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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☑QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2020
☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 000-56117
Terra Property Trust, Inc.
(Exact name of registrant as specified in its charter)
Maryland81-0963486
(State or other jurisdiction of
incorporation or organization)		(I.R.S. Employer
Identification No.)
550 Fifth Avenue, 6th Floor
New York, New York 10036
(Address of principal executive offices)
(212) 753-5100
(Registrant’s telephone number, including area code)
Securities registered pursuant to section 12(b) of the Securities Exchange Act of 1934:
None
Securities registered pursuant to section 12(g) of the Securities Exchange Act of 1934:
Common Stock $0.01 par value per share

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes þ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See 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 þSmaller reporting company ☑
Emerging growth company ☑
    If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☑
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑
As of November 12, 2020, the registrant had 19,487,460 shares of common stock, $0.01 par value, outstanding. No market value has been computed based upon the fact that no active trading market had been established as of the date of this document.


TABLE OF CONTENTS
Page
PART I
Item 1.
Item 2.
Item 3.
Item 4.
PART II
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.

1

PART I – FINANCIAL INFORMATION
Item 1. Financial Statements.
Terra Property Trust, Inc.
Consolidated Balance Sheets
September 30, 2020December 31, 2019
(unaudited)
Assets
Cash and cash equivalents$65,729,695 $29,609,484 
Restricted cash26,017,300 18,542,163 
Cash held in escrow by lender1,864,351 2,398,053 
Marketable securities1,205,001 — 
Loans held for investment, net433,684,904 375,462,222 
Loans held for investment acquired through participation, net4,296,001 3,150,546 
Real estate owned, net (Note 5)
Land, building and building improvements, net63,801,549 64,751,247 
Lease intangible assets, net10,313,504 12,845,228 
Operating lease right-of-use assets16,107,700 16,112,925 
Interest receivable2,860,568 1,876,799 
Other assets3,076,516 2,594,411 
Total assets$628,957,089 $527,343,078 
Liabilities and Equity
Liabilities:
Term loan payable, net of deferred financing fees$103,451,342 $— 
Obligations under participation agreements (Note 7)
89,232,590 103,186,327 
Repurchase agreement payable, net of deferred financing fees— 79,608,437 
Mortgage loan payable, net of deferred financing fees and other44,327,598 44,753,633 
Revolving credit facility payable25,000,000 — 
Interest reserve and other deposits held on investments26,017,300 18,542,163 
Operating lease liabilities16,107,700 16,112,925 
Lease intangible liabilities, net (Note 5)
10,371,307 11,424,809 
Due to Manager (Note 7)
1,468,651 1,037,168 
Interest payable 1,186,535 1,076,231 
Accounts payable and accrued expenses2,951,724 1,749,525 
Unearned income650,340 624,021 
Distributions payable3,906 — 
Other liabilities853,126 1,684,106 
Total liabilities321,622,119 279,799,345 
Commitments and contingencies (Note 9)
Equity:
Preferred stock, $0.01 par value, 50,000,000 shares authorized and
none issued		— — 
12.5% Series A Cumulative Non-Voting Preferred Stock at liquidation
preference, 125 shares authorized and 125 shares issued and outstanding at
both September 30, 2020 and December 31, 2019		125,000 125,000 
Common stock, $0.01 par value, 450,000,000 shares authorized and
19,487,460 and 15,125,681 shares issued and outstanding at
September 30, 2020 and December 31, 2019, respectively		194,875 151,257 
Additional paid-in capital373,443,672 301,727,297 
Accumulated deficit(66,428,577)(54,459,821)
Total equity307,334,970 247,543,733 
Total liabilities and equity$628,957,089 $527,343,078 
See notes to unaudited consolidated financial statements.
2

