phrases), the market price of our common stock could decline significantly and you could lose all or part of your investment in our common stock. Some statements in this prospectus, including statements in the following risk factors, constitute forward-looking statements. Please refer to the section entitled “Forward-Looking Statements.”

Risks Related to the COVID-19 Pandemic

The COVID-19 pandemic has had an adverse effect on us and may have a material adverse effect on us in the future and any other pandemic, epidemic or outbreak of an infectious disease in the markets in which we operate may have a material adverse effect on us in the future.

In late 2019, COVID-19 surfaced in Wuhan, China and subsequently spread around the world, with resulting business and social disruption. COVID-19 was declared a Public Health Emergency of International Concern by the World Health Organization on January 30, 2020, and numerous countries, including the U.S., have declared national emergencies with respect to COVID-19. Although vaccines for COVID-19 have been approved for use and distributed to the public are generally effective, the global impact of the COVID-19 pandemic has been rapidly evolving, especially with the emergence and widespread nature of variants such as the Delta variant, and many governments have reacted by instituting quarantines and restrictions on travel, closing financial markets and/or restricting trading, and limiting operations of non-essential businesses. Such actions have created disruption in global supply chains, increased rates of unemployment and adversely impacted many industries. In the United States, the temporary closing of non-essential businesses and restrictions on travel created disruptive economic conditions which have had a material adverse impact on some of our borrowers’ industries, businesses and financial condition, liquidity and results of operations. Such actions and others may be reinstituted in the future. The COVID-19 pandemic could have a continued adverse impact on economic and market conditions and result in a prolonged global economic slowdown.

The COVID-19 pandemic has had an adverse effect on us and may in the future have a material adverse effect on us, including on, among other things, the value of the collateral underlying our loans, our ability to finance our assets, the financial condition and liquidity of our borrowers, and, as a result, our ability to pay dividends to our stockholders at current rates or at all. We expect that these effects are likely to continue to some extent as the COVID-19 pandemic persists and potentially even longer. Although many or all facets of our business have been or could be impacted by the COVID-19 pandemic, we currently believe the following impacts to be among the most material to us:

 

   

The COVID-19 pandemic could have a significant long-term impact on the broader economy and the CRE market generally, which would negatively impact the value of the assets collateralizing our loans. In particular, our loan portfolio includes loans collateralized by hospitality, office, and other property types and in markets such as New York, New York, which have been particularly negatively impacted by the COVID-19 pandemic. The COVID-19 pandemic presents material uncertainty and risks with respect to our loan portfolio’s collateral as reflected by the weighted average risk rating of our loan portfolio increasing to 3.1 as of June 30, 2021 from 2.8 as of December 31, 2019, with 24.0% of the loans in our portfolio (based on unpaid principal balance) as of June 30, 2021 being rated 4.0 or higher (on a scale of 1.0 to 5.0 with 5.0 being considered the greatest risk) while none of our loans as of December 31, 2019 were rated 4.0 or higher. As of June 30, 2021, of the loans rated 4.0 or higher, 25.1% (based on unpaid principal balance) related to loans secured by hospitality assets (or equity interests relating thereto), 6.5% (based on unpaid principal balance) related to loans secured by office

 

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assets (or equity interests relating thereto) and 64.9% (based on unpaid principal balance) related to loans secured by properties (or equity interests relating thereto) in the New York metropolitan area, property types and markets that have been particularly negatively impacted by the COVID-19 pandemic.

 

   

We have continued our active engagement with our borrowers, some of whom have indicated that, due to the impact of the COVID-19 pandemic, they will be unable to timely execute their business plans, have had to temporarily close their businesses, experienced delays in leasing of real property, or have experienced other negative business consequences and have requested temporary interest deferral or forbearance, or other modifications of their loans. These and other borrowers may be unable to generate operating cash flow sufficient to fund debt service, which, when combined with a decline in underlying asset values, may lead to loan losses. While we have completed a number of loan modifications to date, we also may continue to make additional modifications depending on the duration of the COVID-19 pandemic and its impact on our borrowers’ business plans and our borrowers’ financial condition, liquidity and results of operations. If we are unable to negotiate such loan modifications on terms acceptable to us, or at all, or to successfully sell such loans or if our borrowers default and we are forced to foreclose on the assets underlying our loans or operate or sell any properties securing our loans, the credit profile of our assets and our business, financial condition, liquidity, results of operations and prospects could be materially and adversely affected. From March 15, 2020 through August 31, 2021, we modified 39 investments representing $3.5 billion of unpaid principal balance, or 54.0% of our loan portfolio based on unpaid principal balance as of August 31, 2021. Some of the modifications included credit enhancements such as partial loan repayments, operating cash flow sweeps, and mandatory future principal paydowns in exchange for term extensions, repurposing of reserves, temporary deferrals of interest payments, additional financing commitments, and performance test waivers, among other items. With respect to our loans that were modified during the pandemic, as of August 31, 2021, reported LTVs changed on sixteen of the modified investments, representing $1.5 billion of unpaid principal balance or 22.8% of the loans based on unpaid principal balance. Reported LTVs increased in modifications representing 9.9% of our loans based on unpaid principal balance and decreased in modifications representing 12.9% of our loans based on unpaid principal balance. For investments with changes to reported LTVs due to loan modifications, ten were due to an investment paydown or reduced loan commitment, four were due to an increase in construction costs or increased loan commitment, one was due to a revised appraisal and one was due to a collateral release in connection with a partial loan repayment. Only one of the modifications, relating to a loan secured by a hospitality asset in San Diego, California with an unpaid principal balance representing 1.6% of our loan portfolio as of June 30, 2021, was considered a “troubled debt restructuring” under GAAP. The modification included a waiver of exit fees, a reduction in contractual interest payments, and an extension of the loan’s maturity date in exchange for a principal repayment. In many cases, such loan modifications require approval of our financing counterparties. Obtaining such approvals has required in the past and may require in the future reduction of advance rates on financing, increased borrowing costs or a combination thereof, which could have an adverse impact on our returns on equity and reduce our liquidity. In addition, such loan modifications have reduced, and may reduce in the future, interest income payments received in the near term, or result in paydowns of loans receivable, and lower levels of financing against certain assets, all of which are expected to reduce our returns on equity.

 

   

On February 6, 2018, we originated an $85.0 million mezzanine loan secured by a portfolio of seven limited service hotel properties located in New York, New York, which was subordinate to a $300.0 million securitized senior mortgage. Following the onset of the COVID-19 pandemic, the hotels were forced to close, causing the borrower to experience financial difficulty which resulted in the borrower not paying debt service on the loan. Beginning in June 2020, we began funding debt service on the $300.0 million securitized senior mortgage as protective advances on our loan, which totaled $18.9 million through February 8, 2021. On February 8, 2021, we foreclosed on the portfolio of seven limited service hotel properties through a Uniform Commercial Code foreclosure. The hotel portfolio now appears as real estate owned, net on our balance sheet and as of June 30, 2021, was encumbered by a $290.0 million securitized senior mortgage, which is included as a liability on our balance sheet.

 

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As of June 30, 2021, there were five investments consisting of six loans that were on non-accrual status, representing $525.0 million of unpaid principal balance, or 8.6% of our portfolio (based on unpaid principal balance), of which there were four investments consisting of five loans on non-accrual status, representing $282.6 million of unpaid principal balance, or 4.6% of our loan portfolio (based on unpaid principal balance), as a result of not being current on debt service for 90 days. One of these investments, with an unpaid principal balance of $78.0 million as of June 30, 2021, was modified in September 2021, which involved the borrower satisfying all previously unpaid debt service with a combination of a cash payment and compounding the remaining amount due into the unpaid principal balance. In August 2021, one investment comprised of one loan with an unpaid principal balance of $95.0 million as of June 30, 2021 was placed on non-accrual status as a result of becoming 90 days past due. Additionally, there was one investment, with an outstanding principal balance of $242.5 million, representing 4.0% of our portfolio (based on unpaid principal balance) at June 30, 2021, which had been placed on non-accrual status in the third quarter of 2020 as a result of interest payments becoming 90 days past due, which was modified in December 2020 resulting in all past due interest being paid, bringing the loan current. In September 2021, this loan was repaid.

 

   

Certain of our borrowers’ tenants have been, and may in the future be, unable to pay rent on their leases or our borrowers may be unable to re-lease space that becomes vacant on acceptable terms, which inability could cause our borrowers to default on their loans and could cause us to: (i) no longer be able to pay dividends to our stockholders at our current rates or at all due to reduced operating cash flows, and cause us to preserve liquidity and (ii) be unable to meet our obligations to lenders or satisfy our financial covenants, which could cause us to have to sell our investments or raise capital, if available, on unattractive terms;

 

   

Our borrowers under our construction loans may be unable to continue or complete construction as planned (timing and cost), which may affect their ability to complete construction and lease space, collect rent or sell units and, consequently, their ability to pay principal or interest on our construction loans;

 

   

The COVID-19 pandemic likely will reduce the availability of our sources of liquidity, including selling or financing assets or raising capital, but our requirements for liquidity, including future loan funding obligations and margin calls, likely will not be commensurately reduced. Additionally, pursuant to our contractual arrangements with our borrowers, we will be required to fund borrower unfunded loan commitments, even at times when our liquidity position is constrained. If we do not have funds available to meet our obligations, we would have to raise funds from alternative sources, which may only be available on unfavorable terms or may not be available to us due to the impacts of the COVID-19 pandemic. We expect that the adverse impact of the COVID-19 pandemic will likely adversely affect our liquidity position and, if we face liquidity concerns, we may have to continue to curtail our originations in a manner that materially and adversely affects our ability to execute our growth strategy.

 

   

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

The immediately preceding outcomes are those we consider to be most material as a result of the COVID-19 pandemic. We have also experienced and may experience other negative impacts to our business as a result of the COVID-19 pandemic that could exacerbate other risks described in this prospectus, including:

 

   

the lack of liquidity in certain of our assets;

 

   

the greater risk of loss to which we are exposed in connection with subordinated mortgage interests, mezzanine loans, and other assets that are subordinated or otherwise junior in a borrower’s capital structure and that involve privately negotiated structures;

 

   

the greater risk of loss and exposure to potential operating losses from our real estate owned investment and risks related to real estate ownership in general;

 

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risks associated with loans on properties in transition or construction;

 

   

impairment of our investments and harm to our operations from a prolonged economic slowdown, a lengthy or severe recession or declining real estate values;

 

   

the concentration of our loans and investments in terms of geography, asset types and sponsors from time to time, especially during the COVID-19 pandemic;

 

   

difficulty accessing debt and equity capital on attractive terms, or at all, and a severe disruption and instability in the financial markets or deteriorations in credit and financing conditions, which may affect our ability and our borrowers’ ability to make required payments of principal and interest (whether due to an inability to make such payments, an unwillingness to make such payments, or a waiver of the requirement to make such payments on a timely basis or at all);

 

   

the extent to which the value of commercial real estate declines and negatively impacts the value of our collateral, which has led or could lead to loan loss reserves or impairments on our investments and, with respect to loans financed on our repurchase facilities, may lead to margin calls or the removal of such loans as collateral;

 

   

our inability to satisfy any margin calls from our lenders or required loan paydowns under our financings. If we fail to resolve such margin calls when due by payment of cash or delivery of additional collateral, the lenders may exercise remedies, including demanding payment by us of our aggregate outstanding financing obligations, increasing the interest rate on advanced funds, terminating our ability to borrow funds from them and/or taking ownership of the loans or other assets securing the applicable obligations, and we may have to reduce our loan originations in a manner that materially and adversely affects our ability to execute our growth strategy, which may reduce our returns on equity. We may not have the funds available to repay such financing obligations, and we may be unable to raise necessary funds from alternative sources of financing on favorable terms or at all. Forced sales of the loans or other assets that secure our financing obligations in order to pay outstanding financing obligations may be on terms less favorable to us than might otherwise be available in a regularly functioning market, may result in realized loan losses, and could result in deficiency judgments and other claims against us. In addition, if any such event constitutes an event of default under any of our indebtedness, it could result in a cross-default under our other indebtedness and secured lenders exercising remedies similar to those referenced above;

 

   

disruptions to the efficient function of our operations because of, among other factors, any inability to access short-term or long-term financing for the loans we make and fulfill future loan funding commitments;

 

   

our need to sell assets, potentially at a loss, which could reduce our earnings and capital base;

 

   

decreases in observable market activity or unavailability of information, resulting in restricted access to key inputs such as LTVs, capitalization rates and discount rates used to derive certain estimates and assumptions made in connection with financial reporting or otherwise, including recognition of loan loss reserves or impairments, or valuing our loans or the underlying collateral;

 

   

downgrades in, adverse changes in outlook of, or withdrawals of, credit ratings assigned to our financings;

 

   

the difficulty of estimating provisions for loan losses;

 

   

our inability to remain in compliance with the financial covenants of our financing agreements with our lenders in the event of impairments in the value of the loans we own, reducing our equity base;

 

   

borrower and counterparty risks;

 

   

if the market value or income potential of collateral for our loans declines beyond a certain extent, we may need to increase our real estate investments and income and/or liquidate our non-qualifying assets in order to maintain our REIT qualification or exclusion from registration under the 1940 Act;

 

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operational impacts on ourselves and on our third-party advisors, service providers, loan servicers, vendors and counterparties, including advisors or providers that provide construction monitoring services, information technology services, legal and accounting services, or other operational support services;

 

   

effects of legal and regulatory responses to concerns about the COVID-19 pandemic and related public health issues, including moratoria on business activities, construction, foreclosures, rent cancellation and other remedies, which could result in additional regulation or restrictions affecting the conduct of our business;

 

   

our inability to ensure operational continuity in the event our business continuity plan is not effective or ineffectually implemented or deployed during a disruption; and

 

   

the availability of key personnel of our Manager and our service providers as they face changed circumstances and potential illness during the pandemic.

Although vaccines for COVID-19 have been approved for use that are generally effective, booster vaccines may be necessary and there can be no assurance that efforts to vaccinate the public will be successful in ending the pandemic or that vaccines will be effective against variants such as the Delta variant. The rapid development and fluidity of this situation continues to preclude any prediction as to the ultimate adverse impact of the COVID-19 pandemic on economic and market conditions, and, as a result, present material uncertainty and risk with respect to us and the performance of our investments. The full extent of the impact and effects of the COVID-19 pandemic will depend on future developments, including, among other factors, the duration and the severity of the COVID-19 pandemic, including variants such as the Delta variant, potential resurgences of COVID-19, along with the related travel advisories, quarantines and business restrictions, the need for, and availability of, booster vaccines, the effectiveness and efficiency of distribution of vaccines, the recovery time of the disrupted supply chains and industries, the impact of the labor market interruptions, the impact of government interventions, uncertainty with respect to the duration or the severity of the global economic slowdown, and the performance or valuation outlook for CRE markets and certain property types. The COVID-19 pandemic and the current financial, economic and capital markets environment, and future developments in these and other areas present uncertainty and risk and have had an adverse effect on us and may have a material adverse effect on us in the future.

Risks Related to Our Reliance on Our Manager and its Affiliates

Our future success depends on our Manager and its access to the key personnel and investment professionals of our Sponsor and its affiliates.

We are externally managed and advised by our Manager, an investment adviser registered with the SEC pursuant to the Advisers Act. We have no direct employees or facilities. We rely completely on our Manager and its affiliates to provide us with investment advisory services, which, in the case of our Manager’s affiliates, are provided to our Manager pursuant to a services agreement with MRECS. Our Manager is an affiliate of MRECS and all of our officers are employees or principals of MRECS or its affiliates. Our Manager has significant discretion as to the implementation of our investment and operating policies and strategies.

Accordingly, we believe that our success depends to a significant extent upon the efforts, experience, diligence, skill and network of business contacts of the officers, key personnel and investment professionals of our Sponsor and its affiliates, including our Manager. Our Manager, through the officers, key personnel and investment professionals of our Sponsor and its other affiliates, will evaluate, negotiate, close and monitor our investments and advise us regarding maintenance of our REIT status and exclusion from registration under the 1940 Act; therefore, our success depends on their continued service. The departure of any of the officers, key personnel or investment professionals of our Sponsor or its affiliates could have a material adverse effect on us and our operations and/or subject us to compensation-related claims in connection with the 2016 Plan. To date, in connection with the departure of a certain executive from MRECS, 805,437 RSUs (292,731 time vesting and 512,706 performance vesting) we previously issued to the executive were cancelled in accordance

 

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with their terms. The former executive is challenging the basis for cancellation of the RSUs and seeking their reinstatement within an arbitration proceeding initiated by MRECS. He is also seeking to have us participate in such proceeding. If we are unable to establish that the cancellation of the RSUs was proper and in accordance with their terms, we may be obliged to issue additional RSUs and/or pay damages.

We offer no assurance that our Manager will remain our investment manager or that we will continue to have access to the officers, key personnel and investment professionals of our Sponsor and its affiliates. The term of the Management Agreement with our Manager extends until the earlier of August 25, 2025 and the time at which all of our investments have been disposed of by a Complete Disposition (as defined in the Management Agreement). If the Management Agreement is terminated and no suitable replacement is found to manage us, we may not be able to execute our investment strategy, which would materially and adversely affect us.

If our Sponsor and its other affiliates are unable to hire and retain qualified loan originators and maintain relationships with key loan market participants, we could be materially and adversely affected.

We depend on our Sponsor’s network of business contacts to generate borrower clients by, among other things, developing and maintaining relationships with property owners, developers, mortgage brokers and investors and others, which we believe leads to repeat and referral business. Accordingly, our Sponsor and its other affiliates, which provide services to our Manager, must be able to attract, motivate and retain skilled loan originators. The market for loan originators is highly competitive and may lead to increased costs to hire and retain them. We cannot guarantee that our Sponsor and its affiliates will be able to attract, motivate and retain qualified loan originators. If our Sponsor and its affiliates cannot attract, motivate or retain a sufficient number of skilled loan originators, or even if they can motivate or retain such originators but at higher costs, we could be materially and adversely affected. While our Sponsor will strive to continue to cultivate long-standing relationships that generate repeat business for us, borrowers and loan brokers are free to transact business with other lenders. Our competitors also have relationships with many of the same borrowers and loan brokers and actively compete with us in bidding on potential loans, which could impair our loan origination volume and reduce our returns.

The personnel providing services to our Manager are not required to dedicate a specific portion of their time to the management of our business.

Neither our Sponsor nor any of its other affiliates is obligated to dedicate any specific personnel exclusively to our Manager, and in turn to us, nor will it or its personnel be obligated to dedicate any specific portion of their time to the management of our business other than the portion of our Manager’s time as is necessary and appropriate for our Manager to perform its services under the Management Agreement. As a result, we cannot provide any assurances regarding the amount of time our Manager or its affiliates will dedicate to the management of our business and our Manager and its affiliates may have conflicts in allocating its time, resources and services among our business and any other investment vehicles and accounts our Manager or its affiliates or their respective personnel may manage. Each of our officers is also an employee or principal of MRECS or its affiliates, who has now or may be expected to have significant responsibilities for other investment vehicles, whether focused on credit or equity investments, currently or in the future managed by our executive officers, our Manager or its affiliates. Consequently, we may not receive the level of support and assistance that we otherwise might receive if we were internally managed. Our Manager and its affiliates are not restricted from entering into other investment advisory relationships or from engaging in other business activities from time to time.

Our Manager manages our loan portfolio pursuant to very broad investment guidelines and is not required to seek the approval of our Board for each of our investment decisions, which may result in investment returns that are substantially below expectations or that result in material losses, which could materially and adversely affect us.

Our Manager is authorized to follow very broad investment guidelines that provide it with substantial discretion in our investment decisions. Our Board will periodically review and update our investment guidelines

 

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and will also periodically review our investment portfolio, but is not required to review or approve specific investments. Our Manager will have great latitude within the broad parameters of the investment guidelines to be set by our Board in determining our investments and investment strategies, which could result in investment returns that are substantially below expectations or that result in material losses, which could materially and adversely affect us.

Our success depends on the availability of attractive investments and our Manager’s ability to identify, structure, consummate, leverage, manage and realize returns on our investments.

Our operating results depend upon the availability of attractive investment opportunities, as well as our Manager’s ability to identify, structure, consummate, leverage, manage and realize returns on them. In general, the availability of attractive investment opportunities and, consequently, the performance of these investments and our operating results will be affected by the level and volatility of interest rates, conditions in the financial markets, general economic conditions, the demand from real estate sponsors for CRE debt capital and the supply of such capital from traditional and non-traditional lenders. We cannot make any assurances that our Manager will be successful in identifying and consummating additional investments expected to achieve our desired performance or that these investments, once made, will perform as anticipated.

We may compete with other investment vehicles managed by our Sponsor or its affiliates, including our Manager, or have other conflicts of interest with our Sponsor or its affiliates, including our Manager, which may result in decisions that are not in the best interests of our stockholders.

From time to time, we may compete with other investment vehicles managed by our Sponsor or its affiliates, including our Manager, or our interests may conflict with those of our Sponsor or its affiliates including our Manager. Representatives of our Sponsor also serve on our Board. Certain of our stockholders prior to this offering have representatives on our Board. In addition, certain of our stockholders prior to this offering have an ownership position in our Manager. There can be no assurance that we will be able to adopt policies and procedures that adequately identify and address all of the conflicts of interest that may arise. Some examples of potential conflicts include:

 

   

Broad and Wide-Ranging Activities. Our Sponsor and its affiliates, including our Manager, engage in a broad spectrum of activities in the real estate industry. One or more of our Sponsor’s affiliates may have an investment strategy similar to ours, and therefore may engage in competing activities with us or otherwise may have business interests that conflict with ours.

 

   

Allocation of Investment Opportunities. Certain inherent conflicts of interest arise from the fact that our Sponsor, and its affiliates, including our Manager, will provide investment management and other services both to us and other investment vehicles or accounts they manage. Our Sponsor and its affiliates, including our Manager, are not restricted from entering into other investment advisory relationships or from engaging in other business activities from time to time. As of the date of this prospectus, we, the JV and the High Yield Fund are the sole multi-investor pooled investment vehicles managed by our Sponsor and its affiliates, including our Manager, that invest in CRE debt. No existing investment vehicles or accounts managed by our Sponsor or its affiliates, including our Manager, currently have an investment strategy that is substantially similar to our core investment strategy. Though we do not anticipate making any new loan investments in the JV, and our Sponsor and its affiliates, including our Manager, do not anticipate forming or managing any other investment vehicles or accounts that would have an investment strategy that is substantially similar to our core investment strategy, our Sponsor and its affiliates, including our Manager, are not legally prohibited from forming or managing such investment vehicles or accounts and, regardless, the High Yield Fund and future investment vehicles or accounts managed by our Sponsor or its affiliates may from time to time invest in assets that overlap with our target assets. If any such situation arises, investment opportunities may be allocated between us, the High Yield Fund and other investment vehicles or accounts in a manner that may result in fewer investment opportunities being allocated to us than would have otherwise been

 

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the case. Our Sponsor and its affiliates may also give advice to other sponsored vehicles or accounts that differs from advice given to us by our Manager even if the underlying investment objectives are similar. While our Sponsor and its affiliates will seek to manage potential conflicts of interest in a fair and equitable manner, the strategies employed by our Sponsor and its affiliates in managing other sponsored vehicles or accounts could conflict with the strategies employed by our Manager in managing our business. The business decisions of our Sponsor and its other affiliates with respect to other investment vehicles or accounts may adversely affect the marketability, exit strategy, prices and availability of the assets, securities and instruments in which we invest. Conversely, participation in specific investment opportunities may be appropriate, at times, for both us and other investment vehicles or accounts sponsored by our Sponsor or its affiliates, which may result in us not participating in certain investment opportunities in which we would have otherwise participated. Additionally, prospective investors should note that we are not precluded from entering into other third-party joint ventures or additional co-investment arrangements that have the effect of diluting our stockholders beneficial interest in certain of our investments. Consequently, a stockholder’s indirect economic interest in each investment, expressed as a percentage of the overall economic interests in the investments, may vary substantially. Economically, certain investors may have more or less opportunity to profit or exposure to losses with respect to each investment. Our Board has discretion over these arrangements and stockholders will not have the right to participate therein (other than by virtue of their ownership of our common stock, to the extent of the Company’s interest in a joint venture or co-investment interest, as the case may be) unless specifically agreed with the Company and approved by our Board. For additional information, see “Our Manager and the Management Agreement—Conflicts of Interest.”

 

   

Variation in Financial and Other Benefits. A conflict of interest could arise where the financial or other benefits available to our Manager or its affiliates (including our stockholders prior to this offering who hold an ownership position in our Manager) differ among the accounts, clients, entities, funds and/or investment companies, including us, which we refer to collectively as Clients, that they manage. If the amount or structure of the base management fee, incentive fee and/or other fees payable to our Sponsor or its affiliates differs among Clients, or if our Sponsor establishes management entities other than our Manager that do not include similar third-party ownership or participation interests, our Sponsor or its affiliates might be motivated to prioritize more lucrative Clients over others, including us. Similarly, the desire to maintain assets under management or to enhance our Sponsor’s performance record or to derive other rewards, financial or otherwise, could cause our Sponsor or its affiliates to afford preferential treatment to those Clients that could most significantly benefit our Sponsor, which may not include us. Our Sponsor or its affiliates may, for example, have an incentive to allocate favorable or limited opportunity investments or structure the timing of investments to favor those Clients. Additionally, our Sponsor or its affiliates or their respective personnel might be motivated to favor Clients in which it or they have the most significant direct or indirect ownership interest, which might consist of Clients other than us.

 

   

Service Providers. Our service providers (including lenders, brokers, attorneys, and investment banking firms) may be sources of investment opportunities, counterparties therein or advisors with respect to those investment opportunities. This may influence our Manager in deciding whether to select a particular service provider. In addition, some service providers may be unavailable to us as a result of conflicts relating to other businesses of our Sponsor or its affiliates, including our Manager, and their respective transactions.

 

   

Material, Non-Public  Information. We, directly or through our Manager and its affiliates, may come into possession of material non-public information with respect to an issuer or borrower in which we have invested or may invest. Should this occur, our Manager may be restricted from buying or selling securities, derivatives or loans of the issuer or borrower on our behalf until such time as the information becomes public or is no longer deemed material. Disclosure of information to the personnel responsible for management of our business may be on a need-to-know basis only, and we

 

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may not be free to act upon any of that information. Therefore, we and/or our Manager may not have access to material non-public information in the possession of our Sponsor or its other affiliates which might be relevant to an investment decision to be made by our Manager on our behalf, and our Manager may initiate a transaction or purchase or sell an investment which, if the information had been known to it, may not have been undertaken. Due to these restrictions, our Manager may not be able to initiate a transaction on our behalf that it otherwise might have initiated and may not be able to purchase or sell an investment that it otherwise might have purchased or sold, which could negatively affect us.

 

   

Possible Future Activities. Our Sponsor and its affiliates, including our Manager, may expand the range of services that they provide over time. Except as and to the extent expressly provided in the Management Agreement and as they may expressly agree in writing, our Sponsor and its affiliates will not be restricted in the scope of their business or in the performance of any services (whether now offered or undertaken in the future) even if these activities could give rise to conflicts of interest, and whether or not the conflicts are specifically described herein.

 

   

Transactions with Other Vehicles or Accounts Managed by our Sponsor or its Affiliates. Though not currently expected, from time to time, we may enter into transactions with other vehicles or accounts managed by our Sponsor or its affiliates. These transactions will be conducted in accordance with the Management Agreement (including the requirement that the transactions be approved by us) and applicable laws and regulations.

Our Manager is responsible for the management of our business as well as the JV’s business, and an affiliate of our Manager is responsible for the management of the High Yield Fund’s business, which could result in conflicts in allocating its investment opportunities, time, resources and services among us, the High Yield Fund and other vehicles or accounts managed by our Sponsor or its affiliates.