Terra Property Trust, Inc.
Consolidated Statements of Operations
(Unaudited)
Three Months Ended September 30,Nine Months Ended September 30,
2020201920202019
Revenues
Interest income$9,994,763 $10,690,405 $29,231,803 $31,704,807 
Real estate operating revenue2,990,919 2,362,105 7,555,065 7,210,599 
Prepayment fee income— — — 98,775 
Other operating income76,736 40,458 417,750 149,415 
13,062,418 13,092,968 37,204,618 39,163,596 
Operating expenses
Operating expenses reimbursed to Manager1,719,767 1,308,453 4,781,831 3,636,971 
Asset management fee 1,151,166 942,548 3,321,125 2,779,888 
Asset servicing fee 258,860 220,881 746,384 652,122 
Provision for loan losses42,443 — 1,356,737 — 
Real estate operating expenses841,708 815,690 2,657,433 2,335,653 
Depreciation and amortization1,811,266 946,495 3,704,254 2,839,483 
Impairment charge— — — 1,550,000 
Professional fees (1)
407,444 333,203 1,075,303 3,051,310 
Directors fees36,250 83,750 153,750 251,250 
Other72,231 18,983 404,882 112,261 
6,341,135 4,670,003 18,201,699 17,208,938 
Operating income6,721,283 8,422,965 19,002,919 21,954,658 
Other income and expenses
Interest expense from obligations under
participation agreements		(2,211,901)(3,022,202)(6,805,402)(8,921,349)
Interest expense on repurchase agreement
payable		(706,527)(1,407,889)(3,727,466)(3,708,424)
Interest expense on mortgage loan payable(756,509)(770,446)(2,256,898)(2,333,067)
Interest expense on revolving credit facility(463,333)(74,794)(1,238,311)(74,794)
Interest expense on term loan payable(476,411)— (476,411)— 
Net loss on extinguishment of obligations
under participation agreements		— — (319,453)— 
Realized gains on marketable securities75,055 — 1,160,162 — 
Unrealized (losses) gains on marketable
securities		(38,527)— 28,995 — 
(4,578,153)(5,275,331)(13,634,784)(15,037,634)
Net income$2,143,130 $3,147,634 $5,368,135 $6,917,024 
Preferred stock dividend declared(3,906)(3,906)(11,718)(11,718)
Net income allocable to common stock$2,139,224 $3,143,728 $5,356,417 $6,905,306 
Earnings per share — basic and diluted
$0.11 $0.21 $0.29 $0.46 
Weighted-average shares — basic and
   diluted
19,487,461 14,915,302 18,586,627 14,913,769 
Distributions declared per common share$0.20 $0.51 $0.96 $1.53 
_______________
(1)Amount for the nine months ended September 30, 2019 included $2.4 million of professional fees directly incurred, and which were previously deferred, in contemplation of the Company becoming a public entity. In the second quarter of 2019, Management decided to postpone indefinitely the Company’s public offering.
See notes to unaudited consolidated financial statements.
3

Terra Property Trust, Inc.
Consolidated Statements of Comprehensive Income
(Unaudited)
Three Months Ended September 30,Nine Months Ended September 30,
2020201920202019
Comprehensive income, net of tax
Net income$2,143,130 $3,147,634 $5,368,135 $6,917,024 
Other comprehensive income
Net unrealized gains on marketable securities——192,919 — 
Reclassification of net realized gains on
marketable securities into earnings		——(192,919)— 
— — — — 
Total comprehensive income$2,143,130 $3,147,634 $5,368,135 $6,917,024 
Preferred stock dividend declared(3,906)(3,906)(11,718)(11,718)
Comprehensive income attributable to common
shares		$2,139,224 $3,143,728 $5,356,417 $6,905,306 

See notes to unaudited consolidated financial statements.

4

Terra Property Trust, Inc.
Consolidated Statements of Changes in Equity
(Unaudited)