Our Manager manages our business and the JV’s business, and an affiliate of our Manager is responsible for the management of the High Yield Fund, which could result in conflicts of interest. As of the date of this prospectus, we, the JV and the High Yield Fund are the sole multi-investor pooled investment vehicles managed by our Sponsor and its affiliates, including our Manager, that invest in CRE debt. No existing investment vehicles or accounts managed by our Sponsor or its affiliates, including our Manager, currently have an investment strategy that is substantially similar to our core investment strategy. Though we do not anticipate making any new loan investments in the JV, and our Sponsor and its affiliates, including our Manager, do not anticipate forming or managing any other investment vehicles or accounts that would have an investment strategy that is substantially similar to our core investment strategy, our Sponsor and its affiliates, including our Manager, are not legally prohibited from forming or managing such investment vehicles or accounts and, regardless, the High Yield Fund and future investment vehicles or accounts managed by our Sponsor or its affiliates may from time to time invest in assets that overlap with our target assets. If any such situation arises, investment opportunities may be allocated between us, the High Yield Fund and other investment vehicles or accounts in a manner that may result in fewer investment opportunities being allocated to us than would have otherwise been the case. To the extent that a conflict arises, our Sponsor and its affiliates, including our Manager, will seek to allocate investment opportunities in a fair and equitable manner in accordance with the Allocation Policy. Additionally, neither our Sponsor nor its affiliates is obligated to dedicate any specific personnel exclusively to our Manager, and in turn to us, nor will it or its personnel be obligated to dedicate any specific portion of their time to the management of our business other than the portion of our Manager’s time as is necessary and appropriate for our Manager to perform its services under the Management Agreement. As a result, we cannot provide any assurances regarding the amount of time our Manager or its affiliates will dedicate to the management of our business as opposed to that of the JV, the High Yield Fund and future investment vehicles or accounts, and our Manager or its affiliates may have conflicts in allocating their time, resources and services among our business and the JV, the High Yield Fund and any other investment vehicles and accounts our Manager or its affiliates may manage.

 

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The structure of our Manager’s fees may not create effective incentives and may cause our Manager to make riskier investments.

We will pay our Manager base management fees irrespective of the performance of our investments. That may reduce our Manager’s incentive to devote sufficient effort to seeking attractive investment opportunities as compared to an arrangement in which all fees are performance-based. In addition, because the base management fees are based upon stockholders’ equity, our Manager may be incentivized to increase our equity even if doing so would dilute potential returns for our existing stockholders. On the other hand, our Manager is also entitled to receive incentive fees based on our quarterly performance. These incentive fees may lead our Manager to place undue emphasis on the maximization of short-term net income at the expense of effective risk management in order to achieve higher incentive fees (for example, by causing our Manager to underwrite investments that are generally riskier and more speculative and/or by being unduly aggressive in deploying capital such that we fail to maintain adequate liquidity). This could result in increased risk to our loan portfolio. Accordingly, the structure of our Manager’s fees may fail to promote effective alignment of interests between our Manager and us at any given time, which could materially and adversely affect us.

Termination of the Management Agreement would be costly.

Termination of the Management Agreement would be costly. If we default in the performance or observance of any material term, condition or covenant contained in the Management Agreement and our Manager terminates the Management Agreement, the Management Agreement provides that we will pay our Manager a termination fee equal to three times the sum of the average annual base management fee and the average annual incentive fee earned during the 24-month period immediately preceding the date of termination, calculated as of the end of the most recently completed fiscal quarter prior to the date of termination.

We do not have, and do not intend to adopt, a policy that expressly prohibits our directors, officers, security holders or persons performing services on our behalf (including our Manager and its affiliates) from engaging for their own account in business activities of the types conducted by us.

We do not have, and do not intend to adopt, a policy that expressly prohibits our directors, officers, security holders or persons performing services on our behalf (including our Manager and its affiliates) from engaging for their own account in business activities of the types conducted by us. In addition, the Management Agreement with our Manager does not prevent our Sponsor or its affiliates, including our Manager, from engaging in additional management or investment opportunities, some of which could compete with us.

Our Manager’s liability is limited under the Management Agreement and we have agreed to indemnify our Manager against certain liabilities.

Pursuant to the Management Agreement, our Manager will not assume any responsibility other than to render the services called for thereunder and will not be responsible for any action of our Board in following or declining to follow its advice or recommendations. Under the terms of the Management Agreement, our Manager, its officers, stockholders, members, managers, directors, employees, consultants and personnel and any person controlling or controlled by our Manager and any of those person’s officers, stockholders, members, managers, directors, employees, consultants and personnel and any person providing sub-advisory services to our Manager will not be liable to us, any subsidiary of ours, our Board, our stockholders or any subsidiary’s stockholders, members or partners for acts or omissions (including market movements or trade errors that may result from ordinary negligence, such as errors in the investment decision-making process or in the trade process) performed in accordance with and pursuant to the Management Agreement, except because of acts or omissions constituting fraud or gross negligence in the performance of our Manager’s duties under the Management Agreement or our Manager’s material breach of the Management Agreement, as determined by a judgment at first instance of a court of competent jurisdiction. We have agreed to indemnify our Manager, its officers, stockholders, members, managers, directors, employees, consultants, personnel, any person controlling or

 

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controlled by our Manager and any of those person’s officers, stockholders, members, managers, directors, employees, consultants and personnel and any person providing sub-advisory services to our Manager with respect to all expenses, losses, damages, liabilities, demands, charges and claims arising from acts or omissions of our Manager or such person made in good faith in the performance of our Manager’s duties under the Management Agreement and not constituting fraud or gross negligence in the performance of our Manager’s duties under the Management Agreement. As a result, we could experience poor performance or losses for which our Manager would not be liable.

Risks Related to Our Company

Our business strategy is focused on lending against assets primarily in major U.S. markets which have been, and in the future may continue to be, subject to protests, riots or other forms of civil unrest.

Although we diversify our loan portfolio of investments, our business strategy is focused on lending against assets in major markets which have been, and in the future may continue to be, subject to protests, riots or other forms of civil unrest. For example, as of June 30, 2021, our real estate owned investment and 43.9% of our loan portfolio (based on unpaid principal balance) was secured by properties (or equity interests relating thereto) in the New York metropolitan area. To the extent that such protests, riots or other forms of civil unrest have a material adverse effect on our borrowers’ businesses or have the effect of decreasing demand for commercial real estate in such metropolitan areas, including as a result of a general decline in the desire to live, work in or travel to such metropolitan areas, the value of our investments, and our business, financial condition, liquidity, results of operations and prospects may be materially and adversely affected.

We may not be able to continue to find suitable investments or generate sufficient revenue to make or sustain distributions to our stockholders.

We cannot assure you that we will be able to continue to find suitable investments, including due to the COVID-19 pandemic, or implement our operating policies and strategies as described in this prospectus. Our ability to generate attractive risk-adjusted returns for our stockholders over the long-term is dependent on our ability to generate sufficient cash flow to pay an attractive dividend. There can be no assurance that we will be able to generate sufficient revenues from operations to pay our operating expenses and pay dividends to stockholders. Our results of operations and cash flows depend on several factors, including the availability of attractive risk-adjusted investment opportunities for the origination and/or acquisition of target assets, the ability of our Manager to identify and consummate investments on favorable terms or at all, the level and volatility of interest rates, the availability of adequate short- and long-term financing, conditions in the financial markets and general economic conditions.

Our investment strategy, our investment guidelines, our target assets and our financing strategy may be changed without stockholder consent.

The investment guidelines approved by our Board, and required to be followed by our Manager, are broad. Moreover, these guidelines, as well as our investment strategy, target assets, financing strategy and policies with respect to investments, originations, acquisitions, growth, operations, indebtedness, hedging, capitalization, distributions and other corporate matters may be changed at any time without the consent of our stockholders, subject to applicable law. This could result in changes to the risk profile of our loan portfolio over time. A change in our investment strategy may also increase our exposure to interest rate risk, default risk and real estate market fluctuations. Furthermore, a change in our target assets could result in our making investments in asset categories different from those described in this prospectus. These changes could materially and adversely affect us.

 

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Changes in laws or regulations governing our operations or those of our competitors, or changes in the interpretation thereof, or newly enacted laws or regulations, could result in increased competition for our target assets, require changes to our business practices and collectively could adversely impact our revenues and impose additional costs on us, which could materially and adversely affect us.

The laws and regulations governing our operations or those of our competitors, as well as their interpretation, may change from time to time, and new laws and regulations may be enacted. We may be required to adopt or suspend certain business practices as a result of any changes, which could impose additional costs on us, which could materially and adversely affect us. For example, as a result of the COVID-19 pandemic, some government entities have instituted remedies such as moratoria on business activities, construction, evictions and foreclosures and rent cancellation, all of which may adversely affect us or our borrowers. Furthermore, if “regulatory capital” or “capital adequacy” requirements—whether under the Dodd-Frank Act, Basel III, or other regulatory action—are further strengthened or expanded with respect to lenders that provide us with debt financing, or were to be imposed on us directly, they or we may be required to limit or increase the cost of financing they provide to us or that we provide to others. Among other things, this could potentially increase our financing costs, reduce our ability to originate or acquire loans and reduce our liquidity or require us to sell assets at an inopportune time or price.

In addition, various laws and regulations currently exist that restrict the investment activities of banks and certain other financial institutions but do not apply to us, which we believe creates opportunities for us to originate loans and participate in certain other investments that are not available or attractive to these more regulated institutions. However, proposals for legislation that would change how the financial services industry is regulated are continually being introduced in the U.S. Congress and in state legislatures. Federal financial regulatory agencies may adopt regulations and amendments intended to effect regulatory reforms including reforms to certain Dodd-Frank-related regulations. Prospective investors should be aware that changes in the regulatory and business landscape as a result of the Dodd-Frank Act and as a result of other current or future legislation and regulation may decrease the restrictions on banks and other financial institutions and allow them to compete with us for investment opportunities that were previously not available or attractive to, or otherwise pursued by, them, which could have a material adverse impact on us. See “—Risks Related to Our Investments—We operate in a competitive market for the origination and acquisition of attractive investment opportunities and competition may limit our ability to originate or acquire attractive risk-adjusted investments in our target assets, which could have a material adverse effect on us.”

Over the last several years, there also has been an increase in regulatory attention to the extension of credit outside of the traditional banking sector, raising the possibility that some portion of the non-bank financial sector will become subject to new regulation. While it cannot be known at this time whether any regulation will be implemented or what form it may take, increased regulation of non-bank lending could negatively impact our results of operations, cash flows and financial condition, impose additional costs on us or otherwise materially and adversely affect us.

Failure to obtain, maintain or renew required licenses and authorizations necessary to operate our mortgage-related activities may materially and adversely affect us.

We and our Manager are required to obtain, maintain or renew certain licenses and authorizations (including “doing business” authorizations and licenses to act as a commercial mortgage lender) from U.S. federal and/or state governmental authorities, government sponsored entities or similar bodies in connection with some or all of our mortgage-related activities. There is no assurance that we or our Manager will be able to obtain any or all of the licenses and authorizations that we require or that we or our Manager will avoid experiencing significant delays in seeking these licenses and authorizations. The failure of our Company or our Manager to obtain, maintain or renew the required licenses and authorizations would restrict our ability to engage in certain core business activities, and could subject us to fines, suspensions, terminations and various other adverse actions if it is determined that we or our Manager have engaged in these activities without the requisite licenses or authorizations. If these issues arise, they could have a material adverse effect on us.

 

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State licensing requirements will cause us to incur expenses and our failure to be properly licensed may have a material adverse effect on us.

Non-bank companies are generally required to hold licenses in a number of U.S. states to conduct lending activities. State licensing statutes vary from state to state and prescribe or impose: various recordkeeping requirements; restrictions on loan origination and servicing practices, including limits on finance charges and the type, amount and manner of charging fees; disclosure requirements; requirements that licensees submit to periodic examination; surety bond and minimum specified net worth requirements; periodic financial reporting requirements; notification requirements for changes in principal officers, stock ownership or corporate control; restrictions on advertising; and requirements that loan forms be submitted for review. Obtaining and maintaining state licenses will cause us to incur expenses and failure to be properly licensed under state law or otherwise may have a material adverse effect on us.

Actions of the U.S. government, including the U.S. Congress, Federal Reserve, U.S. Treasury and other governmental and regulatory bodies, to stabilize or reform the financial markets, or market response to those actions, may not achieve the intended effect and could materially and adversely affect us.

The Dodd-Frank Act imposes significant investment restrictions and capital requirements on banking entities and other organizations that are significant to U.S. financial stability. For instance, the Volcker Rule provisions of the Dodd-Frank Act impose significant restrictions on the proprietary trading activities of “banking entities” (as defined under the Volcker Rule) and on their ability to acquire or retain an “ownership interest” (as defined under the Volcker Rule) in, “sponsor” (as defined under the Volcker Rule) or have certain relationships with “covered funds” (as defined under the Volcker Rule), unless pursuant to an exclusion or exemption under the Volcker Rule. The Dodd-Frank Act also subjects non-bank financial companies that have been designated as “systemically important” by the Financial Stability Oversight Council to increased capital requirements and quantitative limits for engaging in such activities, as well as consolidated supervision by the Board of Governors of the Federal Reserve System. In addition, the Dodd-Frank Act seeks to reform the asset-backed securitization market (including the mortgage-backed securities, or MBS, market) by requiring the retention of a portion of the credit risk inherent in each pool of securitized assets and by imposing additional registration and disclosure requirements. Rules of federal regulators that implement the Dodd-Frank Act’s risk retention requirements generally require sponsors of asset-backed securities to retain at least 5% of the credit risk relating to the assets that underlie each issuance of such securities. These rules apply to securitization transactions backed by all types of self-liquidating financial assets, including residential and commercial loans and leases. While the full impact of such rules, the Dodd-Frank Act as a whole and other like-minded regulatory actions and potential actions cannot be fully assessed in the immediate term with respect to our business, they may adversely affect the availability or terms of financing from our lender counterparties whether or not they benefit our business in other ways (such as by causing more CRE borrowers to seek financing from non-bank lenders like us, which could lead to improved pricing).

Recent and future legislative and regulatory developments, such as amendments to key provisions of the Dodd-Frank Act and regulations thereunder, including provisions implementing the Volcker Rule and provisions setting forth capital and risk retention requirements may have an impact on the financial markets and financial services industry. For example, in June 2020, U.S. federal regulatory agencies amended the Volcker Rule’s restrictions on banking entities sponsoring and investing in certain covered hedge funds and private equity funds, including by adopting new exemptions allowing banking entities to sponsor and invest in credit funds, venture capital funds, customer facilitation funds and family wealth management vehicles. The amendments also reduced certain restrictions on extraterritorial fund activities and direct parallel or co-investments made alongside covered funds. The amendments will therefore expand the ability of banking entities to invest in and sponsor private funds. The ultimate consequences on our business remain uncertain and no assurances can be given whether these actions could have a material adverse effect on our results of operations, liquidity and financial condition.

 

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Operational risks, including the risk of cyberattacks, may disrupt our businesses, result in losses and limit our growth.

We rely heavily on our and our Manager’s financial, accounting, treasury, communications and other data processing systems. These systems may fail to operate properly or become disabled as a result of tampering or a breach of the network security systems or otherwise. In addition, these systems are from time to time subject to cyberattacks, which may continue to increase in sophistication and frequency in the future. Attacks on us and our Manager’s and service providers’ systems could involve attempts that are intended to obtain unauthorized access to our proprietary information or personal identifying information of our stockholders or borrowers (and their beneficial owners), destroy data or disable, degrade or sabotage our systems, including through the introduction of computer viruses and other malicious code.

Cybersecurity incidents and cyberattacks have been occurring globally at a more frequent and severe level and will likely continue to increase in frequency in the future. Our information and technology systems as well as those of our Manager and other related parties, such as service providers, may be vulnerable to damage or interruption from cybersecurity breaches, computer viruses or other malicious code, network failures, computer and telecommunication failures, infiltration by unauthorized persons and other security breaches, usage errors by their respective professionals or service providers, power, communications or other service outages and catastrophic events such as fires, tornadoes, floods, hurricanes and earthquakes. As a result of the COVID-19 pandemic, we may face increased cybersecurity risks due to our reliance on internet technology and remote working arrangements, which may create additional opportunities for cybercriminals to exploit vulnerabilities. Cyberattacks and other security threats could originate from a wide variety of sources, including cyber criminals, nation state hackers, hacktivists and other outside parties. There has been an increase in the frequency and sophistication of the cyber and security threats we face, with attacks ranging from those common to businesses generally to those that are more advanced and persistent, which may target us or our Manager because we hold a significant amount of confidential and sensitive information. As a result, we and our Manager may face a heightened risk of a security breach or disruption with respect to this information. If successful, these types of attacks on our or our Manager’s network or other systems could have a material adverse effect on us, due to, among other things, the loss of investor or proprietary data, interruptions or delays in the operation of our business and damage to our reputation. There can be no assurance that measures we or our Manager takes to ensure the integrity of our systems will provide protection, especially because cyberattack techniques used change frequently or are not recognized until successful.

If unauthorized parties gain access to this information and technology systems, they may be able to steal, publish, delete or modify private and sensitive information, including non-public personal information related to stockholders or borrowers (and their beneficial owners) and material non-public information. Although we and our Manager have implemented, and our service providers may implement, various measures to manage risks relating to these types of events, these systems could prove to be inadequate and, if compromised, could become inoperable for extended periods of time, cease to function properly or fail to adequately secure private information. We do not control the cybersecurity plans and systems put in place by third-party service providers, and these third-party service providers may have limited indemnification obligations to us or our Manager, each of which could be negatively impacted as a result. Breaches such as those involving covertly introduced malware, impersonation of authorized users and industrial or other espionage may not be identified even with sophisticated prevention and detection systems, potentially resulting in further harm and preventing them from being addressed appropriately. The failure of these systems or of disaster recovery plans for any reason could cause significant interruptions in our or our Manager’s operations and result in a failure to maintain the security, confidentiality or privacy of sensitive data, including personal information relating to stockholders, material non-public information and the intellectual property and trade secrets and other sensitive information in the possession of us or our Manager. We or our Manager could be required to make a significant investment to remedy the effects of any failures, harm to our reputations, legal claims that we and our Manager may be subjected to, regulatory action or enforcement arising out of applicable privacy and other laws, adverse publicity and other events that may materially and adversely affect us.

 

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In addition, our business highly depends on information systems and technology. The costs related to cyber or other security threats or disruptions may not be fully insured or indemnified by other means. Many jurisdictions in which we operate have laws and regulations relating to data privacy, cybersecurity and protection of personal information. Some jurisdictions have also enacted laws requiring companies to notify individuals of data security breaches involving certain types of personal data. Breaches in security could potentially jeopardize our or our Manager’s, its employees’, or our investors’ or counterparties’ confidential and other information processed and stored in, and transmitted through, our or our Manager’s computer systems and networks, or otherwise cause interruptions or malfunctions in our or our Manager’s, its employees’, or our investors’, our counterparties’ or third parties’ operations, which could result in significant losses, increased costs, disruption of our business, liability to our investors and other counterparties, regulatory intervention or reputational damage. Furthermore, if we or our Manager fail to comply with the relevant laws and regulations, it could result in regulatory investigations and penalties, which could lead to negative publicity and may cause our investors to lose confidence in the effectiveness of our or our Manager’s security measures.

A disaster or a disruption in the infrastructure that supports our business, including a disruption involving electronic communications or other services used by us or third parties with whom we conduct business, could have a material adverse impact on our ability to continue to operate our business without interruption. Our and our Manager’s disaster recovery programs may not be sufficient to mitigate the harm that may result from such a disaster or disruption. In addition, insurance and other safeguards might only partially reimburse us for our losses, if at all.

We are an “emerging growth company,” and we cannot be certain if the reduced reporting requirements applicable to emerging growth companies will make our common stock less attractive to investors.

We are an “emerging growth company” as defined in Section 2(a) of the Securities Act, as modified by the JOBS Act. We may take advantage of exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies, including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements and exemptions from the requirements of holding a non-binding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. We could be an emerging growth company for up to five years, although circumstances could cause us to lose that status earlier, including if we have more than $1.07 billion in annual gross revenues as of the end of our fiscal year (subject to adjustment for inflation), we have more than $700.0 million in market value of our stock held by non-affiliates as of the end of our most recently completed second fiscal quarter (which will be the case shortly after this offering) or we issue more than $1.0 billion of non-convertible debt over a three-year period.

Additionally, the JOBS Act permits an emerging growth company such as us to take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards applicable to public companies. We have elected to use this extended transition period for complying with new or revised accounting standards that have different effective dates for public and private companies until the earlier of the day we (i) are no longer an emerging growth company or (ii) affirmatively and irrevocably opt out of the extended transition period provided in the JOBS Act. As a result, our financial statements may not be comparable to companies that comply with new or revised accounting pronouncements as of public company effective dates.

We cannot predict if investors will find our common stock less attractive because we may rely on any of these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our per share trading price may be adversely affected and more volatile.

 

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Accounting rules for certain of our transactions are highly complex and involve significant judgment and assumptions. Changes in accounting interpretations or assumptions could impact our ability to timely prepare consolidated financial statements, which could materially and adversely affect us.

Accounting rules for transfers of financial assets, securitization transactions, consolidation of variable interest entities, or VIEs, loan loss reserves and other potential aspects of our operations are highly complex and involve significant judgment and assumptions. These complexities could lead to a delay in preparation of financial information and the delivery of this information to our stockholders, including as a result of an increase in the number of loan modifications that we have processed and expect to process in the future due to the COVID-19 pandemic. Changes in accounting interpretations or assumptions could impact our consolidated financial statements and our ability to timely prepare consolidated financial statements that accurately reflect our financial condition, cash flows and results of operations in accordance with prevailing accounting standards. Our inability to timely prepare our consolidated financial statements in the future could materially and adversely affect us.

Risks Related to Sources of Financing and Hedging

We have a significant amount of debt outstanding, and may incur a significant amount of additional debt in the future, which subjects us to increased risk of loss, which could materially and adversely affect us.

As of June 30, 2021, we had approximately $4.4 billion in consolidated indebtedness outstanding. In the future, subject to market conditions and availability, we may incur significant additional debt through repurchase facilities, asset-specific financing structures, and secured term loan borrowings. Over time, in addition to these types of financings, we may also use other forms of leverage, including secured and unsecured credit facilities, structured financings such as CMBS and CLOs, derivative instruments, public and private secured and unsecured debt issuances by us or our subsidiaries.

Subject to compliance with the leverage covenants contained in our repurchase facilities and other financing documents, the amount of leverage we employ will vary depending on our available capital, our ability to obtain financing, the type of assets we are financing, whether the financing is match-funded, recourse or non-recourse, debt restrictions and other covenants sought to be imposed by prospective and existing lenders and the stability of our loan portfolio’s cash flow, as well as general business conditions affecting lenders and the broader debt capital markets, including overall supply and demand of credit. In addition, we may leverage individual assets at substantially higher levels than our targeted Total Leverage Ratio.

A significant amount of debt subjects us to many risks that, if realized, would materially and adversely affect us, including the risk that:

 

   

our cash flow from operating activities could become insufficient to make required payments of principal and interest on our debt, which would likely result in (a) acceleration of the debt (and any other debt containing a cross-default or cross-acceleration provision), increasing the likelihood of further distress if refinancing is not available on favorable terms or at all, (b) our inability to borrow undrawn amounts under other existing financing arrangements, even if we have timely made all required payments under such arrangements, further compromising our liquidity, and/or (c) the loss of some or all of our assets that are pledged as collateral in connection with our financing arrangements (including assets transferred to lenders under repurchase facilities);

 

   

our debt may increase our vulnerability to adverse economic and industry conditions, including adverse conditions arising from the COVID-19 pandemic, with no assurance that such debt will increase our investment yields in an amount sufficient to offset the associated risks relating to leverage;

 

   

we may be required to dedicate a substantial portion of our cash flow from operating activities to payments on our debt, thereby reducing funds available for operations, future business opportunities, stockholder distributions and/or other purposes; and

 

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to the extent the maturity of certain debt (e.g., credit or repurchase facilities) occurs prior to the maturity of a related asset pledged or transferred as collateral for such debt (e.g., an underlying senior or subordinate loan made by us), we may not be able to refinance that debt on favorable terms or at all, which may reduce available liquidity and/or cause significant losses to us.

Although our Manager will seek to prudently manage our exposure to the risk of default on our debt, there can be no assurance that our financing strategy will be successful or that it will produce enhanced returns commensurate with the increased risk of loss that necessarily arises when using leverage. Our financing strategy may cause us to incur significant losses, which could materially and adversely affect us.

Our Secured Term Loan and current repurchase facilities impose, and additional lending facilities may impose, financial and other covenants that restrict our operational flexibility, which could materially and adversely affect us.

Our Secured Term Loan and current repurchase facilities contain, and additional financing facilities may contain, various customary covenants, including requiring us to meet or maintain certain financial ratios or other requirements that restrict our operational flexibility, including restrictions on dividends, distributions or other payments from our subsidiaries, and impede certain investments that we might otherwise make. In addition, certain of our existing lenders and counterparties, and future lenders or counterparties, may require us to maintain minimum amounts of cash or other liquid assets to satisfy ongoing collateral (margin) obligations or pay down borrowings due to declining credit profiles, including those that may be a result of the COVID-19 pandemic. As a result, we may not be able to leverage our assets as fully as we would otherwise choose, which could reduce our liquidity and returns on equity. If we are unable to meet these financial covenants, liquidity requirements and collateral obligations, it could materially and adversely affect us. In addition, certain of our existing lenders require, and future lenders may require, us to agree that we would be in default if our Manager or one or more of its executive officers cease to serve in such capacity for any reason. If we fail to satisfy any of these financial covenants, liquidity requirements or requirements related to our Manager such that a default arises, our lenders may be entitled to enforce remedies such as declaring outstanding amounts due and payable, terminating their commitments, requiring the posting of additional collateral and/or enforcing their security interests against existing collateral, unless we were able to negotiate a waiver, forbearance or other modification. Any such arrangement could be conditioned on an amendment to the lending or repurchase agreement and any related guarantee agreement on terms that may be unfavorable to us. Certain of our financings are, and may also in the future, contain cross-default and/or cross-acceleration provisions with respect to our other debt agreements or facilities. Any such provision could allow a financing counterparty to declare a default because of a default under a financing arrangement with a different financing counterparty, creating multiple financing facility defaults resulting from a single event. This and any other type of default could make it difficult for us to satisfy the requirements necessary to maintain our qualification as a REIT for U.S. federal income tax purposes, as liquidity generated from operating cash flow is transferred to our lenders rather than distributed to our stockholders. As a result, a default on any of our debt could materially and adversely affect us.

Credit ratings assigned to us, our indebtedness or our investments will be subject to ongoing evaluations and revisions and we cannot assure you that those ratings will not be downgraded or withdrawn or placed on negative outlook, which could adversely impact us.

We are currently rated by Standard & Poor’s and Moody’s Investors Service and our Secured Term Loan is also rated. Our credit ratings could change based upon, among other things, our historical and projected business, financial condition, liquidity, results of operations, and prospects. On March 26, 2020, Standard & Poor’s lowered our issuer and senior secured debt credit ratings to B+ from BB- and assigned a “negative” outlook as a result of conditions arising from the COVID-19 pandemic. On June 7, 2021, Standard and Poor’s revised its outlook to “stable” from “negative” and affirmed our issuer and senior secured debt credit rating of B+. On April 14, 2020, Moody’s Investors Service affirmed our issuer and senior secured debt credit rating of Ba3, while assigning a “negative” outlook from “stable,” reflecting its expectation that our asset quality, profitability and

 

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capital will weaken as a result of the COVID-19 pandemic. These ratings actions or any future downgrade, or withdrawal of a rating or any credit rating agency action that indicates that it has placed our rating on a “watch list” for a possible downgrading or lowering, or otherwise indicates that its outlook for our rating is negative, could increase our borrowing costs and our ability to access capital on favorable terms or at all and otherwise adversely affect us. Our ratings are subject to ongoing evaluation by credit rating agencies, and we cannot assure you that any ratings will not be changed adversely or withdrawn by a rating agency in the future if, in its judgment, circumstances warrant.

Some of our investments may also be rated by rating agencies such as Moody’s Investors Service, Fitch Ratings, Standard & Poor’s, DBRS, Inc., Realpoint LLC or Kroll Bond Rating Agency. Any credit ratings on our investments are subject to ongoing evaluation by credit rating agencies, and we cannot assure you that any ratings will not be changed or withdrawn by a rating agency in the future if, in its judgment, circumstances warrant. Any adverse ratings action or withdrawal on one of our investments could adversely impact us. For example, if a rating agency assigns a lower-than-expected rating or subsequently reduces or withdraws, or indicates that it may reduce or withdraw, its ratings of one or more of our investments in the future, the value and liquidity of such investment(s) could significantly decline, which would adversely affect the overall value of our loan portfolio and could result in losses upon our disposition of such investment(s) or the failure of borrowers underlying such investment(s) to satisfy their debt service obligations to us.

The arrangements that we currently use, or may in the future use, to finance our investments may require us to provide additional collateral or pay down debt based on the occurrence of certain events.

Our current and future financing arrangements involve the risk that a decline in the market value of the assets pledged or sold by us to the provider of the related financing will allow the lender or counterparty to make margin calls or otherwise force us to repay all or a portion of the funds advanced or provide additional collateral. While we have not received any margin calls from our repurchase facility lenders as of August 31, 2021 and have reduced the advance rate on certain assets (primarily hospitality loans) within these facilities, the market value of assets pledged or sold by us could further decline as a result of the COVID-19 pandemic and lead to margin calls, although the ultimate impact of the COVID-19 pandemic on such assets remains uncertain. Our Manager generally seeks to structure credit and repurchase facilities that do not allow our lenders or counterparties to make margin calls or require additional collateral solely as a result of a disruption in the CMBS market, capital markets or credit markets, or a general increase or decrease of interest rate spreads or other similar benchmarks (as opposed to allowing such counterparties to make margin calls upon the occurrence of adverse “credit events” related to the collateral). However, approximately half of our repurchase facilities (based on approximately $4.0 billion of total financing capacity as of June 30, 2021) contain and certain of our future repurchase facilities or other financing facilities may contain provisions allowing our lenders to make margin calls or require additional collateral solely upon the occurrence of adverse changes in the markets or interest rate or spread fluctuations, subject to minimum thresholds, among other factors. Additionally, on June 11, 2020, in exchange for voluntary repayments of $40.1 million under our Goldman Sachs Bank USA repurchase facility, the lender agreed not to exercise margin calls for a period of six months ending on December 11, 2020, and on October 23, 2020, in exchange for voluntary repayments of $30.5 million under our Morgan Stanley Bank, N.A. repurchase facility, the lender agreed not to exercise margin calls for a period of six months ending on April 23, 2021. We may continue to pursue similar standstill agreements with these and our other repurchase facility counterparties if or when we deem appropriate, although there is no assurance that such efforts will be successful. Under credit and repurchase facilities that provide for margin calls or require additional collateral based on the market value of the financed asset or assets, the lender or counterparty can generally require additional collateral upon the occurrence of a credit event specific to the collateral that adversely impacts the value of such collateral. From time to time, we may not have the funds available to meet such a margin call, which would likely result in one or more defaults unless we are able to raise the requisite funds from alternative sources such as selling assets at a time when we would not otherwise choose to do so (which we may not be able to achieve on favorable terms or at all). In addition, the payment of margin calls and/or provision of additional collateral could reduce our cash available to make other, higher yielding investments (thereby decreasing our returns on equity). If we cannot meet these

 

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requirements, the lender or counterparty could accelerate our indebtedness and exercise remedies including retention or sale of assets pledged or transferred as collateral, increase the interest rate on advanced funds and/or terminate our ability to borrow funds from it, which could materially and adversely affect us. Additionally, any future loan modifications for our loans that have been financed with repurchase facilities will require the consent from the applicable lender prior to us entering into any such loan modification. There can be no assurance that such lender will consent to any such loan modifications or will not require us to take certain actions as a condition to obtaining such consent, which could materially and adversely affect us.

In our repurchase transactions, we are required to sell the assets to our lenders (i.e., repurchase agreement counterparties) in exchange for the delivery of cash from such lenders. At the maturity of the financing, the lenders are obligated to resell the same assets back to us upon payment of a repurchase price equal to the outstanding advance amount on such assets together with any accrued and unpaid interest thereon and other amounts then due to the lenders. If a counterparty to our repurchase transactions defaults on its obligation to resell the asset back to us at the end of the transaction term, or if the value of the underlying security has declined as of the end of that term, or if we default on our obligations under the repurchase agreement, we will likely incur a loss on our repurchase transactions. If a lender or counterparty files for bankruptcy or becomes insolvent, our loans may become subject to bankruptcy or insolvency proceedings, thus depriving us, at least temporarily, of the benefit of these assets. In addition, our repurchase agreements and credit facilities contain, and any new repurchase agreements or credit agreements we may enter into are likely to contain, cross-default and/or cross acceleration provisions. Such provisions allow a lender to declare a default under its facility with us on the basis of a default under a facility with a different lender. If a default occurs under any of our repurchase agreements or credit facilities and a lender terminates one or more of its repurchase agreements or credit facilities, we may need to enter into replacement repurchase agreements or credit facilities with different lenders. In these circumstances, we may not be successful in entering into replacement repurchase agreements or credit facilities on the same terms as the repurchase agreements or credit facilities that were terminated or at all. Also, because repurchase agreements and similar credit facilities are generally short-term commitments of capital, changes in conditions in the financing markets may make it more difficult for us to secure continued financing during times of market stress. During certain periods of a credit cycle, lenders may lose their ability or curtail their willingness to provide financing. If we are not able to arrange for replacement financing on acceptable terms, or if we default on any covenants or are otherwise unable to access funds under any of our repurchase agreements and credit facilities, we may have to curtail our asset origination and acquisition activities and/or dispose of investments. Such an event could restrict our access to financing and increase our cost of capital, which could materially and adversely affect us.

We depend or may depend on bank credit agreements and facilities, repurchase facilities and structured financing arrangements, public and private debt issuances and derivative instruments, in addition to transaction- or asset- specific financing arrangements and other sources of financing to execute our business plan, and our inability to access financing on favorable terms could have a material adverse effect on us.

Our ability to fund our investments may be impacted by our ability to secure bank credit facilities (including term loans and revolving facilities), repurchase facilities and structured financing arrangements, public and private debt issuances and derivative instruments, in addition to transaction- or asset-specific financing arrangements and other sources of financing on acceptable terms. We may also rely on short-term financing that would be especially exposed to changes in availability. Our access to sources of financing will depend upon a number of factors, over which we have little or no control, including:

 

   

general economic or market conditions;

 

   

the market’s view of the quality of our assets;

 

   

the market’s view of performance of other companies executing a strategy comparable to ours;

 

   

the market’s perception of our growth potential;

 

   

our current and potential earnings liquidity and cash distributions;

 

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regulatory capital reform rules or other regulatory changes; and

 

   

the market price of shares of our common stock.

We will need to periodically access the capital markets to raise cash to fund new investments. Unfavorable economic or capital market conditions, such as the severe dislocation in the capital and credit markets caused by the recent pandemic resulting from the COVID-19 pandemic and by the global financial crisis of 2008, may increase our financing costs, limit our access to the capital markets and result in a decision by our potential lenders not to extend credit. An inability to successfully access the capital markets could limit our ability to grow our business and fully execute our business plan and could decrease our earnings and liquidity and materially and adversely affect us. In addition, any dislocation or weakness in the capital and credit markets, such as the dislocation that existed during the global financial crisis of 2008, could adversely affect our lenders and could cause one or more of our lenders to be unwilling or unable to provide us with financing or to increase the costs of that financing. In addition, as regulatory capital requirements imposed on our lenders are increased, they may be required to limit or increase the cost of financing they provide to us. In general, this could potentially increase our financing costs and reduce our liquidity or require us to sell assets at an inopportune time or price. No assurance can be given that we will be able to obtain financing on favorable terms or at all.

In addition, although we plan to seek to reduce our exposure to lender concentration-related risk by entering into repurchase facilities and other lending facilities with multiple counterparties, we are not required to observe specific diversification criteria. To the extent that the number of or net exposure under our lending arrangements may become concentrated with one or more lenders, the adverse impacts of defaults or terminations by our lenders may be significantly greater.

Interest rate fluctuations could increase our financing costs, which could materially and adversely affect us.

Our primary interest rate exposures relate to the yield on our investments and the financing cost of our debt, as well as our exposure to interest rate swaps that we may utilize for hedging purposes either with respect to our investments or our indebtedness. Changes in interest rates affect our net interest income, which is the difference between the interest income we earn on our interest-earning investments and the interest expense we incur in financing these investments. In a period of rising interest rates, our interest expense on floating rate debt would increase, while any additional interest income we earn on floating rate investments may not compensate for the increase in interest expense and the interest income we earn on fixed rate investments would not change. Similarly, in a period of declining interest rates, our interest income on floating rate investments would decrease, while any decrease in the interest we are charged on our floating rate debt may not compensate for the decrease in interest income and the interest expense we incur on our fixed rate debt would not change. Certain of our financings may have interest rate floors, which if the index rate were to fall below such floor our interest expense would essentially remain fixed. Consequently, changes in interest rates may significantly influence our net interest income. Interest rate fluctuations resulting in our interest expense exceeding interest income would result in operating losses, which could materially and adversely affect us. Changes in the level of interest rates also may affect our ability to originate or acquire investments, the value of our investments and our ability to realize gains from the disposition of assets. Moreover, changes in interest rates may affect borrower default rates. For more information regarding changes in interest rates affecting borrower default rates, please see “—The planned discontinuance of LIBOR has affected and will continue to affect financial markets generally, and may adversely affect our interest income, interest expense, or both.”

Our operating results will depend, in part, on differences between the income earned on our investments, net of credit losses, and our financing costs. The yields we earn on our assets and our borrowing costs tend to move in the same direction in response to changes in interest rates. However, one can rise or fall faster than the other, causing our net interest income to expand or contract. In addition, we could experience a compression of the yield on our investments and our financing costs. Although we seek to match the terms of our liabilities to the expected lives and interest rate reference indices of loans that we originate or acquire, circumstances may arise in

 

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which our liabilities are shorter in duration than our investments, resulting in their adjusting faster in response to changes in interest rates. For any period during which our investments are not match-funded, the income earned on such investments may respond more slowly to interest rate fluctuations than the cost of our borrowings. Consequently, in such circumstances, increases in interest rates, particularly short-term interest rates, may immediately and significantly decrease our results of operations and cash flows and the market value of our investments.

An increase in our borrowing costs relative to the interest that we receive on our leveraged assets would adversely affect our profitability and our cash available for distribution to our stockholders.

As repurchase facilities and other short-term borrowings mature, we must replace such borrowings with new financings, find other sources of liquidity or sell assets. An increase in short-term interest rates at the time that we seek to enter into new borrowings would reduce the spread between the returns on our investments and the cost of our borrowings, which would reduce our earnings and, in turn, cash available for distribution to our stockholders, potentially materially.

Our rights under our repurchase agreements are subject to the effects of bankruptcy and other similar laws in the event of the bankruptcy or insolvency of us or our lenders under the repurchase agreements.

In the event of our insolvency or bankruptcy, certain repurchase agreements may qualify for special treatment under the U.S. Bankruptcy Code, the effect of which, among other things, would be to allow the lender under the applicable repurchase agreement to avoid the automatic stay provisions of the U.S. Bankruptcy Code and to foreclose on any underlying collateral without delay. In the event of the insolvency or bankruptcy of a lender during the term of a repurchase agreement, our current lenders are, and a future lender may be, permitted, under applicable insolvency laws, to repudiate the contract, and our claim against the lender for damages may be treated as an unsecured claim. In addition, if the lender is a broker or dealer subject to the Securities Investor Protection Act of 1970, or an insured depository institution subject to the Federal Deposit Insurance Act, our ability to exercise our rights to recover our assets under a repurchase agreement or to be compensated for any damages resulting from the lender’s insolvency may be further limited by those statutes. These claims would be subject to significant delay and, if and when damages are received, may be substantially less than the damages we actually incur.

Our use of leverage may create a mismatch with the duration and interest rate reference index of the investments that we are financing.

We work to structure our financings to minimize the difference between the term of our investments and the term of the financing for such investments. In the event that a financing has a shorter term than the tenor of the financed investment, we may not be able to extend the financing or find appropriate replacement financing and any such failure would have an adverse impact on our liquidity and our returns. While our Secured Term Loan has a maturity in August 2026, the weighted average remaining term, including extensions, of our repurchase facilities was 3.3 years while the term to fully extended maturity of our loans was 2.6 years, in each case based on unpaid principal balance. In the event that our financing is for a longer term than the financed investment, we may not be able to repay the financing when due or replace the financed investment with an optimal substitute or at all, which will negatively impact our desired leveraged returns.

We attempt to structure our financings to minimize the variability between the type of interest rate of our investments and the interest rate of related financings—financing floating rate investments with floating rate financing and fixed rate investments with fixed rate financing. If such a rate-type matched product is not then available to us on favorable terms, we may use hedging instruments to effectively create such a match. For example, in the case of fixed rate investments, we may finance investments with floating rate financing, but effectively convert all or a portion of the attendant financing to fixed rate using hedging strategies. We routinely use LIBOR floors on both our investments and our debt financings, with the financing LIBOR floor typically at a

 

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lower rate than for our investments. Where prevailing interest rates have generally increased to exceed the financing LIBOR floor but not the investment LIBOR floor, we will experience a decrease in net interest income until the prevailing rate also exceeds the investment LIBOR floor. For more information regarding changes in interest rates affecting borrower default rates, please see “—The planned discontinuance of LIBOR has affected and will continue to affect financial markets generally, and may adversely affect our interest income, interest expense, or both.”

Our attempts to mitigate these risks are subject to factors outside of our control, such as the availability to us of favorable financing and hedging options, which is subject to a variety of factors, of which duration and term matching are only two. A duration mismatch may also occur when borrowers prepay their loans faster or slower than expected. The risks of a duration mismatch are also magnified by the potential for the extension of loans in order to maximize the likelihood and magnitude of their recovery value in the event the loans experience credit or performance challenges. Employment of this asset management practice could effectively extend the duration of our investments, while our hedges or liabilities may have set maturity dates.

Our existing and future financing arrangements and any debt securities we may issue could restrict our operations, limit our ability to pay dividends and expose us to additional risk.

Our existing and future financing arrangements and any debt securities we may issue in the future are or will be governed by a credit agreement, indenture or other instrument containing covenants restricting our operating flexibility. Additionally, any convertible or exchangeable securities that we issue in the future may have rights, preferences and privileges more favorable than those of our common stock. We will bear the cost of issuing and servicing these credit facilities, arrangements or securities.

These restrictive covenants and operating restrictions could have a material adverse effect on us, cause us to lose our REIT status, restrict our ability to finance or securitize new originations and acquisitions, force us to liquidate collateral and negatively affect the market price of our common stock and our ability to pay dividends to our stockholders.

We may enter into hedging transactions that could expose us to contingent liabilities in the future, which could materially and adversely affect us.

Subject to maintaining our qualification as a REIT, part of our investment strategy may involve entering into hedging transactions that could require us to fund cash payments in certain circumstances (such as the early termination of the hedging instrument caused by an event of default or other early termination event, or the decision by a counterparty to request the posting of margin to which it is contractually entitled under the terms of the hedging instrument). Our ability to fund a margin call will depend on the liquidity of our assets and access to capital at the time, and the need to fund these obligations could cause us to incur losses or otherwise materially and adversely affect us.

The extent of our hedging activity will vary in scope based on, among other things, the level and volatility of interest rates, the type of assets held and other market conditions. Although these transactions are intended to reduce our exposure to various risks, hedging may fail to adequately protect or could adversely affect us because, among other things:

 

   

hedging can be expensive, particularly during periods of volatile or rapidly changing interest rates;

 

   

available hedges may not correspond directly with the risks for which protection is sought;

 

   

the duration of the hedge may not match the duration of the related liability;

 

   

the amount of income that a REIT may earn from certain hedging transactions (other than through our taxable REIT subsidiaries, or TRSs) is limited by U.S. federal income tax provisions;

 

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the credit quality of a hedging counterparty may be downgraded to such an extent that it impairs our ability to sell or assign our side of the hedging transaction; and

 

   

the hedging counterparty may default on its obligations.

Title VII of the Dodd-Frank Act governs derivative transactions, including certain hedging instruments we may use in our risk management activities. Rules implemented by the U.S. Commodity Futures Trading Commission, or the CFTC, pursuant to the Dodd-Frank Act require, among other things, that certain derivatives be centrally cleared through a registered derivatives clearing organization, or DCO, and traded on a designated contract market or swap execution facility. These regulations could increase the operational and transactional cost of derivatives contracts in the form of intermediary fees and additional margin requirements imposed by DCOs and the clearing members of the DCOs through which we may clear derivatives, and affect the number and/or creditworthiness of available counterparties. Hedging instruments often are not traded on regulated exchanges or guaranteed by an exchange or its clearing house, and involve risks and costs that could result in material losses.

The cost of using hedging instruments increases as the period covered by the instrument lengthens. Although we may avoid substantial interest rate exposure by investing in floating rate mortgage loans, to the extent that we have interest rate exposure from fixed rate loans we may increase our hedging activity (and therefore our hedging costs) during periods of volatility. In addition, hedging instruments involve risk since they often are not traded on regulated exchanges or guaranteed by an exchange or its clearing house. In general, derivative transactions entered into directly with counterparties, rather than through an exchange, receive fewer regulatory protections than transactions entered into on an exchange. Furthermore, the enforceability of agreements underlying hedging transactions may depend on compliance with applicable statutory and commodity and other regulatory requirements and, depending on the identity of the counterparty, applicable international requirements. In addition, if the business of a hedging counterparty fails we may not only lose unrealized profits but also be forced to cover our forward commitments, if any, at the then current market price.

Although we generally expect to have the right to terminate our hedging positions, it may not always be possible to dispose of or close out a hedging position without the consent of the hedging counterparty, and we may not be able to enter into an offsetting contract in order to cover our risk. We cannot assure you that a liquid secondary market will exist for hedging instruments purchased or sold, and we may be required to maintain a position until exercise or expiration, which could result in material losses.

Changes to derivatives regulation imposed by the Dodd-Frank Act could increase our costs of entering into derivative transactions, which could materially and adversely affect us.

Through its comprehensive regulatory regime for derivatives, Title VII of the Dodd-Frank Act, and the regulations promulgated by the CFTC, the SEC and federal prudential regulators thereunder, impose mandatory clearing, exchange-trading and margin requirements on many derivatives transactions (including formerly unregulated uncleared over-the-counter, or OTC, derivatives) in which we may engage with certain regulated entities. The imposition of margin requirements for uncleared OTC derivatives and clearing and trade execution requirements, where such derivatives are subject to mandatory clearing and trade execution, may increase our overall costs and make it more difficult and costlier for us to use the derivatives markets for hedging and/or investment purposes.

We expect to incur operational and system costs necessary to maintain processes to ensure compliance with the rules and regulations applicable to us as well as to monitor compliance by our business partners. Any additional rules and regulations or changes to current regulation promulgated under the Dodd-Frank Act and implemented by various federal regulators may impact the way we conduct our business and increase costs of compliance, which could materially and adversely affect us. See “—Risks Related to Our Company—Actions of the U.S. government, including the U.S. Congress, Federal Reserve, U.S. Treasury and other governmental and regulatory bodies, to stabilize or reform the financial markets, or market response to those actions, may not achieve the intended effect and could materially and adversely affect us.”

 

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We may fail to qualify for, or choose not to elect, hedge accounting treatment.

We intend to account for derivative and hedging transactions in accordance with Financial Accounting Standards Board, or FASB, Accounting Standards Codification, or ASC, 815 “Derivatives and Hedging,” or ASC 815. Under these standards, we may fail to qualify for, or choose not to elect, hedge accounting treatment for a number of reasons, including if we use instruments that do not meet the FASB ASC 815 definition of a derivative (such as short sales), if we fail to satisfy the FASB ASC 815 hedge documentation and hedge effectiveness assessment requirements, or if our instruments are not highly effective. If we fail to qualify for, or choose not to elect, hedge accounting treatment, gains and losses on derivatives will be included in our operating results and may not be offset by a change in the fair value of the related hedged transaction or item.

Our investments may be subject to fluctuations in interest rates that may not be adequately protected, or protected at all, by our hedging strategies.

Though our primary strategy is to originate and acquire shorter term, floating rate loans, our investments may include loans with either floating interest rates or fixed interest rates. Floating rate investments earn interest at rates that adjust from time to time (typically monthly) based upon an index (typically one-month LIBOR). These floating rate loans are insulated from changes in value specifically due to changes in interest rates. However, the coupons they earn fluctuate based upon interest rate reference indices (again, typically one-month LIBOR) and, in a declining and/or low interest rate environment, these loans will earn lower rates of interest and this will impact our operating performance. Fixed interest rate investments, however, do not have adjusting interest rates and the relative value of the fixed cash flows from these investments will decrease as prevailing interest rates rise or increase as prevailing interest rates fall, causing potentially significant changes in value. We may employ various hedging strategies to limit the effects of changes in interest rates (and in some cases credit spreads), including engaging in interest rate swaps, caps, floors and other interest rate derivative products. We believe that no strategy can completely insulate us from the risks associated with interest rate changes and there is a risk that they may provide no protection at all. Hedging transactions involve certain additional risks such as counterparty risk, leverage risk, the legal enforceability of hedging contracts, the early repayment of hedged transactions and the risk that unanticipated and significant changes in interest rates may cause a significant loss of basis in the contract and a change in current period expense. We cannot make assurances that we will be able to enter into hedging transactions or that hedging transactions will adequately protect us against the foregoing risks.

Accounting for derivatives under GAAP is extremely complicated. Any failure by us to account for our derivatives properly in accordance with GAAP on our consolidated financial statements could adversely affect our earnings. In particular, cash flow hedges which are not perfectly correlated (and appropriately designated and/or documented as such) with variable rate financing will impact our reported income as gains and losses on the ineffective portion of the hedges.

The planned discontinuance of LIBOR has affected and will continue to affect financial markets generally, and may adversely affect our interest income, interest expense, or both.

On March 5, 2021, the Financial Conduct Authority of the United Kingdom, or the FCA, which regulates LIBOR’s administrator, ICE Benchmark Administration Limited, or IBA, announced that all LIBOR tenors relevant to us will cease to be published or will no longer be representative after June 30, 2023 (and that all other LIBOR tenors will cease to be published or will no longer be representative either after December 31, 2021 or after June 30, 2023). IBA also made a related announcement on March 5, 2021. The FCA has power under relevant United Kingdom legislation to compel IBA to continue publishing LIBOR after the date on which IBA would otherwise have ceased doing so and to require changes to LIBOR, including changes to its methodology, in certain circumstances. The FCA has announced that it will consider using its powers to require continued publication, on a “synthetic basis,” of the principal U.S. dollar LIBOR settings for a further period after June 30, 2023. However, the FCA has also stated that any LIBOR settings published on a synthetic basis will no longer be representative for purposes of the relevant United Kingdom legislation. Accordingly, even if certain LIBOR

 

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settings continue on a synthetic basis, they are likely to have limited relevance to the financial markets generally or to us in particular. The FCA and certain U.S. regulators have emphasized that, despite expected publication of U.S. dollar LIBOR through June 30, 2023, no new contracts using U.S. dollar LIBOR should be entered into after December 31, 2021.

As of June 30, 2021, our loan portfolio included $6.0 billion of floating rate loans for which the interest rate was tied to LIBOR. Additionally, we had $4.4 billion of floating rate debt tied to LIBOR. To the extent that any relevant loan or debt instrument is outstanding at the time at which LIBOR is discontinued, its terms may provide for the relevant interest or payment calculations to be made by reference to an alternative benchmark rate or on some other basis. Our loan agreements relating to our investments and financing arrangements generally do provide for replacement reference rates in the event that LIBOR is no longer available or otherwise viable. In any case where the relevant agreement does not include effective fallback arrangements, it may be necessary or desirable to amend its terms to make appropriate provision; but, if that is not possible, the potential legal, regulatory and other consequences are uncertain. Implementation of fallback arrangements may result in uncertainty or differences in the calculation of the applicable interest rate or payment amount, depending on the terms of the agreement, and significant management time and attention may be required to transition to using new benchmark rates (if applicable) and to implement necessary changes to our financial models.

In the United States, the Alternative Reference Rates Committee, or the ARRC, a committee of private sector entities with ex-officio official sector members convened by the Federal Reserve Board and the Federal Reserve Bank of New York, has confirmed that, in its opinion, the March 5, 2021 announcements by the IBA and the FCA on future cessation and loss of representativeness of the LIBOR benchmarks constituted a “Benchmark Transition Event” with respect to all U.S. Dollar LIBOR settings under ARRC-recommended fallback language and has recommended the Secured Overnight Financing Rate, or SOFR, plus a recommended spread adjustment as LIBOR’s replacement. There are significant differences between LIBOR and SOFR, such as LIBOR being an unsecured lending rate while SOFR is a secured lending rate, and SOFR is an overnight rate while LIBOR reflects term rates at different maturities. If our LIBOR-based borrowings are converted to SOFR, the differences between LIBOR and SOFR, plus the recommended spread adjustment, could result in higher interest costs for us, which could have a material adverse effect on our operating results and liquidity. Although SOFR is the ARRC’s recommended replacement rate, it is also possible that lenders may instead choose alternative replacement rates that may differ from LIBOR in ways similar to SOFR or in other ways that would result in higher interest costs for us. In addition, the planned discontinuance of LIBOR and/or changes to another index could result in mismatches with the interest rate of investments that we are financing. The transition from LIBOR to SOFR or other alternative reference rates may also introduce operational risks in our accounting, financial reporting, loan servicing, liability management and other aspects of our business. However, we cannot reasonably estimate the impact of the transition at this time.

LIBOR being discontinued as a benchmark may cause one or more of the following to occur, among other impacts: (i) there may be an increase in the volatility of LIBOR prior to its discontinuance; (ii) fewer investments may be made using interest payment benchmarks based on LIBOR and more investments may be made using interest payment benchmarks other than LIBOR or bearing interest at a fixed rate, resulting in differential investment returns; (iii) there may be an increase in pricing volatility with respect to our investments and/or a reduction in the value of our investments; (iv) there may be a reduction in our ability to effectively hedge interest rate risks; and (v) we may incur losses from hedging disruptions due to transition basis risk, the cessation of LIBOR or an inability of us and our counterparties to effectively value our existing trades due to a lack of dealers providing LIBOR-based quotations in the derivatives markets. There is no certainty as to what rate or rates may become market-accepted alternatives to LIBOR or how those alternatives may impact us or our investment returns. There may not be any alternative benchmark that reflects the composition and characteristics of LIBOR. Financial markets, particularly the trading market for LIBOR-based obligations, may be adversely affected by the discontinuation of LIBOR, the remaining uncertainties regarding its discontinuation, the alternative reference rates that will be used when LIBOR is discontinued (including SOFR) and other reforms related to LIBOR. Any of the foregoing could materially and adversely affect us.

 

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For information on the steps we are taking with regard to the transition from LIBOR to alternative reference rates, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Quantitative and Qualitative Disclosures About Market Risk—LIBOR as our Reference Rate.” See also “—Our use of leverage may create a mismatch with the duration and interest rate reference index of the investments that we are financing.”