Preferred Stock12.5% Series A Cumulative Non-Voting Preferred StockCommon StockAdditional
Paid-in
Capital		Accumulated DeficitAccumulated Other Comprehensive Income
$0.01 Par Value
SharesAmountSharesAmountTotal equity
Balance at December 31, 2019$— 125$125,000 15,125,681$151,257 $301,727,297 $(54,459,821)$— $247,543,733 
Issuance of common stock (Note 3)
— —— 4,574,47045,745 75,334,248 — 75,379,993 
Distributions declared on common shares ($0.53 per share)— —— —— — (8,832,071)— (8,832,071)
Distributions declared on preferred shares— —— —— — (3,906)— (3,906)
Comprehensive income:
Net income— —— —— — 578,963 — 578,963 
Net unrealized gains on marketable securities— —— —— — — 192,919 192,919 
Reclassification of net realized gains on marketable securities
into earnings		— —— —— — — (8,894)(8,894)
Balance at March 31, 2020— 125125,000 19,700,151 197,002 377,061,545 (62,716,835)184,025 314,850,737 
Repurchase of common stock— — — (212,691)(2,127)(3,617,873)—— (3,620,000)
Distributions declared on common share ($0.23 per share)— — — ———(4,459,975)— (4,459,975)
Distributions declared on preferred shares— — — ———(3,906)— (3,906)
Comprehensive income:
Net income— — — ———2,646,042— 2,646,042 
Reclassification of net realized gains on marketable securities
into earnings		— — — ————(184,025)(184,025)
Balance at June 30, 2020— 125 125,000 19,487,460 194,875 373,443,672 (64,534,674)— 309,228,873 
Distributions declared on common share ($0.20 per share)— — — ———(4,033,127)— (4,033,127)
Distributions declared on preferred shares— — — ———(3,906)— (3,906)
Comprehensive income:
Net income— — — ———2,143,130 — 2,143,130 
Balance at September 30, 2020$— 125 $125,000 19,487,460 $194,875 $373,443,672 $(66,428,577)$— $307,334,970 


See notes to unaudited consolidated financial statements.





5

Terra Property Trust, Inc.
Consolidated Statements of Changes in Equity (Continued)
(Unaudited)


Preferred Stock12.5% Series A Cumulative Non-Voting Preferred StockCommon StockAdditional
Paid-in
Capital		Accumulated DeficitAccumulated Other Comprehensive Income
$0.01 Par Value
SharesAmountSharesAmountTotal equity
Balance at December 31, 2018$— 125$125,000 14,912,990$149,130 $298,109,424 $(33,091,195)$— $265,292,359 
Distributions declared on common shares ($0.51 per share)— —— —— — (7,556,413)— (7,556,413)
Distributions declared on preferred shares— —— —— — (3,906)— (3,906)
Comprehensive income:
Net income— —— —— — 3,922,875 — 3,922,875 
Net unrealized gains on marketable securities— —— —— — — — — 
Reclassification of net realized gains on marketable securities
into earnings		— —— —— — — — — 
Balance at March 31, 2019— 125125,000 14,912,990 149,130 298,109,424 (36,728,639)— 261,654,915 
Distributions declared on common share ($0.51 per share)— — — ———(7,626,503)— (7,626,503)
Distributions declared on preferred shares— — — ———(3,906)— (3,906)
Comprehensive income:
Net loss— — — ———(153,485)— (153,485)
Reclassification of net realized gains on marketable securities
into earnings		— — — ————— — 
Balance at June 30, 2019— 125 125,000 14,912,990 149,130 298,109,424 (44,512,533)— 253,871,021 
Issuance of common stock— — — 212,6912,1273,617,873—3,620,000 
Distributions declared on common share ($0.51 per share)— — — ———(7,568,342)— (7,568,342)
Distributions declared on preferred shares— — — ———(3,906)— (3,906)
Comprehensive income:
Net income— — — ———3,147,634— 3,147,634 
Balance at September 30, 2019$— 125 $125,000 15,125,681 $151,257 $301,727,297 $(48,937,147)$— $253,066,407 

See notes to unaudited consolidated financial statements.