We may use securitizations to finance our investments and make investments in CMBS, CLOs, CDOs and other similar structured finance investments, which may expose us to risks that could result in losses.

We may, to the extent consistent with the REIT requirements, seek to securitize certain of our loan portfolio investments to generate cash for financing new investments. This would involve creating a special-purpose vehicle, contributing a pool of our assets to the entity, and selling interests in the entity on a non-recourse basis to purchasers (whom we would expect to be willing to accept a lower interest rate to invest in investment-grade loan pools) and may require us to retain a portion of the risk of the assets in accordance with risk retention laws and regulations, which would not allow us to sell or hedge our risk retention interests. We would expect to retain all or a portion of the equity in the securitized pool of portfolio investments. We may use short-term facilities to finance the acquisition of securities until sufficient eligible securities have been accumulated, at which time we would refinance these facilities through a securitization, such as a CMBS, or issuance of CLOs, or the private placement of loan participations or other long-term financing. If we were to employ this strategy, we would be subject to the risk that we would not be able to acquire, during the period that our short-term facilities are available, sufficient eligible securities to maximize the efficiency of a CMBS, CLO or private placement issuance. We also would be subject to the risk that we would not be able to obtain short-term credit facilities or would not be able to renew any short-term credit facilities after they expire should we find it necessary to extend our short-term credit facilities to allow more time to seek and acquire sufficient eligible securities for a long-term financing. The inability to consummate securitizations of our loan portfolio to finance our investments on a long-term basis could require us to seek other forms of potentially less attractive financing or to liquidate assets at an inopportune time or price, which could adversely affect our performance and our ability to grow our business. Additionally, the securitization of our loan portfolio might magnify our exposure to losses because any equity interest we retain in the issuing entity would be subordinate to the notes issued to investors and we would, therefore, absorb all of the losses sustained with respect to a securitized pool of assets before the owners of the notes experience any losses.

Additionally, we may from time to time invest in subordinate classes of CMBS, CLOs, collateralized debt obligation, or CDOs, and other similar securities, which are subordinated classes of securities in a structure of securities secured by a pool of mortgages or loans. Accordingly, the securities are the first or among the first to bear the loss upon a restructuring or liquidation of the underlying collateral and last or among the last to receive payment of interest and principal.

Subordinate interests such as CLOs, CDOs and similarly structured finance investments generally are not actively traded and are relatively illiquid investments and volatility in CLO and CDO trading markets may cause the value of these investments to decline. In addition, if the underlying mortgage portfolio has been overvalued by the originator, or if the values subsequently decline and, as a result, less collateral value is available to satisfy interest and principal payments and any other fees in connection with the trust or other conduit arrangement for the securities, we may incur significant losses.

With respect to the CMBS, CLOs and CDOs in which we may invest, control over the related underlying loans will be exercised through a special servicer or collateral manager designated by a “directing certificate holder” or a “controlling class representative,” or otherwise pursuant to the related securitization documents. We may acquire classes of CMBS, CLOs or CDOs, for which we may not have the right to appoint the directing certificate holder or otherwise direct the special servicing or collateral management. With respect to the management and servicing of those loans, the related special servicer or collateral manager may take actions that could materially and adversely affect our interests.

 

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We may be subject to losses arising from future guarantees of debt and contingent obligations of our subsidiaries, joint venture or co-investment partners or our borrowers.

We may from time to time guarantee the performance of our subsidiaries’ obligations, including, but not limited to, our repurchase agreements, credit facilities, derivative agreements and unsecured indebtedness. We may also agree to guarantee indebtedness incurred by a joint venture or co-investment partner. A guarantee may be on a joint and several basis with our joint venture or co-investment partner, in which case we may be liable in the event the partner defaults on its guarantee obligation. The non-performance of these obligations may cause losses to us in excess of the capital we initially may have invested or committed under these obligations and there is no assurance that we will have sufficient capital to cover any losses.

We are subject to counterparty risk associated with our hedging activities.

We are subject to credit risk with respect to the counterparties to derivative contracts (whether a clearing corporation in the case of exchange-traded instruments or another third-party in the case of over-the-counter instruments). If a counterparty becomes insolvent or otherwise fails to perform its obligations under a derivative contract due to financial difficulties, we may experience significant delays in obtaining any recovery under the derivative contract in a dissolution, assignment for the benefit of creditors, liquidation, winding-up, bankruptcy, or other analogous proceeding. In the event of the insolvency of a counterparty to a derivative transaction, the derivative transaction would typically be terminated at its fair market value. If we are owed this fair market value in the termination of the derivative transaction and its claim is unsecured, we will be treated as a general creditor of the counterparty, and will not have any claim with respect to the underlying security. We may obtain only a limited recovery or may obtain no recovery in these circumstances. In addition, the business failure of a hedging counterparty with whom we enter into a hedging transaction will most likely result in its default, which may result in the loss of unrealized profits and force us to cover our commitments, if any, at the then current market price. Counterparty risk with respect to certain exchange-traded and over-the-counter derivatives may be further complicated by recently enacted U.S. financial reform legislation.

If we enter into certain hedging transactions or otherwise invest in certain derivative instruments, failure to obtain and maintain an exemption from being regulated as a commodity pool operator by our Manager could subject us to additional regulation and compliance requirements, which could materially and adversely affect us.

The Commodity Exchange Act, as amended, and rules promulgated thereunder by the CFTC, or the CFTC Rules, establish a comprehensive regulatory framework for certain derivative instruments, including swaps, futures, options on futures and foreign exchange derivatives, or Regulated CFTC Instruments. Under this regulatory framework, many mortgage REITs that trade in Regulated CFTC Instruments may be considered “commodity pools” and the operators of such mortgage REITs would accordingly be considered “commodity pool operators,” or CPOs. Absent an applicable exemption, a CPO of a mortgage REIT (which otherwise falls within the statutory definition of commodity pool) must register with the CFTC and become subject to CFTC Rules applicable to registered CPOs, including with respect to disclosure, reporting, recordkeeping and business conduct in respect of the mortgage REIT. We may from time to time, directly or indirectly, invest in Regulated CFTC Instruments, which may subject us to oversight by the CFTC.

Our Manager expects to qualify for and rely upon relief from the CPO registration requirement in respect of us pursuant to the no-action relief issued in December 2012 by the CFTC staff to operators of qualifying mortgage REITs, and has submitted a claim for relief within the required time period. Our Manager expects to qualify for the no-action relief in respect of us on the basis that we satisfy the criteria specified in the CFTC no-action letter, in that we identify as a “mortgage REIT” for U.S. federal income tax purposes, our trading in Regulated CFTC Instruments does not exceed a certain de minimis threshold identified in the no-action relief and our interests are not marketed to the public as or in a commodity pool or other trading vehicle. There can be no assurance, however, that the CFTC will not modify or withdraw the no-action letter in the future or that we will

 

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be able to continue to satisfy the criteria specified in the no-action letter in order to qualify for relief from CPO registration. The CFTC Rules with respect to commodity pools may be revised, which may affect our regulatory status or cause us to modify or terminate the use of Regulated CFTC Instruments in connection with our investment program. If we were required to register as a CPO in the future or change our business model to ensure that we can continue to satisfy the requirements of the no-action relief, it could materially and adversely affect us. Furthermore, we may determine to register as a CPO hereafter, and in such event we will operate in a manner designed to comply with applicable CFTC requirements, which requirements may impose additional obligations and costs on us.

The CFTC has substantial enforcement power with respect to violations of the laws over which it has jurisdiction. Among other things, the CFTC may suspend or revoke the registration of a person who fails to comply, prohibit such a person from trading or doing business with registered entities, impose civil monetary penalties, require restitution and seek fines or imprisonment for criminal violations. Additionally, a private right of action exists against those who violate the laws over which the CFTC has jurisdiction or who willfully aid, abet, counsel, induce or procure a violation of those laws. In the event we are unable to qualify for the no-action relief and fail to comply with the CFTC Rules, we may be unable to use Regulated CFTC Instruments or we may be subject to significant fines, penalties and other civil or governmental actions or proceedings, any of which could materially and adversely affect us.

Risks Related to Our Investments

We operate in a competitive market for the origination and acquisition of attractive investment opportunities and competition may limit our ability to originate or acquire attractive risk-adjusted investments in our target assets, which could have a material adverse effect on us.

We operate in a competitive market for the origination and acquisition of attractive risk-adjusted investment opportunities. A number of entities compete with us to make the types of investments that we originate or acquire. Our success depends, in large part, on our ability to originate or acquire our target assets on attractive terms. In originating our target assets, we will compete with a variety of institutional lenders and investors, including other commercial mortgage REITs, specialty finance companies, public and private funds (including funds that our Manager or its affiliates may in the future sponsor, advise and/or manage), commercial and investment banks, commercial finance and insurance companies and other financial institutions. A number of entities have raised, or are expected to raise, significant amounts of capital pursuing strategies similar to ours, and may have investment objectives that overlap with ours, which may create additional competition for investment opportunities. Many of our competitors are significantly larger than we are and have considerably greater financial, technical, marketing and other resources than we do. Some competitors may have a lower cost of funds and access to financing sources that are not available to us. Many of our competitors are not subject to the operating constraints associated with REITs or maintenance of our exclusion from registration under the 1940 Act. In addition, some of our competitors may have higher risk tolerances or different risk assessments, which could allow them to consider a wider variety of investments, deploy more aggressive pricing or financing strategies and establish more relationships than us. Increased competition in our markets could result in a decrease in origination volumes, which would adversely affect our business, financial condition, liquidity, results of operations and prospects. Furthermore, competition for investments in our target assets may lead to the price of these assets increasing or return on investment declining, which may further limit our ability to generate desired returns. Also, as a result of this competition, desirable investments in our target assets may be limited in the future, and we may not be able to take advantage of attractive risk-adjusted investment opportunities from time to time. In addition, reduced CRE transaction volume could increase competition for available investment opportunities. We can provide no assurance that we will be able to continue to identify and make investments that are consistent with our investment objectives, or that the competitive pressures we face will not have a material adverse effect on us.

Furthermore, changes in the financial regulatory regime could decrease the current restrictions on banks and other financial institutions and allow them to compete for opportunities that were previously not available to them, or subject to significant capital requirements. See “—Risks Related to Our Company—Changes in laws or

 

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regulations governing our operations or those of our competitors, or changes in the interpretation thereof, or newly enacted laws or regulations, could result in increased competition for our target assets, require changes to our business practices and collectively could adversely impact our revenues and impose additional costs on us, which could materially and adversely affect us.”

Loans on properties in transition often involve a greater risk of loss than loans on stabilized properties, including the risk of cost overruns on and noncompletion of the construction or renovation of or other capital improvements to the properties underlying the loans we originate or acquire, and the risk that a borrower may fail to execute the business plan underwritten by us, potentially making it unable to refinance our loan at maturity, each of which could materially and adversely affect us.

We originate and acquire loans on transitional CRE properties to borrowers who are typically seeking capital for repositioning, renovation, rehabilitation, leasing, development, redevelopment or construction. The typical borrower under a loan on a transitional asset has usually identified an undervalued asset that has been under-managed and/or is located in an improving market. If the market in which the asset is located fails to materialize according to the borrower’s projections, or if the borrower fails to improve the quality of the asset’s management and/or the value of the asset, or if it costs the borrower more than estimated or takes longer to execute its business plan than estimated, including as a result of supply chain disruptions or stop work orders due to the COVID-19 pandemic, the borrower may not receive a sufficient return on the asset to satisfy our loan or may experience a prolonged reduction of net operating income and may not be able to make payments on our loan on a timely basis or at all, which could materially and adversely affect us. Other risks may include: environmental risks, delays in legal and other approvals (e.g., certificates of occupancy), other construction and renovation risks and subsequent leasing of the property not being completed on schedule. Accordingly, we bear the risk that we may not recover some or all of our loan unpaid principal balance and interest thereon.

Furthermore, borrowers usually use the proceeds of permanent financing to repay a loan on a transitional property after the CRE property is stabilized. Loans on transitional CRE properties are therefore subject to risks of a borrower’s inability to obtain permanent financing to repay our loan. Our loans are also subject to risks of borrower defaults, bankruptcies, fraud and losses. In the event of any default under our loans, we bear the risk of loss of principal and non-payment of interest and fees to the extent of any deficiency between the value of the underlying asset and the principal amount and unpaid interest and fees of our loan. To the extent we suffer losses with respect to our loans, it could have a material adverse effect on us.

Our investments are and may be concentrated in certain markets, property types and borrowers, among other factors, and will be subject to risk of default.

While we intend to diversify our loan portfolio of investments in the manner described in this prospectus, we are not required to observe specific diversification criteria, and we have criteria outlined in our investment guidelines that can only be changed with approval of our Board. Therefore, our portfolio of target assets is and may be concentrated in certain property types that are subject to higher risk of achieving their stated business plans or other concentration risk, such as from COVID-19, or supported by properties concentrated in a limited number of geographic locations. For example, as of June 30, 2021, our real estate owned investment consisted of seven limited service hotel properties in New York, New York and 43.9% of our loans are secured by CRE assets (or equity interests relating thereto) located in the New York metropolitan area. Further, as of June 30, 2021, 21.2% of our loan investments were secured by multi-family properties (or equity interests relating thereto), 24.2% of our loan investments were secured by mixed-use properties (or equity interests relating thereto), 15.4% of our loan investments were secured by hospitality properties (or equity interests relating thereto), 17.8% of our loan investments were secured by office properties (or equity interests relating thereto), 10.9% of our loan investments were secured by for sale condominium properties (or equity interests relating thereto), 8.9% of our loan investments were secured by land properties (or equity interests relating thereto), 25.4% of our loan investments were construction loans and our 15 largest loan investments represented 53.6% of our loan portfolio, in each case based on unpaid principal balance. Additionally, as a result of the COVID-19 pandemic, the hospitality sector has been materially and adversely impacted by

 

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closures or decreasing occupancy and room rates, and the for sale condominium sector has been adversely impacted by decreased access to property viewings leading to a decline in demand and corresponding decrease in sales. Furthermore, construction projects have received stop work orders in certain regions as a means to slow the spread of COVID-19, which has resulted in project delays for construction loans we have funded, and will likely result in cost overruns to complete such projects.

On February 6, 2018, we originated an $85.0 million mezzanine loan secured by a portfolio of seven limited service hotel properties located in New York, New York, which was subordinate to a $300.0 million securitized senior mortgage. Following the onset of the COVID-19 pandemic, the hotels were forced to close, causing the borrower to experience financial difficulty which resulted in the borrower not paying debt service on the loan. Beginning in June 2020, we began funding debt service on the $300.0 million securitized senior mortgage as protective advances on our loan, which totaled $18.9 million through February 8, 2021. On February 8, 2021, we foreclosed on the portfolio of seven limited service hotel properties through a Uniform Commercial Code foreclosure. The hotel portfolio now appears as real estate owned, net on our balance sheet and as of June 30, 2021, was encumbered by a $290.0 million securitized senior mortgage, which is included as a liability on our balance sheet.

As of June 30, 2021, there were five investments consisting of six loans that were on non-accrual status, representing $525.0 million of unpaid principal balance, or 8.6% of our portfolio (based on unpaid principal balance), of which there were four investments consisting of five loans on non-accrual status, representing $282.6 million of unpaid principal balance, or 4.6% of our loan portfolio (based on unpaid principal balance), as a result of not being current on debt service for 90 days. One of these investments, with an unpaid principal balance of $78.0 million as of June 30, 2021, was modified in September 2021, which involved the borrower satisfying all previously unpaid debt service with a combination of a cash payment and compounding the remaining amount due into the unpaid principal balance. In August 2021, one investment comprised of one loan with an unpaid principal balance of $95.0 million as of June 30, 2021 was placed on non-accrual status as a result of becoming 90 days past due. Additionally, there was one investment, with an outstanding principal balance of $242.5 million, representing 4.0% of our portfolio (based on unpaid principal balance) at June 30, 2021, which had been placed on non-accrual status in the third quarter of 2020 as a result of interest payments becoming 90 days past due, which was modified in December 2020 resulting in all past due interest being paid, bringing the loan current. In September 2021, this loan was repaid.

In the land sector, we have granted, and expect we may in the future grant, loan extensions as a result of the COVID-19 pandemic adversely impacting our borrowers’ ability to close construction loan financing. As of August 31, 2021, 92.6% of our loan portfolio (based on unpaid principal balance) was current on all contractual interest, principal and reserve payments. Although the completed loan modifications discussed throughout this prospectus have resulted and may continue to result in delays of certain required payments to us, those borrowers are treated as current during any applicable deferral or extension periods. To the extent that our portfolio is concentrated in particular geographic regions, types of properties or borrowers, downturns affecting those geographic regions, types of properties or borrowers may result in defaults on a number of our investments within a short period of time, which may reduce our operating results and the market price of our common stock and, accordingly, have a material adverse effect on us.

We will allocate our available capital without input from our stockholders.

You will not be able to evaluate the manner in which our available capital will be invested or the economic merit of our expected investments. As a result, we may use our available capital to invest in investments with which you may not agree. Additionally, our investments will be identified by our Manager and our stockholders will not have input into any investment. Both of these factors will increase the uncertainty, and thus the risk, of investing in shares of our common stock. The failure of our Manager to apply these proceeds effectively or find investments that meet our investment criteria in sufficient time or on acceptable terms could result in unfavorable returns, could cause a material adverse effect on us, and could cause the market price of our common stock to decline.

 

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Until appropriate uses can be identified, our Manager may invest our available capital, including the net proceeds from this offering, in interest-bearing short-term investments, including money market funds, bank accounts, overnight repurchase agreements with primary federal reserve bank dealers collateralized by direct U.S. government obligations and other instruments or investments reasonably determined by our Manager to be of high quality and that are consistent with our continued qualification as a REIT and maintain our exclusion from registration under the 1940 Act. These investments are expected to provide a lower net return than we seek to achieve from investments in our target assets.

Our Manager intends to conduct due diligence with respect to each investment and suitable investment opportunities may not be immediately available. Even if opportunities are available, there can be no assurance that our Manager’s due diligence processes will uncover all relevant facts or that any investment will be successful. We cannot assure you that we will be able to enter into definitive agreements to invest in any new investments that meet our investment criteria; that we will be successful in consummating any investment opportunities we identify; or that one or more investments we may make using our available capital will yield attractive risk-adjusted returns. Our inability to do any of the foregoing likely would materially and adversely affect us.

The lack of liquidity in certain of the assets in our portfolio and our target assets generally may materially and adversely affect us.

The assets in our portfolio, including senior and subordinate loans, mortgage loans, participations in mortgage loans, contiguous subordinate loans and subordinated mortgage interests, and our target assets are relatively illiquid investments due to their short life, lack of cash flow from property that is collateral for those loans, their potential unsuitability for securitization and the greater difficulty of recovery in the event of a borrower’s default. In addition, certain of our investments may become less liquid after our investment as a result of periods of delinquencies or defaults or turbulent market conditions. For example, there is an inverse relationship between credit spreads widening and the value of existing assets diminishing, subject to an offset in part by the value of LIBOR floors. As a result of the COVID-19 pandemic, credit spreads have increased, and we believe that the fair value of the assets in our portfolio has declined. The illiquidity of the assets in our portfolio and our target assets may make it more difficult for us to dispose of these assets at advantageous times or in a timely manner. Moreover, to the extent that we invest in securities, the securities will likely be subject to prohibitions against their transfer, sale, pledge or their disposition except in transactions that are exempt from registration requirements or are otherwise in accordance with federal securities laws. As a result, we expect many of our investments will be illiquid. If we are required to liquidate all or a portion of our portfolio quickly, we may realize significantly less than an asset’s original loan amount or the value at which we have previously recorded for such asset. Further, we may face other restrictions on our ability to liquidate an investment to the extent that we or our Manager (and/or its affiliates) has or could be attributed as having material, non-public information regarding the relevant business entity. As a result, our ability to vary our portfolio in response to changes in economic and other conditions may be relatively limited, which could materially and adversely affect us.

Our risk management policies and procedures may not be effective.

We will establish and maintain risk management policies and procedures designed to identify, monitor and mitigate financial risks, such as credit risk, interest rate risk, prepayment risk and liquidity risk, as well as operational risks related to our business, assets and liabilities. These policies and procedures may not sufficiently identify all of the risks to which we are or may become exposed or mitigate the risks we have identified. Any expansion of our business activities may result in our being exposed to risks to which we have not previously been exposed or may increase our exposure to certain types of risks. Any failure to effectively identify and mitigate the risks to which we are exposed could materially and adversely affect us.

 

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Temporary investment of cash pending deployment into investments will not generate significant interest.

In light of our anticipated investment strategy and the need to be able to deploy capital quickly to capitalize on potential investment opportunities, we may from time to time maintain cash pending deployment into investments, which may at times be significant. Cash may be held in an account of ours for the benefit of stockholders or may be invested in money market accounts or other similar temporary investments. While the expected duration of any holding period is expected to be relatively short, in the event we are unable to find suitable investments, the cash positions may be maintained for longer periods. It is not anticipated that the temporary investment of cash into money market accounts or other similar temporary investments pending deployment into investments will generate significant interest.

In the event of borrower distress or a default, we may lack the liquidity necessary to protect our investment or avoid a corresponding default on any obligations we may have in connection with our own financing.

In the event of borrower distress or a default, including as a result of the COVID-19 pandemic, we may lack the liquidity necessary to protect our investment or avoid a corresponding default on any obligations we may have in connection with our own financing or the related investment. In the event of a default by a borrower on a non-recourse loan, we will only have recourse to the underlying asset (including any escrowed funds and reserves) collateralizing that loan. If the underlying property collateralizing the loan is insufficient to satisfy the outstanding balance of such loan, we may suffer a loss of principal or interest that adversely affects our liquidity and our ability to service or repay our own leverage. Real estate investments generally lack liquidity compared to other financial assets, and the increased lack of liquidity resulting from a borrower distress or a default may limit our ability to quickly change our portfolio or take other necessary actions to avoid a corresponding default on our financing.

We may be unable to refinance debt incurred to finance our loans, thereby increasing the amount of equity capital risk we bear with respect to particular loans or preventing us from deploying our equity capital in the optimal manner.

We may be unable to refinance our investments in our loans, thereby increasing the amount of equity capital risk we bear with respect to particular loans or preventing us from deploying our equity capital in the optimal manner. If we are unable to refinance such debt at appropriate times, we may be required to sell assets on terms that are not advantageous to us or take action that could result in other negative consequences. We may only be able to partly refinance such debt if underwriting standards, including loan-to-value ratios and yield requirements, among other requirements, are stricter than when we originally financed our loans. Additionally, as a result of the COVID-19 pandemic, certain of our borrowers have requested term extensions, and we expect that certain of our other borrowers may request term extensions, and we may not be able to obtain corresponding match-term financing or in certain cases obtain required approvals from our financing counterparties. Obtaining such approvals has required in the past and may require in the future reduction of advance rates on financing, increased borrowing costs or a combination thereof, which could have an adverse impact on our returns on equity and reduce our liquidity. If any of these events occur, our cash flows would be reduced, preventing us from deploying our equity capital in an optimal manner. If we are unable to refinance debt incurred to finance our loans, we also may have to forego other investment opportunities that require equity and our liquidity may be diminished.

As a result of our real estate owned investment, we are subject to the risks commonly associated with real estate owned holdings, including risks related to ownership of hotel properties in New York, New York, which vary from the risks associated with lending.

Borrowers under our loans may not have sufficient financial resources to satisfy their payment obligations to us, and we could be required to take ownership of the assets underlying a particular loan in lieu of full repayment of the principal amount and accrued interest on the loan. For example, in February 2021, we foreclosed on a portfolio of seven limited service hotel properties located in New York, New York that secured a

 

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mezzanine loan with an unpaid principal balance of $103.9 million as of February 8, 2021 that we originated in February 2018. Our real estate owned investment at the time of foreclosure was encumbered by a securitized senior mortgage, which we assumed on February 8, 2021 with a principal balance of $300.0 million. As such, we are subject to the risks commonly associated with real estate owned holdings, including risks related to ownership of hotel properties in New York, New York, which include changes in general or local economic conditions, changes in supply of or demand for similar or competing properties in an area, changes in interest rates and availability and terms of permanent mortgage financing that may render the sale of a property difficult or unattractive, political instability or changes, decreases in property values, changes in tax, real estate, environmental and zoning laws and the risk of uninsured or underinsured casualty loss. No assurances can be given that the New York hospitality market will recover to pre-COVID-19 conditions. Further, our equity interest in our current, or any future, real estate owned investment is subordinate to any indebtedness secured by such property. To the extent that we decide or are required to take ownership of one or more additional properties, these risks will be heightened. Real estate owned investments are illiquid investments and we may be unable to adjust our portfolio in response to changes in economic or other conditions. In addition, the real estate market is affected by many factors, such as general economic conditions, availability of financing, interest rates and other factors, including supply and demand, that are beyond our control. We cannot predict whether we will be able to sell any real estate owned investment for the price or on the terms set by us, or whether any price or other terms offered by a prospective purchaser would be acceptable to us. We cannot predict the length of time needed to find a willing purchaser and to close the sale of a real estate owned investment. We may acquire properties that are subject to contractual “lock-out” provisions that could restrict our ability to dispose of the real estate owned investment for a period of time. In addition, U.S. federal tax laws that impose a 100% excise tax on gains from sales of dealer property by a REIT (generally, property held for sale, rather than investment) could limit our ability to sell properties and may affect our ability to sell properties without adversely affecting returns to our stockholders. These characteristics and restrictions could result in losses that would adversely affect our results of operations, liquidity and financial condition, potentially materially.

We may also be required to expend funds to correct defects or to make improvements before a real estate owned investment can be sold. We have experienced and expect to continue to experience increased operating costs and taxes in connection with our real estate owned investment, including costs related owning the real estate owned investment in a TRS. If the real estate owned investment is owned by our TRS, income from the investment generally will be subject to corporate income tax. We cannot assure stockholders that we will have funds available to correct such defects, to make such improvements or to pay such other costs. In acquiring a real estate owned investment, we may agree to restrictions that prohibit the sale of that real estate owned investment for a period of time or impose other restrictions, such as a limitation on the amount of debt that can be placed or repaid on that real estate owned investment. Real estate owned investments may also be subject to resale restrictions. All of these provisions would restrict our ability to sell a property. These risks vary from the risks associated with lending and could materially and adversely affect us.

Difficult conditions in the commercial mortgage and real estate market, the financial markets and the economy generally have and could continue to materially and adversely affect us.

We have been and could continue to be materially and adversely affected by conditions in the commercial mortgage and real estate markets, the financial markets and the economy generally. A deterioration of real estate fundamentals generally, and in the geographical locations of properties underlying our loans in particular, and changes in general economic conditions, including as a result of the COVID-19 pandemic, have in the past negatively impacted, and could continue to negatively impact, our performance or the value of underlying real estate collateral relating to our loans, increase the default risk applicable to borrowers, and make it relatively more difficult for us to generate attractive risk-adjusted returns.

We cannot predict the degree to which economic conditions generally, and the conditions for real estate debt investing in particular, will improve or decline. Any stagnation in or deterioration of the commercial mortgage or real estate markets may limit our ability to acquire our target assets on attractive terms or cause us to experience losses related to our assets, which could materially and adversely affect us.

 

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We generally determine the LTV for a loan in our portfolio prior to, or at the time of, our origination or acquisition of the loan and such LTVs may change significantly and in an adverse manner thereafter due to various circumstances, including due to the COVID-19 pandemic.