6

Terra Property Trust, Inc.
Consolidated Statements of Cash Flows (Unaudited)
Nine Months Ended September 30,
20202019
Cash flows from operating activities:
Net income$5,368,135 $6,917,024 
Adjustments to reconcile net income to net cash provided by operating activities:
Paid-in-kind interest income, net(1,813,230)(1,731,902)
Depreciation and amortization3,704,254 2,839,483 
Provision for loan losses1,356,737 — 
Impairment charge— 1,550,000 
Lease termination fee income(236,000)— 
Amortization of net purchase premiums on loans41,807 71,990 
Straight-line rent adjustments(727,806)(612,480)
Amortization of deferred financing costs1,484,995 1,490,182 
Net loss on extinguishment of obligations under participation agreements319,453 — 
Amortization of above- and below-market rent intangibles(942,574)(335,248)
Amortization and accretion of investment-related fees, net(16,424)(24,264)
Amortization of above-market rent ground lease(97,761)(97,761)
Realized gains on marketable securities(1,160,162)— 
Unrealized gains on marketable securities(28,995)— 
Changes in operating assets and liabilities:
Interest receivable(983,769)237,579 
Other assets(128,693)2,167,344 
Due to Manager111,076 (85,625)
Unearned income(559,002)396,129 
Interest payable110,304 (147,974)
Accounts payable and accrued expenses1,228,370 (75,779)
Other liabilities(805,229)400,257 
Net cash provided by operating activities6,225,486 12,958,955 
Cash flows from investing activities:
Origination and purchase of loans(85,758,523)(114,805,997)
Proceeds from repayments of loans28,690,175 147,889,592 
Purchase of marketable securities(6,039,567)— 
Proceeds from sale of marketable securities6,023,723 — 
Capital expenditures on real estate— (242,071)
Net cash (used in) provided by investing activities(57,084,192)32,841,524 
Cash flows from financing activities:
Proceeds from borrowings under the term loan105,888,747 — 
Proceeds from borrowings under revolving credit facility35,000,000 4,000,000 
Proceeds from borrowings under repurchase agreement22,860,134 51,290,313 
Proceeds from issuance of common stock in the Merger16,897,074 — 
Proceeds from issuance of common stock to Terra Offshore Funds8,600,000 — 
Distributions paid(17,332,985)(22,759,070)
Proceeds from obligations under participation agreements35,388,717 14,999,783 
Repayment of borrowings under repurchase agreement(103,994,570)(34,200,000)
Payment for repurchase of common stock(3,620,000)— 
Repayment of borrowings under revolving credit facility(10,000,000)(4,000,000)
Proceeds from issuance of common stock— 3,620,000 
Change in interest reserve and other deposits held on investments7,475,137 5,160,013 
Repayment of mortgage principal(404,252)(254,976)
Payment of financing costs(2,279,872)(256,453)
Repayments of obligations under participation agreements(557,778)(31,252,803)
Net cash provided by (used in) financing activities93,920,352 (13,653,193)
Net increase in cash, cash equivalents and restricted cash43,061,646 32,147,286 
Cash, cash equivalents and restricted cash at beginning of period50,549,700 28,538,853 
Cash, cash equivalents and restricted cash at end of period (Note 2)
$93,611,346 $60,686,139 
7

Terra Property Trust, Inc.
Consolidated Statements of Cash Flows (Continued)
(Unaudited)
Nine Months Ended September 30,
20202019
Supplemental Disclosure of Cash Flows Information:
Cash paid for interest$12,030,182 $13,205,625 

Supplemental Non-Cash Financing Activities:

Merger

    On February 28, 2020, Terra Property Trust, Inc. (the “Company”) entered into certain Agreement and Plan of Merger (the “Merger Agreement”), by and among the Company, Terra Property Trust 2, Inc. (“TPT2”) and Terra Secured Income Fund 7, LLC (“Terra Fund 7”), the sole stockholder of TPT2, pursuant to which, effective March 1, 2020, TPT2 was merged with and into the Company, with the Company continuing as the surviving corporation (the “Merger”). In connection with the Merger, the Company issued 2,116,785.76 shares of common stock, par value $0.01 per share, were issued to Terra Fund 7 (Note 3). The following table presents a summary of the consideration exchanged and settlement of the Company’s obligations under participation agreements as a result of the Merger:
Total Consideration
Equity issued in the Merger$34,630,615 
Proceeds from equity issued in the Merger16,897,074 
$17,733,541 
Net assets exchanged
Settlement of obligations under participation agreements$17,688,741 
Interest receivable134,543 
Other assets18,384 
Accounts payable and accrued expenses(57,433)
Due to Manager(50,694)
$17,733,541 
Non-cash Proceeds from Issuance of Common Stock to Terra Offshore Funds