We calculate the LTV for a loan in our portfolio as our total loan commitment from time to time, as if fully funded, plus any financings that are pari passu with or senior to our loan, divided by our estimate of either (1) the value of the underlying real estate, determined in accordance with our underwriting process (typically consistent with, if not less than, the value set forth in a third-party appraisal) or (2) the borrower’s projected, fully funded cost basis in the asset, in each case as we deem appropriate for the relevant loan and other loans with similar characteristics. Underwritten values and projected costs should not be assumed to reflect our judgment of current market values or project costs, which may have changed materially since the date of origination including, without limitation, as a result of the COVID-19 pandemic. LTV is updated only in connection with a partial loan paydown and/or release of collateral, material changes to expected project costs, the receipt of a new appraisal (typically in connection with financing or refinancing activity) or a change in our loan commitment. Because substantially all of the loans in our portfolio were originated or acquired prior to the onset of the COVID-19 pandemic, the LTVs for certain of our loans do not take into account any change in our borrowers’ business operations, creditworthiness or prospects or in the value of the underlying real estate collateral caused by the COVID-19 pandemic. Accordingly, there can be no assurance that the LTVs for the loans in our portfolio that we present in this prospectus, individually or in the aggregate (i.e., our portfolio weighted average LTV of 65.9% as of June 30, 2021) are reflective of current LTVs for the loans in our portfolio or that the LTVs we present are reflective of the subordinate capital available in the event we are forced to foreclose on a loan.

If our Manager overestimates the yields or incorrectly prices the risks of our investments, we may experience losses.

Our Manager evaluates our potential investments based on yields and risks associated with underlying collateral and borrowers. We generally do not project losses on loans we originate. However, the performance of the loans may nonetheless vary from our projections and incur losses. Our reserves for loan losses may prove inadequate, which could have a material adverse effect on us.

We evaluate our loans and the adequacy of our loan loss reserves on a quarterly basis, and may maintain varying levels of loan loss reserves. Our determination of asset-specific loan loss reserves relies on estimates regarding the fair value of any loan collateral. The estimation of ultimate loan losses and expense provisions for loss reserves is a complex and subjective process. As such, there can be no assurance that our judgment will prove to be correct and that reserves will be adequate over time to protect against losses inherent in our portfolio at any given time. Losses could be caused by various factors, including, but not limited to, unanticipated adverse changes in the economy or events adversely affecting specific assets, borrowers, industries in which our borrowers operate or markets in which our borrowers or their properties are located. Additionally, as it relates to the LTV for a loan in our portfolio, underwritten values and projected costs should not be assumed to reflect our judgment of current market values or project costs, which may have changed materially since the date of origination including, without limitation, as a result of the COVID-19 pandemic. LTV is updated only in connection with a partial loan paydown and/or release of collateral, material changes to expected project costs, the receipt of a new appraisal (typically in connection with financing or refinancing activity) or a change in our loan commitment. As a result, that LTVs may not accurately reflect changes in collateral value subsequent to originating such loan, or reflect any risk of impairment. If we incur loan losses or our reserves for loan losses prove inadequate, we may suffer losses, which could have a material adverse effect on us.

In June 2016, FASB issued Accounting Standards Update 2016-13, “Financial Instruments-Credit Losses, Measurement of Credit Losses on Financial Instruments (Topic 326),” or ASU 2016-13. This standard replaces the existing measurement of the allowance for credit losses that is based on our Manager’s best estimate of probable incurred credit losses inherent in our lending activities with our Manager’s best estimate of expected credit losses inherent in our relevant financial assets. The lifetime expected credit losses will be determined using macroeconomic forecast assumptions and judgments applicable to and through the expected life of the portfolio and is required to be determined net of expected recoveries on loans that were previously charged off. The

 

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standard will also expand credit quality disclosures. While the standard changes the measurement of the allowance for credit losses, it does not change the credit risk of our portfolio or the ultimate losses in our portfolio. The Company elected to early adopt the standard on January 1, 2021 and recorded a $78.3 million cumulative effect adjustment to retained earnings. See “—Risks Related to the COVID-19 Pandemic—The COVID-19 pandemic has had an adverse effect on us and may have a material adverse effect on us in the future and any other pandemic, epidemic or outbreak of an infectious disease in the markets in which we operate may have a material adverse effect on us in the future.”

There are increased risks involved with construction lending activities.

We intend to continue to originate and acquire loans which fund the construction of commercial properties. Construction lending generally is considered to involve a higher degree of risk than other types of lending due to a variety of factors, including the difficulties in estimating construction costs and anticipating construction delays and, generally, the dependency on timely, successful project completion and the lease-up or sale of units and commencement of operations post-completion of construction. In addition, since these loans generally entail greater risk than mortgage loans on income-producing property, we may need to establish or increase our allowance for loan losses in the future to account for the potential increase in probable incurred credit losses associated with these loans. Further, as the lender under a construction loan, we may be obligated to fund all or a significant portion of the loan at one or more future dates. We may not have the funds available at those future date(s) to meet our funding obligations under our construction loans. In that event, we would likely be in breach of the loan unless we are able to raise the funds from alternative sources, which we may not be able to achieve on favorable terms or at all.

If a borrower fails to complete the construction of a project or experiences cost overruns, there could be adverse consequences associated with the loan, including a loss of the value of the property underlying the loan, a borrower claim against us for failure to perform under the loan documents if we choose to stop funding, increased costs to the borrower that the borrower is unable to pay, a bankruptcy filing by the borrower, and abandonment by the borrower of the property underlying the loan. Furthermore, construction projects have received stop work orders in certain regions as a means to slow the spread of COVID-19, which has resulted in project delays for construction loans we have funded, and will likely result in cost overruns to complete such projects. These consequences could have a material adverse effect on us.

Our investments in construction loans will require us to make estimates about the fair value of land improvements that may be challenged by the IRS.

We have invested in, and may continue to invest in, construction loans, the interest from which will be qualifying income for purposes of the 75% and 95% REIT gross income tests, provided that certain requirements are met and, in the case of the 75% gross income test, the loan is treated as adequately secured by real property. There can be no assurance that the IRS would not successfully challenge our estimate of the value of the real property and our treatment of the construction loans for purposes of the REIT income and assets tests, which may cause us to fail to qualify as a REIT.

Investments in subordinated mortgage interests, mezzanine loans and other assets that are subordinated or otherwise junior in a borrower’s capital structure may expose us to greater risk of loss.

We have originated or acquired, and may from time to time in the future originate or acquire, subordinated mortgage interests, mezzanine loans and other assets that are subordinated or otherwise junior to other financing in a borrower’s capital structure and that involve privately negotiated structures. To the extent we invest in subordinated debt or mezzanine tranches of a borrower’s capital structure, these investments and our remedies with respect thereto, including the ability to foreclose on any collateral securing the investments, will be subject to the rights of holders of more senior tranches in the borrower’s capital structure and, to the extent applicable, contractual intercreditor and/or participation agreement provisions. Significant losses related to these loans or investments could materially and adversely affect us.

 

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As the terms of these investments are subject to contractual relationships among lenders, co-lending agents and others, they can vary significantly in their structural characteristics and other risks. For example, the rights of holders of subordinated mortgage interests to control the process following a borrower default may vary from transaction to transaction. Further, subordinated mortgage interests typically are secured by a single property and accordingly reflect the risks associated with significant concentration.

Like subordinated mortgage interests, mezzanine loans are by their nature structurally subordinated to more senior property-level financings. If a borrower defaults on our mezzanine loan or on debt senior to our loan, or if the borrower is in bankruptcy, our mezzanine loan will be satisfied only after the property-level debt and other senior debt is paid in full. As a result, a partial loss in the value of the underlying collateral can result in a total loss of the value of the mezzanine loan. In addition, even if we are able to foreclose on the underlying collateral following a default on a mezzanine loan, we would be substituted for the defaulting borrower and, to the extent income generated on the underlying property is insufficient to meet outstanding debt obligations on the property, we may need to commit substantial additional capital and/or deliver a replacement guarantee by a creditworthy entity, which could include us, to stabilize the property and prevent additional defaults to lenders with existing liens on the property. In addition, our investments in senior loans may be effectively subordinated to the extent we borrow under a warehouse line (which can be in the form of a repurchase facility) or similar facility and pledge the senior loan as collateral. Under these arrangements, the lender has a right to repayment of the borrowed amount before we can collect on the value of our loan, and therefore if the value of the pledged senior loan decreases below the amount we have borrowed, we would experience significant losses.

Most of the CRE loans that we originate or acquire are non-recourse loans and the assets securing these loans may not be sufficient to protect us from a partial or complete loss if the borrower defaults on the loan, which could materially and adversely affect us.

Most CRE loans represent non-recourse obligations of the borrower, with the exception of certain limited purpose guarantees such as customary non-recourse carve-outs for certain “bad acts” by a borrower, environmental indemnities and, in some cases, completion guarantees, carry guarantees and limited payment guarantees. Consequently we typically have no recourse (or very limited recourse for specified purposes) against the assets of the borrower or its sponsor other than our recourse to specified loan collateral. In the event of a borrower default under one or more of our loans, we will bear a risk of loss to the extent of any deficiency between the value of the specified collateral and the unpaid principal balance on our loan, absent recoveries to us under any applicable guarantees, which could materially and adversely affect us. In addition, we may incur substantial costs and delays in realizing the value of such collateral. Further, although a loan may provide for limited recourse to a principal, parent or other affiliate of the borrower, there is no assurance that we will be able to recover our deficiency from any such party or that its assets would be sufficient to pay any otherwise recoverable claim. In the event of the bankruptcy of a borrower, the loans to that borrower will be deemed to be secured only to the extent of the value of any underlying collateral at the time of bankruptcy (as determined by the bankruptcy court), and the loan or lien securing the loan could be subject to the avoidance powers of the bankruptcy trustee or debtor-in-possession.

We may be subject to additional risks associated with CRE loan participations.

Some of our CRE loans are, and may in the future be, held in the form of participation interests or co-lender arrangements in which we share the loan rights, obligations and benefits with other lenders. With respect to participation interests, we may require the consent of these parties to exercise our rights under the loans, including rights with respect to amendment of loan documentation, enforcement proceedings upon a default and the institution of, and control over, foreclosure proceedings. In circumstances where we hold a minority interest, we may be become bound to actions of the majority to which we otherwise would object. We may be adversely affected by this lack of control with respect to these interests.

 

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If we originate or acquire CRE loans or CRE-related assets secured by liens on facilities that are subject to a ground lease and the ground lease is terminated unexpectedly, our interests in the loans could be materially and adversely affected.

A ground lease is a lease of land, usually on a long-term basis, that does not include buildings or other improvements on the land. Normally, any real property improvements made by the lessee during the term of the lease will revert to the owner at the end of the lease term. We have originated, and may in the future originate or acquire, CRE loans or CRE-related assets secured by liens on facilities that are subject to a ground lease, and, if the ground lease were to expire or terminate unexpectedly, due to the borrower’s default on the ground lease, our interests in the loans could be materially and adversely affected.

We may invest in derivative instruments, which would subject us to increased risk of loss.

Subject to maintaining our qualification as a REIT, we may invest in derivative instruments. Derivative instruments, especially when purchased in large amounts, may not be liquid, so that in volatile markets we may not be able to close out a position without incurring a loss. The prices of derivative instruments, including swaps, futures, forwards and options, are highly volatile and such instruments may subject us to significant losses. The value of such derivatives also depends upon the price of the underlying instrument or commodity. Derivatives and other customized instruments also are subject to the risk of non-performance by the relevant counterparty. In addition, actual or implied daily limits on price fluctuations and speculative position limits on the exchanges or over-the-counter markets in which we may conduct our transactions in derivative instruments may prevent prompt liquidation of positions, subjecting us to the potential of greater losses. Derivative instruments that may be purchased or sold by us may include instruments not traded on an exchange. The risk of non-performance by the obligor on such an instrument may be greater and the ease with which we can dispose of or enter into closing transactions with respect to such an instrument may be less than in the case of an exchange-traded instrument. In addition, significant disparities may exist between “bid” and “asked” prices for derivative instruments that are traded over-the-counter and not on an exchange. Such over-the-counter derivatives are also typically not subject to the same type of investor protections or governmental regulation as exchange-traded instruments.

In addition, we may invest in derivative instruments that are neither presently contemplated nor currently available, but which may be developed in the future, to the extent such opportunities are both consistent with our investment objectives and legally permissible. Any of these investments may expose us to unique and presently indeterminate risks, the impact of which may not be capable of determination until such instruments are developed and/or we determine to make such an investment.

We may experience a decline in the fair market value of our assets.

A decline in the fair market value of our assets may require us to recognize an “other-than-temporary” impairment against such assets under GAAP if we were to determine that, with respect to any assets in unrealized loss positions, we do not have the ability and intent to hold such assets to maturity or for a period of time sufficient to allow for recovery to the original acquisition cost of such assets. If such a determination were to be made, we would recognize unrealized losses through earnings and write down the amortized cost of such assets to a new cost basis, based on the fair market value of such assets on the date they are considered to be other-than-temporarily impaired. Such impairment charges reflect non-cash losses at the time of recognition; subsequent disposition or sale of such assets could further affect our future losses or gains, as they are based on the difference between the sale price received and adjusted amortized cost of such assets at the time of sale. If we experience a decline in the fair market value of our assets, it could materially and adversely affect us.

Some of our portfolio investments may be recorded at fair market value and, as a result, there will be uncertainty as to the value of these investments.

Most of our portfolio investments may be in the form of positions or securities that are not publicly traded. The fair market value of securities and other investments that are not publicly traded may not be readily determinable. We will value these investments quarterly at fair market value, which may include unobservable

 

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inputs. Because such valuations are subjective, the fair market value of certain of our investments may fluctuate over short periods of time and our determinations of fair market value may differ materially from the values that would have been used if a ready market for these investments existed. We could be materially and adversely affected if our determinations regarding the fair market value of these investments were significantly higher than the values that we ultimately realize upon their disposal, in the case of investments disposed of prior to maturity.

U.S. and global financial systems have undergone significant disruption, and such disruption may negatively impact our ability to execute our investment strategy, which would materially and adversely affect us.

The U.S. and global financial markets have undergone a significant disruption caused by the COVID-19 pandemic, the full ramifications of which are not yet known, but could continue to materially and adversely affect us. They have also experienced significant disruptions in the past, during which times global credit markets collapsed, borrowers defaulted on their loans at historically high levels, banks and other lending institutions suffered heavy losses and the value of real estate declined. During such periods, a significant number of borrowers became unable to pay principal and interest on outstanding loans as the value of their real estate declined. Declining real estate values could reduce the level of new senior and subordinate loan originations. Instability in the U.S. and global financial markets in the future could be caused by any number of factors beyond our control, including, without limitation, pandemics, terrorist attacks or other acts of war and adverse changes in national or international economic, market and political conditions. Any sustained period of increased payment delinquencies, foreclosures or losses could adversely affect both our net interest income from loans in our portfolio as well as our ability to execute our investment strategy, which would materially and adversely affect us.

Insurance proceeds on a property may not cover all losses, which could result in the corresponding non-performance of or loss on our investment related to such property.

There are certain types of losses, generally of a catastrophic nature, such as earthquakes, floods, hurricanes, terrorism or acts of war, which may be uninsurable or not economically insurable. Inflation, changes in building codes and ordinances, environmental considerations and other factors, including terrorism or acts of war, also might result in insurance proceeds insufficient to repair or replace a property if it is damaged or destroyed. Under these circumstances, the borrower’s receipt of insurance proceeds with respect to a property relating to one of our investments might not be adequate to restore our economic position with respect to our investment. Any uninsured loss could result in the loss of cash flow from, and the asset value of, the affected property and the value of our investment related to such property.

Our investments expose us to risks associated with debt-oriented real estate investments generally.

We seek to invest primarily in debt in or relating to real estate assets. Any deterioration of real estate fundamentals generally, and in the U.S. in particular, could negatively impact our performance by making it more difficult for our borrowers to satisfy their debt payment obligations to us, increasing the default risk applicable to borrowers, and/or making it relatively more difficult for us to generate attractive risk-adjusted returns. Changes in general economic conditions will affect the creditworthiness of our borrowers and may include economic and/or market fluctuations, changes in environmental, zoning and other laws, casualty or condemnation losses, regulatory limitations on rents, decreases in property values, changes in the appeal of properties to tenants, changes in supply and demand, fluctuations in real estate fundamentals (including average occupancy and room rates for hotel properties), energy supply shortages, various uninsured or uninsurable risks, natural disasters, terrorism, acts of war, changes in government regulations (such as rent control), political and legislative uncertainty, changes in real property tax rates and operating expenses, changes in interest rates, currency exchange rates changes in the availability of debt financing and/or mortgage funds which may render the sale or refinancing of properties difficult or impracticable, increased mortgage defaults, increases in borrowing rates, negative developments in the economy that depress travel activity, demand and/or real estate values generally and other factors that are beyond our control.

 

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We cannot predict the degree to which economic conditions generally, and the conditions for CRE debt investing in particular, will improve or decline. Declines in the performance of relevant regional and global economies or in the CRE debt market could have a material adverse effect on us.

CRE-related investments that are secured, directly or indirectly, by CRE are subject to potential delinquency, foreclosure and loss, which could materially and adversely affect us.

CRE debt investments that are secured, directly or indirectly, by property are subject to risks of delinquency and foreclosure and risks of loss. The ability of a borrower to repay a loan secured, directly or indirectly by an income-producing property typically depends primarily upon the successful operation of the property rather than upon the existence of independent income or assets of the borrower. If the net operating income of the property is reduced, the borrower’s ability to repay the loan in a timely manner, or at all, may be impaired and therefore could reduce our return from an affected property or investment, which could materially and adversely affect us. Net operating income of an income-producing property can be affected by, among other things:

 

   

tenant mix and tenant bankruptcies;

 

   

success of tenant businesses and the ability to respond to evolving risks, such as COVID-19;

 

   

decreases in the net worth, liquidity or other ability of our borrowers or any guarantor to honor their obligations to us, including as a result of COVID-19;

 

   

property management decisions, including with respect to capital improvements, particularly in older building structures;

 

   

property location and condition;

 

   

competition from other properties offering the same or similar services;

 

   

changes in laws that increase operating expenses or limit rents that may be charged;

 

   

any need to address environmental contamination or compliance with environmental requirements at the property;

 

   

changes in national, regional or local economic conditions and/or specific industry segments;

 

   

declines in regional or local real estate values;

 

   

declines in regional or local rental or occupancy rates;

 

   

changes in interest rates and in the state of the credit and securitization markets and the debt and equity capital markets, including diminished availability or lack of debt financing for CRE;

 

   

changes in real estate tax rates and other operating expenses;

 

   

changes in governmental rules, regulations and fiscal policies, including Treasury Regulations promulgated under the Code, or Treasury Regulations, and environmental legislation;

 

   

fraudulent acts or theft on the part of the property owner, sponsor and/or manager;

 

   

the potential for uninsured or under-insured property losses;

 

   

acts of God, terrorism, social unrest and civil disturbances, which may decrease the availability of or increase the cost of insurance or result in uninsured losses; and

 

   

adverse changes in zoning laws.

In the event of any default under a loan held directly by us, we will bear a risk of loss to the extent of any deficiency between the value of the collateral and the principal of and accrued interest on the loan. In the event of the bankruptcy of a loan borrower, the loan to that borrower will be deemed to be secured only to the extent of the value of any underlying collateral at the time of bankruptcy (as determined by the bankruptcy court), and the lien securing the mortgage loan will be subject to the avoidance powers of the bankruptcy trustee or debtor-in-possession to the extent the lien is unenforceable under state law. Foreclosure of a loan can be an expensive and lengthy process and could result in significant losses.

 

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An increase in interest rates may cause a decrease in the demand for certain of our target assets, which could adversely affect our ability to originate or acquire target assets that satisfy our investment objectives to generate income and pay dividends.

Rising interest rates generally reduce the demand for transitional CRE loans due to the higher cost of borrowing. A reduction in the volume of CRE loans originated may affect the volume of certain target assets available to us, which could adversely affect our ability to acquire target assets that satisfy our investment objectives. If rising interest rates cause us to be unable to originate or acquire a sufficient volume of our target assets with a yield that is above our borrowing cost, our ability to satisfy our investment objectives to generate income and pay dividends may be materially and adversely affected.

Prepayment rates may adversely affect the yield on our loans and the value of our portfolio of assets.

The value of our assets may be affected by prepayment rates on loans. As of June 30, 2021, based on unpaid principal balance, 68.8% of our loans were open to repayment by the borrower without penalty. In periods of declining interest rates, prepayment rates on loans generally increase. If interest rates decline at the same time as prepayment rates, the proceeds of such prepayments received during such periods are likely to be reinvested by us in assets yielding less than the yields on the assets that were prepaid. In addition, if we originate or acquire mortgage-related securities or a pool of mortgage securities, we anticipate that the underlying mortgages will prepay at a projected rate generating an expected yield. If we purchase assets at a premium to par value, when borrowers prepay their loans faster than expected, the corresponding prepayments on the asset may reduce the expected yield on such securities because we will have to amortize the related premium on an accelerated basis. Conversely, if we purchase assets at a discount to par value, when borrowers prepay their loans slower than expected, the decrease in corresponding prepayments on the asset may reduce the expected yield on such securities because we will not be able to accrete the related discount as quickly as originally anticipated. In addition, as a result of the risk of prepayment, the market value of the prepaid assets may benefit less than other fixed income securities from declining interest rates.

Prepayment rates on loans may be affected by a number of factors including, but not limited to, the then-current level of interest rates, the availability of mortgage credit, the relative economic vitality of the area in which the related properties are located, the servicing of the loans, possible changes in tax laws, other opportunities for investment, and other economic, social, geographic, demographic and legal factors and other factors beyond our control. Consequently, such prepayment rates cannot be predicted with certainty and no strategy can completely insulate us from prepayment or other such risks.

A prolonged economic slowdown, a lengthy or severe recession or declining real estate values, including as a result of the COVID-19 pandemic, could impair our investments and harm our operations, which could materially and adversely affect us.

We believe the risks associated with our business will be more severe during periods of economic slowdown or recession if these periods are accompanied by declining real estate values, including as a result of the COVID-19 pandemic. Declining real estate values will likely reduce the level of loan originations since borrowers often use appreciation in the value of their existing properties to support the purchase or investment in additional properties. Borrowers may also be less able to pay principal of and interest on our loans if the value of real estate weakens. Further, declining real estate values significantly increase the likelihood that we will incur losses on its loans in the event of default because the value of our collateral may be insufficient to cover its cost on the loan. Any sustained period of increased payment delinquencies, foreclosures or losses could adversely affect our ability to invest in, sell and securitize loans. Any of the foregoing risks could materially and adversely affect us.

 

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We may not have control over certain of our investments.

Our ability to manage our portfolio of investments may be limited by the form in which they are made. In certain situations, we may:

 

   

acquire investments subject to rights of senior creditors and servicers under intercreditor or servicing agreements;

 

   

pledge our investments as collateral for financing arrangements;

 

   

acquire only a minority and/or a non-controlling participation in an underlying investment;

 

   

co-invest with others through partnerships, joint ventures or other entities, thereby acquiring non-controlling interests; or

 

   

rely on independent third-party management or servicing with respect to the management of an asset.

Therefore, we may not be able to exercise control over all aspects of our investments. Such investments may involve risks not present in investments as to which senior creditors, junior creditors or servicers are not involved. Our rights to control the process following a borrower default may be subject to the rights of senior or junior creditors or servicers whose interests may not be aligned with ours.

Future joint venture investments could be adversely affected by our lack of sole decision-making authority, our reliance on joint venture partners’ financial condition and liquidity and disputes between us and our joint venture partners.

We may in the future make investments through joint ventures. Such joint venture investments may involve risks not otherwise present when we originate or acquire investments without partners, including the following:

 

   

we may not have exclusive control over the investment or the joint venture, which may prevent us from taking actions that are in our best interest;

 

   

joint venture agreements often restrict the transfer of a partner’s interest or may otherwise restrict our ability to sell the interest when we desire and/or on advantageous terms;

 

   

any future joint venture agreements may contain buy-sell provisions pursuant to which one partner may initiate procedures requiring the other partner to choose between buying the other partner’s interest or selling its interest to that partner;

 

   

we may not be in a position to exercise sole decision-making authority regarding the investment or joint venture, which could create the potential risk of creating impasses on decisions, such as with respect to acquisitions or dispositions;

 

   

a partner may, at any time, have economic or business interests or goals that are, or that may become, inconsistent with our business interests or goals;

 

   

a partner may be in a position to take action contrary to our instructions, requests, policies or objectives, including our policy with respect to maintaining our qualification as a REIT and our exclusion from registration under the 1940 Act;

 

   

a partner may fail to fund its share of required capital contributions or may become bankrupt, which may mean that we and any other remaining partners generally would remain liable for the joint venture’s liabilities;

 

   

our relationships with our partners are contractual in nature and may be terminated or dissolved under the terms of the applicable joint venture agreements and, in such event, we may not continue to own or operate the interests or investments underlying such relationship or may need to purchase such interests or investments at a premium to the market price to continue ownership;

 

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disputes between us and a partner may result in litigation or arbitration that could increase our expenses and prevent our Manager and our officers and directors from focusing their time and efforts on our business and could result in subjecting the investments owned by the joint venture to additional risk; or

 

   

we may, in certain circumstances, be liable for the actions of a partner, and the activities of a partner could adversely affect our ability to continue to qualify as a REIT or maintain our exclusion from registration under the 1940 Act, even though we do not control the joint venture.

Any of the above may subject us to liabilities in excess of those contemplated and adversely affect the value of our future joint venture investments, which could materially and adversely affect us.

Loans or investments involving international real estate-related assets are subject to special risks that we may not manage effectively, which could have a material adverse effect on us.

We may invest a portion of our capital in assets outside the U.S. if our Manager deems such investments appropriate. To the extent that we invest in non-U.S. real estate-related assets, we may be subject to certain risks associated with international investments generally, including, among others:

 

   

currency exchange matters, including fluctuations in currency exchange rates and costs associated with conversion of investment principal and income from one currency into another;

 

   

financing related to assets located outside the U.S. may be unavailable on favorable terms or at all, or may be subject to non-customary covenants that hinder our operations;

 

   

less developed or efficient financial markets than in the U.S., which may lead to potential price volatility and relative illiquidity;

 

   

the burdens of complying with international regulatory requirements and prohibitions that differ between jurisdictions;

 

   

the existence of tariffs and other trade barriers or restrictions;

 

   

laws affecting foreclosure and debtor and creditor rights;

 

   

changes in laws or clarifications to existing laws that could impact our tax treaty positions, which could adversely impact the returns on our investments;

 

   

a less developed legal or regulatory environment, differences in the legal and regulatory environment or additional legal and regulatory compliance requirements;

 

   

political hostility to investments by foreign investors;

 

   

higher rates of inflation;

 

   

higher transaction costs;

 

   

difficulty enforcing contractual obligations;

 

   

fewer investor protections;

 

   

certain economic and political risks, including potential exchange control regulations and restrictions on any non-U.S. investments and repatriation of profits on investments or of capital invested, the risks of political, economic or social instability, the possibility of expropriation or confiscatory taxation and adverse economic and political developments; and

 

   

potentially adverse tax consequences.

If any of the foregoing risks were to materialize, they could have a material adverse effect on us.

 

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Transactions denominated in foreign currencies subject us to foreign currency risks.

We may acquire assets in transactions denominated in foreign currencies, including in Euros or British pounds sterling, which exposes us to foreign currency risk. As a result, a change in foreign currency exchange rates may have an adverse impact on the valuation of our assets, as well as our income and distributions. Any such changes in foreign currency exchange rates may impact the measurement of such assets or income for the purposes of our REIT tests and may affect the amounts available for payment of dividends on our common stock.

CRE valuation is inherently subjective and uncertain.