    In addition, on March 2, 2020, the Company entered into two separate contribution agreements, one by and among the Company, Terra Offshore Funds REIT, LLC (formerly known as Terra International Fund 3 REIT, LLC) (the “Terra Offshore Funds”) and Terra Income Fund International, and another by and among the Company, Terra Offshore Funds and Terra Secured Income Fund 5 International, pursuant to which the Company issued an aggregate of 2,457,684.59 shares of common stock in exchange for the settlement of $32.1 million of participation interests in loans held by the Company, $8.6 million in cash, and other net working capital (“Issuance of Common Stock to Terra Offshore Funds”) (Note 3). The following table presents a summary of the consideration exchanged and settlement of the Company’s obligations under participation agreements as a result of the Issuance of Common Stock to Terra Offshore Funds:
Total Consideration
Equity issued to Terra Offshore Funds$40,749,378 
Proceeds from equity issued to Terra Offshore Funds8,600,000 
$32,149,378 
Net Assets exchanged
Settlement of obligations under participation agreements$32,112,257 
Interest receivable270,947 
Due to Manager(233,826)
Net assets acquired excluding cash and cash equivalents$32,149,378 

    

8

Terra Property Trust, Inc.
Consolidated Statements of Cash Flows (Continued)
(Unaudited)


Supplemental Non-Cash Investing Activities:

Lease Termination

In June 2020, the Company received a notice from a tenant occupying a portion of the office building that the Company acquired in July 2018 via foreclosure of their intention to terminate the lease (Note 5). The following table presents a summary of assets received and written off in connection with the lease termination effective September 4, 2020:
    
Lease Termination Fees:
Cash$142,620 
Furniture & Fixture236,000 
$378,620 
Assets and Liabilities Write-offs:
In-place lease intangible assets$869,694 
Below-market rent liabilities(616,392)
Rent receivable125,318 
$378,620 

Deed in Lieu of Foreclosure

    On January 9, 2019, the Company acquired 4.9 acres of adjacent land encumbering a $14.3 million first mortgage via deed in lieu of foreclosure in exchange for the payment of the first mortgage and related fees and expenses (Note 5). The following table summarizes the carrying value of the first mortgage and the fair value of asset acquired in the transaction as of the date of the deed in lieu of foreclosure:
Carrying Value of First Mortgage
Loan held for investment$14,325,000 
Interest receivable439,300 
Restricted cash applied against loan principal amount(60,941)
$14,703,359 
Assets Acquired at Fair Value
Land$14,703,359 

    

See notes to unaudited consolidated financial statements.

9

Terra Property Trust, Inc.
Notes to Consolidated Financial Statements (Unaudited)
September 30, 2020

Note 1. Business

    Terra Property Trust, Inc. (and, together with its consolidated subsidiaries, the “Company” or “Terra Property Trust”) was incorporated under the general corporation laws of the State of Maryland on December 31, 2015. Terra Property Trust is a real estate credit focused company that originates, structures, funds and manages commercial real estate investments, including mezzanine loans, first mortgage loans, subordinated mortgage loans and preferred equity investments. The Company’s loans finance the acquisition, construction, development or redevelopment of quality commercial real estate in the United States. The Company focuses on the origination of middle market loans in the approximately $10 million to $50 million range, to finance properties in primary and secondary markets. The Company believes these loans are subject to less competition and offer higher risk adjusted returns than larger loans with similar risk/return metrics.
    On January 1, 2016, Terra Secured Income Fund 5, LLC (“Terra Fund 5”), the Company’s then parent, contributed its consolidated portfolio of net assets to the Company pursuant to a contribution agreement in exchange for shares of the Company’s common stock. Upon receipt of the contribution of the consolidated portfolio of net assets from Terra Fund 5, the Company commenced its operations on January 1, 2016. On March 2, 2020, the Company engaged in a series of transactions pursuant to which the Company issued an aggregate of 4,574,470.35 shares of our common stock in exchange for the settlement of an aggregate of $49.8 million of participation interests in loans held by the Company, cash of $25.5 million and other working capital. As of September 30, 2020, Terra JV, LLC (“Terra JV”) held 87.4% of the issued and outstanding shares of the Company's common stock with the remainder held by Terra Offshore Funds (Note 3).