The valuation of CRE assets and therefore the valuation of any underlying collateral relating to loans made by us is inherently subjective and uncertain due to, among other factors, the individual nature of each property, its location, the expected future cash flows from that particular property, future market conditions, the impact of the COVID-19 pandemic on the demand for various types of real estate and the valuation methodology adopted. In addition, where we invest in construction loans, initial assessments will assume completion of the project. Additionally, as it relates to the LTV for a loan in our portfolio, values and projected costs should not be assumed to reflect our judgment of current market values or project costs, which may have changed materially since the date of origination including, without limitation, as a result of the COVID-19 pandemic. LTV is updated only in connection with a partial loan paydown and/or release of collateral, material changes to expected project costs, the receipt of a new appraisal (typically in connection with financing or refinancing activity) or a change in our loan commitment. As a result, the valuations of the CRE assets against which we will make loans are subject to a large degree of uncertainty, which has increased due to the COVID-19 pandemic, and are made on the basis of assumptions and methodologies that may not prove to be accurate, particularly in periods of volatility, low transaction flow or restricted debt or equity capital availability in the commercial or residential real estate markets.

The due diligence process that our Manager undertakes in regard to investment opportunities may not reveal all facts that may be relevant in connection with an investment and if our Manager incorrectly evaluates the risks of our investments, we may experience losses, which could materially and adversely affect us.

Before making investments for us, our Manager conducts due diligence that it deems reasonable and appropriate based on the facts and circumstances relevant to each potential investment. When conducting due diligence, our Manager may be required to evaluate important and complex business, financial, tax, accounting, environmental and legal issues, among others. Outside consultants, legal advisors and accountants may be involved in the due diligence process in varying degrees depending on the type of potential investment. Relying on the resources available to it, our Manager will evaluate our potential investments based on criteria it deems appropriate for the relevant investment. Our Manager’s credit underwriting may not prove accurate, as actual results may vary from estimates. If our Manager’s assessment of the asset’s future performance and value is not accurate relative to the price we pay for a particular investment, we may experience losses with respect to such investment. Any such losses could materially and adversely affect us.

Moreover, investment analyses and decisions by our Manager may frequently be required to be undertaken on an expedited basis to take advantage of investment opportunities. In such cases, the information available to our Manager at the time of making an investment decision may be limited, and they may not have access to detailed information regarding such investment. Therefore, we cannot assure you that our Manager will have knowledge of all circumstances that may adversely affect such investment.

In addition to other analytical tools, our Manager will utilize financial models to evaluate investments, the accuracy and effectiveness of which cannot be guaranteed.

In addition to other analytical tools, our Manager utilizes financial models to evaluate investments, the accuracy and effectiveness of which cannot be guaranteed. In all cases, financial models are only estimates of

 

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future results which are based upon assumptions made at the time that the projections are developed. There can be no assurance that our Manager’s projected results will be attained and actual results may vary significantly from the projections. General economic and industry-specific conditions, which are not predictable, can have an adverse impact on the reliability of projections.

We may need to foreclose on certain of the loans we originate or acquire, which could result in losses that materially and adversely affect us.

Properties underlying our CRE loans may be subject to unknown or unquantifiable liabilities that may adversely affect the value of our investments. Such defects or deficiencies may include title defects, title disputes, liens or other encumbrances on the mortgaged properties. The discovery of such unknown defects, deficiencies and liabilities could affect the ability of our borrowers to make payments to us or could affect our ability to take title to and sell the underlying properties, which could materially and adversely affect us.

We may find it necessary or desirable to foreclose on certain of the loans we originate or acquire in order to preserve our investment. Any foreclosure process may be lengthy and expensive. Among the expenses that are likely to occur in any foreclosure would be the incurrence of substantial legal fees and potentially significant transfer taxes. If we foreclose on an asset, we may take title to the property securing that asset subject to any debt and debt service requirements then in effect, which was the case for the foreclosure resulting in our real estate owned investment. As a result, we cannot assure you that the value of the collateral underlying a foreclosed loan at or after the time a foreclosure is contemplated or completed will exceed our investment, including related foreclosure expenses and assumed indebtedness, or that operating cash flows from such investment will exceed debt service requirements, if any. As a result, a contemplated or completed foreclosure could result in significant losses. If we do not or cannot sell a foreclosed property, we would then come to own and operate it as “real estate owned.” Owning and operating real property, such as our real estate owned investment, involves risks that are different (and in many ways more significant) than the risks faced in lending against a CRE asset.

Whether or not we have participated in the negotiation of the terms of any such loans, we cannot assure you as to the adequacy of the protection of the terms of the applicable loan, including the validity or enforceability of the loan and the maintenance of the anticipated priority and perfection of any applicable security interests. Furthermore, claims may be asserted by lenders or borrowers that might interfere with enforcement of our rights. Borrowers may resist foreclosure actions by asserting numerous claims, counterclaims and defenses against us, including, without limitation, lender liability claims and defenses, even when the assertions may have no basis in fact, in an effort to prolong the foreclosure action and seek to force the lender into a modification of the loan or a favorable buyout of the borrower’s position in the loan. In some states, foreclosure actions can take several years or more to litigate. At any time prior to or during the foreclosure proceedings, the borrower may file for bankruptcy, which would have the effect of staying the foreclosure actions and further delaying the foreclosure process and potentially resulting in a reduction or discharge of a borrower’s debt. Foreclosure may create a negative public perception of the related property, resulting in a diminution of its value. Even if we are successful in foreclosing on a loan, the liquidation proceeds upon sale of the underlying real estate may not be sufficient to recover our cost basis in the loan, resulting in a loss to us. Furthermore, any costs or delays involved in the foreclosure of the loan or a liquidation of the underlying property will further reduce the net proceeds and, thus, increase any such loss. The incurrence of any such losses could materially and adversely affect us.

We may be subject to lender liability claims, and if we are held liable under such claims, we could be subject to losses.

In recent years, a number of judicial decisions have upheld the right of borrowers to sue lending institutions on the basis of various evolving legal theories, collectively termed “lender liability.” Generally, lender liability is founded on the premise that a lender has either violated a duty, whether implied or contractual, of good faith and fair dealing owed

 

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to the borrower or has assumed a degree of control over the borrower resulting in the creation of a fiduciary duty owed to the borrower or its other creditors or stockholders. We cannot assure prospective investors that such claims will not arise or that we will not be subject to significant liability and losses if a claim of this type did arise.

If the loans that we originate or acquire do not comply with applicable laws, we may be subject to penalties, which could materially and adversely affect us.

Loans that we originate or acquire may be directly or indirectly subject to U.S. federal, state or local governmental laws. Real estate lenders and borrowers may be responsible for compliance with a wide range of laws intended to protect the public interest, including, without limitation, the Truth in Lending, Equal Credit Opportunity, Fair Housing and Americans with Disabilities Acts and local zoning laws (including, but not limited to, zoning laws that allow permitted non-conforming uses). If we or any other person fails to comply with such laws in relation to a loan that we have originated or acquired, legal penalties may be imposed, which could materially and adversely affect us. Additionally, jurisdictions with “one action,” “security first” and/or “antideficiency rules” may limit our ability to foreclose on a real property or to realize on obligations secured by a real property. In the future, new laws may be enacted or imposed by U.S. federal, state or local governmental entities, and such laws could have a material adverse effect on us.

We may not control the servicing of mortgage loans in which we invest and, in such cases, the special servicer may take actions that could adversely affect our interests.

Third parties service certain of our investments, and their responsibilities will include all services and duties customary to servicing and sub-servicing mortgage loans in a diligent manner consistent with prevailing mortgage loan servicing standards, such as the collection and remittance of payments on our mortgage loans, administration of mortgage escrow accounts, collection of insurance claims and foreclosure. Should a servicer experience financial or operational difficulties, it may not be able to perform these services or these services may be curtailed, including any obligation to advance payments of amounts due from delinquent loan obligors. For example, typically a servicer’s obligation to make advances on behalf of a delinquent loan obligor is limited to the extent that it does not expect to recover the advances from the ultimate disposition of the collateral pledged to secure the loan. In addition, as with any external service provider, we are subject to the risks associated with inadequate or untimely services for other reasons such as fraud, negligence, errors, miscalculations or other reasons. The ability of a servicer to effectively service our portfolio of mortgage loans may be critical to our success. The failure of a servicer to effectively service our portfolio of mortgage loans could materially and adversely affect us.

Liability relating to environmental matters may impact the value of our loans or of properties that we may acquire upon foreclosure of the properties underlying our investments.

To the extent we take title to any of the properties underlying our investments, we may be subject to environmental liabilities arising from the foreclosed properties. Under various U.S. federal, state and local laws, an owner or operator of real property may become liable for the costs of removal of certain hazardous substances released on its property. These laws often impose liability without regard to whether the owner or operator knew of, or was responsible for, the release of the hazardous substances. The presence of hazardous substances on a property may adversely affect our ability to sell the property, and we may incur substantial remediation costs. As a result, the discovery of material environmental liabilities attached to those properties could materially and adversely affect us.

In addition, the presence of hazardous substances may adversely affect an owner’s ability to sell real estate or borrow using real estate as collateral. To the extent that an owner of a property underlying one of our loans becomes liable for removal costs, the ability of the owner to make payments to us may be reduced, which in turn may adversely affect the value of the relevant loan held by us and could materially and adversely affect us.

 

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Climate change has the potential to impact properties.

Currently, it is not possible to predict how legislation or new regulations that may be adopted to address greenhouse gas, or GHG, emissions will impact CRE properties. However, any such future laws and regulations imposing reporting obligations or limitations on GHG emissions could require the owners of properties to make significant expenditures to attain and maintain compliance. The impact of climate change could have a material adverse effect on the properties underlying our investments.

Risks Related to Our Common Stock

There has been no public market for our common stock prior to this offering and an active trading market may not develop or be sustained following this offering, which may negatively affect the liquidity and market price of our common stock and make it difficult for investors to sell their shares on favorable terms when desired.

The shares of our common stock being sold in this offering are newly issued securities for which there is no established trading market. We intend to apply to list our common stock on the NYSE under the trading symbol “CMTG.” There can be no assurance that an active trading market for our common stock will develop, or if one develops, be maintained. Accordingly, no assurance can be given as to the ability of our stockholders to sell their common stock when desired or as to the price that our stockholders may obtain for their common stock.

The initial public offering price per share of our common stock offered under this prospectus may not accurately reflect the value of your investment.

Prior to this offering, there has been no market for our common stock. The initial public offering price per share of our common stock offered by this prospectus was negotiated among us and the underwriters, and therefore may not accurately reflect the value of your investment. Factors considered in determining the price of our common stock include:

 

   

the valuation multiples of publicly-traded companies that the representatives for the underwriters believe to be comparable to us;

 

   

our financial information;

 

   

the history of, and the prospects for, our company and the industry in which we compete;

 

   

an assessment of our Manager and its affiliates, their past and present operations, and the prospects for, and timing of, our future performance and condition;

 

   

the above factors in relation to market values and various valuation measures of other companies engaged in activities similar to ours; and

 

   

other factors deemed relevant by the underwriters and us.

You will experience immediate and dilution from the purchase of our common stock in this offering.

The initial public offering price per share of our common stock is higher than the pro forma as adjusted net tangible book value per share of our common stock outstanding as of the date of this prospectus. Accordingly, if you purchase common stock in this offering, you will experience immediate dilution of approximately $         per share of our common stock, based upon an assumed initial public offering price of $         per share, which is the mid-point of the price range indicated on the cover page of this prospectus, and assuming no exercise by the underwriters of their option to purchase additional shares of our common stock. This means that investors that purchase shares of our common stock in this offering will pay a price per share that exceeds the pro forma as adjusted net tangible book value per share of our common stock. See “Dilution.”

 

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The United Kingdom’s exit from the European Union could materially and adversely affect us.

The United Kingdom has withdrawn from the European Union (an event known as Brexit). The United Kingdom and the European Union have entered into a trade and cooperation agreement governing certain aspects of their future relationship. The agreement addresses trade, economic arrangements, law enforcement, judicial cooperation and a governance framework including procedures for dispute resolution, among other things. However, significant political and economic uncertainty remains about how the precise terms of the relationship between the parties will differ from the terms before Brexit. These developments, or the perception that any related developments could occur, have had and may continue to have a material adverse effect on global economic conditions and financial markets, and could significantly reduce global market liquidity and restrict the ability of key market participants to operate in certain financial markets. Since we rely on access to the financial markets in order to refinance our debt liabilities and gain access to new financing, ongoing political uncertainty and any worsening of the economic environment may reduce our ability to refinance our existing and future liabilities or gain access to new financing, in each case on favorable terms or at all.

We have not established a minimum dividend payment level, and we may be unable to generate sufficient cash flows from our operations to pay dividends to our stockholders at any time in the future at a particular level, or at all, which could materially and adversely affect us.

We are generally required to annually distribute to our stockholders at least 90% of our REIT taxable income, determined without regard to the deduction for dividends paid and excluding net capital gains, for us to qualify as a REIT, which requirement we currently intend to satisfy through quarterly distributions of all or substantially all of our REIT taxable income in such year, subject to certain adjustments. Our ability to pay dividends may be adversely affected by a number of factors, including due to the COVID-19 pandemic and the risk factors described in this prospectus. Any distributions we make to our stockholders will be at the discretion of our Board and will depend upon our historical and anticipated REIT taxable income, results of operations, financial condition, liquidity, financing agreements (including covenants), maintenance of our REIT qualification, our exclusion from registration under the 1940 Act, applicable provisions of the MGCL and such other factors as our Board deems relevant. We believe that a change in any one of the following factors could adversely impair our ability to pay dividends to our stockholders:

 

   

the profitability of the investment of the net proceeds from this offering;

 

   

our ability to make investments that generate attractive risk-adjusted returns;

 

   

margin calls, obligations to accelerate repayment of financings or other expenses that reduce our cash flow;

 

   

defaults in our portfolio or decreases in the value of our portfolio, including as a result of the COVID-19 pandemic; and

 

   

the fact that anticipated operating expense levels may not prove accurate, as actual results may vary from estimates.

As a result, no assurance can be given that we will be able to pay dividends to our stockholders at any time in the future or that the level of any distributions we do make to our stockholders will achieve our targeted yield or increase or even be maintained over time, any of which could materially and adversely affect us.

We may use a portion of the net proceeds from this offering to make quarterly distributions, which would, among other things, reduce our cash available for investing.

Prior to the time we have fully invested the net proceeds from this offering, we may fund our quarterly distributions out of such net proceeds, which would reduce the amount of cash we have available for investing and other purposes. The use of these net proceeds for distributions could be dilutive to our financial results. In addition, funding our distributions from our net proceeds may constitute a return of capital to our investors, which would have the effect of reducing each stockholder’s basis in its shares of our common stock.

 

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Investing in our common stock may involve a high degree of risk.

The investments that we make in accordance with our investment objectives may result in a high amount of risk when compared to alternative investment options and volatility or loss of principal. Our investments may be highly speculative and aggressive, and therefore an investment in our common stock may not be suitable for someone with lower risk tolerance.

Because a limited number of stockholders, including affiliates of our Manager and members of our Sponsor’s senior management team and principals, own a substantial number of our shares, they may make decisions or take actions that may be detrimental to your interests.

As of the date of this prospectus, our Sponsor’s senior management and principals own approximately     % of our common stock and, on a pro forma as adjusted basis (assuming the number of shares offered by us as set forth on the cover page of this prospectus remains the same), will own approximately     % of our common stock. By virtue of their voting power, these stockholders have the power to significantly influence our business and affairs and are able to influence the outcome of matters required to be submitted to stockholders for approval, including the election of our directors, amendments to our charter, mergers or sales of assets. The influence exerted by these stockholders over our business and affairs might not be consistent with the interests of some or all of our stockholders. In addition, the concentration of equity ownership may have the effect of delaying, deterring or preventing a change in control of our company, including transactions which would be in the best interests of our stockholders and would result in receipt of a premium to the price of shares of our common stock and therefore such concentration might negatively affect the market price of shares of our common stock.

If we or our existing stockholders sell additional shares of our common stock after this offering, the market price of our common stock could decline.

The sale of substantial amounts of shares of our common stock in the public market, or the perception that such sales could occur, could harm the prevailing market price of shares of our common stock. These sales, or the possibility that these sales may occur, also might make it more difficult for us to sell equity securities in the future at a time and at a price that we deem appropriate.

Upon completion of this offering, we will have a total of                  shares of our common stock outstanding (or                  shares if the underwriters exercise in full their option to purchase                  additional shares). Of the outstanding                  shares, the                  shares sold in this offering (or                  shares if the underwriters exercise their option to purchase additional shares) will be freely tradable without restriction or further registration under the Securities Act (except for shares of our common stock purchased in the directed share program, which are subject to a 180-day lock-up period), subject to the limitations on ownership and transfer set forth in our charter, and except that any shares held by our affiliates, as that term is defined under Rule 144 of the Securities Act, may be sold only in compliance with the limitations described in “Shares Eligible for Future Sale.”

The remaining outstanding                  shares of common stock held by our existing stockholders after this offering will be subject to certain restrictions on resale. We, our Manager, our executive officers, directors, director nominees, our existing stockholders and certain other persons buying shares of our common stock through the directed share program will be subject to lock-up agreements with the underwriters that, subject to certain customary exceptions, restrict the sale of the shares of our common stock held by them for 180 days following the date of this prospectus. The representatives of the underwriters may, in their sole discretion and without notice, release all or any portion of the shares of common stock subject to lock-up agreements. See “Underwriting” for a description of these lock-up agreements.

Upon the expiration of the lock-up agreements described above, all of such                  shares will be eligible for resale in a public market, subject, in the case of shares held by our affiliates, to volume, manner of sale and

 

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other limitations under Rule 144. However, commencing 181 days following the date of this prospectus, certain holders of our common stock will have the right, subject to certain exceptions and conditions, to require us to register the resale of their shares of common stock under the Securities Act, and they will have the right to participate in future registrations of securities by us. Upon completion of this offering, the shares covered by registration rights would represent approximately     % of our total common stock outstanding on a pro forma basis giving effect to this offering (or     %, if the underwriters exercise in full their option to purchase additional shares). Registration of any of these outstanding shares of common stock would result in such shares becoming freely tradable without compliance with Rule 144 upon effectiveness of the registration statement. See “Shares Eligible for Future Sale.”

We intend to file a registration statement on Form S-8 under the Securities Act to register shares of our common stock subject to issuance under the 2016 Plan. We expect to file this registration statement as promptly as possible after the completion of this offering. Shares covered by this registration statement will be eligible for sale in the public market, upon the expiration or release from the terms of the lock-up agreements or other substantially similar contractual restrictions, as applicable, and subject to the Rule 144 limitations applicable to affiliates and vesting of such shares, as applicable.

As restrictions on resale end, the market price of shares of our common stock could drop significantly if the holders of these restricted shares sell them or are perceived by the market as intending to sell them. These factors could also make it more difficult for us to raise additional funds through future offerings of shares of our common stock or other equity securities.

Purchases of our common stock by                      for us under the 10b5-1 Purchase Plan may result in the market price of our common stock being higher than the price that otherwise might exist in the open market absent such a plan.

We have entered into the 10b5-1 Purchase Plan with                     , one of the underwriters in this offering. Pursuant to the 10b5-1 Purchase Plan,                     , as our agent, will buy in the open market up to $         million in shares of our common stock in the aggregate during the period beginning four full calendar weeks following the completion of this offering and ending 12 months thereafter or, if sooner, the date on which all the capital committed to the 10b5-1 Purchase Plan has been exhausted. See “Certain Relationships and Related Transactions—10b5-1 Purchase Plan” for additional details regarding the 10b5-1 Purchase Plan. Whether purchases will be made under the 10b5-1 Purchase Plan and how much will be purchased at any time is uncertain, dependent on prevailing market prices and trading volumes, all of which we cannot predict. These activities may have the effect of maintaining the market price of our common stock or retarding a decline in the market price of the common stock, and, as a result, the market price of our common stock may be higher than the price that otherwise might exist in the open market absent such a plan.

Risks Related to Our Organization and Structure

Stockholders have limited control over changes in our policies and operations.

Our Board determines our major policies, including with regard to investments, financing, equity and debt capitalization, REIT qualification, exclusion from registration under the 1940 Act and distributions, among others. Our Board may amend or revise these and other policies without a vote of the stockholders. Under our charter and the MGCL, our stockholders generally have a right to vote only on the following matters:

 

   

the election or removal of directors;

 

   

the amendment of our charter, except that our Board may amend our charter without stockholder approval to:

 

   

change our name;

 

   

change the name or other designation or the par value of any class or series of stock and the aggregate par value of our stock;

 

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increase or decrease the aggregate number of shares of stock that we have the authority to issue;

 

   

increase or decrease the number of our shares of any class or series of stock that we have the authority to issue; and

 

   

effect certain reverse stock splits;

 

   

our liquidation and dissolution; and

 

   

our being a party to certain mergers, conversions, consolidation, sale or other disposition of all or substantially all of our assets or statutory share exchange.

All other matters are subject to the discretion of our Board.

Avoiding the need to register under the 1940 Act imposes significant limits on our operations. Your investment return may be reduced if we are required to register as an investment company under the 1940 Act.

We intend to conduct our operations so that neither we nor any of our subsidiaries are required to register as an investment company under the 1940 Act. Section 3(a)(1)(A) of the 1940 Act defines an investment company as any issuer that is, or holds itself out as being, engaged primarily, or proposes to engage primarily, in the business of investing, reinvesting or trading in securities. Section 3(a)(1)(C) of the 1940 Act defines an investment company as any issuer that is engaged or proposes to engage in the business of investing, reinvesting, owning, holding or trading in securities, and owns or proposes to acquire investment securities having a value exceeding 40% of the value of such issuer’s total assets (exclusive of U.S. government securities and cash items) on an unconsolidated basis, which we refer to as the 40% test. Excluded from the term “investment securities,” among other things, are U.S. government securities and securities issued by majority-owned subsidiaries that are not themselves investment companies and are not relying on the exception from the definition of “investment company” set forth in Section 3(c)(1) or Section 3(c)(7) of the 1940 Act.

We are organized as a holding company and conduct our businesses primarily through our subsidiaries. We intend to conduct our operations so that we comply with the 40% test. The securities issued by any wholly-owned or majority-owned subsidiaries that we may form in the future that are excepted from the definition of “investment company” based on Section 3(c)(1) or Section 3(c)(7) of the 1940 Act, together with any other investment securities we may own, may not have a value in excess of 40% of the value of our total assets (exclusive of U.S. government securities and cash items) on an unconsolidated basis. We will monitor our holdings to ensure continuing and ongoing compliance with this test. In addition, we believe that we will not be considered an investment company under Section 3(a)(1)(A) of the 1940 Act because we will not engage primarily or hold ourselves out as being engaged primarily in the business of investing, reinvesting or trading in securities. Rather, through our subsidiaries, we are primarily engaged in non-investment company businesses related to real estate.

The determination of whether an entity is a majority-owned subsidiary of our company is made by us. The 1940 Act defines a majority-owned subsidiary of a person as a company 50% or more of the outstanding voting securities of which are owned by such person, or by another company which is a majority-owned subsidiary of such person. The 1940 Act further defines voting securities as any security presently entitling the owner or holder thereof to vote for the election of directors of a company. Generally, we treat companies in which we own at least a majority of the outstanding voting securities as majority-owned subsidiaries for purposes of the 40% test. We have not requested that the SEC or its staff approve our treatment of any company as a majority-owned subsidiary, and neither the SEC nor its staff has done so. If the SEC or its staff were to disagree with our treatment of one or more companies as majority-owned subsidiaries, we would need to adjust our strategy and our assets in order to continue to pass the 40% test. Any such adjustment in our strategy or assets could have a material adverse effect on us.

 

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We expect certain of our subsidiaries to qualify for the exclusion from the definition of “investment company” pursuant to Section 3(c)(5)(C) of the 1940 Act, which is available for certain entities “primarily engaged in the business of purchasing or otherwise acquiring mortgages and other liens on and interests in real estate.” To qualify for the exclusion pursuant to Section 3(c)(5)(C), based on positions set forth by the staff of the SEC, each such subsidiary generally is required to hold (i) at least 55% of its assets in qualifying real estate assets and (ii) at least 80% of its assets in qualifying real estate assets and real estate-related assets. For our majority- or wholly-owned subsidiaries that will maintain this exclusion or another exclusion or exception under the 1940 Act (other than Section 3(c)(1) or Section 3(c)(7) thereof), our interests in these subsidiaries will not constitute “investment securities.” We expect each of our subsidiaries relying on Section 3(c)(5)(C) to rely on guidance published by the SEC staff or on our analyses of guidance published with respect to other types of assets to determine which assets are qualifying real estate assets and real estate-related assets.

Any change in the interpretive positions of the SEC or its staff with respect to Section 3(c)(5)(C) of the 1940 Act could have a material adverse effect on us.

In general, the SEC staff takes the position that a qualifying real estate asset is an asset that represents an actual interest in real estate or is a loan or lien fully secured by real estate. The SEC staff also takes the position that an asset that can be viewed as being the functional equivalent of, and provide its holder with the same economic experience as, a direct investment in real estate (or in a loan or lien fully secured by real estate) may be considered to be a qualifying real estate asset for purposes of Section 3(c)(5)(C). On the other hand, the SEC staff generally takes the position that an asset is not a qualifying real estate asset for purposes of Section 3(c)(5)(C) if it is an interest in the nature of a security in another person engaged in the real estate business (e.g., fractionalized interests in individual or pooled mortgages).

The interpretive positions of the SEC or its staff may change. For example, on August 31, 2011, the SEC issued a concept release and request for comments regarding the exclusion provided by Section 3(c)(5)(C) (Release No. IC-29778) in which it contemplated the possibility of issuing new rules or providing new interpretations of the exemption that might, among other things, define the phrase “liens on and other interests in real estate” or consider sources of income in determining a company’s “primary business.” To the extent the SEC staff publishes new or different guidance with respect to these matters, we may be required to adjust our strategy or assets accordingly. There can be no assurance that we will be able to maintain this exclusion from registration for certain of our subsidiaries. In addition, we may be limited in our ability to make certain investments, and these limitations could result in a subsidiary holding assets we might wish to sell or selling assets we might wish to hold.

As a consequence of our seeking to avoid the need to register under the 1940 Act on an ongoing basis, we and/or our subsidiaries may be restricted from making certain investments or may structure investments in a manner that would be less advantageous to us than would be the case in the absence of such requirements. For example, these restrictions will limit the ability of our subsidiaries to invest directly in CMBS that represent less than the entire ownership in a pool of mortgage loans, debt and equity tranches of securitizations and certain asset-backed securities, and equity interests in real estate companies or in assets not related to real estate. Further, the mortgage-related investments that we acquire are limited by the provisions of the 1940 Act and the rules and regulations promulgated thereunder. We also may be required at times to adopt less efficient methods of financing certain of our mortgage-related investments, and we may be precluded from acquiring certain types of mortgage-related investments. Additionally, Section 3(c)(5)(C) of the 1940 Act prohibits us from issuing redeemable securities. If we fail to qualify for an exemption from registration as an investment company under the 1940 Act or an exclusion from the definition of an investment company, our ability to use leverage would be substantially reduced, and we would not be able to conduct our business as described in this prospectus.

No assurance can be given that the SEC staff will concur with our classification of our or our subsidiaries’ assets or that the SEC staff will not, in the future, issue further guidance that may require us to reclassify those assets for purposes of qualifying for an exclusion or exemption from registration under the 1940 Act. To the extent that the SEC staff provides more specific guidance regarding any of the matters bearing upon the

 

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definition of “investment company” and the exclusions or exceptions to that definition, we may be required to adjust our investment strategies accordingly.