    The Company has elected to be taxed, and to qualify annually thereafter, as a real estate investment trust (“REIT”) under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”), commencing with the taxable year ended December 31, 2016. As a REIT, the Company is not subject to federal income taxes on income and gains distributed to the stockholders as long as certain requirements are satisfied, principally relating to the nature of income and the level of distributions, as well as other factors. The Company also operates its business in a manner that permits it to maintain its exclusion from registration under the Investment Company Act of 1940, as amended.

    The Company’s investment activities are externally managed by Terra REIT Advisors, LLC (“Terra REIT Advisors” or the “Manager”), a subsidiary of the Company’s sponsor, Terra Capital Partners, LLC, pursuant to a management agreement (the “Management Agreement”), under the oversight of the Company’s board of directors (Note 7). The Company does not currently have any employees and does not expect to have any employees. Services necessary for the Company’s business are provided by individuals who are employees of the Manager or by individuals who were contracted by the Company or by the Manager to work on behalf of the Company pursuant to the terms of the Management Agreement.

Note 2. Summary of Significant Accounting Policies

Basis of Presentation and Principles of Consolidation

    The interim consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles (“U.S. GAAP”) and include all of the Company’s accounts and those of its consolidated subsidiaries. The accompanying interim financial statements of the Company and related financial information have been prepared pursuant to the requirements for reporting on Form 10-Q and Articles 6 or 10 of Regulation S-X. All intercompany balances and transactions have been eliminated.

Loans Held for Investment

    The Company originates, acquires, and structures real estate-related loans generally to be held to maturity. Loans held for investment are carried at the principal amount outstanding, adjusted for the accretion of discounts on investments and exit fees, and the amortization of premiums on investments and origination fees. The Company’s preferred equity investments, which are economically similar to mezzanine loans and subordinate to any loans but senior to common equity, are accounted for as loans held for investment. Loans are carried at cost less allowance for loan losses.

10


Notes to Unaudited Consolidated Financial Statements

Allowance for Loan Losses
    
    The Company’s loans are typically collateralized by either the sponsors’ equity interest in the real estate properties or the underlying real estate properties. As a result, the Company regularly evaluates the extent and impact of any credit migration associated with the performance and/or value of the underlying collateral property as well as the financial and operating capability of the borrower/sponsor on a loan-by-loan basis. Specifically, a property’s operating results and any cash reserves are analyzed and used to assess (i) whether cash from operations and/or reserve balances are sufficient to cover the debt service requirements currently and into the future; (ii) the ability of the borrower to refinance the loan; and/or (iii) the property’s liquidation value. The Company also evaluates the financial wherewithal of the sponsor as well as its competency in managing and operating the real estate property. In addition, the Company considers the overall economic environment, real estate sector, and geographic sub-market in which the borrower operates. Such analyses are completed and reviewed by asset management and finance personnel, who utilize various data sources, including (i) periodic financial data such as debt service coverage ratio, property occupancy, tenant profile, rental rates, operating expenses, the borrower’s exit plan, the capitalization and discount rates; (ii) site inspections; and (iii) current credit spreads and discussions with market participants.

    The Manager performs a quarterly evaluation for possible impairment of the Company’s portfolio of loans. A loan is impaired if it is deemed probable that the Company will not be able to collect all amounts due according to the contractual terms of the loan. Impairment is measured based on the present value of expected future cash flows or the fair value of the collateral, if the loan is collateral dependent. Upon measurement of impairment, the Company records an allowance to reduce the carrying value of the loan with a corresponding charge to net income.

    In conjunction with the quarterly evaluation of loans not considered impaired, the Manager assesses the risk factors of each loan and assigns each loan a risk rating between 1 and 5, which is an average of the numerical ratings in the following categories: (i) sponsor capability and financial condition; (ii) loan and collateral performance relative to underwriting; (iii) quality and stability of collateral cash flows and/or reserve balances; and (iv) loan to value. Based on a 5-point scale, the Company’s loans are rated “1” through “5”, from less risk to greater risk, as follows:
Risk RatingDescription
1Very low risk
2Low risk
3Moderate/average risk
4Higher risk
5Highest risk

    The Company records an allowance for loan losses equal to (i) 1.5% of the aggregate carrying amount of loans rated as a “4”, plus (ii) 5% of the aggregate carrying amount of loans rated as a “5”, plus (iii) impaired loan reserves, if any.