Additional guidance from the SEC staff could provide additional flexibility to us, or it could further inhibit our ability to pursue the investment strategies we have chosen. If the SEC or its staff take a position contrary to our view with respect to the characterization of any of the assets or securities we invest in, we may be deemed an unregistered investment company. Therefore, in order not to be required to register as an investment company, we may need to dispose of a significant portion of our assets or securities or acquire significant other additional assets that may have lower returns than our expected portfolio, or we may need to modify our business plan to register as an investment company, which would result in significantly increased operating expenses and would likely entail significantly reducing our indebtedness, which could also require us to sell a significant portion of our assets, which would likely reduce our profitability. We cannot assure you that we would be able to complete these dispositions or acquisitions of assets, or deleveraging, on favorable terms, or at all. Consequently, any modification of our business plan could have a material adverse effect on us.

There can be no assurance that we and our subsidiaries will be able to successfully avoid operating as an unregistered investment company. If the SEC determined that we were an unregistered investment company, there would be a risk that we would be subject to monetary penalties and injunctive relief in an action brought by the SEC, that we would potentially be unable to enforce contracts with third parties and that third parties could seek to obtain rescission of transactions undertaken during the period for which it was established that we were an unregistered investment company. Any of these results would have a material adverse effect on us. Since we will not be subject to the 1940 Act, we will not be subject to its substantive provisions, including but not limited to, provisions requiring diversification of investments, limiting leverage and restricting investments in illiquid assets.

Rapid changes in the values of our other real estate-related investments may make it more difficult for us to maintain our qualification as a REIT or exclusion from registration under the 1940 Act.

If the market value or income potential of real estate-related investments declines as a result of increased interest rates, prepayment rates or other factors, we may need to increase our real estate investments and income and/or liquidate our non-qualifying assets in order to maintain our REIT qualification or exclusion from registration under the 1940 Act. If the decline in real estate asset values and/or income occurs quickly, this may be especially difficult to accomplish. This difficulty may be exacerbated by the illiquid nature of any non-qualifying assets that we may own. We may have to make investment decisions that we otherwise would not make absent the REIT and 1940 Act considerations, which could materially and adversely affect us.

Our rights and the rights of our stockholders to recover on claims against our directors and officers are limited, which could reduce your and our recovery against them if they negligently cause us to incur losses.

Maryland law permits us to include in our charter a provision limiting the liability of our directors and officers to us and our stockholders for money damages, except for liability resulting from (a) actual receipt of an improper benefit or profit in money, property or services or (b) active and deliberate dishonesty established by a final judgment and which is material to the cause of action. Our charter contains a provision which eliminates directors’ and officers’ liability to the maximum extent permitted by Maryland law.

In addition our charter obligates us, to the maximum extent permitted by Maryland law in effect from time to time, to indemnify and, without requiring a preliminary determination of the ultimate entitlement to indemnification, pay or reimburse reasonable expenses in advance of final disposition of a proceeding to: (a) any present or former director or officer who is made or threatened to be made a party to, or witness in, the proceeding by reason of his or her service in that capacity; or (b) any individual who, while a director or officer of the Company and at our request, serves or has served as a director, officer, partner, member, manager, trustee, employee or agent of another corporation, real estate investment trust, partnership, limited liability company, joint venture, trust, employee benefit plan or other enterprise and who is made or threatened to be made a party

 

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to, or witness in, the proceeding by reason of his or her service in that capacity. For details regarding the circumstances under which we are required or authorized to indemnify and to advance expenses to our directors, officers or our Manager, see “Our Manager and the Management Agreement—Management Agreement—Liability and Indemnification.”

We also are permitted to purchase and maintain insurance or provide similar protection on behalf of any directors, officers, employees and agents, including our Manager and its affiliates, against any liability asserted which was incurred in any such capacity with us or arising out of that status. This may result in us having to expend significant funds, which will reduce the available cash for distribution to our stockholders.

Our charter contains provisions that make removal of our directors difficult, which could make it difficult for our stockholders to effect changes to our management or ownership.

Our charter provides that, subject to the rights of holders of one or more classes or series of preferred stock to elect or remove one or more directors, directors may be removed from office with or without cause, but only upon the affirmative vote of stockholders entitled to cast a majority of all of the votes entitled to be cast generally in the election of directors; provided that consent of Almanac shall also be required to remove any director that is a designee of Almanac. Vacancies on our Board, whether resulting from an increase in the number of directors or otherwise, will be filled by a majority vote of the remaining directors; provided that for so long as Almanac directly or indirectly owns 4.9% or more of the outstanding shares of our common stock and for so long as Fuyou is an affiliate of Ping An and Fuyou, together with other affiliates of Ping An, owns 4.9% or more of the outstanding shares of common stock, respectively, if a vacancy on our Board occurs at any time with respect to any director that was designated for nomination by either Almanac or Fuyou, then a new designee of Almanac or Fuyou, as the case may be, will be nominated for election to serve, and will be elected, as a new director in accordance with our organizational documents. These requirements make it more difficult to change our management by removing and replacing directors and may prevent a change in control of the Company that is in the best interests of our stockholders.

Our charter does not permit any person to own more than (a) 9.6%, in value or in number of shares, whichever is more restrictive, of the aggregate of the outstanding shares of our common stock, or (b) 9.6% in value of the aggregate of the outstanding shares of our capital stock, and any attempt to acquire shares of our common stock or any of our capital stock in excess of these ownership limits will not be effective without a prior exemption by our Board.

For us to qualify as a REIT under the Code, not more than 50% of the value of our outstanding stock may be owned directly or indirectly, by five or fewer individuals during the last half of a taxable year. “Individuals” for this purpose include natural persons, private foundations, some employee benefit plans and trusts, and some charitable trusts. For the purpose of preserving our qualification as a REIT for federal income tax purposes, our charter prohibits beneficial or constructive ownership by any person of more than a certain percentage, currently 9.6%, in value or in number of shares, whichever is more restrictive, of the aggregate of the outstanding shares of our common stock or more than a certain percentage, currently 9.6%, in value of the aggregate of the outstanding shares of our capital stock.

The constructive ownership rules are complex and may cause shares of the outstanding common stock owned by a group of related individuals or entities to be deemed to be constructively owned by another individual or entity. As a result, the acquisition of less than 9.6% of our outstanding shares of common stock or our capital stock by an individual or entity could cause another individual or entity to own constructively in excess of 9.6% of our outstanding shares of common stock or our capital stock, respectively, and thus violate one of the ownership limits. Any attempt to own or transfer shares of our common stock in violation of the ownership limits without the consent of our Board will result in either (a) the transfer of the shares in question to a trust for the exclusive benefit of a charitable beneficiary, or (b) the transfer being void, with the ultimate determination depending on the circumstances surrounding the transfer in question. In either case, the purported transferee shall acquire no rights in any shares purported to be transferred in excess of the ownership limits.

 

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The ownership limits may have the effect of precluding a change in control of us by a third-party, even if the change in control would be in the best interests of our stockholders or would result in receipt of a premium to the price of shares of our common stock (and even if the change in control would not reasonably jeopardize our REIT status). The exemptions to the ownership limit granted to date may limit our Board’s power to increase the ownership limit or grant further exemptions in the future.

Our bylaws designate certain Maryland courts as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers or employees.

Our bylaws provide that, unless we consent in writing to the selection of an alternative forum, the Circuit Court for Baltimore City, Maryland, or, if that Court does not have jurisdiction, the U.S. District Court for the District of Maryland, Northern Division, shall be the sole and exclusive forum for the following: any derivative action or proceeding brought on our behalf, other than actions arising under U.S. federal securities laws; and any Internal Corporate Claim, as such term is defined in the MGCL, or any successor provision thereof, including, without limitation (i) any action asserting a claim of breach of any duty owed by any of our present or former directors, officers or other employees to the corporation or to our stockholders; (ii) any action asserting a claim against us or any of our present or former directors, officers or other employees arising pursuant to any provision of the MGCL or our charter or bylaws; or (iii) any action asserting a claim against us or any of our present or former directors, officers or other employees that is governed by the internal affairs doctrine. This choice of forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that the stockholder believes is favorable for disputes with us or our directors, officers or other employees, which may discourage lawsuits against us and our directors, officers and employees. Alternatively, if a court were to find these provisions of our bylaws inapplicable to, or unenforceable in respect of, one or more of the specified types of actions or proceedings, we may incur additional costs associated with resolving these matters in other jurisdictions, which could materially and adversely affect us.

In addition, our bylaws provide that, unless we consent in writing to the selection of an alternative forum, the federal district courts of the United States of America shall, to the fullest extent permitted by law, be the sole and exclusive forum for the resolution of any claim arising under the Securities Act. Although our bylaws contain the choice of forum provisions described above, it is possible that a court could rule that such provisions are inapplicable for a particular claim or action or that such provisions are unenforceable. For example, under the Securities Act, federal courts have concurrent jurisdiction over all suits brought to enforce any duty or liability created by the Securities Act, and investors cannot waive compliance with the federal securities laws and the rules and regulations thereunder. In addition, the exclusive forum provisions described above do not apply to any actions brought under the Exchange Act.

Some provisions of our charter and bylaws and Maryland law may delay, deter or prevent takeover attempts, which may limit the opportunity of our stockholders to sell their shares at a favorable price.

Some of the provisions of Maryland law and our charter and bylaws discussed below could make it more difficult for a third-party to acquire us, even if doing so might be beneficial to our stockholders by providing them with the opportunity to sell their shares at a premium to the then current market price.

Issuance of Stock Without Stockholder Approval. Our charter authorizes our Board, without stockholder approval, to authorize the issuance of up to 500,000,000 shares of common stock, $0.01 par value per share, and up to 10,000,000 shares of preferred stock, $0.01 par value per share, of which 125 shares are classified as 12.5% Series A Redeemable Cumulative Preferred Stock. Our charter authorizes a majority of our entire Board, without stockholder approval, to amend our charter from time to time to increase or decrease the aggregate number of authorized shares of stock or the number of shares of stock of any class or series that we have authority to issue. In addition, our Board, without stockholder approval, may reclassify any unissued shares of our common stock or preferred stock and may set the preferences, conversions or other rights, voting powers and other terms of the

 

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classified or reclassified shares. The issuance of any preferred stock could materially and adversely affect the rights of holders of our common stock and, therefore, could reduce the market price of our common stock. In addition, specific rights granted to future holders of our preferred stock could be used to restrict our ability to merge with, or sell assets to, a third-party. The power of our Board to cause us to issue preferred stock could, in certain circumstances, make it more difficult, delay, deter, prevent or make it more costly to acquire or effect a change in control that might involve a premium price for shares of our common stock or otherwise be in the best interest of our stockholders.

Advance Notice Bylaw. Our bylaws contain advance notice procedures for the introduction by a stockholder of new business by a stockholder. These provisions could, in certain circumstances, discourage proxy contests and make it more difficult for you and other stockholders to elect stockholder-nominated directors and to propose and, consequently, approve stockholder proposals opposed by management.

Certain Provisions of Maryland Law. Certain provisions of the MGCL may have the effect of inhibiting a third-party from acquiring us or of impeding a change of control under circumstances that otherwise could provide our stockholders with the opportunity to realize a premium over the then-prevailing market price of the shares, including:

 

   

“business combination” provisions that, subject to limitations, prohibit certain business combinations between an “interested stockholder” (defined generally as any person who beneficially owns 10% or more of the voting power of our outstanding shares of voting stock or an affiliate or associate of the corporation who, at any time within the two-year period immediately prior to the date in question, was the beneficial owner of 10% or more of the voting power of the then outstanding stock of the corporation) or an affiliate of any interested stockholder and us for five years after the most recent date on which the stockholder becomes an interested stockholder, and thereafter imposes two super-majority stockholder voting requirements on these combinations; and

 

   

“control share” provisions that provide that holders of “control shares” of our company (defined as voting shares of stock that, if aggregated with all other shares of stock owned or controlled by the acquirer or in respect of which the acquirer is able to exercise or direct the exercise of voting power (except solely by virtue of a revocable proxy), would entitle the acquirer to exercise one of three increasing ranges of voting power in electing directors) acquired in a “control share acquisition” (defined as the direct or indirect acquisition of issued and outstanding “control shares,” subject to certain exceptions) have no voting rights except to the extent approved by stockholders by the affirmative vote of at least two-thirds of all of the votes entitled to be cast on the matter, excluding all interested shares.

Pursuant to the Maryland Business Combination Act, our Board adopted a resolution exempting any business combination with any other person, provided that the business combination is first approved by the Board. Consequently, the five-year prohibition and the supermajority vote requirements do not apply to business combinations between us and any person, provided that the business combination is first approved by the Board. As a result, any person may be able to enter into business combinations with us that may not be in the best interest of our stockholders, without compliance with the supermajority vote requirements and the other provisions of the statute.

As permitted by the MGCL, our bylaws contain a provision exempting from the control share acquisition statute any and all acquisitions of our stock. There can be no assurance that this provision will not be amended or eliminated at any time in the future.

Additionally, Title 3, Subtitle 8 of the MGCL permits our Board, without stockholder approval and regardless of what currently is provided in our charter or bylaws, to implement certain takeover defenses, such as a classified board, some of which we do not have.

 

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U.S. Federal Income Tax Risks

Failure to maintain our qualification as a REIT would materially and adversely affect us and the market price of our common stock.

We have elected to be taxed as a REIT commencing with our taxable year ended December 31, 2015. We believe that we have been organized and have operated in conformity with the requirements for qualification and taxation as a REIT under the Code, and that our intended manner of operation will enable us to meet the requirements for qualification and taxation as a REIT. We have not requested and do not plan to request a ruling from the IRS that we qualify as a REIT and cannot assure you that we so qualify. If we fail to qualify as a REIT or lose our REIT qualification, we will face serious tax consequences that would substantially reduce the funds available for distribution to our stockholders for each of the years involved because:

 

   

we would not be allowed a deduction for distributions to our stockholders in computing our REIT taxable income and would be subject to regular U.S. federal corporate income tax;

 

   

we also could be subject to increased state and local taxes; and

 

   

unless we are entitled to relief under applicable statutory provisions, we could not elect to be taxed as a REIT for four taxable years following the year during which we were disqualified.

Any such corporate tax liability could be substantial and would reduce our cash available for, among other things, our operations and distributions to our stockholders. In addition, if we fail to maintain our qualification as a REIT, we will not be required to pay dividends to our stockholders. As a result of all these factors, our failure to maintain our qualification as a REIT also could impair our ability to expand our business and raise capital, and would materially and adversely affect us and the market price of our common stock. Furthermore, we have from time to time owned direct or indirect interests in one or more entities that elected to be taxed as REITs under the Code. We refer to each such entity as a Subsidiary REIT. If a Subsidiary REIT was to fail to qualify as a REIT, then (i) the Subsidiary REIT would face the tax consequences described above, and (ii) the Subsidiary REIT’s failure to qualify as a REIT could have an adverse effect on our ability to comply with the REIT income and asset tests, and thus could impair our ability to qualify as a REIT unless we could avail ourselves of certain relief provisions.

Qualification as a REIT involves the application of highly technical and complex provisions of the Code for which there are only limited judicial and administrative interpretations.

The determination of various factual matters and circumstances not entirely within our control may affect our ability to maintain our qualification as a REIT. In order to maintain our qualification as a REIT, we must satisfy a number of requirements, including requirements regarding the ownership of our stock, requirements regarding the composition of our assets and a requirement that at least 95% of our gross income in any year must be derived from qualifying sources. Also, we must pay dividends to our stockholders aggregating annually at least 90% of our REIT taxable income, determined without regard to the dividends paid deduction and excluding net capital gains. In addition, legislation, new regulations, administrative interpretations or court decisions may materially adversely affect our investors, our ability to maintain our qualification as a REIT for federal income tax purposes or the desirability of an investment in a REIT relative to other investments.

Even if we remain qualified as a REIT, we may face other tax liabilities that reduce our cash flow, which could materially and adversely affect us.

Even if we maintain our qualification as a REIT for federal income tax purposes, we may be subject to some federal, state and local income, property and excise taxes on our income or property, including taxes on any undistributed income, tax on income from some activities conducted as a result of a foreclosure and, in certain cases, a 100% penalty tax, in the event we sell property as a dealer. In addition, any TRSs that we own will be subject to tax as regular corporations in the jurisdictions in which they operate.

 

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Complying with REIT requirements may force us to liquidate, restructure or forego otherwise attractive investments.

To qualify as a REIT, we must ensure that we meet the REIT gross income tests annually and that, at the end of each calendar quarter, at least 75% of the value of our assets consists of cash, cash items, government securities, stock in REITs and other qualifying real estate assets, including certain mortgage loans and certain kinds of MBS and debt instruments of publicly offered REITs. The remainder of our investments in securities (other than government securities and REIT qualified real estate assets) generally cannot include more than 10% of the outstanding voting securities of any one issuer or more than 10% of the total value of the outstanding securities of any one issuer. In addition, in general, no more than 5% of the value of our assets (other than government securities and securities that are qualifying real estate assets) can consist of the securities of any one issuer, and no more than 20% of the value of our total securities can be represented by securities of one or more TRSs. If we fail to comply with these requirements at the end of any calendar quarter, we must correct the failure within 30 days after the end of the calendar quarter or qualify for certain statutory relief provisions to avoid losing our REIT qualification and suffering adverse tax consequences. As a result, we may be required to liquidate from our portfolio, or contribute to a TRS, otherwise attractive investments, and may be unable to pursue investments that would be otherwise advantageous to us in order to satisfy the income or asset requirements for qualifying as a REIT. These actions could have the effect of reducing our income and amounts available for distribution to our stockholders.

Liquidation of assets may jeopardize our REIT qualification or create additional tax liability for us.

To continue to qualify as a REIT, we must comply with requirements regarding our assets and our sources of income. If we are compelled to liquidate our investments to repay obligations to our lenders, we may be unable to comply with these requirements, ultimately jeopardizing our qualification as a REIT, or we may be subject to a 100% tax on any resultant gain if we sell assets that are treated as dealer property or inventory.

The failure of mortgage loans or CMBS subject to a repurchase agreement or a mezzanine loan to qualify as a real estate asset would adversely affect our ability to qualify as a REIT.

When we enter into repurchase agreements, we will nominally sell certain of our assets to a counterparty and simultaneously enter into an agreement to repurchase the sold assets. We believe that we will be treated for U.S. federal income tax purposes as the owner of the assets that are the subject of any of these agreements notwithstanding that these agreements may transfer record ownership of the assets to the counterparty during the term of the agreement. It is possible, however, that the IRS could assert that we did not own the assets during the term of the repurchase agreement, in which case we could fail to qualify as a REIT.

In addition, we may acquire and originate mezzanine loans, which are loans secured by equity interests in a partnership or limited liability company that directly or indirectly owns real property. In Revenue Procedure 2003-65, the IRS provided a safe harbor pursuant to which a mezzanine loan, if it meets each of the requirements contained in Revenue Procedure 2003-65, will be treated by the IRS as a real estate asset for purposes of the REIT asset tests, and interest derived from the mezzanine loan will be treated as qualifying mortgage interest for purposes of the REIT 75% gross income test. Although Revenue Procedure 2003-65 provides a safe harbor on which taxpayers may rely, it does not prescribe rules of substantive tax law. We may treat certain mezzanine loans that do not meet all of the requirements for reliance on this safe harbor as real estate assets giving rise to qualifying mortgage interest for purposes of the REIT asset and income requirements, or otherwise not adversely affecting our qualification as a REIT. There can be no assurance that the IRS will not challenge the tax treatment of these mezzanine loans, and if such a challenge were sustained, we could in certain circumstances be required to pay a penalty tax or fail to qualify as a REIT.

 

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We may be required to report REIT taxable income for certain investments in excess of the economic income we ultimately realize from them.

We may acquire debt instruments in the secondary market for less than their face amount. The amount of the discount will generally be treated as “market discount” for U.S. federal income tax purposes. Accrued market discount is reported as income when, and to the extent that, any payment of principal of the debt instrument is made, unless we elect to include accrued market discount in income as it accrues. Principal payments on certain loans are made monthly, and consequently accrued market discount may have to be included in income each month as if the debt instrument were assured of ultimately being collected in full. If we collect less on the debt instrument than our purchase price plus the market discount we previously reported as income, we may not be able to benefit from any offsetting loss deductions.

In addition, we may acquire distressed debt investments, or loans that become “non-performing” following our acquisition thereof, that are subsequently modified by agreement with the borrower. If the amendments to the outstanding debt are “significant modifications” under applicable Treasury Regulations, the modified debt may be considered to have been reissued to us at a gain in a debt-for-debt exchange with the borrower. In that event, we may be required to recognize taxable gain to the extent the principal amount of the modified debt exceeds our adjusted tax basis in the unmodified debt, even if the value of the debt or the payment expectations have not changed.

Moreover, some of the CMBS that we may acquire may have been issued with original issue discount, or OID. We will be required to report such OID based on a constant yield method and will be taxed based on the assumption that all future projected payments due on such CMBS will be made. If such CMBS turns out not to be fully collectible, an offsetting loss deduction will become available only in the later year that uncollectibility is provable.

Finally, in the event that any debt instrument that we acquire is delinquent as to mandatory principal and interest payments, or in the event payments with respect to a particular debt instrument are not made when due, we may nonetheless be required to continue to recognize the unpaid interest as REIT taxable income as it accrues, despite doubt as to its ultimate collectability. We may also be required to accrue interest income with respect to subordinate MBS at its stated rate regardless of whether corresponding cash payments are received or are ultimately collectable. In each case, while we would in general ultimately have an offsetting loss deduction available to us when the interest was determined to be uncollectible, the utility of that deduction could depend on our having REIT taxable income in that later year or thereafter.

The “taxable mortgage pool” rules may increase the taxes that we or our stockholders may incur, and may limit the manner in which we effect future securitizations.

Securitizations by us or our subsidiaries could result in the creation of taxable mortgage pools, or TMPs, for U.S. federal income tax purposes. As a result, we could have “excess inclusion income.” Certain categories of stockholders, such as non-U.S. stockholders eligible for treaty or other benefits, stockholders with net operating losses, and certain tax-exempt stockholders that are subject to unrelated business income tax, could be subject to increased taxes on a portion of their dividend income from us that is attributable to any excess inclusion income. In addition, to the extent that our common stock is owned by tax-exempt “disqualified organizations,” such as certain government-related entities and charitable remainder trusts that are not subject to tax on unrelated business taxable income, or UBTI, we may incur a corporate level tax on a portion of any excess inclusion income. Moreover, we could face limitations in selling equity interests in these securitizations to outside investors, or selling any debt securities issued in connection with these securitizations that might be considered to be equity interests for tax purposes. These limitations may prevent us from using certain techniques to maximize our returns from securitization transactions.

 

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Our ownership of TRSs is subject to certain restrictions, and we will be required to pay a 100% penalty tax on certain income or deductions if our transactions with our TRSs are not conducted on arm’s length terms.

From time to time we may own interests in one or more TRSs. A TRS is a corporation other than a REIT in which a REIT directly or indirectly holds stock, and that has made a joint election with such REIT to be treated as a TRS. If a TRS owns more than 35% of the total voting power or value of the outstanding securities of another corporation, such other corporation will also be treated as a TRS. Other than some activities relating to lodging and health care facilities, a TRS may generally engage in any business, including activities that generate fee income that would be nonqualifying income for purposes of the REIT gross income tests or the provision of customary or non-customary services to tenants of its parent REIT. A TRS is subject to federal income tax as a regular C corporation. In addition, a 100% excise tax will be imposed on certain transactions between a TRS and its parent REIT that are not conducted on an arm’s length basis.

A REIT’s ownership of securities of a TRS is not subject to the 5% or 10% asset tests applicable to REITs. Not more than 20% of the value of a REIT’s total assets may be represented by securities of TRSs, and not more than 25% of the value of a REIT’s total assets may be represented by securities (including securities of one or more TRSs), other than those securities includable in the 75% asset test. We anticipate that the aggregate value of the stock and securities of any TRSs that we own will be less than 20% of the value of our total assets, and together with any other nonqualifying assets that we own will be less than 25% of the value of our total assets, and we will monitor the value of these investments to ensure compliance with applicable ownership limitations. In addition, we intend to structure our transactions with any TRSs that we own to ensure that they are entered into on arm’s-length terms to avoid incurring the 100% excise tax described above. There can be no assurance, however, that we will be able to comply with the above limitations or to avoid application of the 100% excise tax discussed above.

To maintain our REIT status, we may be forced to raise capital during unfavorable market conditions or pay dividends in the form of taxable stock distributions, and the unavailability of capital on favorable terms at the desired times, or at all, may cause us to curtail our investment activities and/or to dispose of assets at inopportune times, which could materially and adversely affect us.

To qualify as a REIT, we generally must distribute to our stockholders at least 90% of our REIT taxable income each year (determined without regard to the dividends paid deduction and excluding net capital gains), and we will be subject to regular corporate income taxes to the extent that we distribute less than 100% of our REIT taxable income (determined without regard to the dividends paid deduction and including net capital gains) each year. In addition, we will be subject to a 4% nondeductible excise tax on the amount, if any, by which distributions we pay in any calendar year are less than the sum of 85% of our ordinary income, 95% of our net capital gains, and 100% of our undistributed income from prior years. To maintain our REIT status and avoid the payment of federal income and excise taxes, we may need to raise capital to meet the REIT distribution requirements, even if the then-prevailing market conditions are not favorable for raising capital. These capital needs could result from differences in timing between the actual receipt of income and inclusion of income for federal income tax purposes. For example, we may be required to accrue interest and discount income on mortgage loans, MBS, and other types of debt securities or interests in debt securities before we receive any payments of interest or principal on the assets. Our access to third-party sources of capital depends on a number of factors, including the market’s perception of our growth potential, our current and potential leverage, our outstanding equity on an actual and fully diluted basis and our current and potential future results of operations, liquidity, and financial condition. We cannot assure you that we will have access to capital on favorable terms at the desired times, or at all, which may cause us to curtail our investment activities and/or to dispose of assets at inopportune times, which could materially and adversely affect us. Alternatively, we may make taxable in-kind distributions of our own stock, which may cause our stockholders to be required to pay income taxes with respect to such distributions in excess of any cash they receive, or we may be required to withhold taxes with respect to such distributions in excess of any cash our stockholders receive.

 

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Dividends payable by REITs, including us, generally do not qualify for the reduced tax rates available for some dividends, which may negatively affect the value of our common stock.

“Qualified dividends” payable to U.S. stockholders that are individuals, trusts and estates are generally subject to tax at preferential rates, currently at a maximum federal rate of 20%. Dividends payable by REITs, however, generally are not eligible for the preferential tax rates applicable to qualified dividend income. Under the Tax Cuts and Jobs Act, or the 2017 Tax Legislation, however, U.S. stockholders that are individuals, trusts and estates generally may deduct up to 20% of the ordinary dividends (e.g., dividends not designated as capital gain dividends or qualified dividend income) received from a REIT for taxable years beginning after December 31, 2017 and before January 1, 2026. Although this deduction reduces the effective U.S. federal income tax rate applicable to certain dividends paid by REITs (generally to 29.6% assuming the stockholder is subject to the 37% maximum rate), such tax rate is still higher than the tax rate applicable to corporate dividends that constitute qualified dividend income. Accordingly, investors who are individuals, trusts and estates may perceive investments in REITs to be relatively less attractive than investments in the stocks of non-REIT corporations that pay dividends, which could materially and adversely affect the value of the stock of REITs, including the per share trading price of our common stock.

Complying with REIT requirements may limit our ability to hedge effectively.

The REIT provisions of the Code may limit our ability to hedge our assets and operations. Under these provisions, any income that we generate from transactions intended to hedge our interest rate exposure or currency fluctuations will be excluded from gross income for purposes of the REIT 75% and 95% gross income tests if (A) the instrument hedges either (i) interest rate risk on liabilities used to carry or acquire real estate assets or (ii) currency fluctuations with respect to items of income that qualify for purposes of the REIT 75% or 95% gross income tests or assets that generate such income or (B) the transaction is entered into to hedge the income or loss from prior hedging transactions, where the property or indebtedness which was the subject of the prior hedging transaction was extinguished or disposed of, and, in any such case, such instrument is properly identified under applicable Treasury Regulations. Income from hedging transactions that do not meet these requirements will generally constitute nonqualifying income for purposes of both the REIT 75% and 95% gross income tests. As a result of these rules, we may have to limit our use of hedging techniques that might otherwise be advantageous or implement those hedges through a TRS. This could increase the cost of our hedging activities because our TRS would be subject to tax on gains, or expose us to greater risks associated with changes in interest rates than we would otherwise want to bear. In addition, losses in a TRS will generally not provide any tax benefit, except for being carried forward against future taxable income in such TRS.

The tax on prohibited transactions will limit our ability to engage in transactions, including certain methods of securitizing mortgage loans, that would be treated as sales for U.S. federal income tax purposes.

A REIT’s net income from prohibited transactions is subject to a 100% tax. In general, prohibited transactions are sales or other dispositions of property, other than foreclosure property, but including mortgage loans, held as inventory or primarily for sale to customers in the ordinary course of business. We could be subject to this tax if we were to sell or securitize loans in a manner that was treated as a sale of the loans as inventory or primarily for sale to customers in the ordinary course of business for U.S. federal income tax purposes. Therefore, in order to avoid the prohibited transactions tax, we may choose not to engage in certain sales of loans, other than through a TRS, and we may be required to limit the structures we use for securitization transactions, even though such sales or structures might otherwise be beneficial for us.

In connection with our acquisition of certain assets, we may rely on legal opinions or advice rendered or given or statements by the issuers of such assets, and the inaccuracy of any conclusions of such opinions, advice or statements may adversely affect our REIT qualification and result in significant corporate-level tax.

When purchasing securities, we may rely on opinions or advice of counsel for the issuer of the securities, or statements made in related offering documents, for purposes of determining whether the securities represent debt

 

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or equity securities for U.S. federal income tax purposes, and also to what extent those securities constitute qualifying real estate assets for purposes of the REIT asset tests and produce income which qualifies under the 75% and 95% REIT gross income tests. The inaccuracy of any these opinions, advice or statements may adversely affect our REIT qualification and result in significant corporate-level tax.

Legislative or other actions affecting REITs materially and adversely affect our stockholders and us.

The rules dealing with federal income taxation are constantly under review by persons involved in the legislative process and by the IRS and the U.S. Department of the Treasury. Changes to the tax laws, with or without retroactive application, could materially and adversely affect our stockholders and us. We cannot predict how changes in the tax laws might affect our investors or us. New legislation, Treasury Regulations, administrative interpretations or court decisions could significantly and negatively affect our ability to qualify as a REIT or the federal income tax consequences of such qualification, or the federal income tax consequences of an investment in us. Also, the law relating to the tax treatment of other entities, or an investment in other entities, could change, making an investment in other entities more attractive relative to an investment in a REIT.

The 2017 Tax Legislation has significantly changed the U.S. federal income taxation of U.S. businesses and their owners, including REITs and their stockholders. The legislation is unclear in many respects and could be subject to potential amendments and technical corrections, as well as interpretations and implementing regulations by the Treasury and IRS, any of which could lessen or increase the impact of the legislation. In addition, it is unclear how these U.S. federal income tax changes will affect state and local taxation, which often uses federal taxable income as a starting point for computing state and local tax liabilities.

General Risks

If we fail to implement and maintain an effective system of internal control, we may not be able to accurately determine our financial results or prevent fraud, which could materially and adversely affect us.

Effective internal controls are necessary for us to provide reliable financial reports and effectively prevent fraud. We may in the future discover areas of our internal controls that need improvement. We cannot be certain that we will be successful in implementing or maintaining an effective system of internal control over our financial reporting. Furthermore, as we grow our business, our internal controls will become more complex, and we will require significantly more resources to ensure our internal controls remain effective. Additionally, the existence of any material weakness or significant deficiency would require our Manager to devote significant time and us to incur significant expense to remediate any material weaknesses or significant deficiencies and our Manager may not be able to remediate any material weaknesses or significant deficiencies in a timely manner. The existence of any material weakness in our internal control over financial reporting could also result in errors in our financial statements that could require us to restate our financial statements, cause us to fail to meet our reporting obligations and cause stockholders to lose confidence in our financial results, which could materially and adversely affect us.

The obligations associated with being a public company will require significant resources and attention from our Manager’s senior management team.

As a public company with listed equity securities, we will need to comply with new laws, regulations and requirements, including the requirements of the Exchange Act, certain corporate governance provisions of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, related regulations of the SEC and requirements of the NYSE, with which we were not required to comply as a private company. The Exchange Act requires that we file annual, quarterly and current reports with the SEC. The Sarbanes-Oxley Act requires, among other things, that we establish and maintain effective internal control over financial reporting. These reporting and other obligations will place significant demands on our Manager’s senior management team, administrative, operational and accounting resources and will cause us to incur significant expenses. We may need to upgrade

 

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our systems or create new systems, implement additional financial and other controls, reporting systems and procedures, and create or outsource an internal audit function. If we are unable to accomplish these objectives in a timely and effective fashion, our ability to comply with the financial reporting requirements and other rules that apply to reporting companies could be impaired.

If we are unable to implement and maintain effective internal control over financial reporting in the future, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our common stock may be negatively affected.

As a public company, we will be required to maintain effective internal control over financial reporting and to report any material weaknesses in our internal controls. In addition, beginning with our second annual report on Form 10-K, we will be required to furnish a report by management on the effectiveness of our internal control over financial reporting, pursuant to Section 404 of the Sarbanes-Oxley Act. Once we are no longer an emerging growth company, our independent registered public accounting firm will be required to formally attest to the effectiveness of our internal control over financial reporting on an annual basis. The process of designing, implementing and testing the internal control over financial reporting required to comply with this obligation is time consuming, costly and complicated. If we identify material weaknesses in our internal control over financial reporting, if we are unable to comply with the requirements of Section 404 of the Sarbanes-Oxley Act in a timely manner or to conclude that our internal control over financial reporting is effective or if, once we are no longer an emerging growth company, our independent registered public accounting firm is unable to express an opinion that our internal control over financial reporting is effective, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our common stock could be negatively affected. We could also become subject to investigations by the stock exchange on which our securities are listed, the SEC or other regulatory authorities, which could require additional financial and management resources.

The impact of any future terrorist attacks and the potential unavailability of affordable terrorism insurance expose us to certain risks.

Terrorist attacks, the anticipation of any such attacks, and the consequences of any military or other response by the U.S. and its allies may have an adverse impact on the U.S. financial markets and the economy in general. We cannot predict the severity of the effect that any such future events would have on the U.S. financial markets, the economy or our business. Any future terrorist attacks could adversely affect the credit quality of some of our investments. Some of our investments will be more susceptible to such adverse effects than others, particularly those secured by properties in major cities or properties that are, or are in close proximity to, prominent landmarks or public attractions. To the extent that protests, riots or other forms of civil unrest have a material adverse effect on our borrowers’ businesses or have the effect of decreasing demand for commercial real estate in such metropolitan areas, including as a result of a general decline in the desire to live, work in or travel to such metropolitan areas, the value of our investments, and our business, financial condition, liquidity, results of operations and prospects may be materially and adversely affected. We may suffer losses as a result of the adverse impact of any future terrorist attacks or civil unrest and these losses may materially and adversely affect us.

In addition, the enactment of the Terrorism Risk Insurance Act of 2002, or TRIA, and the subsequent enactments of the Terrorism Risk Insurance Program Reauthorization Act of 2007, which extended TRIA through the end of 2014, and the Terrorism Risk Insurance Program Reauthorization Act of 2015, which extended TRIA through the end of 2020, requires insurers to make terrorism insurance available under their property and casualty insurance policies and provides federal compensation to insurers for insured losses. However, this legislation does not regulate the pricing of such insurance and there is no assurance that this legislation will be extended beyond 2020. The absence of affordable insurance coverage may adversely affect the general real estate lending market, lending volume and the market’s overall liquidity and may reduce the number of suitable investment opportunities available to us and the pace at which we are able to make investments. If the properties that we invest in are unable to obtain affordable insurance coverage, the value of those investments could decline and in the event of an uninsured loss, we could lose all or a portion of our investment.

 

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The market price of our common stock may fluctuate significantly.

The capital and credit markets have recently experienced a period of extreme volatility and disruption. The market price and liquidity of the market for shares of our common stock may be significantly affected by numerous factors, some of which are beyond our control and may not be directly related to our operating performance.

Some of the factors that could negatively affect the market price of our common stock include:

 

   

our actual or projected operating results, financial condition, cash flows and liquidity, or changes in investment strategy or prospects, including as a result of the COVID-19 pandemic;

 

   

actual or perceived conflicts of interest between us and our Manager or its affiliates or personnel;

 

   

equity or equity-related issuances by us, or share resales by our stockholders, or the perception that such issuances or resales may occur;

 

   

our inability to raise capital on attractive terms when needed, including the loss of one or more major financing sources;

 

   

our inability to originate investments with attractive risk-adjusted returns;

 

   

actual, anticipated or perceived accounting or internal control problems;

 

   

publication of research reports about us, the CRE industry, CRE debt on transitional assets or interest rates;

 

   

changes in market valuations of similar companies;

 

   

adverse market reaction to any increased leverage we incur in the future;

 

   

additions to or departures of key personnel of our Sponsor or its affiliates, including our Manager, or their key personnel;

 

   

speculation in the press or investment community about us or other similar companies;

 

   

changes in market interest rates, which may lead investors to demand a higher distribution yield for our common stock, if we have begun to pay dividends to our stockholders, and which could result in increased interest expenses on our debt;

 

   

a compression of the yield on our investments and an increase in the cost of our liabilities;

 

   

failure to maintain our REIT qualification and our exclusion from registration under the 1940 Act;

 

   

price and volume fluctuations in the overall stock market from time to time;

 

   

a prolonged economic slowdown, a lengthy or severe recession or declining real estate values, including as a result of the COVID-19 pandemic;

 

   

general market and economic conditions, and trends including inflationary concerns and the current state of the credit and capital markets, including as a result of the COVID-19 pandemic;

 

   

significant volatility in the market price and trading volume of securities of publicly-traded REITs or other companies in our sector, which are not necessarily related to the operating performance of these companies, including the recent volatility and disruption caused by the COVID-19 pandemic;

 

   

changes in law, regulatory policies or tax guidelines, or interpretations thereof, particularly with respect to REITs;

 

   

changes in the value of our portfolio, including as a result of the COVID-19 pandemic;

 

   

any shortfall in revenue or net income or any increase in losses from levels expected by investors or securities analysts, including as a result of the COVID-19 pandemic;

 

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operating performance of companies comparable to us;

 

   

level of competitive pressures from time to time;

 

   

short-selling pressure with respect to shares of our common stock or commercial mortgage REITs generally;

 

   

uncertainty surrounding the strength of the U.S. economic recovery;

 

   

concerns regarding the high-yield debt market; and

 

   

the other factors described under “Risk Factors.”

As noted above, market factors unrelated to our performance could also negatively impact the market price of our common stock. One of the factors that investors may consider in deciding whether to buy or sell our common stock is our distribution rate as a percentage of our stock price relative to market interest rates. If market interest rates increase, prospective investors may demand a higher distribution rate or seek alternative investments paying higher dividends or interest. As a result, interest rate fluctuations and conditions in the capital markets can affect the market price of our common stock. For instance, if interest rates rise, it is likely that the market price of our common stock will decrease as market rates on interest-bearing securities increase.

Future offerings of debt or equity securities, which would rank senior to our common stock, may adversely affect the market price of our common stock.

If we decide to issue debt or equity securities in the future that would rank senior to our common stock, those securities generally will have a preference to our receipt of dividends and liquidation payments. It is likely that those securities will also be governed by an indenture or other instrument containing covenants restricting our operating flexibility. Additionally, any convertible or exchangeable securities that we issue in the future may have rights, preferences and privileges more favorable than those of our common stock and those securities, as well as other equity securities we issue, may result in dilution to owners of our common stock. We and, indirectly, our stockholders, will bear the cost of issuing and servicing such securities. Because our decision to issue debt or equity securities in any future offering will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing, nature or success of our future offerings. Thus holders of our common stock will bear the risk of our future offerings reducing the market price of our common stock and diluting the value of their stock holdings in us.

 

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FORWARD-LOOKING STATEMENTS

We make forward-looking statements in this prospectus that are subject to risks and uncertainties. These forward-looking statements include information about possible or assumed future results of our business, financial condition, liquidity, results of operations, plans and objectives. When we use the words “believe,” “expect,” “anticipate,” “estimate,” “plan,” “continue,” “intend,” “should,” “may” or similar expressions, we intend to identify forward-looking statements. Statements regarding the following subjects, among others, may be forward-looking:

 

   

use of the net proceeds from this offering;

 

   

our business and investment strategy;

 

   

our projected operating results;

 

   

the timing of cash flows, if any, from our investments;

 

   

the state of the U.S. and global economy generally or in specific geographic regions;

 

   

the duration and the severity of the COVID-19 pandemic, actions that may be taken by governmental authorities to contain the COVID-19 pandemic or to treat its impact and the adverse impacts that the COVID-19 pandemic has had, and will likely continue to have, on the global economy and on our business, financial condition, liquidity, results of operations and prospects and on our ability to service our debt and pay dividends to our stockholders, including as a result of the COVID-19 pandemic’s adverse impact on the net worth, liquidity and other ability of borrowers or any guarantors to honor their obligations to us;

 

   

defaults by borrowers in paying debt service on outstanding loans;

 

   

governmental actions and initiatives and changes to government policies;

 

   

the amount of commercial mortgage loans requiring refinancing;

 

   

our ability to obtain financing arrangements on attractive terms, or at all;

 

   

current and prospective financing costs and advance rates for our target assets;

 

   

our expected leverage;

 

   

general volatility of the securities markets in which we may invest;

 

   

the impact of a protracted decline in the liquidity of credit markets on our business;

 

   

the uncertainty surrounding the strength of the global economy;

 

   

the return on or impact of current and future investments, including our loan portfolio and real estate owned investment;

 

   

allocation of investment opportunities to us by our Manager and our Sponsor;

 

   

changes in interest rates and the market value of our investments;

 

   

effects of hedging instruments on our target assets;

 

   

rates of default or decreased recovery rates on our target assets and related impairment charges, including as it relates to our real estate owned investment;

 

   

the degree to which our hedging strategies may or may not protect us from interest rate volatility;

 

   

changes in governmental regulations, tax law and rates, and similar matters (including interpretation thereof);

 

   

our ability to maintain our qualification as a REIT;

 

   

our ability to maintain our exclusion from registration under the 1940 Act;

 

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availability and attractiveness of investment opportunities we are able to originate in our target assets;

 

   

the ability of our Manager to locate suitable investments for us, monitor, service and administer our investments and execute our investment strategy;

 

   

availability of qualified personnel from our Sponsor and its affiliates, including our Manager;

 

   

estimates relating to our ability to pay dividends to our stockholders in the future;

 

   

our understanding of our competition;

 

   

impact of increased competition on projected returns; and

 

   

market trends in our industry, interest rates, real estate values, the debt markets generally, the CRE debt market or the general economy.

The forward-looking statements are based on our beliefs, assumptions and expectations of our future performance, taking into account all information currently available to us. You should not place undue reliance on these forward-looking statements. These beliefs, assumptions and expectations can change as a result of many possible events or factors, not all of which are known to us. Some of these factors are described in this prospectus under the headings “Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business.” If a change occurs, our business, financial condition, liquidity, results of operations and prospects may vary materially from those expressed in our forward-looking statements. Any forward-looking statement speaks only as of the date on which it is made. New risks and uncertainties arise over time, and it is not possible for us to predict those events or how they may affect us. Except as required by law, we are not obligated to, and do not intend to, update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

 

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USE OF PROCEEDS

We estimate that the net proceeds we will receive from this offering, after deducting the underwriting discount and estimated offering expenses payable by us, will be approximately $                , or approximately $                 if the underwriters exercise in full their option to purchase additional shares of common stock from us, assuming an initial public offering price of $                 per share, which is the midpoint of the initial public offering price range set forth on the cover page of this prospectus. A $1.00 increase or decrease in the assumed initial public offering price of $                 per share would increase or decrease the net proceeds to us from this offering by approximately $                 , assuming the number of shares offered by us as set forth on the cover page of this prospectus remains the same.

We intend to use the net proceeds from this offering to fund investments in our target assets. For more information regarding our target assets, please see “Business—Our Target Assets.”

We intend to use any net proceeds from this offering that are not applied as described above for general corporate and working capital purposes. Until appropriate uses can be identified, our Manager may invest this balance initially in interest-bearing short-term investments, including money market funds, bank accounts, overnight repurchase agreements with primary federal reserve bank dealers collateralized by direct U.S. government obligations and other instruments or investments reasonably determined by our Manager to be of high quality and consistent with our intention to continue to qualify as a REIT and maintain our exclusion from registration under the 1940 Act. These initial investments are expected to provide a lower net return than we will seek to achieve from our target assets. In addition, prior to the time that we have permanently used all of the net proceeds from this offering, we may temporarily reduce amounts outstanding under our repurchase facilities with a portion of the net proceeds from this offering going to the counterparties, which may be the underwriters in this offering or their affiliates. See “Underwriting—Other Relationships.”

 

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DISTRIBUTION POLICY

To satisfy the requirements to continue to qualify as a REIT and generally not be subject to U.S. federal income and excise tax, we intend to make regular quarterly distributions of all or substantially all of our REIT taxable income to holders of our common stock out of assets legally available therefor. Any distributions we make to our stockholders will be at the discretion of our Board and will depend upon our historical and anticipated REIT taxable income, results of operations, financial condition, liquidity, financing agreements (including covenants), maintenance of our REIT qualification, our exclusion from registration under the 1940 Act, applicable provisions of the MGCL and such other factors as our Board deems relevant. Our REIT taxable income, results of operations, financial condition and liquidity will be affected by various factors, including the net interest and other income from our portfolio, our operating expenses and any other expenditures. See “Risk Factors.”

In addition, prior to the time we have fully invested the net proceeds from this offering, we may fund our quarterly distributions out of these net proceeds, which would reduce the amount of cash we have available for investing and other purposes. The use of these net proceeds for distributions could be dilutive to our financial results.

Below is a summary of our dividend history since the first quarter of 2018:

 

     Per
Share
Distribution
     Total
Distribution
(in millions)(1)
     Shares
Outstanding(2)
     Book Value
Per Share(3)
     Annualized
Dividend
Yield(4)
 

2018

              

First Quarter

   $ 0.39      $ 23.5        60,456,493      $ 19.54        8.0

Second Quarter

   $ 0.35      $ 28.0        79,908,076      $ 19.55        7.2

Third Quarter

   $ 0.40      $ 37.5        93,756,088      $ 19.56        8.2

Fourth Quarter

   $ 0.44      $ 44.5        101,641,901      $ 19.56        9.0

2019

              

First Quarter

   $ 0.44      $ 46.1        105,137,651      $ 19.53        9.0

Second Quarter

   $ 0.44      $ 46.8        107,182,299      $ 19.38        9.0

Third Quarter

   $ 0.41      $ 48.0        115,765,777      $ 19.39        8.6

Fourth Quarter

   $ 0.46      $ 55.0        120,550,871      $ 19.40        9.4

2020

              

First Quarter

   $ 0.43      $ 56.0        130,226,218      $ 19.41        8.9

Second Quarter

   $ 0.44      $ 59.0        133,726,218      $ 19.39        9.1

Third Quarter

   $ 0.37      $ 50.0        133,726,218      $ 19.40        7.7

Fourth Quarter

   $ 0.37      $ 50.0        133,726,218      $ 19.35        7.7

2021

              

First Quarter

   $ 0.37      $ 50.0        133,433,487      $ 18.81        8.0

Second Quarter

   $ 0.37      $ 50.0        133,433,487      $ 18.76        8.0

 

(1)

Includes, in the case of the second quarter of 2019 and each period through the fourth quarter of 2020, dividend equivalent payments made to holders of 877,498 fully-vested but not settled RSUs granted on April 4, 2019, and includes, in the case of the first quarter of 2021, dividend equivalent payments made to holders of 584,767 fully-vested but not settled RSUs granted on April 4, 2019, both of which are entitled to and have received dividend equivalent payments per RSU equal to the dividends paid per share on our common stock since the date of grant. Amount does not include any accrued and unpaid dividend equivalent rights related to 1,097,293 unvested performance-based RSUs granted on April 4, 2019 that are expected to vest in full as of the date of this prospectus; however, dividend equivalent rights will accrue from the date of grant and will be paid in cash to the extent the underlying performance-based RSUs vest.

(2)

Includes shares of common stock outstanding as of the dividend record date plus, in the case of the second quarter of 2019 and each period through the fourth quarter of 2020, 877,498 shares of common stock underlying RSUs that are vested in full but not yet settled, and in the case of the first quarter of

 

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  2021, 584,767 shares of common stock underlying RSUs that were vested in full but not yet settled. Does not include 1,097,293 shares of common stock underlying unvested RSUs that are expected to vest in full as of the date of this prospectus.
(3)

As of the end of the most recently completed calendar quarter prior to the dividend payment date. Calculated as (i) total stockholders’ equity less non-controlling interest and preferred stock divided by (ii) number of shares of common stock outstanding at period end, which in the case of the second quarter of 2019 and through the fourth quarter of 2020 includes 877,498 shares of common stock underlying RSUs that are vested in full but not yet settled, and in the case of the first quarter of 2021, includes 584,767 shares of common stock underlying RSUs that are vested in full but not yet settled. Excludes 1,097,293 shares of common stock underlying unvested RSUs that are expected to vest in full as of the date of this prospectus.

(4)

Annualized dividend yield is calculated as the distribution amount divided by the product of (i) the number of shares outstanding as of the record date reflected in this table and (ii) book value per share reflected in this table, multiplied by four.

 

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CAPITALIZATION

The following table sets forth our cash and cash equivalents and capitalization as of June 30, 2021:

 

   

on an actual basis;

 

   

on a pro forma basis to give effect to (i) the reclassification of 7,306,984 shares of our redeemable common stock outstanding as of the date of this prospectus into an equivalent number of shares of our common stock and (ii) the issuance of 1,097,293 shares of our common stock underlying unvested RSUs that are expected to vest in full as of the date of this prospectus and the related acceleration of $9.0 million of equity compensation expense; and

 

   

on a pro forma as adjusted basis to give effect to the pro forma adjustments described above and the sale by us of approximately                 shares of our common stock in this offering at an assumed initial public offering price of $                 per share, the midpoint of the initial public offering price range set forth on the cover page of this prospectus, after deducting the estimated underwriting discount and offering expenses payable by us.

This table is unaudited and should be read in conjunction with the information contained in “Use of Proceeds” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” as well as our consolidated financial statements and related notes included elsewhere in this prospectus.

 

     As of June 30, 2021  
(in thousands, except share and per share data)    Actual     Pro Forma     Pro Forma As
Adjusted(1)
 
           (unaudited)     (unaudited)  

Cash and Cash Equivalents(2)

   $ 476,983     $ 472,468                         

Debt

      

Repurchase agreements

     2,688,216       2,688,216    

Loan participations sold, net

     484,117       484,117    

Notes payable, net

     162,863       162,863    

Secured term loan, net

     743,921       743,921    
  

 

 

   

 

 

   

 

 

 

Debt related to real estate owned, net

     289,762       289,762    
  

 

 

   

 

 

   

 

 

 

Total Debt

   $ 4,368,879     $ 4,368,879    

Redeemable common stock, $0.01 par value, 7,306,984 shares issued and outstanding, actual; no shares issued and outstanding, pro forma and pro forma as adjusted(3)

     137,093       —      

Stockholders’ Equity

      

Preferred stock, par value $0.01 per share and liquidation preference $1,000 per share, 10,000,000 shares authorized and 125 shares issued and outstanding, actual, pro forma and pro forma as adjusted

     125       125    

Common stock, par value $0.01 per share; 500,000,000 shares authorized, 126,126,503 shares issued and outstanding, actual; 134,530,780 shares issued and outstanding, pro forma; shares issued and outstanding, pro forma as adjusted

     1,261       1,345    

Additional paid-in capital

     2,485,878       2,637,631    

Dividends declared

     (668,112     (722,412  

Retained earnings

     547,350       585,642    
  

 

 

   

 

 

   

 

 

 

Total Claros Mortgage Trust, Inc. equity

     2,366,502       2,502,331    
  

 

 

   

 

 

   

 

 

 

Non-controlling interests

     36,644       36,644    
  

 

 

   

 

 

   

 

 

 

Total Stockholders’ Equity

   $ 2,403,146     $ 2,538,975    
  

 

 

   

 

 

   

 

 

 

Total Capitalization

   $ 6,909,118     $ 6,907,854    
  

 

 

   

 

 

   

 

 

 

 

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(1)

Assumes no exercise of the underwriters’ option to purchase an additional                 shares of our common stock.

(2)

Pro forma and pro forma as adjusted reflect the payment of $4.5 million of dividend equivalent rights related to 1,097,293 shares of common stock underlying unvested RSUs that are expected to fully vest as of the date of this prospectus.

(3)

Represents shares of our common stock held by Fuyou that Fuyou has a contractual right to require us to repurchase. See “Certain Relationships and Related Transactions—Redemption Right.” We are currently required to classify those shares of common stock held by Fuyou as redeemable common stock on our balance sheet in accordance with GAAP as Fuyou’s right to redemption is outside of our control. This redemption right will terminate upon completion of this offering.

 

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DILUTION

Purchasers of shares of our common stock in this offering will incur an immediate dilution in net tangible book value per share of their shares of our common stock to the extent the initial public offering price per share of our common stock exceeds the pro forma as adjusted net tangible book value per share of our common stock as of the date of this prospectus.

Our net tangible book value as of June 30, 2021 was approximately $2.4 billion, or $18.76 per share of our common stock. We calculate net tangible book value per share by taking the amount of our total tangible assets reduced by the amount of our total liabilities, redeemable common stock, non-controlling interest and preferred stock, and then dividing that amount by the number of shares of our common stock of 126,126,503.

Our pro forma net tangible book value as of June 30, 2021 was $2.5 billion, or $18.60 per share of our common stock. Pro forma net tangible book value per share represents the amount of our total tangible assets less our total liabilities, non-controlling interest and preferred stock, divided by the number of shares of our common stock outstanding as of June 30, 2021, after giving effect to (i) the reclassification for financial reporting purposes of 7,306,984 shares of our redeemable common stock outstanding as of the date of this prospectus into an equivalent number of shares of our common stock upon the closing of this offering and (ii) the issuance of 1,097,293 shares of common stock underlying unvested RSUs that are expected to vest in full as of the date of this prospectus.

Our pro forma as adjusted net tangible book value as of June 30, 2021, gives effect to the sale of                  shares of common stock in this offering at an assumed initial public offering price of $                 per share, the midpoint of the price range set forth on the cover page of this prospectus, after deducting the estimated underwriting discount and offering expenses payable by us and, would have been $                , or $                 per share of our common stock. This amount represents an immediate increase in pro forma as adjusted net tangible book value of $                 per share to our existing stockholders and an immediate dilution in pro forma as adjusted net tangible book value of $                 per share to new investors purchasing shares of our common stock in this offering.

The following table illustrates this dilution on a per share basis:

 

Assumed initial public offering price per share of our common stock

     $                

Net tangible book value per share as of June 30, 2021

   $ 18.76    

Decrease per share attributable to the pro forma adjustments described above

     (0.16  
  

 

 

   

Pro forma net tangible book value per share as of June 30, 2021

     18.60    

Increase in pro forma as adjusted net tangible book value per share attributable to new investors purchasing common stock in this offering

    

Pro forma as adjusted net tangible book value per share upon completion of this offering

    

Dilution per share to new investors purchasing common stock in this offering